In this diversity case, Appellee John Shelak sued White Motor Co. for damages resulting from injuries he sustained in 1972 in the course of his employment. The injuries occurred when a metal step on a truck tractor manufactured by White Motor broke and caused Shelak to fall. Appellant Transport Indemnity Co. (Transport), the workers' compensation carrier for Shelak's employer, had paid a total of $17,307.60 to Shelak for compensation and medical expenses as a result of the injuries. In 1975, Transport moved to intervene, claiming a subrogation interest in any recovery Shelak might obtain from White, along with reasonable costs and attorney's fees, under the provision of the Texas Workers' Compensation Act governing actions against third parties, Tex.Rev.Civ.Stat.Ann. art. 8307, § 6a (Vernon 1967).1

During the trial, the attorneys representing Shelak, White Motor and Transport stipulated that the attorney's fee allowed for Transport's attorney would be $3,500.00, "(s)ubject to verdict in excess of $61,000.00 and further subject to ruling by court as to the "(l)aw regarding fee." Record on Appeal at 28.

The jury returned a verdict of $125,000.00, and White Motor appealed. This court affirmed with respect to liability, but remanded for a new trial on the issue of damages. Shelak v. White Motor Co., 581 F.2d 1155 (5th Cir. 1978). Before the second trial, Shelak and White Motor settled for a lump sum of $150,000.00 plus court costs. Transport then filed a motion in the district court for an award, to be paid out of Shelak's settlement recovery, of a total of $22,445.70 $17,307.60 for compensation and medical expenses, $1,638.10 for out-of-pocket litigation expenses and $3,500.00 for stipulated attorney's fees.

The district court awarded Transport the amount of its subrogation interest for compensation and medical expenses,2 as well as its claimed litigation expenses. However, it refused to grant Transport's request for attorney's fees. Instead, after considering the respective contribution of counsel for Shelak and Transport to Transport's recovery, the court awarded a fee of $4,615.00 to Shelak's attorneys for their role in protecting Transport's interests.3 The district court cited Fed.R.Civ.P. 54 and art. 8307, § 6a as authority for its fee award.

The sole issue on appeal is whether the district court erred in awarding an attorney's fee to Shelak's attorneys out of Transport's recovery instead of awarding Transport an attorney's fee out of Shelak's lump sum settlement. Resolution of that issue turns on whether the district court applied the appropriate body of law in making the fee award.

Our cases have made it clear that in an ordinary diversity case, state rather than federal law governs the issue of the awarding of attorney's fees. See, e. g., Perkins State Bank v. Connolly, 632 F.2d 1306, 1310 (5th Cir. 1980); Reynolds v. Allstate Insurance Co., 629 F.2d 1111, 1116 n.11 (5th Cir. 1980); United States v. Midwest Construction Co., 619 F.2d 349, 352-53 (5th Cir. 1980) (characterizing the issue of awarding attorney's fees as substantive); Schilling v. Belcher, 582 F.2d 995, 1003 (5th Cir. 1978); see also Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 259 n.31, 95 S. Ct. 1612, 1622 n.31, 44 L. Ed. 2d 141 (1975); 6 Moore's Federal Practice P 54.77(2) at 1712-13 (2d ed. 1976). Thus, the discretionary authority granted district courts by Fed.R.Civ.P. 54(d) to award attorney's fees must be exercised within the bounds of applicable state law, and fee awards which contravene state law cannot be upheld on appeal.4

Transport contends that while the district court attempted to follow Texas law on the attorney's fee issue, it erred by applying the current rather than the pre-amendment version of art. 8307, § 6a. While Shelak concedes that the pre-amendment version of art. 8307, § 6a is the applicable Texas law,5 he argues that the attorney's fee award was authorized under the pre-amendment statute. After considering both versions of the statute and the relevant case law, we are convinced that the district court applied the current version of the Texas statute, and that the court's refusal to award a fee to Transport and its award of a fee to Shelak's attorneys was erroneous under the pre-amendment statute.

Texas precedent makes it plain that the pre-amendment version of art. 8307, § 6a did not authorize an attorney's fee award to plaintiff's counsel out of the workers' compensation carrier's recovery. Reliance Insurance Co. v. Kronzer, Abraham & Watkins, 582 S.W.2d 170, 173 (Tex.Civ.App. Houston (1st Dist.) 1979, no writ); Simpson v. Texas Employers Insurance Ass'n, 519 S.W.2d 209, 211-13 (Tex.Civ.App. Ft. Worth 1975, writ ref'd n. r. e.); Dover v. Casualty Reciprocal Exchange, 410 S.W.2d 306, 307 (Tex.Civ.App. Amarillo 1966, no writ). Rather, under the pre-amendment statute, the insurance company was entitled to recover expenses incident to recovery of its subrogation interest, including a reasonable attorney's fee, out of the plaintiff's recovery. Pan American Insurance Co. v. Hi-Plains Haulers, Inc., 350 S.W.2d 644, 646 (Tex.1961); Fort Worth Lloyds v. Haygood, 246 S.W.2d 865 (Tex.1952); Smith v. Henger, 226 S.W.2d 425, 434-35 (Tex.1950); Traders & General Insurance Co. v. West Texas Utilities Co., 165 S.W.2d 713, 716 (Tex.1942); Reliance, 582 S.W.2d at 173; Dover, 410 S.W.2d at 307. In sharp contrast to the pre-amendment statute, the current law, in cases in which the carrier is represented by an attorney, allows the court to award an attorney's fee to the plaintiff out of the compensation carrier's recovery of up to one-third of the carrier's subrogation interest. See Texas General Indemnity Co. v. Jones, 601 S.W.2d 194, 196 (Tex.Civ.App. El Paso 1980, no writ); Insurance Company of North America v. Stuebing, 594 S.W.2d 565 (Tex.Civ.App. Ft. Worth 1980, writ ref'd n. r. e.). Thus, it appears that the district court applied the current version of art. 8307, § 6a in awarding a fee to Shelak's attorneys out of Transport's recovery. Because the district court's fee award contravened the pre-amendment Texas statute, which Shelak concedes is the applicable state law, the award was erroneous.

In addition, Transport is entitled under the pre-amendment statute to a reasonable attorney's fee out of Shelak's recovery. In the original trial, all parties signed a stipulation providing that, subject to the court's ruling on the law with respect to attorney's fees, the attorney's fee for Transport's counsel would be $3,500.00. Shelak admits that the purpose and effect of the stipulation was to establish the amount of attorney's fees recoverable by (Transport) out of (Shelak's) recovery, in the event the (c)ourt were to determine that such was appropriate." Brief of Appellee at 16. We conclude that the stipulation with respect to the proper amount of Transport's attorney's fee must be given effect.

Therefore, the judgment of the district court with respect to attorney's fees must be reversed and judgment rendered for attorney's fees against John Shelak in favor of Transport Indemnity Co., in the amount of $3,500.00.

REVERSED AND RENDERED.