Nov 20, 2015

Recovery of Attorneys Fees for Breach of Contract in Texas

By: John Faubion & Benton Williams

On March 6, 2015, the Northern District of Texas considered the recovery of attorney's fees from an LLC on a breach of contract claim under Texas law.  Judge Fitzwater carefully considered section 38.001 of the Civil Practice and Remedies Code and found that the Supreme Court of Texas has not yet addressed whether section 38.001 permits recovery of attorney’s fees from an LLC.  Because pracitioners commonly associate breach of contract claims with recovery of attorney’s fees under section 38.001, this decision was both unanticipated and instructive. 

The opinion considers the language of the statute holding that recovery of fees under section 38.001 is available only from “an individual or corporation.”  The Court then considered the likely interpretation of “corporation” under section 38.001 by the Texas Supreme Court and whether it would include a Limited Liability Corporation.  Considering the history of section 38.001 and the predessessor statute, Article 2226, the Court concluded that the term “corporation” does not include an LLC.  Article 2226 made a distinction between a “corporation” and “other legal entities,” from which attorney's fees could not be recovered.

The Court concluded that:

In sum, based on the plain meaning of the terms “individual” and “corporation,” the history of § 38.001 and its predecessor, Article 2226, and the construction given to § 38.001 by Texas courts of appeals and federal courts (including judges of this court), the court makes an Erie prediction that the Supreme Court of Texas would hold that an LLC is neither an “individual” nor a “corporation” within the meaning of § 38.001, and that a party with a valid claim cannot recover attorney's fees from an LLC under § 38.001.  Because it is undisputed that L & M is an LLC, Hoffman cannot recover attorney's fees and nontaxable expenses under § 38.001.

Hoffman v. L & M Arts, No. 3:10-CV-0953-D, 2015 WL 1000838, at *10 (N.D. Tex. Mar. 6, 2015).  As the LLC has become an increasingly popular corporate entity choice in Texas, practicioners should be aware of the Hoffman opinion and follow its subsequent impact on litigation strategy.