In “Animal Farm,” George Orwell wrote that “[a]ll animals are equal, but some animals are more equal than others.” Soon, business entities sued in Texas courts will find themselves treated as “more equal” than they had been in the past – and might now find themselves subject to a statutory claim for the recovery of attorneys’ fees.

Under the “American Rule,” a party generally is required to pay its own litigation costs and expenses unless recovery of attorneys’ fees is available under a contract or statute. But in Texas, even where a contract contains no such express provision, Texas Civil Practice & Remedies Code § 38.001 nevertheless permits the recovery of “reasonable attorney’s fees from an individual or corporation,” beyond the amount of a valid claim and costs, in certain circumstances if the claim is for rendered services, performed labor, furnished material, freight or express overcharges, lost or damaged freight or express, killed or injured stock, a sworn account, or an oral or written contract.

In practice however, Tex. Civ. Prac. & Rem. Code § 38.001’s express language has raised notable fairness concerns as various courts have held it to apply only to recovery against individuals or corporations but not to limited liability companies or partnerships.  See, e.g., CBIF Limited Partnership, et al. v. TGI Friday’s, Inc., et al., No. 05-15-00157-CV, 2017 WL 1455407 (Tex. App.—Dallas April 21, 2017, pet. denied) (mem. op.); Alta Mesa Holdings, L.P. v. Ives, No. 14–14–00739–CV, 2016 WL 1534007 (Tex. App.—Houston [14th Dist.] Apr. 14, 2016).

For example, consider a hypothetical case where a corporation sues a limited liability company and each has a competing breach of contract claim against the other, but where their contract lacks any attorney fee provision. Under the current version of Tex. Civ. Prac. & Rem. Code § 38.001, despite the similarity of the underlying claims, a court can render an award of attorneys’ fees only against the corporation – thereby effectively shielding the limited liability company from the risk of fee shifting. Thus, a party’s business form has had a significant effect upon litigation strategy and potential liability at issue, particularly for unknowing, unfamiliar out-of-state corporations.

All of that is about to change.

On May 31, 2021, the Texas Legislature adopted House Bill 1578, which amends CPRC § 38.001 to permit the recovery of attorneys’ fees in future litigation against a broader range of business organizations. The amendment, which goes into effect for “an award of attorney’s fees in an action commenced on or after the effective date of” September 1, 2021, adds a new section defining an “organization” to mean the same as in Section 1.002(62) of the Texas Business Organizations Code: that is, 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. The amendment specifically excludes quasi-governmental entities authorized to perform a function by state law, charitable organizations, or charitable trusts. The bill now heads to Governor Abbott for signature.

Litigators in Texas can expect to see significant, practical impacts from H.B. 1578. In the short term, parties with potential recovery against business organizations excluded from the current version of § 38.001 may consider delaying actions or may dismiss and refile existing ones after September 1, 2021, to comply with the amendment and bring such parties within the ambit of potential attorneys’ fees liability. On the longer time horizon, once effective, all parties will need to consider the applicability of § 38.001 when evaluating their potential liability and exposure. Regardless, at long last, in rendering an award of attorneys’ fees under the CPRC, it will now be “…impossible to say which was which” as between corporations, partnerships, limited liability companies, and other business entities.

For more information on how this legislative change could affect your business or organization, please contact Adam J. Russ at aruss@gamb.com or (713) 333-5573.