Choice of Law and Attorney’s Fee Claims by Debt Collection Attorney under Texas law

This blog post discusses the basis for recovery of attorney's fees in debt suits filed in Texas, and the question whether Texas law even applies. Under the American Rule, each party pays its own fees regardless of who wins unless a statute specifically authorizes an award of attorney's fees in the type of lawsuit at issue or the dispute involves a contract that provides for recovery of fees under specified circumstances. Both bases for fee recovery are available in Texas, but Texas law does not necessarily govern a debt claim because most credit card agreements specify another jurisdiction in a choice-of-law clause. This raises the question if and when the choice-of-law issue should be raised. Since choice-of-law is contractual, it is – like other contractual rights – subject to waiver.

Other articles on this blog discuss or will discuss the matter of proving and disputing attorney's fees, i.e. reasonableness of the amount claimed, which, in the context of summary judgment and default judgment, typically involves a fee affidavit by the Plaintiff's counsel. Fee claims vary greatly in amount among collection attorneys. Some debt collection law firms do not claim any and therefore do not submit attorney fee affidavits either. -- > Attorney fee affidavits   

  

LEGAL BASIS FOR RECOVERY OF ATTORNEY'S FEES UNDER TEXAS LAW

When debt collection lawyers seek attorney's fees -- not all do -- they typically claim such fees both under the underlying contract, and under Chapter 38 of the Civil Practice and Remedies Code.

To recover fees under the contract, the Plaintiff would have to prove its claim as a breach of contract claim (i.e. produce the contract and prove Defendant's liability under it) and show that such contract authorizes attorney fee recovery. If the contract provisions says the creditor may recover "reasonable" legal fees, the reasonableness element would require evidence because it is a fact issue. Reasonable attorney's fees are not liquidated.

To recover fees under Chapter 38, authorizes fee recovery for contract claims and certain other specified types of claims, but additional requirements must satisfied to take advantage of this statutory authorization for an award. A separate post on this blog discusses these requirements, including the presentment requirement as a condition precedent. 

The implication of the broader scope of Chapter 38 for debt collection cases is that the plaintiff can recover attorney’s fees even if it does not base its claim on breach of contract (i.e. breach of credit card agreement in a credit card debt suit), but uses an alternative theory, such as account stated, which courts of appeals in some appellate districts (but not all) have blessed as a viable theory of recovery even though the original creditor is a bank, rather than a merchants that sold goods on credit, or a provider of professional services.   

REASONABLENESS AND NECESSITY OF FEES SOUGHT UNDER CHAPTER 38  

The principal evidentiary requirements for a viable fee claim under Chapter 38 (and likely on any other basis) encompass the elements of reasonableness and necessity of the amount claimed. 
  
Reasonableness is a fact issue because attorney effort and time vary across cases and, as such, requires evidence. Reasonableness, of course, also depends on comparison with what other attorneys charge for similar efforts in similar cases, and thus requires the opinion of an expert familiar with the relevant market for legal services.

Disputes over reasonableness and necessity of attorneys fees claimed in debt collection suits, and defensive strategies, are the subject of a subsequent post. (Click link). 

But the Texas Civil Practice & Remedies Code constitutes Texas law, and would arguably be inapplicable if the Plaintiff's claim is governed by a credit card agreement that specified that the law of another state applies. The issue can, of course, be waived, and that is what typically happens even in the minority of collection cases in which the debtor hires an attorney.

If the other jurisdiction's law is found to apply, however, the Plaintiff would have rely on authority from the other state that permits attorney fee recovery as an exception to the American Rule, and would be subject to any applicable limitations.

DOES TEXAS LAW APPLY TO THE FEE CLAIM?

Most credit card agreements (CMAs) contain a choice-of law clause that specifies that the law of a state other than Texas applies to the extent federal law does not apply. The most common states are Delaware, South Dakota, and Utah.

Federal law is mentioned because the issuers are federally regulated; many are even established under federal law, as reflected in part of their name: National, NB for national bank, or NA for National Association. Only national banks are allowed to use the term "national". A list on national banks can be found on the website of the Office of the Comptroller of the Currency.

Chapter 38 of the Texas Civil Practice of Remedies Code authorizes fee recovery for a successful breach-of-contract cause of action irrespective of where the contract was signed and what state's law applies. It even authorizes fee recovery in a case involving an oral contract, and on other specified types of claims, such as sworn account, materials furnished, and services rendered.

In order to thwart a plaintiff's claim for recovery of attorney's fees under Texas law (i.e., dispute its right to invoke chapter 38 altogether), the Defendant would have to seek enforcement of the choice-of-law provision in the relevant contract. -- > Motion for judicial notice and application of another state's law 

It may also be necessary to convince the trial court that a claim for attorney's fees a matter of substantive law, and that is not a matter for which the forum state supplies the law. There is such a dispute regarding on whether the statute of limitations is procedural or substantive. As for attorney's fees, however, existing case law stands for the proposition that recovery of attorneys' fees is a substantive, not a procedural, issue and that it will be governed by the law governing the substantive issues.   

IS IT WORTH CHALLENGING THE APPLICABILITY OF TEXAS LAW? 

Probably not, in most cases, for several reasons: (1) The choice-of-law state will likely also authorize recovery of attorney's fees by statute or rule; and (2) the Defendant would either have to prove up the contract and its terms, or agree with the Plaintiff that the unsigned version of a cardmember agreement that it produced (attached to its petition, in discovery, or as a summary judgment or trial exhibit) is the correct one, and that both parties are bound by its terms. In other words, the Defendant would give up all arguments and objections relating to Plaintiff's proof of the correct contract and Defendant's liability under it.

The Defendant would surrender a potential defense to Plaintiff's claim because the Plaintiff has the burden to prove the contract terms, and may have difficulty doing so. After all, cardmember agreements are rarely signed (by the consumer/card holder) and issuing banks typically have (or have over time issued) numerous different versions. Therefore, a creditor must establish the Defendant's liability on the unsigned contract document offered as a trial or summary judgment exhibit with extrinsic contract-formation proof, i.e. proof of offer and acceptance.

IS THE OTHER STATE'S LAW MORE FAVORABLE?

If there is no dispute or fact issue regarding the identity of the contract that controls the debt claim (and Defendant's liability under its terms), it may be worthwhile researching whether the law of the jurisdiction specified in the choice-of-law clause differs in a significant way, and whether it is more or less favorable to the defendant regarding fees. This is the key consideration generally when choice-of-law is a potential issue in any lawsuit, and the reason why lawyers spar over it.  

Researching the other state’s law may pay off where the Plaintiff's fee claim seems excessive. But it would be only one option among several, to counter an unreasonably large fee claim. See -- > Countering attorney fee claim and fee affidavits.

There may, of course, be good reasons to file a motion for judicial notice and application of the law of the state chosen in the choice-of-law clause, -- reasons that have nothing to do with attorney's fees.

A savvy attorney for the defense may, for example, challenge a Plaintiff's attempted recovery under a common-law theory other breach of contract on which the Plaintiff has favorable Texas appellate precedent (in some appellate districts) that have no counterpart under the jurisprudence of the choice-of-law state.

See -- > Account stated claim as an alternative theory to recover a credit card debt under Texas law. 

-- > Open account suit: a questionable basis for recovery of a credit card debt.

SAMPLE CHOICE OF LAW CLAUSES FROM CREDIT CARD AGREEMENTS
(click on image to enlarge the display) 

US Bank NA ND: North Dakota