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1999 Term, Number 6 / November 8, 1999

Today the Supreme Court granted certiorari in three cases, two of which are of potential interest to the business community. Amicus briefs in support of the petitioner are due on Thursday, December 23, 1999, and amicus briefs in support of the respondents are due on Monday, January 24, 2000. Any questions about this case should be directed to Donald Falk (202-263-3245) or Eileen Penner (202-263-3242) in our Washington office. Attached to this Report is an interview with our partner, Roy T. Englert, Jr., that recently appeared on Legal-Times.com.

1. Employment Discrimination Age Discrimination in Employment Act Sufficiency of Evidence ("Pretext-Only" or "Pretext-Plus"). The Age Discrimination in Employment Act (ADEA) prohibits employers from taking adverse employment actions against any employee over the age of 40 "because of such individual's age." 29 U.S.C. 623(a)(1). The Supreme Court granted certiorari in Reeves v. Sanderson Plumbing Products, Inc., No. 99-536, to decide (1) whether, to survive an employer's motion for judgment as a matter of law ("JMOL") in an age discrimination case, an employee need only show that the employer's articulated justification is pretextual, or must also present direct evidence that the employer's motivation was discriminatory; and (2) whether, in ruling on a motion for JMOL, a district judge should consider all of the evidence or only the evidence favoring the non-movant. (The petition also purports to present the settled question whether the standard for deciding a motion for JMOL is the same as that used for deciding motions for summary judgment. It is. See Anderson v. Liberty Lobby, 477 U.S. 242, 251-252 (1986).)

Reeves, a 57-year-old production line supervisor at Sanderson Plumbing Products, was terminated after an investigation revealed numerous errors in time records for which he was responsible. Reeves' own (younger) supervisor also was discharged; another supervisor responsible for the errors had resigned some months earlier. In the months preceding Reeves' dismissal, a senior manager had remarked to Reeves that he was so old he "must have come over on the Mayflower" and that he was "too damn old to do the job."

Reeves sued Sanderson under the ADEA, and convinced a jury that his dismissal was based on his age. The district court denied Sanderson's motion for JMOL.

The Fifth Circuit reversed in an unpublished opinion. In accord with its en banc decision in Rhodes v. Guiberson Oil Tools, Inc., 75 F.3d 989 (5th Cir. 1996), the court of appeals held that Reeves was entitled to submit the case to the jury only if he had presented sufficient evidence both that (1) Sanderson's proffered reason was pretextual, and that (2) age was Sanderson's true motivation. The Fifth Circuit determined that, although Reeves may have presented evidence sufficient to show that Sanderson's reason was pretextual, he had not introduced evidence that Sanderson's true motivation was discriminatory. In the court's view, the two age-related comments by a Sanderson manager were mere "stray remarks" that were too far removed from Reeves' dismissal to establish that the decision itself was discriminatory.

There is a deep and long-standing conflict on the principal question in this case, involving the application to the full range of employment discrimination law of the familiar burden-shifting mechanism set forth in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). The conflict reflects two seemingly contradictory statements in St. Mary's Honor Center v. Hicks, 509 U.S. 502 (1993): (1) the plaintiff must prove "both that the reason was false, and that discrimination was the real reason" (id. at 515), and (2) if the jury "disbelie[ves] * * * the reasons put forward by the defendant" for the challenged action, "'[n]o additional proof of discrimination is required'" (id. at 511).

Adopting a "pretext-plus" position, the First, Fourth, and Fifth Circuits have held that, once an employer articulates a nondiscriminatory justification for its actions, an employee cannot proceed to a jury without evidence both that the employer's explanation is false and that its true motivation was discriminatory. See Woods v. Friction Materials, Inc., 30 F.3d 255 (1st Cir. 1994); Theard v. Glaxo, Inc., 47 F.3d 676 (4th Cir. 1995). By contrast, several circuits use a "pretext-only" standard, holding that a plaintiff need only present evidence that the employer's stated reason was false. See, e.g., Gallo v. Prudential Residential Services, 22 F.3d 1219 (2d Cir. 1994); Sheridan v. E.I. DuPont de Nemours & Co., 100 F.3d 1061 (3d Cir. 1996) (en banc); Washington v. Garrett, 10 F.3d 1421 (9th Cir. 1994); Combs v. Plantation Patterns, 106 F.3d 1519 (11th Cir. 1997).

The Court also will resolve a conflict among the circuits on the second question. The Fifth Circuit, joined at least by the First, Second, Seventh, and Ninth Circuits, has held that a district court deciding a motion for JMOL should consider all of the evidence presented at trial. See Crane v. Green & Freedman Baking Co., 134 F.3d 17 (1st Cir. 1998); Merrill Lynch Interfunding, Inc. v. Argenti, 155 F.3d 113 (2d Cir. 1998); Allen & O'Hara, Inc. v. Barrett Wrecking, Inc., 898 F.2d 512 (7th Cir. 1990); Electro Source, Inc. v. United Parcel Service, Inc., 95 F.3d 837 (9th Cir. 1996). In the Eighth Circuit, by contrast, a court deciding a motion for JMOL may consider only the evidence that supports the non-movant. See Rockwood Bank v. Gaia, 170 F.3d 833 (8th Cir. 1999).

This case is of enormous importance for all employers. JMOL is a critical tool in the defense of employment discrimination claims of all kinds. Because proof of "pretext" may amount only to evidence that the employer's proffered reasons were debatable, juries in employment discrimination claims may award huge damages based on no more than an employee's protected status coupled with the jury's disagreement with the employer's assessment of the employee's merit. A more stringent standard would help employers avoid the stigma of intentional discrimination verdicts where there was no direct evidence of discriminatory motivation. In resolving the principal question, the Court also may address the circumstances under which supervisors' stray comments concerning age or other protected status (such as race or religion) constitute direct evidence of discrimination; that, in itself, is a frequently litigated issue. Finally, because of the importance of JMOL in a broad range of litigation, businesses may wish to be heard on whether a court determining a motion for JMOL may consider all the undisputed evidence (as well as disputed evidence favoring the non-movant), or must consider only the evidence favoring the non-movant.

2. Bankruptcy Standing of Administrative Claimants Under Section 506(c). Suppliers of goods and services needed for the continued operation of a Chapter 11 debtor have priority over other unsecured creditors. 11 U.S.C. 503. Because debtors often have no unsecured assets, however, the bankruptcy "trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim." 11 U.S.C. 506(c). The Supreme Court granted certiorari in Hartford Underwriters Insurance Co. v. Magna Bank, N.A., No. 99-409, to decide whether, in addition to the trustee, administrative claimants have standing to seek payment under 11 U.S.C. 506(c).

Magna Bank made secured loans to Hen House Interstate, Inc. After Hen House petitioned for bankruptcy under Chapter 11, Hartford Underwriters Insurance Company provided Hen House with workers' compensation insurance coverage that was required under Missouri law. Hen House failed to pay premiums totaling almost $52,000. In January 1993 the bankruptcy court converted the Hen House case into a Chapter 7 liquidation proceeding, and appointed a trustee.

Hartford brought an action in the bankruptcy court seeking allowance of its claim as an administrative expense. The bankruptcy court held that Hartford had standing under Section 506(c), relying on IRS v. Boatmen's First National Bank, 5 F.3d 1157, 1159 (8th Cir. 1993). Approving the substance of Hartford's claim, the bankruptcy court ordered the surcharge of Magna's secured collateral, and the district court affirmed.

A panel of the Eighth Circuit also affirmed. 150 F.3d 868 (1998). On rehearing en banc, however, a 7-5 majority of the Eighth Circuit overruled Boatmen's and held that the language of Section 506(c) does not afford non-trustee claimants standing to assert claims against a secured creditor's collateral. 177 F.3d 719 (1999). The five dissenting judges believed that the doctrine of prudential standing permitted administrative claimants to bring actions under Section 506(c). See id. at 725 (Heaney, J., dissenting).

The Fourth Circuit, like the Eighth Circuit, has held that non-trustee claimants lack standing under Section 506(c). E.g., Ford Motor Credit Co. v. Reynolds & Reynolds Co. (In re JKJ Chevrolet, Inc.), 26 F.3d 481, 484 (4th Cir. 1994). By contrast, four courts of appeals have held that Section 506(c) does give non-trustee claimants standing. See Precision Steel Shearing, Inc. v. Fremont Financial Corp. (In re Visual Industries, Inc.), 57 F.3d 321, 325 (3d Cir. 1995); North County Jeep & Renault, Inc. v. General Electric Capital Corp. (In re Palomar Truck Corp.), 951 F.2d 229, 232 (9th Cir. 1991); In re Parque Forestal, Inc., 949 F.2d 504, 511-12 (1st Cir. 1991); New Orleans Public Service, Inc. v. First Federal Savings & Loan Ass'n (In re Delta Towers, Ltd.), 924 F.2d 74, 77 (5th Cir. 1991).

This case is of obvious importance to secured lenders and to firms that may provide goods and services to post-petition businesses. The volume of litigation in bankruptcy cases could be even more significantly affected, as the decision may affect the application of other Bankruptcy Code provisions that give trustees the ability to pursue certain claims. For example, the same usage of "trustee" appears in the avoidance provisions governing actions to revoke fraudulent conveyances or preferential transfers of a debtor's assets. See 11 U.S.C. 544(a), 545, 547(b), 548(a), 549(a).

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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