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Competitive Bidding

DID THE SCHOOL DISTRICT DISCRIMINATE AGAINST THE BANKRUPT COMPANY?

Case citation:  Devon Enterprises, LLC v. Arlington ISD, __ Fed. Appx. __, 2013 WL 5526699 (5th Cir. 2013).

Summary:  Devon Enterprises, LLC, doing business as Alliance Bus Charters, was a charter bus company providing bus services to Arlington Independent School District, and others.  In October of 2010, the company filed a petition in bankruptcy under Chapter 11 of the U.S. Bankruptcy Code.  Around the same time, the district began accepting bids for its charter bus carrier contract for the 2010-11 school year.  Devon submitted a bid for the contract.  In reviewing the bid, the district’s director of purchasing noticed that the company had reported an injury accident to the U.S. Department of Transportation during the previous reporting period.  Shortly thereafter, an employee of a competing charter bus company informed the district that Devon had a petition in bankruptcy.  The district also was aware that, on one occasion, a Devon bus had broken down, leaving students stranded in El Paso.  In addition, Devon had difficulty maintaining a valid certificate of insurance on file.  The district did not select Devon as the charter bus carrier for the 2010-11 school year.

In December of 2010, the district’s associate superintendent for finance sent an email to the district’s superintendent stating that she confirmed that Devon was the company that the district did not award a bid to for charter bus services “because they are currently in bankruptcy.”  Devon later filed suit against the school district alleging violations of the Bankruptcy Code, 11 U.S.C. § 525(a) and Texas competitive procurement procedures, Texas Education Code § 44.031.  The company claimed that the district discriminated against it solely because it had recently filed for bankruptcy.  The school district requested judgment in its favor prior to trial on each of Devon’s claims and the trial court granted that request.  [See, Devon Enterprises, LLC v. Arlington ISD, 2012 WL 6200229 (N.D. Tex. 2012)(unpublished); Texas School Administrators’ Legal Digest, March 2013].  Devon then appealed to the Fifth Circuit Court of Appeals.

Ruling:  The Fifth Circuit reversed the trial court judgment in favor of the school district and returned the case to the lower court.  Under § 525(a) of the U.S. Bankruptcy Code, a governmental unit may not discriminate against a person “solely because such bankrupt or debtor is or has been a debtor under this title . . .”
In this case, the trial court disregarded the associate superintendent’s email confirming that Devon was the company that the district did not award a bid for bus services “because they are currently in bankruptcy.”

According to the appeals court, the trial court erred when it classified that statement as a “stray remark” and excluded it from evidence.  The remark was “written by a person involved in the decisionmaking chain at a time reasonably near the decisive events.”  The appeals court considered the statement relevant because it made the district’s alleged discrimination more or less likely and was of consequence in determining whether the district denied the bid solely because of Devon’s bankruptcy.  Further, according to the Fifth Circuit, the parties presented conflicting evidence of the district’s motivation for rejecting Devon’s bid.  The evidence created genuine issues of material fact on whether the district violated § 525(a) of the U.S. Bankruptcy Code, and whether the district did not comply with Texas Education Code § 44.031(b).

Things to Remember:  The court noted that the term “solely” in this context is to be narrowly construed.  The law prohibits discrimination against a company that filed for bankruptcy protection “solely” because of that fact, but does not prohibit “examination of the factors surrounding the bankruptcy, the imposition of financial responsibility rules if they are not imposed only on former bankrupts, or the examination of prospective financial condition or managerial ability.”  It does seem logical that a district would want answers to a lot of questions before entering into a contract with a vendor that has recently gone into bankruptcy.