2021 Amendments to Tex. Civ. Prac. & Rem. Code ch. 38 Answer Some Questions and Raise Others

By Paul Curl

In its most recent session, the Texas Legislature passed two key amendments to Chapter 38 of the Texas Civil Practice and Remedies Code, which governs recovery of attorney’s fees in many cases. These amendments, which took effect September 1, 2021, address recovery of attorney’s fees against non-corporate entities and recovery of attorney’s fees in construction cases. While the amendments resolve certain issues and questions, they raise others.

Section 38.001 of the Texas Civil Practice and Remedies Code authorizes recovery of attorney’s fees in cases alleging an unpaid debt or a breach of contract. Until September 1, 2021, Section 38.001 read 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 materials

4. freight or express overcharges

5. lost or damaged freight or express

6. killed or injured stock

7. a sworn account

8. an oral or written contract (emphasis added).

A question had arisen in some recent cases about whether a limited liability company could be liable for attorney’s fees under Section 38.001. The reflexive response to this question is, “Why wouldn’t it be?” The answer is because an LLC is not an “individual or corporation,” the only classifications of defendant mentioned in Section 38.001.

The issue of an LLC’s liability for attorney’s fees was not raised in the case authority for many years. In several cases, the courts allowed recovery of attorney’s fees against LLCs, without addressing the fact that an LLC is not an individual or corporation. See Triton 88, LP v. Star Elec, LLC, 411 S.W.3d 42, 63-65 (Tex. App.—Houston [1st Dist.] 2013, no pet.); Howard Indus., Inc. v. Crown Cork & Seal Co., 403 S.W.3d 347, 353 (Tex. App.—Houston [14th Dist.] 2013, no pet.); Lee-Way Prince Enters., LLC v. QAI Assur., Inc., No 01-0701004-CV, 2009 WL 3490982, at *4 (Tex. App.—Houston [1st Dist.] Oct. 29, 2009, no pet.). In these cases, the parties did not raise the issue of whether an LLC could be liable for attorney’s fees under Section 38.001.

More recently, though, some Texas courts of appeals have addressed this question and held that an LLC is not liable for attorney’s fees because a limited liability company is not mentioned in Section 38.001. In Alta Mesa Holdings, LP v. Ives, 488 S.W.3d 438

(Tex. App.—Houston [14th Dist.] 2016, pet. denied), the LLC appellants made the argument that they were not liable for attorney’s fees because they were not “an individual or corporation.” The appellate court agreed. The appellate court looked “primarily to the language of the statute itself,” because it is “‘a fair assumption that the Legislature tries to say what it means, and therefore the words it chooses should be the surest guide to legislative intent.’” Id. at 453 (citing Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 866 (Tex. 1999)). After some discussion, the appellate court held that an LLC is not an individual and cannot be equated to a corporation, despite the fact that the words “‘company’ and ‘corporation’ are sometimes used synonymously.” Id. Therefore, the appellate court reasoned that attorney’s fees cannot be awarded against an LLC under Section 38.001. Although the appellate court acknowledged that, in some cases, attorney’s fees were awarded against an LLC, the court distinguished those cases on the basis that the parties never raised the issue.

The Fourth Court of Appeals quoted extensively from Alta Mesa to reach the same result in 8305 Broadway, Inc. v. J & J Martindale Ventures, LLC, No. 04–16–00447–CV, 2017 WL 2791322 at *5 (Tex. App.— San Antonio June 28, 2017, no pet.). The Thirteenth Court of Appeals likewise followed Alta Mesa and also reviewed the legislative history of Section 38.001 and its predecessor statute in First Cash, Ltd. v. JQ-Parkdale, LLC, 538 S.W.3d 189, 200 (Tex. App.—Corpus Christi-Edinburg 2018, no pet.), reaching the same result.

While other Texas courts of appeals have also followed Alta Mesa, the Texas Supreme Court has never taken up the issue. Recently, though, the Texas Legislature amended Section 38.001, and effective September 1, 2021, Section 38.001 reads as follows:

(a) In this section, “organization” has the meaning assigned by Section 1.002, Business Organizations Code.

(b) A person may recover reasonable attorney’s fees from an individual or organization other than a quasigovernmental entity authorized to perform a function by state law, a religious organization, a charitable organization, or a charitable trust, in addition to the amount of a valid claim and costs. . . .

(emphasis added). In turn, Section 1.002(62) of the Texas Business Organizations Code defines “organization” as:

[A] corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign.

Now, it is clear that an LLC and virtually any other type of business entity can be held liable for attorney’s fees under Section 38.001. The list of eight types of claims that may give rise to a claim for attorney’s fees is unchanged in the amended Section 38.001.

The author/sponsor of House Bill 1578, which amended Section 38.001, made the following statement of intent for the amendment and referred specifically to Alta Mesa:

Section 38.001, Civil Practice and Remedies Code, permits recovery of attorney’s fees from “an individual or corporation” in certain types of claims. Alta Mesa Holdings, LP v. Ives, 488 S.W.3d 438, 452-53 (Tex. App.—Houston [14th Dist.] 2016, pet. denied), construed the term “corporation” narrowly in this context, concluding that an LLC could not be held liable for attorney’s fees under Section 38.001, Civil Practice & Remedies Code. In doing so, the case foreclosed recovery of attorney’s fees from LLCs, partnerships, and other entities found liable for the claims listed in Section 38.001, Civil Practice and Remedies Code.

H.B. 1578 addresses this situation by amending Section 38.001, Civil Practice and Remedies Code, to replace “corporation” with “organization,” as defined by Section 1.002, Business Organizations Code, for purposes of who may be required to pay attorney’s fees. Under Section 1.002, Business Organizations Code, “organization” means a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign. This ensures that attorney’s fees may be recovered from all such entities—not just “corporations”—that are found liable for a claim enumerated in Section 38.001, Civil Practice and Remedies Code.

Author’s/Sponsor’s Statement of Intent, Tex. H.B. 1578, 87th Leg.

The question is settled for lawsuits filed on or after September 1, 2021, but what about lawsuits that were in progress and pending resolution before that date? Was the Legislature’s amendment to Section 38.001 curative? Does it suggest that the courts of appeals had interpreted Section 38.001 incorrectly, or is the amendment an expansion of former Section 38.001 and an acknowledgment that it, indeed, did not previously apply to LLCs?

Since the Texas Supreme Court never addressed the meaning of “individual or corporation” in the previous version of Section 38.001, it may still be an open question as to whether an LLC can be held liable for attorney’s fees under the pre-amendment version of Section 38.001. Section 38.006, which remains part of Chapter 38, states that “This chapter shall be liberally construed to promote its underlying purpose,” yet as the author/sponsor of House Bill 1578 noted, the Alta Mesa court applied a narrow construction to “corporation.” There should be enough lawsuits against LLCs filed before September 1, 2021, which are still in litigation, to make it worthwhile for Texas courts to revisit this question and consider whether the Alta Mesa court’s construction of the previous Section 38.001 was too narrow.

The Legislature also added Section 38.0015 to Chapter 38. This section, which is completely new, deals with recovery of attorney’s fees in construction cases. Section 38.0015 states:

(a) A person may recover reasonable attorney’s fees from an individual, corporation, or other entity from which recovery is permitted under Section 38.001 as compensatory damages for breach of a construction contract as defined by Section 130.001.

(b) This section may not be construed to create or imply a private cause of action or independent basis to recover attorney’s fees.

Section 130.001 of the Texas Civil Practice and Remedies Code defines a “construction contract” as:

[A] contract or agreement made and entered into by an owner, contractor, subcontractor, registered architect, licensed engineer, or supplier concerning the design, construction, alteration, repair, or maintenance of a building, structure, appurtenance, road, highway, bridge, dam, levee, or other improvement to or on real property, including moving, demolition, and excavation connected with the real property.

Section 38.0015 does not create an independent ground to recover attorney’s fees. To the contrary, according to subsection (b) of Section 38.0015, the claimant must still meet the other requirements of Chapter 38 to recover attorney’s fees, which may then be deemed “compensatory damages.”

The author’s/sponsor’s statement of intent for Section 38.0015 (House Bill 2416) indicates that it was intended to provide extra protection for contractors seeking coverage under an insurance policy, and to overrule the effect of an unnamed Texas Supreme Court case:

The Texas Supreme Court has previously ruled that attorney’s fees awarded to a prevailing party are considered costs and not damages under a commercial general liability insurance policy. It has been suggested that this ruling leaves contractors exposed, even in covered insurance claims, to potentially large awards for attorney’s fees. In some cases, a contractor could have an otherwise covered case but still be forced to go to trial if the insurance carrier disagrees with the plaintiff’s assessment of damages. If the plaintiff gets an award of attorney’s fees, these costs will not be covered by the policy even if the rest of the damages are covered, which creates a sizeable gap in coverage. H.B. 2416 seeks to fill this coverage gap by authorizing a person to recover attorney’s fees as compensatory damages for breach of a construction contract.

Author’s/Sponsor’s Statement of Intent, Tex. H.B. 2416, 87th Leg.

The language of Section 38.0015 goes beyond protecting contractors. It provides that not just a contractor but a “person”—the same word used in Section 38.001—may recover attorney’s fees “as compensatory damages for breach of a construction contract.” Given the broad definition of “construction contract” in Section 130.001, it appears that an owner, subcontractor, architect, engineer, or supplier should be entitled to the benefit of Section 38.0015.

The real effect of Section 38.0015 may have less to do with insurance coverage than with supersedeas bonds. The Texas Supreme Court held in In re Nalle Plastics Family LP, 406 S.W.3d 168, 176 (Tex. 2013), that attorney’s fees awarded in a judgment are not compensatory damages that must be superseded on appeal under Section 52.006(a) of the Texas Civil Practice and Remedies Code in order to prevent enforcement of the judgment while the case is on appeal. Section 38.0015 changes this rule, at least in cases involving construction contracts, meaning that attorney’s fees—now denominated as compensatory damages—must be superseded on appeal along with the rest of the damage award, or else the judgment can be collected while the case is on appeal.

Why did the Legislature make this exception part of Chapter 38 instead of part of Section 52.006? Is there now a conflict between the statutes? If Section 38.0015 affects insurance coverage, will insurance companies just draft their policies differently in response? Will other industries, in addition to the construction industry, lobby for a similar exception? Does Section 38.0015 apply only in cases alleging an express construction contract, or will it also apply in a quantum meruit case? Will it be necessary to plead in construction cases that attorney’s fees are sought as compensatory damages? If attorney’s fees are sought as compensatory damages, will this change the manner in which the attorney’s fees should be proved up? These questions and others need to be addressed by the appellate courts and the Legislature.