Ready to Sue? How Three Letters can Spell out your Ability to Recover your Attorney's Fees
Benjamin Franklin once famously remarked “In this world, nothing can be said to be certain, except death and taxes.” If you run a business, you’ve probably found that “paying lawyers” can be added to that list as well.
Don’t worry, I’m not offended if you’re nodding your head in disgust at this reality. Paying an attorney to handle a legal dispute is like paying an emergency room doctor – clearly, you’ve ended up somewhere you didn’t want to be.
Two of the most common questions a client asks when considering whether to file suit on a contract breached by another company are: (i) “how much is this going to cost me?” and (ii) “can I recover those costs from the other company if I win?” The answer to the first question often depends on a host of reasoned factors. The answer to the second question, however, may depend on one seemingly arbitrary factor: what type of “company” is your defendant company?
If your defendant company happens to have an “Inc.” at the end of its name, congratulation, you likely have a basis to recover attorney’s fees. But if it has an “LLC,” you may be completely out of luck. Who knew those three letters could spell such a difference?
Now, for the sake of our discussion, let’s presume that there is no provision in our breached contract that provides for the recovery of attorney’s fees (if there is such a provision, we likely have an independent basis to recover attorney’s fees; that’s a topic for another day). Surprisingly, many contracts do not contain an attorney’s fee provision, especially when the contract is formed simply from the exchange of purchase orders, order confirmations, invoices, etc.
Texas courts follow the “American Rule” for recovery of attorney’s fees. This basically means that unless a contract or statute provides for the recovery of attorney’s fees by the prevailing party in a legal dispute, both parties must “pay their own way” to bring or defend the lawsuit. As we said above, we’re presuming here that we have no contract provision on which to hang our hat. That means we must find a statute that permits us to recover attorney’s fees from our defendant company.
Since 1985, Texas attorneys have turned to Texas Civil Practice and Remedies Code § 38.001 to recover attorney’s fees for clients. This statute basically says “A person may recover reasonable attorney's fees from an individual or corporation” when a contract is breached, work or material are provided and not paid, and a few other similar bases.
For decades, virtually no Texas state court challenged the notion that the word “corporation” in the statute generically meant “Inc.’s” (corporations), “LLCs” (limited liability companies), “LPs” (limited partnerships) and “LLPs” (limited liability partnerships). But then, in 2014, a Texas court carefully dissected the statute, along with the older statute that it replaced, and concluded that there’s no way to read “corporation” to mean anything other than an honest-to-goodness “Inc.” The new “rule” was soon adopted universally by Texas state and federal courts.
So, what does this mean? Unless a contract otherwise provides for recovery of attorney’s fees, the “Inc.” defendant likely gets stuck paying a prevailing plaintiff’s reasonable and necessary attorney’s fees, but the “LLC” defendant likely gets a free pass.
Is that fair? Arguably not. Did the legislature intend this result? Again, arguably not. But that doesn’t mean the courts got it wrong. The courts’ job is to interpret the statute as drafted, which is exactly what they’ve done. Rather, it is the legislature’s job to amend the statute if they intended a different result. Some efforts have been made by the legislature to do just that, including a proposal to permit recovery of fees from “an individual, corporation, or other legal entity…” To date, however, no such amended language has been adopted.
As it stands, the implications of the statute are considerable – imagine a plaintiff “Inc.” filing suit against a defendant “LLC” for breach of contract. The defendant “LLC” countersues the plaintiff “Inc.” for breach of the same contract. The contract contains no provision for the recovery of attorney’s fees. The defendant “LLC” fights on, knowing it can recovery attorney’s fees if it wins, but the plaintiff “Inc.” has no such hope, eating its costs as it goes. As both parties incur tens of thousands in attorney’s fees, its easy to see how that disparity would affect their respective willingness to fight on.
The next time your business is considering bringing a lawsuit, or defending a lawsuit brought by another business, be sure to check those letters at the end of both business’ names. They could spell out quite a bit of frustration or relief, depending on your point of view.
If you have questions regarding the above, or need help with your business (Inc., LLC or otherwise), please contact Stibbs & Co.
These materials are made available by Stibbs & Co., P.C. for informational purposes only, do not constitute legal or tax advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Stibbs & Co., P.C. The facts and results of each case will vary, and no particular result can be guaranteed. Employers should consult their tax advisors concerning the application of tax laws to their particular situation.