The Fourteenth Court of Appeals in Alta Mesa Holdings, L.P. v. Ives, No. 14–14–00739–CV, 2016 WL 1534007 (Tex. App.—Houston [14th Dist.] Apr. 14, 2016) has reversed an award of attorneys’ fees granted by a trial court pursuant to Section 38.001 of the Texas Civil Practice and Remedies Code, reasoning that a limited liability company is not a “corporation” for purposes of Section 38.001.
Texas follows the American Rule, which generally requires litigants to bear their own litigation costs unless awards of attorneys’ fees are made available by contract or statute. Absent a contractual fee-shifting clause, Section 38.001 provides that “[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: . . . an oral or written contract.”
In Alta Mesa, the Fourteenth Court was asked to determine whether an LLC was a “corporation” as used in Section 38.001. After careful textual analysis, the court concluded that it was not. Accordingly, it reversed the trial court’s award of fees.
Alta Mesa followed a mere two years on the heels of the same court’s ruling in Fleming & Assoc., L.L.P. v. Barton, 425 S.W.3d 560, 574-75 (Tex. App.—Houston [14th Dist.] 2014, pet. denied) that partnerships were not “individuals” or “corporations” either under Section 38.001. Alta Mesa relied on similar background logic set forth in Fleming but, given the shared characteristics of corporations and LLCs, the court’s reasoning was more involved. In arriving at its conclusion, the court focused on the fact that Texas statutes do not use the terms “corporation” and “limited liability company” interchangeably.
The court noted further that the legislative history of Section 38.001 supports this result because the predecessor statute implicitly acknowledged that corporations are distinct from other legal entities, indicating that the legislature did not intend for the term “corporation” to include other legal entities, like LLCs. The court did, however, acknowledge that awards of attorneys’ fees against LLCs have been affirmed by Texas appellate courts, but the court emphasized that the appealing parties in those cases apparently did not contest whether Section 38.001 extends to LLCs. Thus, these cases, according to the court, do not stand for the proposition that Section 38.001 allows for awards of attorneys’ fees against LLCs.
Interestingly, it is worth noting that the statute provides that a “person” prevailing on a breach-of-contract claim may be awarded attorneys’ fees, meaning that − though Section 38.001 limits the entities against whom fees may be awarded to “individuals” and “corporations” − the scope of entities that may be awarded attorneys’ fees, apparently, is not subject to the same limitations. Though the term “person” is not defined within Chapter 38, it is defined in the Texas Code Construction Act and includes all business forms.
It remains unclear whether a clear policy reason underpins the selective language of Section 38.001. Contrast, for example, Section 38.001 with the Texas Uniform Declaratory Judgment Act, which gives courts the authority to, at their discretion, award attorneys’ fees “as are equitable and just” without limitation as to the types of entities that may be required to bear such costs.
It is important to note that the issues in Fleming were fully briefed on the merits to the Texas Supreme Court, which declined to hear the matter. That action is a strong signal that both the result and the reasoning underpinning Fleming and, likely, Alta Mesa, have been blessed and will not be reversed. But, to date, no other Texas courts of appeals have adopted Fleming or Alta Mesa and the time to appeal Alta Mesa to the Supreme Court has not yet run.
The implications of these holdings to litigation strategy are clear. But they are perhaps even more important at the drafting table − either in contracting or in choosing your corporate structure.