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Closing the 38.001 Loophole: Texas Legislature Broadens Recovery of Attorney’s Fees

by Mitchell Austin

Texas law follows the “American Rule” regarding the recovery of attorneys’ fees in litigation. Under this rule, prevailing litigants may recover attorneys’ fees only if specifically provided for by statute or pursuant to a contract.1 In all other situations, the parties must pay their own fees and expenses regardless of the lawsuit’s outcome.

One of the most frequently cited statutes allowing the recovery of attorneys’ fees is Section 38.001 of the Texas Civil Practice and Remedies Code. As currently written, §38.001 allows the recovery of attorneys’ fees from an “individual” or “corporation” in a breach-of-contract lawsuit.2 Although likely not what the legislature intended, Texas courts have strictly construed “corporation” in §38.001 to preclude recovery of attorneys’ fees against limited liability companies, partnerships and similar unincorporated entities.3 As a practical matter, this placed corporations defending a contract lawsuit in a more vulnerable position than limited liability companies or partnerships because corporate defendants must evaluate the added risk of paying the other side’s attorneys’ fees when considering settling or litigating the case. However, this imbalance is about to change.

On June 15, 2021, the Texas Legislature enacted H.B. No. 1578, revising §38.001 by replacing “corporation” with “organization”, as defined by Section 1.002 of the Texas Business Organizations Code.4 In turn, Section 1.002 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.”5 The change will be effective for lawsuits filed on or after September 1, 2021.

The 2021 amendments to §38.001 almost certainly comply with what the legislature originally intended. In fact, the Texas House of Representatives introduced similar bills in 2017 and 2019, but only in 2021 was the loophole finally closed.6 The amendments have major implications for both plaintiffs and defendants. First, successful litigants in contract actions can now recover attorneys’ fees against nearly any type of company. Potential plaintiffs contemplating filing a breach-of-contract lawsuit in the near future should consider waiting to file their lawsuit until September 2021 so these amendments govern their suit. On the other side, corporations are no longer alone in the §38.001 risk evaluation. Rather, limited liability companies, limited liability partnerships and the like now must consider the prospects of paying the opposing party’s attorneys’ fees when deciding to settle or fight a contract lawsuit to the end.

1 Epps v. Fowler, 351 S.W.3d 862, 865 (Tex. 2011)
2 TEX. CIV. PRAC. & REM. CODE §38.001.
3 Alta Mesa Holdings, L.P. v. Ives, 488 S.W.3d 438, 452–53 (Tex. App.—Houston [14th Dist.]
2016, pet. denied) (holding 38.001 fees are nonrecoverable against LLCs); Fleming & Assocs. V.
Barton, 425 S.W.3d 560, 576 (Tex. App.—Houston [14th Dist.] 2014, pet. denied) (holding 38.001
fees are nonrecoverable against GPs, LLPs, or LPs); Greco v. Nat’l Football League, 116
F.Supp.3d 744, 748 (N.D. Tex. 2015) (holding 38.001 fees are nonrecoverable against
professional, unincorporated associations such as the National Football League).
4 Tex. H.B. 1578, 87th Leg., R.S., Ch. 665, §1, sec. 38.001, 2021 Tex. Sess. Law. Serv. (to be
codified at Texas Civil Practice and Remedies Code §38.001).
5 Tex. H.B. 370, 86th Leg., R.S. (2019).
6 Tex. H.B. 744, 85th Leg., R.S. (2017).

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