Everyone in business wants to collect their accounts receivable.  It’s easy – you earned the money and you should be paid; however, that is not always how it works out.  And, when the account is not paid, you inevitably have to decide whether to file suit to collect the account, and whether you want to spend the money to do so.  There is no question that lawsuits are expensive, and that leads to the question of whether the costs can be kept in check and whether attorney’s fees and litigation expenses can be recovered.  The answer to the first question is now “Yes,” and the answer to the second is “Well, maybe.”

First the “Yes.”

For some time now, the Texas court rules have provided limitations on discovery in smaller cases in order to keep the cost of pursuing smaller claims in check.  However, those rules only applied to cases where the total amount of actual damages, attorney’s fees, court costs, and other relief combined was less than $100,000.  Cases where the actual damages were over $50,000, for example, often would not quality because the attorney’s fees, court costs, and other expenses could push the amount at issue over the top.

Beginning January 1, 2021, the rules change to provide that all cases seeking recovery of up to $250,000 in actual damages (not counting attorney’s fees, interest, and other types of relief) are to be considered expedited actions.  The benefit of bringing collection cases as expedited actions is that the amount of document requests, interrogatories, and depositions are significantly limited in order to keep the cost of collection down.  The new rules include other provisions which should also reduce costs.  Thus, business owners will be able to pursue collection of past due accounts of $250,000 or less on a much more affordable basis in 2021.

Then the “Maybe.”

In Texas, attorney’s fees can be recovered in a lawsuit if allowed by a statute or contract.  In 1985, the Texas legislature enacted a statute that allowed a business of any type (corporation, partnership, and sole proprietor) to recover its attorney’s fees together with amounts owed on account from its non-paying customer.  The statute simply states: “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 [listed types of claims].”  Under that statute, the winning party in a collection case routinely received an award that included recovery of its attorney’s fees.

Then came the proliferation of businesses formed as limited liability companies instead of corporations.   When attorney fee awards were challenged by partnerships and limited liability companies, the courts began considering whether the words “corporation” and “individual” applied to them.  In cases where the issue was raised, the courts have consistently held that the words “corporation” and “individual” do not include partnerships of any kind or limited liability companies; however, the word “person” does include those types of entities.  Thus, under current law a limited liability company can recover its attorney’s fees, but limited liability companies cannot be held liable for the payment of those fees.  It is an archaic result that ignores modern business practice, but the legislature has refused to modernize the statute.

Fortunately, there is a work around, but it requires business owners to be proactive.A clause should be included in a purchase order or contract signed by the customer that provides: “In the event that suit is brought to collect any amounts due in connection with this contract or customer’s account, [insert name of company] will be entitled to recover all attorney’s fees, costs and litigation expenses incurred in prosecuting the suit.”