Court Opinion

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Date Created: 2015-10-13 21:58:53.424928+00
Date Added: 2024-06-11T11:46:48.874941
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Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

9-20-2004

In Re: Integrated
Precedential or Non-Precedential: Precedential

Docket No. 04-2411

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Recommended Citation
"In Re: Integrated " (2004). 2004 Decisions. Paper 273.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/273

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PRECEDENTIAL
                                            Before: SMITH, BECKER, and
    UNITED STATES COURT                     GREENBERG, Circuit Judges
         OF APPEALS
    FOR THE THIRD CIRCUIT                     (Filed: September 20, 2004)

             _________                  Seth P. Waxman (Argued)
                                        Craig Goldblatt
         Case No: 04-2411               Wilmer Cutler Pickering
           __________                     Hale & Dorr LLP
                                        2445 M Street, NW
  IN RE: INTEGRATED TELECOM             Washington, DC 20037
          EXPRESS, INC.
a/k/a INTEGRATED TECHNOLOGY             Christopher J. Meade
          EXPRESS, INC.                 Wilmer Cutler Pickering
  a/k/a DELAWARE INTEGRATED               Hale & Dorr LLP
     TELECOM EXPRESS, INC.,             399 Park Ave
                                        30th Floor
                        Debtor          New York, NY 10022

       NM SBPCSLDHB, L.P.,              Counsel for Appellant

                    Appellant           Laura D. Jones
                                        David W. Carickhoff, Jr.
                   v.                   Pachulski, Stang, Ziehl, Young,
                                          Jones & Weintraub P.C.
INTEGRATED TELECOM EXPRESS,             919 North Market Street
              INC.;                     P.O. Box 8705, 16th Floor
and THE OFFICIAL COMMITTEE OF           Wilmington, DE 19801
     EQUITY HOLDERS, et al.
                                        Tobias S. Keller (Argued)
  On Appeal From The United States      Pachulski, Stang, Ziehl, Young,
            District Court                Jones & Weintraub P.C.
    For The District Of Delaware        Three Embarcadero Center
      (Civ. A. No. 03-236-KAJ)          Suite 1020
                                        San Francisco, CA 94111
District Judge: The Honorable Kent A.
                Jordan                  Counsel for Appellee Integrated Telecom
              __________                Express, Inc.

       Argued August 3, 2004            Kevin Gross
           __________                   Rosenthal, Monhait, Gross & Goddess
919 North Market Street, Suite 1401              Bankruptcy Code.                  A p p e l l a nt
P.O. Box 1070                                    NMSBPCSLDHB, L.P. (the “Landlord”)
Wilmington, DE 19899                             appeals from an order of the District Court
                                                 affirming the Bankruptcy Court’s denial of
Ali M. Mojdehi (Argued)                          its motion to dismiss for lack of good faith.
Baker & McKenzie                                 The Landlord contends that the Debtor,
101 West Broadway                                Integrated Telecom Express, Inc.
12th Floor                                       (“Integrated”), was never in financial
San Diego, CA 92101                              distress and that the petition in this case
                                                 was instead filed to frustrate the Landlord’s
Counsel for Appellee Official Committee          claims and to increase the distribution of
of Equity Security Holders                       the Debtor’s estate to Integrated’s
                                                 shareholders at the Landlord’s expense.
Robert K. Rasmussen                              These contentions are corroborated by the
Vanderbilt Law School                            record. First, according to schedules filed
131 21st Ave. South                              with the Bankruptcy Court, Integrated had
Nashville, TN 37240                              $105.4 million in cash and $1.5 million in
                                                 other assets at the time that it filed for
G. Marcus Cole                                   bankruptcy, and yet the Landlord’s proof of
Stanford Law School                              claim lists the present discounted value of
559 Nathan Abbott Way                            Integrated’s le as e o b l ig a t i o ns at
Stanford, CA 94305-8610                          approximately $26 million. Integrated’s
                                                 schedules also list miscellaneous liabilities
David A. Skeel, Jr.                              of approximately $430,000.                 Thus
University of Pennsylvania Law School            Integrated was highly solvent and cash rich
3400 Chestnut Street                             at the time of the bankruptcy filing. Even
Philadelphia, PA 19104                           if the IPO class action claim, which was
                                                 capped at $25 million with Integrated’s
Amicus Curiae in Support of Appellant            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
               OPINION                           smoking gun resolution approved by the
              ___________                        Board, and notwithstanding its strong
                                                 financial position, Integrated authorized a
                                                 letter to the Landlord threatening that if it
SMITH, Circuit Judge.                            did not enter into a settlement of the lease
       This appeal tests the limits of the       in the amount of at least $8 million,
good faith requirement applicable to             Integrated would file for bankruptcy so as
petitions filed under Chapter 11 of the          to take advantage of § 502(b)(6), which

                                             2
sharply limits the amount that a landlord            million. Integrated hired a management
can recover in bankruptcy for damages                and technology consulting firm in
resulting from the termination of a lease.           December 2001 to help evaluate
                                                     Integrated’s operating alternatives.
        The issue on appeal is whether, on
                                                     Integrated also retained Lehman Brothers,
the facts of this case, a Chapter 11 petition
                                                     an investment bank, in February 2002, to
filed by a financially healthy debtor, with
                                                     assist in identifying, soliciting, and
no intention of reorganizing or liquidating
                                                     evaluating proposals for a sale or merger of
as a going concern, with no reasonable
                                                     Integrated or its assets. Unable to find a
expectation that Chapter 11 proceedings
                                                     third party willing to enter into such a
will maximize the value of the debtor’s
                                                     transaction, and unable to identify an
estate for creditors, and solely to take
                                                     alternative business model, Integrated’s
advantage of a provision in the Bankruptcy
                                                     Board of Directors prepared a plan for the
Code that limits claims on long-term
                                                     liquidation and dissolution of the company
leases, complies with the requirements of
                                                     under state law.
the Bankruptcy Code. We conclude that
such a petition is not filed in good faith and              In November 2001, a securities class
will therefore reverse.                              action styled Richmon v. Integrated
                                                     Telecom Express, Inc., No. 01-CV-10108-
                      I.
                                                     SAS, was filed in the Southern District of
       Integrated was a supplier of                  New York naming Integrated as a
software and equipment to the broadband              defendant, along with certain officers,
communications industry. In the summer               directors, and underwriters of Integrated.
of 2000, Integrated negotiated a lease of            The class consists of individuals who
real property in Silicon Valley with the             purchased Integrated stock between August
Landlord.      After several months of               18, 2000, and December 6, 2000. The
negotiation, during which the Landlord               class action alleges claims in the amount of
evaluated Integrated’s business condition            $93.24 million for various violations of the
and reviewed the company’s prospectus,               Securities Act of 1933 and the Securities
Integrated and the Landlord executed a               Exchange Act of 1934 in connection with
lease for a term of ten years beginning on           Integrated’s initial public offering of
February 23, 2001, with a monthly base               securities. Similar lawsuits concerning
rent of $200,000, increasing 5 percent               more than 300 other companies’ initial
annually. The Landlord was aware of the              public offerings have been filed and
financial risks associated with Integrated’s         coordinated as In re Initial Public Offering
business and willingly accepted those risks.         Securities Litigation, No. 21-MC-00092-
                                                     SAS (S.D.N.Y.).
       2001 was a very poor year for
Integrated. The market for many of the                     On April 18, 2002, Integrated’s
company’s products deteriorated, causing             Board approved a Plan of Complete
Integrated to suffer net losses of $36.2             Liquidation and Dissolution under

                                                 3
Delaware law. The two major issues to be             reviewed with the Board the
resolved prior to dissolution were (1) the           draft letter to the landlord (a
disposition of Integrated’s intellectual             copy of w hich w as
property rights and (2) its remaining                previously distributed to the
obligations under the lease. In May of               Board).
2002, the Board approved the sale of
                                                     Ms. Murray then reviewed
substantially all of Integrated’s intellectual
                                                     with the Board the timeline .
property and related assets to Real Com, a
                                                     . . for a bankruptcy filing and
corporation to be formed by certain of
                                                     related        bankruptcy
Integrated’s officers and directors. The
                                                     procedures.
proposed purchase price was $1.5 million
plus assumption of Integrated’s technical            Various members of the
support and warranty obligations.                    Board then asked questions
                                                     of Ms. Murray related to the
        Thereafter, Integrated attempted to
                                                     draft letter to the landlord
negotiate an accord and satisfaction of its
                                                     and the procedures for, and
lease. Integrated asserts that, “[d]uring this
                                                     implications of, a possible
time, Debtor first became aware that it
                                                     bankruptcy filing by the
might use Chapter 11 to, among other
                                                     Company.       A discussion
things, address Landlord’s claims.”
                                                     among the Board ensued,
Appellee’s Br. at 6-7. On August 13,
                                                     including a discussion of the
2002, the Board authorized a Chapter 11
                                                     costs and potential benefits
filing in the event that the Landlord would
                                                     and risks of proceeding with
not accept $8 million as an accord and
                                                     a bankruptcy filing.
satisfaction of Integrated’s obligations
under the lease. The minutes of the August           Following that discussion,
13 Board meeting state, in pertinent part:           Mr. Regel asked the Board
                                                     for     authority        for
       Mr. Regel [Integrated’s
                                                     management to negotiate a
       CEO] updated the Board on
                                                     settlement with the landlord
       his discussions with the
                                                     in an amount in the range of
       landlord subsequent to the
                                                     $6 to $7 million. A further
       last board meeting. Mr.
                                                     discussion among the Board
       Regel noted that the landlord
                                                     ensued regarding the costs
       did not appear to believe that
                                                     associated with a bankruptcy
       t h e C o m p a ny would
                                                     filing and potential costs of
       seriously consider making a
                                                     any litigation.        A fter
       bankruptcy filing.
                                                     additional discussion, the
       Ms. Murray [of the law firm                   Board approved the
       Murray & Murray] next                         following resolutions:

                                                 4
RESOLVED:          That the                RESOLVED FURTHER:
officers of the Company are,               That the officers of the
and each of them hereby is,                Company be, and each of
authorized and directed to                 them hereby is, authorized
send the landlord the letter               and directed to instruct
prepared by Murray and                     bankruptcy counsel to begin
Murray in substantially the                to prepare the necessary
form reviewed with the                     paperwork for a bankruptcy
Board.                                     filing.
RESOLVED FURTHER:                          RESOLVED FURTHER:
That the officers of the                   That if the landlord is not
Company are, and each of                   willing to enter into a
them hereby is, authorized                 settlement agreement with a
and directed to negotiate a                maximum amount of $8
settlement with the landlord               million, then the officers of
up to a maximum settlement                 the Company shall be, and
amount of $7 million.                      each of them hereby is,
                                           authorized and empowered
RESOLVED FURTHER:
                                           on behalf of, and in the
That the Board hereby
                                           name of, the Company to
appoints . . . a special
                                           execute and verify or certify
c o m m it t e e      ( t h e
                                           a petition under Chapter 11
“Committee”) that is hereby
                                           of the Bankruptcy Code and
empowered on behalf of the
                                           to cause the same to be filed
Board to authorize the
                                           in the appropriate United
officers of the Company to
                                           States Bankruptcy Court
enter into a settlement with
                                           (the “Bankruptcy Court”) at
the landlord up to a
                                           such time as said authorized
maximum settlement amount
                                           officer executing the same
of $8 million.
                                           shall determine.
RESOLVED FURTHER:
                                            On August 15, 2002, Integrated’s
That the officers of the
                                    bankruptcy counsel sent the Landlord a
Company shall be required
                                    letter stating that, if the Landlord was
to seek approval from the
                                    unwilling to settle, the Debtor was
Board prior to entering into
                                    prepared to avail itself of various
an [sic] settlement with the
                                    provisions in the Bankruptcy Code,
landlord in excess of $8
                                    including the cap on landlords’ claims set
million.

                                5
forth in 11 U.S.C. § 502(b)(6). 1       The       letter asserted that “even if [Integrated]
                                                  were to file bankruptcy solely to cap the
                                                  Lessor’s claim using Bankruptcy Code §
  1                                               502(b)(6), a use for which this Code
     11 U.S.C. § 502(b)(6) limits the
                                                  section is intended, [Integrated] would not
amount that a landlord can recover in
                                                  violate the good faith filing doctrine.”
bankruptcy for damages resulting from
the termination of a lease. Under §                       No settlement was reached.
502(b)(6), a landlord can recover rent that
                                                          Proceedings in the Bankruptcy
has accrued as of the filing of the
                                                  Court
petition, but may not recover rent
remaining on the lease beyond one year’s                  Integrated filed a voluntary petition
rent or 15 percent of the remaining rent          for relief under Chapter 11 of the
(not to exceed three years), whichever is         Bankruptcy Code on October 8, 2002.
greater:                                          According to schedules filed with the
                                                  Bankruptcy Court, Integrated had $105.4
(a) A claim or interest, proof of which is        million in cash and $1.5 million in other
filed under section 501 of this title, is         assets at the time that it filed for
deemed allowed, unless a party in interest        bankruptcy. The Landlord filed a proof of
. . . objects.                                    claim listing the present discounted value
                                                  of Integrated’s lease obligations at
(b) . . . if such objection to a claim is         approximately $26 million. Integrated’s
made, the court, after notice and a               schedules also list miscellaneous liabilities
hearing, shall determine the amount of            of approximately $430,000.
such claim in lawful currency of the
                                                           Immediately after Integrated filed
United States as of the date of the filing
                                                  its petition, Integrated attempted to address
of the petition, and shall allow such claim
in such amount, except to the extent
that—
                                                  lease, following the earlier of—
...
                                                  (i) the date of the filing of the petition;
(6) if such claim is the claim of a lessor        and
for damages resulting from the
termination of a lease of real property,          (ii) the date on which such lessor
such claim exceeds—                               repossessed, or the lessee surrendered,
                                                  the leased property; plus
(A) the rent reserved by such lease,
without acceleration, for the greater of          (B) any unpaid rent due under such lease,
one year, or 15 percent, not to exceed            without acceleration, on the earlier of
three years, of the remaining term of such        such dates . . . .

                                              6
the two major obstacles to dissolution: the          did not expand on this statement except to
sale of its intellectual property assets and         stress that Integrated “was losing a lot of
its remaining obligations under the lease.           money.” The court characterized the
On October 9, 2002, the day after                    company’s financial losses as “dramatic.”
Integrated filed its petition, Integrated            According to the court, Integrated “was
moved to sell its intellectual property assets       experiencing a dramatic downward spiral”
at a public auction.            The Official         in September 2001. As such, the court
Committee of Equity Security Holders (the            concluded that “the Board had an
“OCESH”) objected to the adequacy of                 obligation, and appropriately exercised
Integrated’s efforts to market the assets.           that obligation, to give the investors their
Ultimately, Integrated was able to                   money back.”
renegotiate the sale and to introduce other
                                                            Alternatively, the Bankruptcy Court
bidders. As a result, a new agreement was
                                                     held that, “even assuming” that
reached with Real Com for some, but not
                                                     Integrated’s stated reasons for filing the
all, of the assets for $2 million, an increase
                                                     petition were not “particularly persuasive,”
of $500,000. The remaining assets were
                                                     Integrated’s desire to take advantage of the
sold for $500,000 after confirmation of the
                                                     § 502(b)(6) cap on landlords’ claims was
plan of reorganization.
                                                     not a sufficient basis on which to dismiss
       Also on October 9, 2002, Integrated           the petition “as a matter of law”:
moved to reject the lease. The Landlord
                                                            But even assuming that
opposed the motion and, on October 28,
                                                            those other factors are not
2002, filed a motion to dismiss the Chapter
                                                            particularly persuasive, even
11 proceeding on the ground that the
                                                            assuming or accepting the
petition was not filed in good faith. On
                                                            l a n d l o rd’s p o si t io n ,
January 8, 2003, the Bankruptcy Court
                                                            particularly illustrated by the
conducted an evidentiary hearing on the
                                                            Board of Directors’ minutes
motion to dismiss and the motion to reject
                                                            of August 13 of ‘02, that the
the lease during which it heard evidence
                                                            principal reason for the
regarding Integrated’s decision to file for
                                                            Chapter 11 case was to cap
Chapter 11. After the close of evidence,
                                                            the damage claim for the
the Bankruptcy Court determined that oral
                                                            landlord, I conclude that as
argument was unnecessary and denied the
                                                            a matter of law, that is not a
motion to dismiss from the bench.
                                                            debilitating fact. I held in
       The Bankruptcy Court explained at                    [In re PPI Enterprises
the hearing that Integrated “offered a                      (U.S.), Inc., 228 B.R. 339
number of reasons for the filing of the                     (Bankr. D. Del. 1998), aff’d,
bankruptcy case,” and that the court                        324 F.3d 197 (3d Cir.
“believe[d] there is validity to a number of                2003)], and other cases have
those considerations.” The court, however,                  held, that it does not

                                                 7
       establish bad faith for a                           was not leveraged. And
       debtor to file a chapter 11                         instead of the significant
       case for the purpose of                             distribution going to debt
       taking advantage of                                 holders . . . it’s going to go
       prov isions wh ich alte r                           to the shareholders.
       pre-petition rights, including
                                                    The Bankruptcy Court then went on to
       altering the rights of a
                                                    discuss “other decisions that agree with
       landlord under State law.
                                                    that proposition, namely that a solvent
       The Bankruptcy Court was guided              debtor can avail itself of the 502(b)(6)
by the following proposition: “[A]s the             cap,” focusing in particular on In re
case law clearly indicates, not limited to          Sylmar Plaza, L.P., 314 F.3d 1070 (9th
my case [referring to the Bankruptcy                Cir. 2002), and characterizing Sylmar as
Judge’s decision in PPI], the solvency of           “almost on all fours with the situation
the debtor and the fact that the equity             before me.”
interest holders will receive a distribution
                                                            With respect to the equities of the
does not serve as the basis for a finding of
                                                    case, the Bankruptcy Court found that,
bad faith.”     The court thus saw no
                                                    although the shareholders would realize a
significance in the fact that the § 502(b)(6)
                                                    “benefit” from the bankruptcy in the form
cap would operate solely to the benefit of
                                                    of a “significant distribution,” “the
equity holders, as opposed to creditors:
                                                    shareholders are not coming out whole by
               What I think is also                 any means.” The court concluded that
       significant in this case is that             “obviously you can’t consider that they
       . . . this debtor had no                     [i.e., the shareholders] are being treated
       significant debt. . . .                      [to] any windfall.” Conversely, the court
                                                    found that the Landlord elected to “ride
               The difference in this
                                                    with the bulls,” when it entered into the
       case is that the company was
                                                    lease with Integrated, and that, as a
       not at all leveraged. And if
                                                    “sophisticated individual” who “took the
       the distribution were, for the
                                                    risk [hoping] that his instincts were right,”
       most part, or totally to go to
                                                    he must “suffer the consequences” of his
       the creditors, there would be
                                                    instincts being wrong. On January 30,
       no basis for the landlord to
                                                    2003, the Bankruptcy Court issued an
       complain regarding some
                                                    order formally denying the motion “for the
       equitable principle.
                                                    reasons stated on the record at the
             But I don’t think the                  Hearing.”
       Code makes any distinction.
                                                    The B ankruptcy Court Confirm s
       And I think that the—why
                                                    Integrated’s Plan of Liquidation
       this case is different is
       because the debtor simply                           The Bankruptcy Court held a

                                                8
confirmation hearing on April 7, 2003, and                 that regard, it’s also worth
issued an order confirming Integrated’s                    noting that [this] Chapter 11
proposed plan of liquidation over the                      case had the effect on the
Landlord’s objections on April 16, 2003.                   securities law plaintiffs
Applying § 502(b)(6), the Landlord’s claim                 similar to its effect on this
was reduced from $26 million to $4.3                       landlord.      It effectively
million.                                                   reduced the recovery by the
                                                           securities law claimants by
       The plan of liquidation did not
                                                           t r e a ti n g th e m lik e
completely resolve the securities class
                                                           shareholders pursuant to
action. Instead, the plan reserved $5
                                                           Section 510(b).[ 2 ]
million of the debtor’s estate to satisfy any
judgment that might be entered in the                              Could the securities
securities class action. When added to $20                 law plaintiffs obtain a bad
million in insurance coverage available to                 faith ruling in this case? I
Integrated, the plan effectively limited any               don’t think so for essentially
potential judgment in the securities class                 the same reasons I think that
action to $25 million. The securities class                the landlord cannot.
voted in favor of the plan of liquidation.
                                                                   With respect to the
       The Landlord appealed to the                        securities law action, I am
District Court and moved the Bankruptcy                    puzzled to understand how
Court to stay confirmation of the plan                     that claim could be resolved
pending appeal. The Bankruptcy Court                       in a non-bankruptcy law
addressed the Landlord’s motion for a stay                 liquidation context absent a
at an April 29, 2003 hearing.           The                final resolution of that
Bankruptcy Court reaffirmed its earlier                    claim. In a non-bankruptcy
ruling on the Landlord’s motion to dismiss,                law context, the securities
making several “observations to amplify                    law plaintiffs would have
the record on the issue.” Specifically, the
Bankruptcy Court elaborated on the
significance of the securities class action:          2
                                                         11 U.S.C. § 510(b) subordinates
                                                    claims for damages arising from the
       There is nothing in the law                  purchase or sale of a security of the
       to sugg est that the                         debtor to all claims and interests that are
       corporation cannot avail                     senior or equal to the claim or interest
       itself to the distribution                   represented by such security. Where, as
       scheme set forth in the                      here, the security is common stock, the
       Bankruptcy C ode in                          claim has the same priority as common
       effecting that liquidation. In               stock. Collier on Bankruptcy §§ 510.01,
                                                    510.04[1] (15th ed. 2004).

                                                9
       h a d a v e r y s t r at e g ic                       THE COURT:             Well,
       advantage, namely so long as                          I—they could. But I believe
       there w as a po ssible                                they would be in breach of
       recovery again st the                                 their fiduciary duty if they
       corporation, the liquidation                          did, and I made this
       would be stalled indefinitely.                        observation back in January.
                                                      The Bankruptcy Court nevertheless stayed
        The Bankruptcy Court also                     its confirmation order pending appeal, on
commented on Integrated’s financial                   the condition that the Landlord post a $2.5
affairs leading up to its decision to file for        million bond.
Chapter 11:
                                                             Appeal to the District Court
       THE COURT: Are you
                                                               The District Court affirmed,
       sa yi ng that Integrate d
                                                      holding that the Bankruptcy Court did not
       Tele com is a healthy
                                                      abuse its discretion in denying the
       company?
                                                      Landlord’s motion to dismiss. The District
       MR. HAZELTINE: Your                            Court concluded that the Bankruptcy Court
       Honor, Integrated Telecom                      made two specific findings of fact: (1) that
       as it sits here today is a very                in September 2001 the Debtor was in
       healthy company. At the                        “financial distress”; and (2) that the Board,
       t im e i t e n t e r e d f o r                 consistent with its fiduciary responsibility,
       bankruptcy it was a very                       properly pursued liquidation in order to
       healthy company.          They                 fulfill its obligations to its investors. The
       had—                                           District Court did not disturb either
                                                      finding.
       THE COURT: They’re out
       of business, aren’t they?                             The District Court understood the
                                                      Bankruptcy Court to have alternatively
       MR. HAZELTINE: They’re
                                                      ruled, as a matter of law, that “even if the
       out of business. But their
                                                      Debtor’s principal reason for filing its
       balance sheet looks great.
                                                      Chapter 11 case was to cap the Landlord’s
       They have $105 million in
                                                      damage claim, that alone was insufficient
       assets, $28 million in debts if
                                                      to establish bad faith.” The District Court
       the landlord’s claim is not
                                                      concluded that the Bankruptcy Court’s
       capped.
                                                      legal ruling “was based on a sound
             They could become                        interpretation of relevant case law from
       an investment company,                         this and other jurisdictions, and does not
       invest that money and                          constitute an abuse of discretion.” The
       make—make money. They                          District Court rejected the Landlord’s
       just—                                          argument that “permitting a solvent

                                                 10
corporation to invoke the landlord cap              1112(b) unless filed in good faith, and the
would permit an end run around a core               burden is on the bankruptcy petitioner to
principle of bankruptcy law, the ‘absolute          establish that its petition has been filed in
priority rule’—that is, that creditors must         good faith. In re SGL Carbon Corp., 200
be paid in full before stockholders can             F.3d 154, 159-62 (3d Cir. 1999); accord
retain equity interests for any purpose.”           Solow v. PPI Enters. (U.S.), Inc. (In re PPI
Like the Bankruptcy Court, the District             Enters. (U.S.), Inc.), 324 F.3d 197, 211 (3d
Court observed that insolvency is not a             Cir. 2001) (“The debtor bears the burden
prerequisite to filing under Chapter 11.            of establishing good faith.”). 3 Whether the
Regardless, in light of the Bankruptcy              good faith requirement has been satisfied
Court’s finding that Integrated was                 is a “fact intensive inquiry” in which the
“experiencing a dramatic downward spiral”           court must examine “the totality of facts
and that filing a Chapter 11 petition               and circumstances” and determine where
fulfilled the Board’s obligations to                a “petition falls along the spectrum
shareholders, the District Court concluded          ranging from the clearly acceptable to the
that no such “end run” had taken place.             patently abusive.” Id. at 162. We
Although the District Court affirmed the            therefore review for abuse of discretion the
Bankruptcy Court’s ruling, the District             Bankruptcy Court’s refusal to dismiss a
Court extended the Bankruptcy Court’s               Chapter 11 petition for want of good faith.
stay of the confirmation order.                     Solow v. PPI Enters. (U.S.), Inc. (In re PPI
                                                    Enters. (U.S.), Inc.), 324 F.3d 197, 211 (3d
       The Landlord filed a timely appeal
                                                    Cir. 2003). “[A]n abuse of discretion
from the District Court’s order. We
                                                    exists where the district court’s decision
expedited the appeal and stayed the
Bankruptcy Court’s confirmation order
pending the appeal. Jurisdiction in the
                                                      3
District Court was proper under 28 U.S.C.                Under 11 U.S.C. § 1112(b), “the
§ 158(a), and we exercise jurisdiction              court may convert a case under [Chapter
under 28 U.S.C. § 158(d). Although this             11] to a case under Chapter 7 . . . or may
Court’s jurisdiction is over the decision of        dismiss a case under this chapter,
the District Court, 28 U.S.C. § 158(d),             whichever is in the best interest of
“review of the District Court’s decision            creditors and the estate, for cause.” The
effectively amounts to review of the                statute lists 10 non-exhaustive factors
bankruptcy court’s opinion in the first             that may amount to cause. H.R. Rep. No.
instance.” In re Hechinger Inv. Co. of              95-595, at 406 (1977), reprinted in 1978
Del., 298 F.3d 219, 224 (3d Cir. 2002).             U.S.S.C.A.N. 5963, 6362 (“[The] list
                                                    [contained in § 1112(b) ] is not
                    II.
                                                    exhaustive. The court will be able to
       Chapter 11 bankruptcy petitions are          consider other factors as they arise, and
subject to dismissal under 11 U.S.C. §              to use its equitable powers to reach an
                                                    appropriate result in individual cases.”).

                                               11
rests upon a clearly erroneous finding of          Court has identified two of the basic
fact, an errant conclusion of law, or an           purposes of Chapter 11 as (1) “preserving
improper application of law to fact.” SGL          going concerns” and (2) “maximizing
Carbon, 200 F.3d at 159 (quoting ACLU v.           property available to satisfy creditors.”
Black Horse Pike Reg’l Bd. of Ed., 84 F.3d         Bank of Am. Nat’l Trust & Sav. Ass’n v.
1471, 1476 (3d Cir. 1996)).                        203 N. LaSalle St. P’ship, 526 U.S. 434,
                                                   453 (1999); accord Toibb v. Radloff, 501
       At its most fundamental level, the
                                                   U.S. 157, 163-64 (1991) (discussing “the
good faith requirement ensures that the
                                                   congressional purpose of deriving as much
Bankruptcy Code’s careful balancing of
                                                   value as possible from the debtor’s
interests is not undermined by petitioners
                                                   estate”). Each of these purposes informs
whose aims are antithetical to the basic
                                                   our application of the good faith
purposes of bankruptcy:
                                                   requirement:
       “[A good faith standard]
                                                         “Review and analysis of
       furthers the balan cin g
                                                         [the bankruptcy laws and
       process between the interests
                                                         relevant cases] disclose a
       of debtors and creditors
                                                         common theme and
       which characterizes so many
                                                         objective [underlying the
       provisions of the bankruptcy
                                                         reorganization provisions]:
       laws and is necessary to
                                                         avoidance              of    the
       legitimize the delay and
                                                         consequences of economic
       costs imposed upon parties
                                                         d is m em b e rm e n t a n d
       to    a    bankruptcy.
                                                         l i q u i d a t io n , a n d t h e
       Requirement [sic] of good
                                                         preservation of ongoing
       faith prevents abuse of the
                                                         values in a manner which
       bank ruptc y process by
                                                         does equity and is fair to
       debtors whose overriding
                                                         rights and interests of the
       motive is to delay creditors
                                                         parties affected. But the
       without benefitting them in
                                                         perimeters of this potential
       any way . . . .”
                                                         mark the borderline between
SGL Carbon, 200 F.3d at 161-62 (quoting                  fulfillment and perversion;
Little Creek Dev. Co. v. Commonwealth                    between accomplishing the
Mortgage Corp. (In re Little Creek Dev.                  objectives of rehabilitation
Co.), 779 F.2d 1068, 1072 (5th Cir. 1986));              and reorganization, and the
see also Carolin Corp. v. Miller, 886 F.2d               use of these statutory
693, 698 (4th Cir. 1989) (good faith                     provisions to destroy and
requirement is “indispensable to proper                  undermine the legitimate
accomplishment of the basic purposes of                  rights and interests of those
Chapter 11 protection”). The Supreme                     intended to benefit by this

                                              12
        sta t utory p o licy. T hat                       going concern or maximizing the value of
        borderline is patrolled by                        the debtor’s estate, and (2) whether the
        courts of equity, armed with                      petition is filed merely to obtain a tactical
        the doctrine of ‘good faith’ .                    litigation advantage. SGL Carbon, 200
        . . .”                                            F.3d at 165.
SGL Carbon, 200 F.3d at 161 (quoting In                          It is easy to see why courts
re Victory Constr. Co., Inc., 9 B.R. 549,                        have required Chapter 11
558 (Bankr. C.D. Cal. 1981), order stayed                        petitioners to act within the
Hadley v. Victory Constr. Co., Inc. (In re                       scope of the bankruptcy
Victory Constr. Co., Inc.), 9 B.R. 570                           laws to further a valid
(Bankr. C.D. Cal. 1981)); see also Marsch                        reorganizational purpose.
v. Marsch (In re Marsch), 36 F.3d 825, 828                       Chapter 11 vests petitioners
(9th Cir. 1994) (“The test is whether a                          with      considerable
debtor is attempting to unreasonably deter                       powers—the automatic stay,
or harass creditors or attempting to effect a                    the exclusive right to
speedy, efficient reorganization on a                            propose a reorganization
feasible basis.”); United Sav. Ass’n of Tex.                     plan, the discharge of debts,
v. Timbers of Inwood Forest Assocs., Ltd.                        etc.— that can impose
(In re Timbers of Inwood Forest Assocs.,                         significant hardship on
Ltd.), 808 F.2d 363, 373 (5th Cir. 1987) (en                     particular creditors. When
banc) (stating that if Chapter 11 plan does                      financially troub led
not have a rehabilitative purpose, the                           petitioners seek a chance to
“statutory provisio ns designed to                               remain in business, the
accomplish the reorganization objective                          exercise of those powers is
become destructive of the legitimate rights                      justified. But this is not so
and interests of creditors, the intended                         when a petitioner’s aims lie
beneficiaries”); Connell v. Coastal Cable                        outside those of th e
T.V., Inc. (In re Coastal Cable T.V., Inc.),                     Bankruptcy Code.
709 F.2d 762, 764 (1st Cir. 1991) (Breyer,
J.) (stating that there must be “some
r e l a ti o n — a t l e a s t a n a r g u a b l e        Id. at 165-66.4 Likewise, “because filing a
relation—between the chapter 11 plan and
the reorganization-related purposes that the
                                                            4
chapter was designed to serve”).                               In SGL Carbon, we used the phrase
                                                          “a valid reorganizational purpose”
       Our cases have accordingly focused
                                                          because that case involved a plan of
on two inquiries that are particularly
                                                          reorganization. See SGL Carbon, 200
relevant to the question of good faith: (1)
                                                          F.3d at 167. Reorganization, however, is
whether the petition serves a valid
                                                          not the only “appropriate use of Chapter
bankruptcy purpose, e.g., by preserving a
                                                          11 since the Code clearly contemplates

                                                     13
Chapter 11 petition merely to obtain                  tactical litigation advantages is not within
                                                      ‘the legitimate scope of the bankruptcy
                                                      laws,’ courts have typically dismissed
liquidating plans under 11 U.S.C. §
                                                      Chapter 11 petitions under these
1123(b)(4), whereby a debtor may
                                                      circumstances as well.”         Id. at 165
develop a Chapter 11 plan to sell off all
                                                      (quoting In re Marsch, 36 F.3d at 828); see
of its assets.” PPI, 324 F.3d at 211;
                                                      also Furness v. Lilienfield, 35 B.R. 1006,
accord 11 U.S.C. § 1123(b)(4) (“[A] plan
                                                      1013 (D. Md. 1983) (“The Bankruptcy
may . . . provide for the sale of all or
                                                      provisions are intended to benefit those in
substantially all of the property of the
                                                      genuine financial distress. They are not
estate, and the distribution of the
                                                      intended to be used as a mechanism to
proceeds of such sale among holders of
                                                      orchestrate pending litigation.”).
claims or interests . . . .”). Yet liquidation
plans, no less than reorganization plans,                                     A.
must serve a valid bankruptcy purpose.
                                                                  A s the Ban krup tcy C ourt
That is, they must either preserve some
                                                      recognized, Integrated is unquestionably
going concern value, e.g., by liquidating a
                                                      “out of business,” and therefore has no
company as a whole or in such a way as
                                                      going concern value to preserve in Chapter
to preserve some of the company’s
                                                      11 through reorganization or liquidation
goodwill, or by maximizing the value of
                                                      under the Bankruptcy Code. The question
the debtor’s estate.
                                                      therefore becomes whether Integrated’s
                                                      p e t i ti o n m i g h t r e as o n a b l y h a v e
        We therefore reject the OCESH’s
                                                      “maximiz[ed] the value of the bankruptcy
argument that the good faith inquiry
                                                      estate.” Toibb, 501 U.S. at 163; accord
applies with less force to liquidation
                                                      203 N. LaSalle, 526 U.S. at 453. For the
plans because, since ownership is not
                                                      reasons that follow, we conclude that it
allowed to retain an interest in the
                                                      would not.
reorganized entity, the potential for bad
faith is reduced. The good faith                              To say that liquidation under
requirement is necessitated as much by                Chapter 11 maximizes the value of an
the hardship of Chapter 11 to certain                 entity is to say that there is some value that
interests as it is by the benefit to others.          otherwise would be lost outside of
SGL Carbon, 200 F.3d at 161-62, 165-66.               ba nk ru pt cy.       E l i z a b e th W a r r e n ,
Moreover, the facts of this case                      Bankruptcy Policymaking In an Imperfect
demonstrate the fallacy of the OCESH’s                World, 92 Mich. L. Rev. 336, 350 (1993)
argument. While the owners of                         (“Two empirically based economic
Integrated may never recover the full                 assumptions underlie the attempt to
value of their investments, they stand to             preserve the value of a failing company:
reap a substantial gain through                       (1) orderly liquidation is likely to produce
bankruptcy, at the expense of the                     more value— or to avoid more loss—than
company’s sole creditor.

                                                 14
piecemeal liquidation; and (2) going-                  Inc., 871 F.2d 1023, 1027 (11th Cir. 1989)
concern value is likely to be higher than              (recognizing that one factor relevant to
liquidation value.”); Collier on Bankruptcy            good faith is “whether the debtor is
¶ 1108.12 (“[W]here liquidation is                     ‘financially distressed’” and affirming
appropriate, the Code contemplates orderly             dismissal of petition for, inter alia, use of
liquidation and not a ‘fire sale.’”). At its           bankruptcy proceedings despite the
most basic level, the Bankruptcy Code                  apparent good financial health of the
maximizes value by alleviating the problem             debtor”); Little Creek, 779 F.2d at 1072
of financial distress. See Thomas H.                   (“Determining whether the debtor’s filing
Jackson, The Logic and Limits of                       for relief is in good faith depends largely
Bankruptcy Law 10 (1986) (“The basic                   upon the bankruptcy court’s on-the-spot
problem that bankruptcy law is designed to             evaluation of the debtor’s financial
handle, both as a normative matter and as              condition, motives, and the local financial
a positive matter, is that the system of               realities.”); In re The Bible Speaks, 65
individual creditor remedies may be bad                B.R. 415, 424-26 (Bankr. D. Mass. 1986)
for the creditors as a group when there are            (concluding that, despite the absence of a
not enough assets to go around.”). As                  statutory financial eligibility standard in
Integrated conceded at oral argument, good             Chapter 11, “[t]he legislative history [to
faith necessarily requires some degree of              the Bankruptcy Code] indicates that
financial distress on the part of a debtor.            Congress intended Chapter 11 to be
See SGL Carbon, 200 F.3d at 166 (“Courts,              resorted to by business entities which are
therefore, have consistently dismissed                 experiencing some type of financial
Chapter 11 petitions filed by financially              difficulty”); In re Talladega Steaks, Inc.,
healthy companies with no need to                      50 B.R. 42, 44 (Bankr. N.D. Ala. 1985)
reorganize under the protection of Chapter             (dismissing petition w here d ebtor
11.” (emphasis added)); Coastal Cable,                 “presented no evidence that financial
709 F.2d at 765 (“To meet the ‘good faith’             difficulties had precipitated the filing of
requirement . . . many courts have held that           the petition and indeed testified that the
a reorganization plan must bear some                   debtor’s debts and other financial
relation to the statutory objective of                 obligations were substantially current”).
resuscitating a financially troubled
                                                              To be sure, a debtor need not be
corporation.” (emphasis added)); Baker v.
                                                       insolvent before filing for bankruptcy
Latham Sparrowbrush Assocs. (In re
                                                       protection. SGL Carbon, 200 F.3d at 163-
Cohoes Indus. Terminal, Inc.), 931 F.2d
                                                       64.
222, 228 (2d Cir. 1991) (“Although a
debtor need not be in extremis in order to                    [T]he drafters of the
file such a petition, it must, at least, face                 Bankruptcy          Code
such financial difficulty that, if it did not                 understood the need for
file at that time, it could anticipate the need               early access to bankruptcy
to file in the future.”); In re Dixie Broad.,                 relief to allow a debtor to

                                                  15
       rehabilitate its business                             reorganize under t he
       before it is faced with a                             protection of Chapter 11.
       hopeless situation.    Such                           Those courts have
       encouragement, however,                               r e c ogni z e d that if a
       does not open the door to                             petitioner has no need to
       premature filing, nor does it                         rehabilitate or reorganize, its
       allow for the filing of a                             petition cannot serve the
       bankruptcy petition that                              rehabilitative purpose for
       l a c k s     a    v a l i d                          which Chapter 11 was
       reorganizational purpose.                             designed.
SGL Carbon, 200 F.3d at 163 (footnote                 SGL Carbon, 200 F.3d at 166 (citations
om itted); see also, e.g., In re                      omitted). Accordingly, the absence of a
Johns-Manville Corp., 36 B.R. 727, 736                solvency requirement recognizes that even
(Bankr. S.D.N.Y. 1984) (“Accordingly, the             solvent firms can, at times, suffer from
drafters of the Code envisioned that a                financial distress. Id. at 163 (early access
financially beleaguered debtor with real              for solvent debtors designed to preempt “a
debt and real creditors should not be                 hopeless situation”); In re M arshall, 300
required to wait until the economic                   B.R. 507, 512-13 (Bankr. C.D. Cal. 2003)
situation is beyond repair in order to file a         (“It is not uncommon for debtors to be
reorganization petition.”). Saying that               solvent under the balance sheet test, and
there is no insolvency requirement,                   yet to have severe financial problems. . . .
however, does not mean that all solvent               The United States bankruptcy law is
firms should have unfettered access to                designed to provide relief from creditor
Chapter 11. Despite the absence of an                 pressures for debtors with cash flow
express financial eligibility requirement in          difficulties, even where they are clearly
the Code,5 SGL Carbon emphatically                    solvent under a balance sheet test.”).
rejected any such proposition:
                                                             Both the Bankruptcy Court and the
       Courts, therefore, have                        District Court concluded that Integrated
       c o n s i s t e n t l y d is m is s e d        faced financial distress because it “was
       Chapter 11 petitions filed by                  losing a lot of money,” and “was
       financially healthy                            experiencing a dramatic downward spiral”
       companies with no need to                      in September 2001, and that, as a result,
                                                      Integrated had gone “out of business.” We
                                                      do not see how bankruptcy offers
  5                                                   Integrated any relief from this sort of
     Integrated unquestionably meets the
                                                      distress, which has no relation to any debt
express statutory requirements for
                                                      owed by Integrated. That is, we can
eligibility to file a Chapter 11 petition.
                                                      identify no value for Integrated’s assets
11 U.S.C. § 109(d); The Bible Speaks, 65
                                                      that was threatened outside of bankruptcy
B.R. 415 at 424-25.

                                                 16
by the collapse of Integrated’s business            $12.6 million in stock in Del Monte Food
model, but that could be preserved or               Co., free of restrictions that would
maximized in an orderly liquidation under           otherwise have limited its value to $1.6
Chapter 11.          Because Integrated’s           million; and (2) limiting the landlord’s
“dramatic downward spiral” does not                 lease termination damages under §
establish that Integrated was suffering from        502(b)(6). Id. at 201 & n.5. The debtor
financial distress, it does not, standing           was successful on both fronts. The Del
alone, establish that Integrated’s petition         Monte stock was sold at a court-approved
was filed in good faith.                            auction for $11 million, id. at 201 n.5, and
                                                    the landlord’s lease claim was capped at
       Creditors that fear an impending
                                                    $100,000, id. at 207.
default may seek to protect their claims,
triggering “the chaotic mix of self-help                    Critically, the debtor in PPI claimed
repossession and judicial execution                 to have been insolvent. In addition to the
available at state law” to which the                landlord’s claims, the debtor had
Bankruptcy Code provides an alternative.            unsecured claims of approximately $54.6
Warren, Bankruptcy Policymaking, 92                 million, dwarfing the value of its only
Mich. L. Rev. at 350. The absence of an             asset, the Del Monte stock. PPI, 228 B.R.
insolv ency requirement encourages                  at 343. The landlord in PPI objected to
companies to file for Chapter 11 before             these claims because the debt was owed to
they face a financially hopeless situation.         insiders of the debtor, namely, the debtor’s
SGL Carbon, 200 F.3d at 163-64. Yet this            parent companies. The landlord argued
is decidedly not the case here. The                 that these insider claims should be
Bankruptcy C ourt recognize d th e                  recharacterized as equity interests, which
unquestionable reality that “the debtor             would leave the debtor solvent by
simply was not leveraged” and, apart from           approximately $11 million (not including
the Landlord’s claim, “had no significant           the landlord’s claim). Id. at 345. This
debt.” JA34-35. The court’s conclusion              issue, however, was not raised on appeal,
that “I don’t think the Code makes any              and we proceeded on the assumption that
distinction” is legal error.                        the debtor “owed 50 million in ‘inter-
                                                    company debt.’” PPI, 324 F.3d at 200 n.3.
       The absence of any financial
                                                    Accordingly, PPI stands fo r the
distress facing Integrated distinguishes the
                                                    proposition that an insolvent debtor can
two principal cases relied on by the
                                                    file under Chapter 11 in order to maximize
Bankruptcy Court and the District Court.
                                                    the value of its sole asset to satisfy its
In PPI, an insolvent debtor defaulted on a
                                                    creditors, while at the same time availing
lease with approximately $5.86 million in
                                                    itself of the landlord cap under §
rent remaining on the lease. 324 F.3d at
                                                    502(b)(6).
200-01. The debtor’s Chapter 11 petition
purported to serve two main purposes: (1)                 We likewise understand In re
liquidating the debtor’s sole asset, namely,        Sylmar Plaza, which the Bankruptcy

                                               17
Court considered “almost on all fours with            cannot be divorced from the facts of that
the situation before me,” to be a case in             case, which reveal that the Bankruptcy
which Chapter 11 was used to maximize                 Code was used to maximize value for
value for creditors. The debtors in Sylmar            creditors as a whole. Moreover, although
Plaza owned a shopping center that was                the debtors appear to have come out
subject to a secure loan from the bank.               solvent in Symlar Plaza, there is no
The debtors experienced “cash flow                    indication that they would have come out
problems” and ultimately defaulted on the             solvent had the bank’s claim not been
loan. 314 F.3d at 1072-73. Bankruptcy                 limited, or that solvency was a foregone
allowed the debtor to sell the shopping               conclusion when the petition was filed.
center free and clear of the bank’s lien,
                                                                 In contrast, as noted above and
which sale the Bankruptcy Court found to
                                                      detailed below, according to schedules
be in the best interest of the estate and all
                                                      filed with the Bankruptcy Court,
of its creditors. Id. at 1073; Supp. App. at
                                                      Integrated had $105.4 million in cash and
114 (Order Authorizing Sale of Real
                                                      $1.5 million in other assets at the time that
Property Free and Clear of Liens at 4, In re
                                                      it filed for bankruptcy, and yet the
Sylmar Plaza, No. LA-99-33188-AA
                                                      Landlord’s proof of claim lists the present
(Bankr. C.D. Cal. Nov. 24, 1999)).
                                                      discounted value of Integrated’s lease
       The bank did not appeal the sale               obligations at approximately $26 million.
order. Sylmar Plaza, 314 F.3d at 1073.                I n t e g ra t e d’ s s c h e d u l e s a l s o lis t
Instead, the Bank appealed from the                   miscellaneous liabilities of approximately
confirmation of the debtor’s plan of                  $430,000. Thus Integrated was highly
reorganization, which took advantage of a             solvent and cash rich at the time of the
provision in the Bankruptcy Code to                   bankruptcy filing. Even if the IPO class
calculate the bank’s claim according to the           action claim, which was capped at $25
regular interest rate, rather than the default        million with Integrated’s liability limited
interest rate. Id. In particular, the bank            to a $5 million reserve (the balance to be
objected to the fact that “the plan leaves            paid by insurance) was listed at its full
the [debtors] solvent while permitting them           alleged value, Integrated was still solvent
to avoid paying post-petition interest at the         at the time of filing.
default interest rate.” Id. at 1074.
                                                             In light of the foregoing, we
        The Ninth Circuit affirmed the                conclude that the collapse of Integrated’s
lower court’s finding of good faith,                  business model does not support a finding
reasoning that (1) insolvency is not a                of good faith. Integrated was not suffering
prerequisite to a finding of good faith, and          financial distress when it filed its petition,
(2) the fact that a creditor’s contractual            and the rulings of the Bankruptcy Court
rights are adversely affected does not by             and the District Court to the contrary
itself warrant a bad faith finding. Id. at            constitute legal error. The failure of
1074-75. The court’s holding, however,                Integrated’s business did not subject the

                                                 18
company to any pressure on the value of its          that the securities class action did not place
assets that could be reduced or avoided in           Integrated in financial distress. When it
an orderly liquidation under Chapter 11.             filed its petition, Integrated had assets of
Because Integrated’s economic difficulties           nearly $107 million (of which $105
do not establish that Integrated was                 million was cash). Integrated also had
suffering from financial distress, they do           Directors and Officers (“D&O”) insurance
not, standing alone, establish that                  coverage of $20 million. Although the
Integrated’s petition was filed in good              securities class claimed $93 million,
faith.                                               Integrated concedes in its brief that it
                                                     “believed that the Securities Claim would
                     B.
                                                     be settled, likely within policy limits [i.e.,
        On appeal, Integrated argues that its        for less than $20 million].” Appellee’s Br.
petition served a valid bankruptcy purpose           at 33. In documents filed with the SEC,
because bankruptcy “provide[d ] a                    including a proxy statement issued in
framework for the Debtor to resolve the              anticipation of a vote on Integrated’s Plan
Securities Class Action.” Appellee’s Br. at          of Complete Liquidation and Dissolution
8. In this regard, the Bankruptcy Court              under Delaware law, Integrated stated:
made no findings that are entitled to
                                                            The company believes that
deference. Instead the Bankruptcy Court
                                                            the claims against it are
merely acknowledged that Integrated
                                                            without merit and intends to
“offered a number of reasons for the filing
                                                            d e fend this lawsuit
of the bankruptcy case,” and that the court
                                                            vigorously.       While the
“believe[d] there is validity to a number of
                                                            outcome of these claims is
those considerations.” (Emphasis added).
                                                            currently not determinable,
“[A] number of those considerations”
                                                            the Company does not
necessarily is less than all of those
                                                            expect that the ultimate
considerations, and the Bankruptcy Court
                                                            costs to resolve these claims
did not ide ntify wh ich pa rticular
                                                            will have a material adverse
considerations had merit except to stress
                                                            effect on the Company’s
that Integrated “was losing a lot of money.”
                                                            financial position, results of
Moreover, colloquially at least, stating that
                                                            operations or cash flows.
“there is validity to” something is not the
same as saying that something is valid.              James G. Regel, Integrated’s CEO,
                                                     testified that the above statement was true
       Nevertheless, Integrated bore the
                                                     when the proxy statement was filed.
burden of demonstrating good faith, and
                                                     Integrated offers no argument that
there is no evidence in the record from
                                                     circumstances surrounding the securities
which a finding of good faith could be
                                                     class action changed between April of
made based on the pending securities class
                                                     2002, when the Board resolved to liquidate
action. There is no question, for example,
                                                     under state law, and October of that year,

                                                19
when the Board decided to file under                           At the April 29 hearing, the
Chapter 11.                                            Bankruptcy Court suggested that the
                                                       bankruptcy process facilitated the
        In the end, Integrated’s predictions
                                                       liquidation of the securities class action.
proved accurate. The securities class
                                                       First, the Court reasoned that Chapter 11
ultimately voted in favor of a plan of
                                                       “effectively reduced the recovery by the
liquidation that capped their claims at $25
                                                       securities law claimants by treating them
million.     Although the plan does not
                                                       like shareholders pursuant to Section
resolve the securities claims, it limits
                                                       510(b).” We cannot find any evidence in
Integrated’s liability for the securities class
                                                       the record to support a finding that this
action to a $5 million reserve. The
                                                       treatment forced the securities class to
securities class action will go forward, but
                                                       accept the $25 million limit that the plan
the class has essentially capped its recovery
                                                       places on their potential recovery. Nor
at $25 million (the $5 million reserve plus
                                                       could counsel for Integrated and the
the $20 million D&O policy).               The
                                                       OCESH support this finding when it was
inescapable conclusion from the record is
                                                       raised at oral argument.
that the securities class action did not
threaten any value of Integrated that                          Second, the Bankruptcy Court
Chapter 11 seeks to preserve. This case is             observed that, “[i]n a non-bankruptcy law
therefore entirely distinguishable from                context, the securities law plaintiffs would
cases such as Johns-Manville, where the                have had a very strategic advantage,
debtor faced “approximately 16,000                     namely so long as there was a possible
lawsuits pending as of the filing date,” with          recovery against the corporation, the
the prospect of the “filing of an even more            liquidation would be stalled indefinitely.”
staggering number of suits over the course             While the causal connection here may be
of 20-30 years,” 36 B.R. at 729, or The                more compelling, we fail to see how this
Bible Speaks, where the debtor experienced             observation distinguishes the securities
“two types of financial difficulty: a cash             class from any other typical creditor, since
flow problem which prevent[ed] it from                 creditors often have strategic advantages
meeting its current obligations” and a                 outside of bankruptcy that they lack inside
“staggering” claim that “may well exceed               bankruptcy.
the value of the Debtor’s assets” and that
                                                                 Regardless, neithe r of the
“pose[d] a threat to the Debtor’s continued
                                                       B a n k r u p t c y C o u r t ’ s o b se r v a ti o n s
existence,” 65 B.R. at 426. See SGL
                                                       establishes that Integrated suffered
Carbon, 200 F.3d at 168-69 (discussing
these cases). 6

                                                       would have remained solvent even if the
  6
     We further note that, given the $105              securities class and the Landlord were to
million in cash held by Integrated and the             recover the full value of their claims ($93
$20 million in D&O coverage, Integrated                million and $26 million, respectively).

                                                  20
financial distress, and neither supports a            failed business.”        OCESH Br. at 7.
finding that liquidation under Chapter 11             Dissolution, however, is not an objective
offered a reasonable chance of maximizing             that can be attained in bankruptcy. Collier
the value available to satisfy all of the             on Bankruptcy § 727.01[3] (“After
parties with an interest in Integrated’s              liquidation, any dissolution of the
estate. Rather than pursuing a valid                  corporation or partnership that the parties
bankruptcy purpose, these observations                desire must be effectuated under state law,
suggest that Integrated filed for Chapter 11          since the Code does not provide for
in part to gain a litigation advantage over           d i s s o lu t i o n o f c o r p o r a t i o n s o r
the securities class, a use of Chapter 11 that        partnerships.”). Nor is “distribution,”
we emphatically rejected in SGL Carbon.               standing alone, a valid bankruptcy
200 F.3d at 167 (holding that petition was            purpose. Instead, the Bankruptcy Code
not filed in good faith where debtor’s sole           allows for a distribution of the debtor’s
purpose was “to put pressure on [a                    estate pursuant to a valid plan of
claimant] to accept the company's                     reorganization or liquidation. 11 U.S.C. §
settlement terms”).                                   1123. Antecedent to any such distribution
                                                      is an inquiry whether the petition and the
                     C.
                                                      plan are filed in good faith, i.e., whether
       Integrated argues that its petition            they serve a valid bankruptcy purpose.
served three additional purposes that                 Neither Integrated nor the OCESH offer
support a finding of good faith. As with              any authority that the Code can be used to
the securities class action, the Bankruptcy           effectuate a liquidation that has no hope of
Court did not specify which, if any, of               maximizing the value of the company, 203
these asserted justifications had merit. Our          N. LaSalle, 526 U.S. at 453; Toibb, 501
own review of the record convinces us that            U.S. at 163, but simply facilitates
none of Integrated’s proffered justifications         dissolution on terms favorable to equity
warrant a finding of good faith.                      interests. Moreover, neither Integrated nor
                                                      the OCESH have identified any
       First, Integrated argues that Chapter
                                                      efficiencies that were realized in this
11 “provide[d] an efficient procedure for
                                                      bankruptcy that could not have been
the dissolution of Debtor and distribution
                                                      realized under Delaware law.
of its assets to parties in interest.”
Appellee’s Br. at 8. In the same vein, the                   Second, Integrated argues that
OCESH argues that “[t]he Debtor’s                     Chapter 11 “provide[d] court oversight to
Chapter 11 filing was in good faith                   the proposed sale of its intellectual
[because] the debtor utilized the liquidation         property [as well as] certain protections to
provisions under Chapter 11 of the                    the parties [to the sale] not available
Bankruptcy Code for the proper purpose of             outside of Chapter 11.” Appellee’s Br. at
obtaining a quick, efficient, and orderly             8. Integrated’s intellectual property assets
winding down of the operations of its                 consist of patents, trademarks, copyrights,

                                                 21
and trade secrets related to the company’s           and, but for Integrated’s petition, the
products and services. There is no dispute           OCESH would not have existed. But
that the sale of these assets during the             surely Integrated did not need Chapter 11
bankruptcy realized an additional $1                 to discover that a more open and
million beyond the sale that Integrated had          competitive auction might increase the
negotiated prior to filing its Chapter 11            price obtained for its assets.
petition. Under the circumstances of this
                                                             Moreover, the increase in value was
case, however, this fact hardly justifies
                                                     relatively insignificant, representing less
invocation of Chapter 11.
                                                     than one percent of Integrated’s total
        For one, the increase in value was a         assets. Integrated’s de minimis assets
result of Integrated’s failure to adequately         (office equipment, inventory, etc.), by
market the assets to potential bidders               comparison, totaled $500,000. Further, the
outside of the Board and management. 7               net gain to Integrated’s estate must also
When, on the very next day after it filed its        consider the fees paid from the estate to
petition, Integrated moved to sell the assets        the OCESH’s committee mem bers,
at auction without further marketing, the            attorneys, and professionals. In the end,
OCESH challenged Integrated’s sale as an             this case is a far cry from PPI, where an
improper exercise of business judgment.              insolvent debtor used Chapter 11 to
True, the OCESH is “a creature of the                increase the value of its sole asset by over
Bankruptcy Code,” Appellee’s Br. at 31,              600 percent ($1.6 million to $11 million).
                                                     That bankruptcy allowed for an additional
                                                     $10 million to be paid to the creditors of
  7
     Although Integrated suggests that the           the debtors. PPI, 324 F.3d at 201 & n.5.
increase in value was realized because
                                                            Finally, Integrated argues that
“the Bankruptcy Code afforded Debtor
                                                     Chapter 11 “enable[d] the Debtor to
and the buyer protections including the
                                                     establish a bar date and define the universe
ability to sell free and clear of liens and
                                                     of claims against it to assure that any
claims, see section 363(f), and specific
                                                     distributions to its creditors and
evidentiary ‘good faith purchaser’
                                                     stockholders account for any inchoate
findings, see section 363(m),” Appellee’s
                                                     claims.” Appellee’s Br. at 8. Essentially,
Br. at 30, the record provides no support
                                                     Integrated argues that, through the
for this assertion. For the most part, the
                                                     OCESH, shareholders were able to
assets were sold to the same insiders with
                                                     investigate potential claims and determine
whom Integrated had already negotiated a
                                                     that none existed. The Bankruptcy Court
sale prior to filing for Bankruptcy. The
                                                     made no finding that Integrated was
fact that these insiders were willing to
                                                     subject to “inchoate” claims that needed to
purchase the assets outside of bankruptcy
                                                     be liquidated or barred, and Integrated’s
undercuts any argument that the
                                                     vague and passing references to potential
protections of the Code affected the
                                                     disputes with its shareholders is entirely
purchase price.

                                                22
insufficient to establish a good faith                      declare it?”).
expectation that Chapter 11 protection was
                                                                    The far more relevant question is
necessary to protect Integrated from such
                                                            whether a desire to take advantage of a
claims.
                                                            particular provision in the Bankruptcy
                        D.                                  Code, standing alone, establishes good
                                                            faith.8 We hold that it does not. Just as a
           Having determined that Integrated
                                                            desire to take advantage of the protections
was not in financial distress, and having
                                                            of the Code cannot establish bad faith as a
r e j e ct e d I n t e g r a t e d ’ s p o s t h o c
                                                            matter of law, that desire cannot establish
rationalizations for filing under Chapter 11,
                                                            good faith as a matter of law. Given the
we turn to the OCESH’s argument that
                                                            truism that every bankruptcy petition seeks
Integrated’s desire to take advantage of the
                                                            some advantage offered in the Code, any
cap on landlord claims provided by §
                                                            other rule would eviscerate any limitation
502(b)(6) establishes good faith in and of
                                                            that the good faith requirement places on
itself. Integrated makes a similar argument
                                                            Chapter 11 filings.
when it states that its petition properly
sought “a favorable forum for the                                   At least one Bankruptcy Court has
consideration and resolution of other                       dismissed for a lack of good faith a
disputed claims, including the Landlord’s                   Chapter 11 petition seeking primarily to
claim.” Appellee’s Br. at 8.                                cap a landlord’s claim for future rent under
                                                            § 502(b)(6), In re Liberate Technologies,
        The Bankruptcy Court did not hold
                                                            No. 04-31394-TC, 2004 WL 2008956, at
that Integrated’s desire to take advantage
                                                            *7-*8 (Bankr. N.D. Cal. Sept. 8, 2004),
of the § 502(b)(6) cap established good
                                                            and other Bankruptcy Courts have
faith. Instead, the Bankruptcy Court held
                                                            similarly dismissed Chapter 11 petitions
that “it does not establish bad faith for a
                                                            filed merely to take advantage of other
debtor to file a chapter [11] case for the
purpose of taking advantage of provisions
which alter pre-petition rights, including
                                                              8
altering the rights of a landlord under State                    The law is clear that the burden is on
law.” (Emphasis added). We agree.                           the bankruptcy petitioner to establish that
Indeed, we believe it to be a truism that it                its petition has been filed in good faith.
is not bad faith to seek to avail oneself of a              PPI, 324 F.3d at 211; SGL Carbon, 200
particular protection in the Bankruptcy                     F.3d at 162 n.10. The Bankruptcy
Code— Congress enacted such protections                     Court’s statements that “it does not
with the expectation that they would be                     establish bad faith for a debtor to,” or “I
used. In re James Wilson Assocs., 965                       conclude that as a matter of law, that is
F.2d 160, 170 (7th Cir. 1992) (“It is not                   not a debilitating fact,” erroneously
bad faith to seek to gain an advantage from                 suggest that the question before the court
declaring bankruptcy—why else would one                     was whether bad faith, rather than good
                                                            faith, had been proven.

                                                       23
singular provisions of the Bankruptcy               In re HBA East, Inc., 87 B.R. 248, 262
Code. See N.W. Place, Ltd. v. Cooper (In            (Bankr. E.D.N.Y. 1988). Indeed, if there
re N.W. Place, Ltd.), 73 B.R. 978, 982              is a “classic” bad faith petition, it may be
(Bankr. N.D. Ga. 1987) (Chapter 11                  one in which the petitioner’s only goal is
petition filed to invoke trustee’s avoidance        to use the automatic stay provision to
powers under Bankruptcy Code and to set             avoid posting an appeal bond in another
aside transfer); In re S. Cal. Sound Sys.,          court. E.g., Marsch, 36 F.3d at 828.
Inc., 69 B.R. 893, 900 (Bankr. S.D. Cal.
                                                            Integrated and the OCESH may
1987) (Chapter 11 petition filed to reject
                                                    therefore be correct that § 502(b)(6)
executory contract pursuant to 11 U.S.C. §
                                                    reflects a Congressional determination that
365(a)); In re Cardi Ventures, Inc., 59 B.R.
                                                    landlords stand to receive a windfall in a
18, 22-23 (Bankr. S.D.N.Y. 1985) (Chapter
                                                    bankruptcy, and that landlord claims are
11 petition filed to assume and assign lease
                                                    inherently speculative.       Furthermore,
pursuant to 11 U.S.C. § 365(f)); In re
                                                    Integrated and the OCESH may be correct
Nancant, Inc., 8 B.R. 1005, 1008 (Bankr.
                                                    that § 502(b)(6) should operate to cap
D. Mass. 1981) (Chapter 11 petition filed
                                                    landlord claims, even where the only effect
to have certain tax liability determined
                                                    of the cap would be to transfer assets from
pursuant to 11 U.S.C. § 505).            For
                                                    creditors to equity holders.9        Yet §
example, 11 U.S.C. § 362 protects debtors
                                                    502(b)(6) and the legislative policy
by staying litigation against them during
                                                    underlying that provision assume the
the pendency of the bankruptcy. Yet courts
                                                    existence of a valid bankruptcy, which, in
universally demand more of Chapter 11
                                                    turn, assumes a debtor in financial distress.
petitions than a naked desire to stay
                                                    The question of good faith is therefore
pending litigation. E.g., Dixie Broad., 871
                                                    antecedent to the operation of § 502(b)(6).
F.2d at 1026-27. As one Bankruptcy Court
put it:                                                     Although the Bankruptcy Code
                                                    contains many provisions that have the
       The protection of the
                                                    effect of redistributing value from one
       automatic stay is not per se a
                                                    interest group to an other, these
       valid justification for a
                                                    redistributions are not the Code’s purpose.
       Chapter 11 filing; rather, it is
                                                    Instead, the purposes of the Code are to
       a consequential benefit of an
                                                    preserve going concerns and to maximize
       otherwise good faith filing.
                                                    the value of the debtor’s estate. 203 N.
       A perceived need for the
                                                    LaSalle, 526 U.S. at 453; Toibb, 501 U.S.
       autom atic stay, without
                                                    at 163-64. Section 502(b)(6) is precisely
       more, cannot convert a bad
       faith filing to a good faith
       one.
                                                      9
                                                        The Landlord and Amici vigorously
                                                    argue that § 502(b)(6) does not apply to a
                                                    solvent debtor.

                                               24
the sort of provision this Court had in mind                    Elizabeth Warren, Bankruptcy Policy, 54
when we stated:                                                 U. Chi. L. Rev. 775, 792 (1987), for the
                                                                proposition that “[a]n almost axiomatic
         It is easy to see why courts
                                                                principle of business law is that, because
         have required Chapter 11
                                                                equity owners stand to gain the most when
         petitioners to act within the
                                                                a business succeeds, they should absorb
         scope of the bankruptcy laws
                                                                the costs of the business’s collapse—up to
         to further a valid
                                                                the full amount of their investment”); see
         reorganizational purpose.
                                                                also 203 N. LaSalle, 526 U.S. at 453
         Chapter 11 vests petitioners
                                                                (characterizing one of the purposes of
         with         considerable
                                                                Chapter 11 as “maximizing property
         powers—the automatic stay,
                                                                available to satisfy creditors”).
         the exclu sive right to
         propose a reorganization                                       As we have explained above, in a
         plan, the discharge of debts,                          smoking gun resolution approved by the
         etc.— that can impose                                  Board, and notwithstanding its strong
         significant hardship on                                financial position, Integrated authorized a
         particular creditors. When                             letter to the Landlord threatening that if it
         financially troub led                                  did not enter into a settlement of the lease
         petitioners seek a chance to                           in the amount of at least $8 million,
         remain in business, the                                Integrated would file for bankruptcy so as
         exercise of those powers is                            to take advantage of § 502(b)(6), which
         justified. But this is not so                          sharply limits the amount that a landlord
         when a petitioner’s aims lie                           can recover in bankruptcy for damages
         o u t s id e t h ose of th e                           resulting from the termination of a lease.
         Bankruptcy Code.
                                                                        Taken to its logical conclusion, the
SGL Carbon, 200 F.3d at 165 (emphasis                           OCESH’s argument is that any entity
added). To be filed in good faith, a petition                   willing to undergo Chapter 11 proceedings
must do more than merely invoke some                            may cap the claims of its landlord.
d i s tr i b u ti o n a l m e c h anism in th e                 Nothing in the Bankruptcy Code or its
Bankruptcy Code. It must seek to create or                      legislative history suggests that §
preserve some value that would otherwise                        502(b)(6) was meant to allow tenants to
be lost—not merely distributed to a                             avoid their leases whenever the landlord’s
d i f f e r en t s t a k e ho l d e r — o u t s i d e of        state law remedy exceeds the cap under §
bankruptcy. This threshold inquiry is                           502(b)(6) by an amount greater than the
particularly sensitive where, as here, the                      cost of proceeding through a Chapter 11
petition seeks to distribute value directly                     reorganization or liquidation. Such a rule
from a creditor to a company’s                                  would not only obviate the need for a good
shareholders. See In re Telegroup Inc.,                         faith requirem ent, b ut would be
281 F.3d 133, 140 (3d Cir. 2002) (quoting                       antithetical to the structure and purposes of

                                                           25
the Bankruptcy Code.
                    III.
       We hold that both the District Court
and the Bankruptcy Court erred as a matter
of law in concluding that Integrated
suffered financial distress.        Although
Integrated’s business model had failed, the
company had no significant debt apart from
the Landlord’s claim. Moreover, the
record demonstrates that the securities
class action did not present a significant
threat to Integrated’s finances. Because
Integrated was not in financial distress, its
Chapter 11 petition was not filed in good
faith as it cou ld no t— and did
not—preserve any value for Integrated’s
creditors that would have been lost outside
of bankruptcy. We will therefore reverse
the order of the District Court affirming the
Bankruptcy Court’s denial of the
Landlord’s motion to dismiss, and will
remand this case to the Bankruptcy Court
with instructions to dismiss Integrated’s
petition.

                                                26