Big Loopholes in Texas Attorney Fees Recovery Law Closed in Much-Anticipated Legislative Update

Recovery of Attorney Fees in Texas Under 38.001

Generally, Texas law follows the “American Rule,” which requires a party to pay its own litigation costs and expenses unless recovery is available under a contract or statute.

But for cases that were filed in Texas before September 1, 2021, Texas Civil Practice & Remedies Code Section 38.001 provided for the recovery of attorney fees “from an individual or corporation” if the claim was for: (1) rendered services; (2) performed labor; (3) furnished material; (4) freight or express overcharges; (5) lost or damaged freight or express; (6) killed or injured stock; (7) a sworn account; or (8) an oral or written contract.

Unfortunately, for many claimants, the express language of Chapter 38 did not permit the recovery of attorney fees from limited liability companies, limited partnerships, limited liability partnerships, or any similar entities that were not corporations. This raised obvious fairness concerns for contract claimants as they were unable to recover their attorney fees against non-corporation entities, even if the claimant won the lawsuit—particularly if the contract at issue did not address recovery of attorney fees.

Recovery of Attorney Fees after September 1, 2021

On June 15, 2021, Texas Governor Abbot signed House Bill 1578, which finally amended Chapter 38 to extend to entities other than corporations. For cases filed in Texas after September 1, 2021, Chapter 38 was thus amended to provide, “a person may recover reasonable attorney’s fees from an individual or organization other than a quasi-governmental entity authorized to perform a function by state law, a religious organization, a charitable organization or a charitable trust. “Organization” is defined by Section 1.002 of the Texas Business Organizations Code and includes corporations, limited liability companies, limited partnerships and limited liability partnerships.

Practice Points

While the amendments to Chapter 38 solve some glaring loopholes to recovering attorney fees in Texas, the new Chapter 38 does not resolve all potential attorney fees problems for practitioners. The new Chapter 38 still will not provide relief to defendants incurring significant attorney fees, because the statute only applies to prevailing plaintiffs. Further, because the recent changes to Chapter 38 only apply to cases filed after September 1, 2021, many cases, filed on or prior to September 1, 2021, remain pending where the old attorney fees loopholes remain. Therefore, attorneys should, in most cases, ensure that their client’s contracts include an attorney fee provision that appropriately covers their clients recovery of attorney fees and expenses in the event of litigation. A “prevailing party” attorney fees clause may be appropriate to balance risk. At the very least, practitioners need to review the contract at issue, determine whether attorney fees (and other costs) are recoverable by their client and/or the opposing side under the contract terms, and address their client’s rights (or the rights of the opposition) to the recovery of fees under Chapter 38 if the case is in Texas or otherwise subject to Texas law.