Opinion ID: 895336
Heading Depth: 2
Heading Rank: 1

Heading: Is a Holder's Section 3.414 Claim Against a Drawer a Contractual Claim to Which Section 38.001(8) Applies?

Text: Texas adheres to the American Rule for the award of attorney's fees, under which attorney's fees are recoverable in a suit only if permitted by statute or by contract. See, e.g., Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat'l Dev. & Research Corp., 299 S.W.3d 106, 120 (Tex. 2009); Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 310-11 (Tex.2006). [8] Texas Civil Practice and Remedies Code section 38.001 is one of several statutes modifying the American Rule. It provides, in relevant part: 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:. . . (8) an oral or written contract. TEX. CIV. PRAC. & REM.CODE § 38.001(8). [9] The Legislature instructs us to construe section 38.001 liberally . . . to promote its underlying purposes. See id. § 38.005. [10] Although Chapter 38 does not explain its underlying purposes, there are at least two reasons for allowing a claimant to recover attorney's fees on a contract suit. First, a wronged claimant may recover the full amount of her damagesincluding costs in having to litigate the suitfrom the wrongdoer, so that she is made whole. See Shook v. Walden, 304 S.W.3d 910, 922 (Tex.App.-Austin 2010, no pet.). And, second, a party with a small but valid contract claim [11] is more likely to hazard bringing suit since the claimant may recover attorney's fees if successful, even if the potential amount of attorney's fees is greater than the amount of the contract. [12] Section 38.001's establishment of a one-way fee shift means that a claimant does not risk having to pay the defendant's attorney's fees if the suit is unsuccessful. See TEX. CIV. PRAC. & REM.CODE § 38.001. To recover attorney's fees under section 38.001, a claimant must meet several prerequisites. The claimant must: (1) plead and prevail on a claim for which attorney's fees are permitted under section 38.001, (2) be represented by an attorney, (3) present the claim to the opposing party or his agent, and (4) demonstrate that the opposing party did not tender payment within thirty days after the claim was presented. See id. §§ 38.001, .002. Additionally, Chapter 38 excludes various types of contracts from its reachspecifically, certain contracts issued by insurers. See id. § 38.006. Here, Half-Price was represented by an attorney, presented its claim to UAIC, and established that UAIC did not tender payment within thirty days. Further, Half-Price is not suing on an excluded insurance contract. Thus, our sole inquiry in determining if Half-Price may collect attorney's fees is whether its suit is a claim on a contract to which section 38.001(8) applies. As a threshold matter, we decide whether a check is a contract. We conclude that it is. It is settled law that a checkas a type of negotiable instrumentis a formal contract, a rule established not only in treatises [13] but also the common law of this state [14] and other states. [15] A negotiable instrument is an unconditional promise or order to pay a fixed amount of money, TEX. BUS. & COM. CODE § 3.104(a), a definition that fits squarely within the meaning of a contract as a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in someway recognizes as a duty, see RESTATEMENT (SECOND) OF CONTRACTS § 1 (1981). [16] The drawer of a check has a clear obligation to pay the holder of a dishonored check under section 3.414. See TEX. BUS. & COM.CODE § 3.414; FRED H. MILLER & ALVIN C. HARRELL, THE LAW OF MODERN PAYMENT SYSTEMS AND NOTES § 1.03 (practitioner's ed. 2002) (A negotiable instrument is a contract. The contractual nature of a negotiable instrument is evident in the case of a promissory note, where there is an express promise to pay. But it is also true of drafts, where the promise to pay is implied. . . . Article 3 thus constitutes a special body of legal rules governing the particular kinds of contracts called negotiable instruments.). The parties dispute, however, whether a claim by an endorsee holder of a check against a drawer under section 3.414 is a contractual claim. [17] UAIC contends that while a suit by a payee against a check's drawer is undoubtably contractual in nature, a suit by a holder like Half-Price is merely a statutory claim inasmuch as the holder and drawer never entered into a contract with each other. The premise for UAIC's distinction is that a drawer (as the person writing the check) and a payee (as the person named as the recipient of the check) are both parties to the contract, while a holder is not identified anywhere within the four corners of the check and must instead seek relief under section 3.414 rather than the common law of contracts. Whether a suit on a check is contractual, thus allowing for the recovery of attorney's fees under section 38.001(8), has recently divided the courts of appeals. Until the Dallas Court of Appeals' Time Out Grocery opinion, the courts of appeals that examined this issue held that such a suit is contractual in nature. [18] But in 2005, the Dallas Court of Appeals held that a claim under section 3.414 is statutory rather than contractual, and thus the holder was not entitled to attorney's fees under section 38.001(8). Time Out Grocery, 187 S.W.3d at 44-45. In reaching this holding, the court concluded that a check does not meet the requirements for the formation of a contract under the common law. Id. at 44. The court further distinguished previous court of appeals' opinions that had approved section 38.001(8) attorney's fees for claims on checks, observing that (1) the Time Out Grocery suit involved an ordinary, rather than a cashier's, check, and (2) the claimant sued the drawer rather than the payee. Id. [19] UAIC implicitly concedes that some of the reasoning in Time Out Grocery was flawed, specifically (1) the court's rationale that a formal contract must meet the same formation requirements as a simple contract in order to be considered a contract, [20] and (2) the court's attempt to distinguish a cashier's check from an ordinary check. [21] However, UAIC continues to argue that a suit by a holder against a drawer under section 3.414 lacks a contractual basis, albeit on grounds that the holder is not explicitly identified within the four corners of the check. We disagree and conclude that a suit on a check under section 3.414 is a suit on a contract, whether it is brought by a holder or a payee. We accordingly disapprove Time Out Grocery and its progeny. Contrary to UAIC's assertion, the drawer of a check enters into a contract in which the drawer unconditionally promises to pay not only the payee, but also a subsequent holder of the instrument. Because the check itself is the contract, it embodies the full agreement between the parties, as manifested by the drawer's signature on the check; in signing the check, the drawer contractually obligates itself to pay the amount of the instrument to the instrument's holder. See 22 RICHARD A. LORD, WILLISTON ON CONTRACTS § 60:1 (4th ed.2002). [22] When a check is appropriately transferred to another person by endorsement, the transfer vests in the transferee any right of the transferor to enforce the check. See TEX. BUS. & COM.CODE §§ 3.201, .203. Thus, the drawer's obligation extends not just to the payee, but also to any downstream holder of the instrument. The crux of a claim under section 3.414whether brought by a payee or holderis that the drawer possesses an obligation to pay the check according to its terms in the event the drawer's bank dishonors the instrument. See id. § 3.414(b); WILLIAM H. LAWRENCE, UNDERSTANDING NEGOTIABLE INSTRUMENTS AND PAYMENT SYSTEMS § 4.02 (2002) (The [drawer's] signature constitutes the outward manifestation of an intent to be bound that subsequent parties are reasonably entitled to rely upon. . . . These consequences have their legal support in the Article 3 contracts.). And when a drawer does not honor that obligation and the holder sues the drawer, the suit is on the instrumentand thus the contractitself. See LAWRENCE, supra, §§ 4.02-.03 (A lawsuit brought on the instrument is premised on contract liability arising from the defendant's signature. . . . In the absence of an explicit disclaimer, everyone who signs a negotiable instrument promises to pay it. This promise is a significant part of the conceptual basis for recognizing liability on the instrument as contractual liability.). Article 3's identical remedies for payee and holder when suing the drawer for a dishonored instrument further evidences the infirmity of UAIC's distinction. See TEX. BUS. & COM.CODE § 3.414(b). Section 3.414's codification of a drawer's obligation to pay a holder does not alter our conclusion. Article 3 is based on the common law of contracts regarding negotiable instrumentsspecifically the law merchant. [23] The law merchant was codified as the Uniform Negotiable Instruments Law (NIL) beginning in 1896, and was eventually adopted by every state, including, in 1919, Texas. 22 WILLISTON ON CONTRACTS § 60:1; ROY RYDEN ANDERSON ET AL., ANDERSON, BARTLETT & EAST'S TEXAS UNIFORM COMMERCIAL CODE ANNOTATED § 3.101 cmt. (2007). Article 3 is the successor of the NIL. 22 WILLISTON ON CONTRACTS § 60:1. Even before the codification of the law merchant in the NIL, and certainly before the codification of article 3, this Court observed that a check is a contract, and treated suits on checks as suits on contracts. See Yale v. Ward, 30 Tex. 17, 23 (1867) ([The drawer's] contract under the law merchant is, that if the drawee shall not accept the bill [of exchange] when presented, or shall not pay it when it becomes payable, and the holder shall give him due notice thereof, then he will pay the amount of the bill.). A holder's ability to sue on the instrument, as codified in section 3.414, is equally a common law principle. As early as 1758, in the seminal English commercial paper case, Miller v. Race, a holder could sue and recover for the amount of a dishonored instrument. See Miller v. Race, (1758) 97 Eng. Rep. 398 (K.B.) 401-02; 1 Burr. 452, 458 (establishing holder in due course rule, which allows a holder who obtains the negotiable instrument for value, in good faith, and without notice of any claims or defenses, the entitlement to enforce the promise to pay). [24] These deep roots in the common law are reflected in article 3's provision of many common law contract defenses in the event of suit. See, e.g., TEX. BUS. & COM.CODE § 3.303(b) (allowing drawer a defense if the instrument is issued without consideration); id. § 3.305(a) (providing that the obligor of a negotiable instrument has many defenses available for simple contracts). [25] Indeed, the UCC explicitly provides that it is to be supplemented by principles of law, including the law merchant and the law relative to capacity to contract, unless displaced by the UCC's specific provisions. See id. § 1.103(b). Thus, section 3.414 does not convert what is a common law contractual obligation into a purely statutory one. As a tool of commerce, a check would be meaningless if, in the absence of a statute, a drawer was burdened with no contractual obligation to pay the amount of a dishonored check to the holder of the instrument. Further, under the economic loss rule, we have held that a claim sounds in contract when the only injury is economic loss to the subject of the contract itself. See Med. City Dallas, Ltd. v. Carlisle Corp., 251 S.W.3d 55, 61 (Tex.2008) (`When the injury is only the economic loss to the subject of a contract itself, the action sounds in contract.') (quoting Am. Nat'l Petroleum Co. v. Transcon. Gas Pipe Line Corp., 798 S.W.2d 274, 282 (Tex.1990)). Here, Half-Price's damages are solely based on its economic loss due to UAIC's failure to pay the amount of the dishonored checkthe fact that Half-Price sued pursuant to a statutory provision does not negate the reality that its damages sound in contract. [26] Because we conclude that a holder's suit against a drawer under section 3.414 is contractual, the remaining question is whether section 38.001(8) applies to such a suit. Section 38.001 applies to a claim for an oral or written contract. TEX. CIV. PRAC. & REM.CODE § 38.001(8). As discussed above, a check is a formal contract. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 6. Importantly, section 38.001(8) does not distinguish between formal contracts and other types of contracts, nor between codified contract claims as compared to those that have not been codified. Section 38.001(8) does not narrow its scope to claims for breach of contract, nor differentiate between different types of contracts: it merely applies to claims on written or oral contracts. See TEX. CIV. PRAC. & REM.CODE § 38.001(8). [27] Chapter 38 provides an express exclusion for certain insurance contracts, but not for contracts involving financial instruments. In Medical City, we held that attorney's fees were available under section 38.001(8) for an article 2 breach of express warranty claim, concluding that a claim based on an express warranty is, in essence, a contract action in that it involves a party seeking damages based on an opponent's failure to uphold its end of the bargain. See Med. City, 251 S.W.3d at 58, 61. We further noted that a breach of express warranty claim, while distinct from a breach of contract claim, is a creature of contract and is contract-based. Id. at 60-61. The same is true here: though perhaps not a traditional breach of contract claim, Half-Price has brought a claim that is contract-based. See id. at 61. Finally, as we have noted, the Legislature instructs us to construe section 38.001 liberally, not strictly, to promote its underlying purposes. See TEX. CIV. PRAC. & REM. CODE § 38.005; see also Med. City, 251 S.W.3d at 59 (noting that courts are to construe section 38.001 liberally to promote its underlying purposes); Preload Tech., Inc. v. A.B. & J. Constr. Co., 696 F.2d 1080, 1094-95 (5th Cir.1983) (applying section 38.001(8) to promissory estoppel claim given liberal construction afforded under that section). Applying section 38.001 here would do just thatit would allow a plaintiff with a small but valid contract claim to recoup its full amount of damages, a principle in line with the UCC's direction to liberally administer the remedies in the Code so that the aggrieved party may be put in as good a position as if the other party had fully performed. TEX. BUS. & COM.CODE § 1.305(a). Here, Half-Price conclusively proved UAIC's contractual liability on the check as a matter of law, as well as its claim for attorney's fees. By its plain terms, we hold that section 38.001(8) applies to Half-Price's contract claim brought pursuant to section 3.414.