384 F.3d 108 (3rd Cir. 2004), 04-2411, In re Integrated Telecom Express, Inc.
|Citation:||384 F.3d 108|
|Party Name:||In re: INTEGRATED TELECOM EXPRESS, INC. a/k/a Integrated Technology Express, Inc. a/k/a Delaware Integrated Telecom Express, Inc., Debtor NMSBPCSLDHB, L.P., Appellant v. Integrated Telecom Express, Inc.; and The Official Committee of Equity Holders, et al.|
|Case Date:||September 20, 2004|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
Argued Aug. 3, 2004.
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Seth P. Waxman (Argued), Craig Goldblatt, Wilmer Cutler Pickering, Hale & Dorr LLP, Washington, DC, Christopher J. Meade, Wilmer Cutler Pickering, Hale & Dorr LLP, New York, NY, for Appellant.
Laura D. Jones, David W. Carickhoff, Jr., Pachulski, Stang, Ziehl, Young, Jones & Weintraub P.C., Wilmington, DE, Tobias S. Keller (Argued), Pachulski, Stang, Ziehl, Young, Jones & Weintraub P.C., San Francisco, CA, for Appellee Integrated Telecom Express, Inc.
Kevin Gross, Rosenthal, Monhait, Gross & Goddess, Wilmington, DE, Ali M. Mojdehi (Argued), Baker & McKenzie, San Diego, CA, for Appellee Official Committee of Equity Security Holders.
Robert K. Rasmussen, Vanderbilt Law School, Nashville, TN, G. Marcus Cole, Stanford Law School, Stanford, CA, David A. Skeel, Jr., University of Pennsylvania Law School, Philadelphia, PA, Amicus Curiae in Support of Appellant.
Before SMITH, BECKER, and GREENBERG, Circuit Judges.
SMITH, Circuit Judge.
This appeal tests the limits of the good faith requirement applicable to petitions filed under Chapter 11 of the Bankruptcy Code. Appellant NMSBPCSLDHB, L.P. (the "Landlord") appeals from an order of the District Court affirming the Bankruptcy Court's denial of its motion to dismiss for lack of good faith. The Landlord contends that the Debtor, Integrated Telecom Express, Inc. ("Integrated"), was never in financial distress and that the petition in this case was instead filed to frustrate the Landlord's claims and to increase the distribution of the Debtor's estate to Integrated's shareholders at the Landlord's expense. These contentions are corroborated by the record. First, according to schedules filed with the Bankruptcy Court, Integrated had $105.4 million in cash and $1.5 million in other assets at the time that it filed for bankruptcy, and yet the Landlord's proof of claim lists the present discounted value of Integrated's lease obligations at approximately $26 million. Integrated's schedules also list miscellaneous liabilities of approximately $430,000. Thus Integrated was highly solvent and cash rich at the time of the bankruptcy filing. Even if the IPO class action claim, which was capped at $25 million with Integrated's liability limited to a $5 million reserve (the balance to be paid by insurance) was listed at its full alleged value, Integrated was still solvent at the time of filing. Second, in a smoking gun resolution approved by the Board, and notwithstanding its strong financial position, Integrated authorized a letter to the Landlord threatening that if it did not enter into a settlement of the lease in the amount of at least $8 million, Integrated would file for bankruptcy so as to take advantage of § 502(b) (6), which sharply limits the amount that a landlord can recover in bankruptcy for damages resulting from the termination of a lease.
The issue on appeal is whether, on the facts of this case, a Chapter 11 petition filed by a financially healthy debtor, with no intention of reorganizing or liquidating as a going concern, with no reasonable expectation that Chapter 11 proceedings will maximize the value of the debtor's estate for creditors, and solely to take advantage of a provision in the Bankruptcy Code that limits claims on long-term leases, complies with the requirements of the Bankruptcy Code. We conclude that such a petition is not filed in good faith and will therefore reverse.
Integrated was a supplier of software and equipment to the broadband communications industry. In the summer of 2000, Integrated negotiated a lease of real property in Silicon Valley with the Landlord. After several months of negotiation, during which the Landlord evaluated Integrated's business condition and reviewed the company's prospectus, Integrated and the Landlord executed a lease for a term of ten years beginning on February 23, 2001, with a monthly base rent of $200,000, increasing 5 percent annually. The Landlord was aware of the financial risks associated with Integrated's business and willingly accepted those risks.
2001 was a very poor year for Integrated. The market for many of the company's products deteriorated, causing Integrated to suffer net losses of $36.2 million. Integrated hired a management and technology consulting firm in December 2001 to help evaluate Integrated's operating alternatives. Integrated also retained Lehman Brothers, an investment bank, in February 2002, to assist in identifying, soliciting, and evaluating proposals for a sale
or merger of Integrated or its assets. Unable to find a third party willing to enter into such a transaction, and unable to identify an alternative business model, Integrated's Board of Directors prepared a plan for the liquidation and dissolution of the company under state law.
In November 2001, a securities class action styled Richmon v. Integrated Telecom Express, Inc., No. 01-CV-10108-SAS, was filed in the Southern District of New York naming Integrated as a defendant, along with certain officers, directors, and underwriters of Integrated. The class consists of individuals who purchased Integrated stock between August 18, 2000, and December 6, 2000. The class action alleges claims in the amount of $93.24 million for various violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with Integrated's initial public offering of securities. Similar lawsuits concerning more than 300 other companies' initial public offerings have been filed and coordinated as In re Initial Public Offering Securities Litigation, No. 21-MC-00092-SAS (S.D.N.Y.).
On April 18, 2002, Integrated's Board approved a Plan of Complete Liquidation and Dissolution under Delaware law. The two major issues to be resolved prior to dissolution were (1) the disposition of Integrated's intellectual property rights and (2) its remaining obligations under the lease. In May of 2002, the Board approved the sale of substantially all of Integrated's intellectual property and related assets to Real Com, a corporation to be formed by certain of Integrated's officers and directors. The proposed purchase price was $1.5 million plus assumption of Integrated's technical support and warranty obligations.
Thereafter, Integrated attempted to negotiate an accord and satisfaction of its lease. Integrated asserts that, "[d]uring this time, Debtor first became aware that it might use Chapter 11 to, among other things, address Landlord's claims." Appellee's Br. at 6-7. On August 13, 2002, the Board authorized a Chapter 11 filing in the event that the Landlord would not accept $8 million as an accord and satisfaction of Integrated's obligations under the lease. The minutes of the August 13 Board meeting state, in pertinent part:
Mr. Regel [Integrated's CEO] updated the Board on his discussions with the landlord subsequent to the last board meeting. Mr. Regel noted that the landlord did not appear to believe that the Company would seriously consider making a bankruptcy filing.
Ms. Murray [of the law firm Murray & Murray] next reviewed with the Board the draft letter to the landlord (a copy of which was previously distributed to the Board).
Ms. Murray then reviewed with the Board the timeline ... for a bankruptcy filing and related bankruptcy procedures.
Various members of the Board then asked questions of Ms. Murray related to the draft letter to the landlord and the procedures for, and implications of, a possible bankruptcy filing by the Company. A discussion among the Board ensued, including a discussion of the costs and potential benefits and risks of proceeding with a bankruptcy filing.
Following that discussion, Mr. Regel asked the Board for authority for management to negotiate a settlement with the landlord in an amount in the range of $6 to $7 million. A further discussion among the Board ensued regarding the costs associated with a bankruptcy filing and potential costs of any litigation. After additional discussion, the Board approved the following resolutions:
RESOLVED: That the officers of the Company are, and each of them hereby is, authorized and directed to send the landlord the letter prepared by Murray and Murray in substantially the form reviewed with the Board.
RESOLVED FURTHER: That the officers of the Company are, and each of them hereby is, authorized and directed to negotiate a settlement with the landlord up to a maximum settlement amount of $7 million.
RESOLVED FURTHER: That the Board hereby appoints ... a special committee (the "Committee") that is hereby empowered on behalf of the Board to authorize the officers of the Company to enter into a settlement with the landlord up to a maximum settlement amount of $8 million.
RESOLVED FURTHER: That the officers of the Company shall be required to seek approval from the Board prior to entering into an [sic] settlement with the landlord in excess of $8 million.
RESOLVED FURTHER: That the officers of the Company be, and each of them hereby is, authorized and directed to instruct bankruptcy counsel to begin to prepare the necessary paperwork for a bankruptcy filing.
RESOLVED FURTHER: That if the landlord is not willing to enter into a settlement agreement with a maximum amount of $8 million, then the officers of the Company shall be, and each of them hereby is, authorized and...
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