## Facts

- Integrated Telecom Express, Inc., a broadband-related technology company, entered a 10-year Silicon Valley commercial lease in 2001 at about $200,000 per month.
- By its 2002 Chapter 11 filing, Integrated had about $105.4 million in cash and $1.5 million in other assets, with miscellaneous liabilities of about $430,000.
- The landlord asserted a proof of claim for lease damages with a present discounted value of about $26 million.
- Integrated faced securities class-action litigation tied to its IPO; the litigation was capped at $25 million, with Integrated’s expected out-of-pocket exposure limited to a $5 million reserve due to insurance coverage.
- Integrated’s board pursued a plan to liquidate operations and return value to shareholders.
- The board authorized a letter threatening a bankruptcy filing to use 11 U.S.C. § 502(b)(6) to cap the landlord’s lease-damages claim unless the landlord accepted an $8 million termination settlement.
- After negotiations failed, Integrated filed Chapter 11, moved to reject the lease, sold intellectual property for about $2 million, and sold remaining assets for about $500,000.
- The Chapter 11 plan contemplated substantial distributions to equity holders, with the landlord’s recovery limited by the § 502(b)(6) cap.
- The landlord moved to dismiss the case as a bad-faith filing.

## Issues

1. Whether a Chapter 11 petition by a highly solvent, cash-rich debtor lacking genuine financial distress satisfies the implicit good-faith filing requirement.
2. Whether Chapter 11 may be used primarily to invoke § 502(b)(6) to reduce a single creditor’s lease-damages claim and increase distributions to equity.

## Decision

- The Third Circuit reversed the district court’s affirmance of the bankruptcy court’s denial of dismissal.
- The court held the Chapter 11 petition was not filed in good faith because Integrated was solvent, not in genuine financial distress, and filed to limit the landlord’s claim and increase shareholder distributions.
- The case was remanded with instructions to dismiss the Chapter 11 proceeding.

## Legal Principles

- Good faith is an implicit prerequisite to Chapter 11 relief and may require dismissal “for cause” under § 1112(b) when absent.
- A valid Chapter 11 filing generally must serve a reorganizational purpose consistent with the Bankruptcy Code, with financial distress as a central consideration.
- Resort to Chapter 11 solely to obtain Code-imposed limits on a creditor’s rights, without a valid reorganizational objective, constitutes bad faith.
- Courts assess good faith under a totality-of-the-circumstances analysis, including the debtor’s financial condition, motivations, timing, creditor structure, and whether the case is essentially a two-party dispute better addressed outside bankruptcy.

## Conclusion

The Third Circuit ordered dismissal because the debtor, though solvent and cash rich, used Chapter 11 chiefly as a tactical means to cap a landlord’s lease-damages claim under § 502(b)(6) and channel the resulting value to shareholders, which failed the good-faith requirement.


In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004)