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Another Win for Texas LLCs

Author: Braden M. Wayne

Since its birth in Texas in 1991, the limited liability company, or LLC, has emerged as the clear entity of choice for Texas business owners. Approximately 82 percent of all new business entities in Texas are LLCs, due in large part to the significant advantages the LLC provides over its more rigid and traditional counterparts – from increased liability protections to favorable taxation options.

While litigation implications are rarely top of mind when a business begins the entity formation process, contractual disputes, litigation, and attorney’s fees are simply a standard cost of doing business in the modern commercial landscape. As such, options that can help reduce future legal liabilities should be factored significantly when entrepreneurs weigh potential legal structures for their new entities. For this reason, recent developments in Texas law make the LLC an even more attractive choice than previously thought, and provide important guidance in transactional matters.

In Hoffman v. L&M Arts, the Northern District of Texas ruled that LLCs cannot be held liable for attorney’s fees in the absence of an express contractual provision allowing for fee shifting. Previously, the general rule in Texas had long been that a party that breaches a contract is responsible for the non-breaching party’s attorney’s fees in the event of litigation. This rule is found in Section 38.001 of the Texas Civil Practice & Remedies Code, which provides that:

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…an oral or written contract. Tex. Civ. Prac. & Rem. Code § 38.001(8).

The Hoffman Court conducted an in-depth, semantic analysis of the specific wording used by the legislature in drafting section 38.001 – a statute that was last amended by the legislature six years before LLCs were recognized in Texas – and specifically the juxtaposition of “person” as compared to “individual or corporation.” The Court began by noting that “person” has always been broadly defined to include a corporation, organization, government or governmental subdivision or agency, business trust, estate, trust, partnership, association, and any other legal entity. As such, the Court ruled that any person or entity may be entitled to recover attorney’s fees in the event of a contractual breach.

However, in terms of who can be held liable for such fees, the Court contrasted the legislature’s use of the word “person” with its use of the more narrowly tailored “individual or corporation.” The Court noted than an LLC is clearly not an individual, and went on to discuss whether, then, an LLC would qualify as a corporation as that term is used in the statute. Following a rather strict analysis, the Hoffman Court concluded that LLCs and corporations are distinct legal entities, and therefore the term “corporation” should not be read as inclusive of LLCs.

Therefore, the Court held, section 38.001 of the Civil Practice & Remedies Code allows for LLCs to recover attorney’s fees, but does not allow for LLCs to be held liable for them absent an express provision within the contract.

The result appears to be that an LLC, as plaintiff, can sue an individual or corporation for breach of a contract and recover its attorney’s fees, but cannot be held liable for attorney’s fees in the event the LLC breaches the same contract. This quirky outcome resulting from the very particular language of the Civil Practice & Remedies Code demonstrates the importance of a carefully-worded attorney’s fees clause in all written contracts.

The Hoffman ruling will likely be subject to both legislative and judicial scrutiny, leaving the attorney fee issue currently on somewhat unsettled ground. For more information on this or any other issue, please feel free to contact me at bwayne@settlepou.com