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By James W. Holbrook, III
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In a matter of first impression, the United States District Court for the Northern District of Texas recently held that Section 38.001 of the Texas Civil Practice and Remedies Code — the statutory provision allowing a plaintiff to recover reasonable and necessary attorneys' fees incurred in a successful action for breach of contract — does not apply to suits against limited liability companies. This ruling makes clear that Section 38.001 authorizes the award of attorneys' fees against only a single form of business entity — the corporation.

Change may be on the horizon, however, as the Texas Legislature considers a bill that would amend Section 38.001 to include partnerships, limited liability companies and all other legal entities in the list of defendants from whom a successful breach of contract claimant may recover its reasonable and necessary attorneys' fees. If enacted, this proposed statutory amendment would subject all defendants (other than governmental entities) to potential liability for attorneys' fees in breach of contract actions.

Fee-Shifting Under Section 38.001

Texas follows the American Rule, which permits a litigant to recover attorneys' fees only when specifically provided by contract or statute.[1] One such statute — Section 38.001 of the Texas Civil Practice Remedies Code — authorizes a “person [to] recover reasonable attorneys' fees from an individual or corporation” in a “claim on an oral or written contract.”[2]

Although concise in form and seemingly straightforward in substance, Section 38.001’s brevity raises several questions regarding the statute’s scope and application, including who qualifies as an “individual or corporation” against whom such a fee award may be entered. Texas courts have concluded, for example, that a partnership is neither an “individual” nor a “corporation” and, therefore, is not subject to the fee-shifting provisions of Section 38.001.[3]

But does the same hold true for other noncorporate business entities, such as limited liability companies? The United States District Court for the Northern District of Texas recently resolved this question in Hoffman v. L & M Arts LLC,[4] holding that Section 38.001 does not authorize the recovery of attorneys' fees against a limited liability company, because “the term ‘corporation’ does not include an LLC.” [5]

Hoffman v. L & M Arts LLC

The dispute in Hoffman stemmed from the sale of a 1961 Mark Rothko oil painting at public auction. Marguerite Hoffman sued L & M Arts LLC for breach of contract, claiming the public sale contravened the confidentiality clause of the letter agreement under which she had sold the painting several years earlier. Hoffman successfully tried her case to a jury, obtaining a judgment against L & M Arts in the amount of $500,000, plus interest and taxable costs.

The judgment also authorized Hoffman to recover such attorneys' fees and nontaxable costs as the court might award by separate order “if Hoffman establishe[d] by separate timely motion that L & M [Arts was] liable for attorneys' fees and nontaxable expenses.”[6] Hoffman subsequently moved for such an award under Section 38.001.[7] L & M opposed the motion, contending that Section 38.001 authorizes the recovery of attorneys' fees from only an individual or corporation, not a limited liability company.[8] The court agreed with L&M and denied Hoffman’s motion for attorneys' fees.[9]

In reaching its holding, the court noted that the terms “individual” and “corporation” are not defined in Section 38.001 or the state’s Code Construction Act and, therefore, must be given their ordinary meanings.[10] In doing so, the court concluded that the term “individual” — under its plain meaning — does not include business entities such as limited liability companies.[11]

Addressing the more difficult question of “whether the Texas Supreme Court would interpret the term “corporation” in [Section] 38.001 to include an LLC,”[12] the court stated:

LLCs are a comparatively recent innovation in business organizational form, in essence affording the corporation-like benefit of limited liability but with partnership tax treatment. LLCs, however, are separate and distinct legal entities, governed by a separate title within the Business Organizations Code. They are neither included in the Code's definition of “corporation,” nor are they included in the ordinary meaning of the word “partnership.”

Although ... LLCs and corporations are treated similarly for some purposes, LLCs and corporations are distinct legal entities. Otherwise, there would be no need ... for Texas law to provide that corporations and LLCs are to be treated the same in certain enumerated circumstances. Provisions of law that apply to corporations would necessarily pertain to LLCs.[13]

The Hoffman court also examined the legislative history of Section 38.001, noting that the statute’s predecessor “clearly distinguished between ‘corporations,’ on the one hand ... and ‘partnerships’ and ‘other legal entities,’ on the other hand.”[14] Comparing these three types of business entities, the court concluded that a limited liability company best fit within the category of “other legal entity.”[15] “It is neither a corporation nor a partnership, per se, although it has attributes of both.”[16] Having reached this conclusion, the court held that a limited liability company — “[a]s an ‘other legal entity’” — is not an entity from whom attorneys' fees may be recovered under Section 38.001.[17]

A Potential Legislative Solution

Although a case of first impression, Hoffman represents the logical extension of earlier cases interpreting the scope of Section 38.001. Texas courts of appeals and federal district courts applying Texas law have uniformly held that Section 38.001 allows a successful breach of contract claimant to recover attorneys' fees from only individuals and corporations, not partnerships, limited partnerships, limited liability partnerships, governmental subdivisions, or “other legal entities.”[18] It is difficult, however, to identify a compelling policy-based reason for subjecting an individual or corporation to greater contract liability than a partnership, limited liability company, or other noncorporate business entity.

To address this current disparity under the law, the Texas House of Representatives recently passed a bill that would amend Section 38.001 to include "other legal entity" in the list of defendants from whom a successful breach of contract claimant may recover its reasonable and necessary attorneys' fees.[19] This proposed amendment — in effect — would subject limited partnerships, limited liability companies, and any other legal entities (other than governmental units) to Section 38.001’s fee-shifting provisions. The bill is now awaiting the Texas Senate’s consideration.

In the interim, contracting parties who wish to ensure that noncorporate business entities are held liable for attorneys' fees in the event of breach should include appropriate fee-shifting provisions in their contracts. As Hoffman and related cases make clear, Section 38.001 — in its present form — provides no relief for the claimant who prevails on a breach of contract claim against a partnership, limited liability company, or other noncorporate entity.

—By James Holbrook, Zelle Hofmann Voelbel & Mason LLP

James Holbrook is a partner in Zelle Hofmann's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See, e.g., Epps v. Fowler, 351 S.W.3d 862, 865 (Tex. 2011); Gulf States Utils. Co. v. Low, 79 S.W.3d 561, 567 (Tex. 2002).

[2] TEX. CIV. PRAC. REM. CODE § 38.001(8).

[3] See Fleming & Assocs. LLP v. Barton, 425 S.W.3d 560, 575 (Tex. App. – Houston [14th Dist.], pet. filed).

[4] No. 3:10–CV–0953–D, 2015 WL 1000838 (N.D. Tex. Mar. 6, 2015) (Fitzwater, J.).

[5] Hoffman, 2015 WL 1000838, at *8.

[6] Id. at *1.

[7] See id.

[8] See id.

[9] See id. at *10.

[10] See Hoffman, 2015 WL 1000838, at *5.

[11] See id. at *7.

[12] Id.

[13] Id. at *7 (internal citations omitted) (internal quotations omitted).

[14] Id. at *8.

[15] See Hoffman, 2015 WL 1000838, at *8.

[16] Id.

[17] Id.

[18] See, e.g., Fleming & Assocs., 425 S.W.3d at 575 (holding that limited liability partnership was not subject to fee-shifting provisions of Section 38.001); Ganz v. Lyons P’ship, L.P., 173 F.R.D 173, 176 (N.D. Tex. 1997) (holding that attorneys' fees are not recoverable from partnership or limited partnership under Section 38.001); Baylor Health Care Sys. V. Nat’l Elevator Indus. Health Benefit Plan, No. 3:06-CV-1888-P, 2008 WL 2245834, at *6 (N.D. Tex. June 2, 2008) (holding that “the plain language of Section 38.001 . . . is unambiguous and that an ERISA plan ... is not an ‘individual or corporation’ under Section 38.001”); Base-Seal, Inc. v. Jefferson County, 901 S.W.2d 783, 786 (Tex. App. – Beaumont 1995, writ denied) (“A county is a political subdivision of the State; as such, it is neither an individual nor a corporation.”). A survey of Texas cases reveals several matters involving fee awards against partnerships, limited liability companies, and other non-corporate entities. See, e.g., Midland W. Bldg. LLC v. First Serv. Air Conditioning Contractors Inc., 300 S.W.3d 738, 739 (Tex. 2009). However, in each such case, “there is no indication that the question [of] whether such an award was permitted under [Section] 38.001 was raised or considered.” Hoffman, 2015 WL 1000838, at *9.

[19] In pertinent part, House Bill 230 proposes to amend Section 38.001 as follows:

Sec. 38.001. RECOVERY OF ATTORNEY'S FEES. (a) Except as provided by Subsection (b), a [A] person may recover reasonable attorney's fees from an individual, [or] corporation, or other legal entity, in addition to the amount of a valid claim and costs, if the claim is for:

* * * *

(8) an oral or written contract.

(b) Subsection (a) does not authorize the recovery of attorney's fees from the state, an agency or institution of the state, or a political subdivision of the state. This section does not affect any other statute regarding the recovery of attorney's fees from the state, an agency or institution of the state, or a political subdivision of the state.