Friday, May 13, 2016

Little Known Facts: LLCs and Statutory Attorney's Fees in Texas

Here's a Little Known Fact about an advantage of operating as a limited liability company (LLC) in Texas.

LLC's are not subject to Section 38.001 of the Texas Civil Practice and Remedies Code, which permits statutory recovery of reasonable attorney's fees from individuals and corporations for certain claims, including claims for an oral or written contract.

Section 38.001 of the Texas Civil Practice and Remedies Code provides as follows:

"A person may recover reasonable attorney's fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for:
(1) rendered services;
(2) performed labor;
(3) furnished material;
(4) freight or express overcharges;
(5) lost or damaged freight or express;
(6) killed or injured stock;
(7) a sworn account;  or
(8) an oral or written contract."

A 2014 case decided by the Houston Court of Appeals (Fleming v. Barton) has confirmed that the statute means what it says - that only individuals and corporations (not LLCs, limited partnerships (LPs), limited liability partnerships (LLPs) and other entities) may be liable under Section 38.001. Relying upon the plain language of the statute, that court denied a claim for legal fees under Section 38.001 against Fleming & Associates, L.L.P. because it was a limited liability partnership.

But wait a second, why wouldn't a limited liability company, limited liability partnership, or limited partnership who lost a breach of contract lawsuit face the same liability as a natural person or a corporation that was guilty of the exact same breach?

It arises as a quirk of Texas's statutory codification process.  When the Civil Practice and Remedies Code was adopted in 1986, it replaced the existing Article 2226 of the Texas Revised Civil Statutes, which permitted recovery of legal fees against “a person or corporation.”  The then-recently adopted Texas Code Construction Act had defined "person" broadly to include any legal entity, including governmental entities.  So in seeking to avoid substantive changes to Article 2226, the drafters chose the word "individual" instead of "person" to clarify that governmental entities could not be subject to liability under Section 38.001.

This strikes me as a great area of the law for the Texas legislature to step in and clarify that LLCs, LPs, LLPs, and other business entities (perhaps excluding governmental entities) should face the same liability under Section 38.001 as individuals and corporations.

Note that the issue discussed above relates only to statutory attorney's fees provided for by Section 38.001 of the Texas Civil Practice and Remedies Code.  Nothing in that section prevents an LLC or other entity to agreeing to cover another party's attorney's fees pursuant to a contract.

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