When It Comes to Attorney’s Fees, Is Texas Becoming More American?

Under the majority “American Rule,” parties are generally required to bear their own attorney’s fees in civil cases. For over 100 years, however, Texas has been in the minority that allows courts to award attorney’s fees to prevailing parties for certain claims, such as for breach of oral or written contracts. In 1986, the Legislature changed the language describing those who could be liable for attorney’s fees from “person or corporation” to “individual or corporation.” By adopting this more restrictive meaning, it could be said that Texas was becoming more “American” in its view of fee shifting statutes

Section 38.001of the Texas Civil Practice & Remedies Code currently governs the award of attorney’s fees in certain civil cases and specifically provides that “[a] person may recover reasonable attorney’s fees from an individual or corporation …” While the issue of who and what should be included within the scope of § 38.001 as an “individual or corporation” has not been addressed by the Texas Supreme Court, other Texas courts have adopted a narrow interpretation based on legislative history of § 38.001.  Article 2226 of the Texas Revised Civil Statutes, the predecessor statute to § 38.001, provided that “any person, corporation, partnership, or other legal entity” may seek attorneys fees from such “person or corporation.” The reviser’s notes to § 38.001 indicate that the drafters chose not to use ‘person’ to identify those against whom attorney’s fees may be recovered because of the broadness of the definition of ‘person’ in the Code Construction Act. As one Texas court said, “the legislature changed the terminology used to describe those liable for attorney’s fees under § 38.001 from ‘person or corporation’ to ‘individual or corporation’ in order to retain a more restrictive meaning.

To be sure, there are numerous cases in which awards of § 38.001 attorney’s fees against entities other than corporations have been upheld, but none of those cases addressed the statutory revision. Those courts that have specifically addressed the change in language between Art. 2226 and § 38.001, however, have interpreted it as limiting the coverage of the statute to exclude its applicability to business entities that are not corporations. For example, in Ganz v. Lyons P’ship, L.P., 173 F.R.D. 173, 176 (N.D. Tex. 1997), the Northern District of Texas concluded that partnerships do not fall under the “individual or corporation” language in § 38.001. The Court emphasized the fact that “person” as used in the Code Construction Act included partnerships and the legislature specifically eliminated the inclusion of “person” in § 38.001 because it was too broad. Thus, by changing the phrase from “person or corporation” to “individual or corporation” the legislature specifically intended to eliminate partnerships and other non-corporate entities from the purview of the statute.

More recently, the Northern District of Texas held that a self-funded and self-administered welfare benefit trust fund was not an “individual or corporation” under § 38.001 and, therefore, was not liable for attorney’s fees. Baylor Health Care Systems v. National Elevator Indus. Health Benefit Plan, 2008 WL 2245834 (N.D. Tex. 2008). Relying on statutory interpretation principles and legislative history, the Court attempted to determine how the Texas Supreme Court might rule on the issue and ultimately predicted that the Texas Supreme Court would likely find § 38.001’s language is unambiguous and thus the term “individual” should not be interpreted to include entities previously covered as “persons” under Article 2226.

We won’t have a definitive answer on whether entities other than “corporations” can be held liable for attorney’s fees until either the Texas Supreme Court addresses the issue or the Legislature amends the statute.  Until then, practitioners should take a close look at the entity against whom attorney’s fees are being sought and whether that entity is a “corporation.”
P.S. The Texas Business Organization Code defines “corporation” as “an entity governed as a corporation under Title 2 [corporations] or 7 [professional entities]. The term includes a for-profit corporation, nonprofit corporation, and professional corporation.” Tex. Bus. Orgs. Code. Ann. § 1.002(14) (Vernon Pamp. 2009).

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