Tuesday, July 26, 2016

More on How an LLC is Not a Corporation

More on How an LLC is Not a Corporation

Texas has a curious statute which provides that in any breach of contract action against a person or a corporation, the prevailing party may recover their attorney’s fees. This rule is set forth in Section 38.001 of the Texas Civil Practice and Remedies Code. Specifically, with respect to claims arising in certain categories, “[a] person may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and cost.” In both Hoffmen v. L & M Arts, Civ. Act No. 3:10-CV-0953-D, 2015 WL 1000838 (N.D. Texas March 6, 2015), and more recently in Alta Mesa Holdings, L.P. v. Ives, 488 S.W.3d 438 (Tex. App. Houston [14th Dist.] April 14, 2016) the court was called upon to assess who is potentially liable under this provision.

While Section 38.001 allows recovery to a “person”, which is itself a defined term (see Tex. Gov’t Code Ann. § 311.005(2)), that term is not utilized as defining who was potentially subject to liability. Rather, that is restricted to “an individual or corporation.”, and neither of those terms is defined. Both of these suits involved a claim against an LLC, the court was faced with the conundrum that:

Thus while it is apparent from the text of § 38.001 that the universe of those who may recover attorney’s fees is broader than those from whom such fees may be recovered, the court must decide whether an LLC falls within the scope of “an individual.” Hoffmen, 2015 WL 1000838, *5.

The Hoffmen court easily disposed of the suggestion that an LLC constitutes an “individual,” finding rather that the term is restricted to natural persons. The court likewise dismissed the suggestion that “corporation” encompasses LLCs, noting that they are organized under different statutes and that corporation as a defined term under the Business Association Act does not include LLCs. Likewise, the Alta Mesa case rejected the suggestion that “corporation” should be interpreted as including LLCs.  Rather, “the legal entities identified by the terms ‘corporation’ and limited liability company’ are distinct entities with some but not all the same features.” Alta Mesa, 488 S.W.3d at 453.  “In other words, the use of one of the terms does not encompass the other type of entity.” Id. at 454.

There has been submitted to the Texas legislature a proposal to expand § 38.001 to include claims against LLCs and other organizational forms in addition to corporations. See 2015 HB 230. To date, however, that legislation has not passed.

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