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Do You Know Who You Are Doing Business With?

Dark Businessman.JPGWhen you are entering into contracts with a company, do you consider whether they are a corporation versus an LLP or LLC? Perhaps you should.

In an opinion released on February 27, 2014, the Houston 14th Court of Appeals determined that not all entities are created equal in terms of whether a plaintiff has the right to recover attorney's fees for a breach of contract claim under Section 38.001 of the Texas Civil Practice and Remedies Code.

The Case:

Fleming & Associates, L.L.P. v. Barton, No. 14-12-00582-CV (Tex.App.-Houston [14th Dist.] Feb. 27, 2014).

The Facts:

This case involved a dispute between lawyers in the Fen-Phen pharmaceutical litigation. The Johnson-Barton Joint Venture ("J&B"), formed by lawyers Nick Johnson and Dan Barton, was a firm that obtained powers of attorney for Fen-Phen cases, and then entered into an agreement to refer those cases (and future cases it signed up) to another law firm, Fleming & Associates, L.L.P. ("F&A"). J&B referred over 1,700 cases to F&A under this agreement.

F&A paid J&B over $8.3 million under the agreement, but it withheld another $2.7 million in what it deemed shared expenses. J&B believed those expenses were not shared and were to be borne solely by F&A. As a result, J&B filed suit against F&A for breach of contract, seeking to obtain the $2.7 million in deducted litigation expenses. It also sought an award of attorney's fees under Section 38.001(8) of the Texas Civil Practice & Remedies Code.

The Court's Analysis:

At the trial court, J&B obtained a summary judgment on its breach of contract claim against F&A to recover the $2.7 million in improperly withheld expenses. The trial court also awarded J&B its attorney's fees in prosecuting the breach of contract claim.

The Houston 14th Court of Appeals affirmed the summary judgment as to the breach of contract. It then turned to the issue of attorney's fees.

Section 38.001(8) permits a "person" to recover reasonable attorney's fees "from an individual or corporation" on a claim for breach of contract. F&A argued that because it was a Limited Liability Partnership, it was not an "individual" or a "corporation" under the statute and therefore an award of attorney's fees under the statute was improper. The Court agreed.

The Court explains statutory construction and the words chosen in Section 38.001. The statute allows a "person" (whose definition includes individuals, corporations, partnerships, and any other legal entity) to recover attorney's fees, but only from "an individual or corporation." Because the terms "individual" and "corporation" are not defined by statute, the Court reverted back to their ordinary meanings. The Court determined that a partnership is neither an individual nor a corporation, and therefore held that "under the plain language of Section 38.001(8), a person may not recover attorney's fees against a partnership." Since F&A was an L.L.P., and not an individual or partnership, the overturned the trial court's award of attorney's fees.

What to Take Away:

This case only deals with a statutory award of attorney's fees. Attorney's fees can still be recovered against a partnership when specifically allowed by the contract. When doing business with any type of partnership, consider including attorney's fees as part of the contract. And if you are thinking about filing suit against a partnership, you need to be aware that 38.001(8) does not permit you to recover attorney's fees as part of your damages.

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