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A financially healthy company that is going out of business cannot file for bankruptcy for the sole purpose of taking advantage of a provision of the Bankruptcy Code that sharply limits the amount a landlord may recover for termination of a long-term lease, the 3d U.S. Circuit Court of Appeals has ruled. In its 26-page opinion in In re Integrated Telecom Express Inc., No. 04-2411, a unanimous three-judge panel reversed both the bankruptcy court and the Delaware federal court that had said that Integrated Telecom, despite having plenty of cash, had the right to pursue a Chapter 11 filing because it “was losing a lot of money” and had gone “out of business.” Those findings were not enough to show that the debtor was in “financial distress,” the 3d Circuit ruled, because Integrated “was highly solvent and cash rich at the time of the bankruptcy filing.” 3d Circuit Judge D. Brooks Smith found that the Bankruptcy Code does not allow for the filing of a Chapter 11 petition “by a financially healthy debtor, with no intention of reorganizing or liquidating as a going concern.” Smith, who was joined by Senior 3d Circuit judges Edward R. Becker and Morton I. Greenberg, found that Integrated had “no reasonable expectation” that its Chapter 11 proceedings would “maximize the value of the debtor’s estate for creditors.” Instead, Smith said, the evidence showed that Integrated filed the petition “solely to take advantage of a provision in the Bankruptcy Code” that limits claims on long-term leases. The ruling is a victory for the landlord and its lawyers, Seth P. Waxman and Craig Goldblatt of Wilmer Cutler Pickering Hale and Dorr. In 2002, Integrated prepared a liquidation plan. One outstanding issue was its long-term lease. The firm told the landlord that if its offer of $8 million was rejected, it would file a Chapter 11 bankruptcy petition in order to make use of � 502(b)(6) of the Bankruptcy Code, which imposes a cap on the landlord’s claims. The landlord refused to settle, and Integrated filed its bankruptcy petition, including schedules that showed it having $105.4 million in cash. The court confirmed Integrated’s plan and, applying the cap, reduced the landlord’s claim from $26 million to $4.3 million. The Delaware federal court affirmed. But the 3d Circuit reversed. To be filed in good faith, Smith said, a bankruptcy petition “must do more than merely invoke some distributional mechanism in the Bankruptcy Code. It must seek to create or preserve some value that would otherwise be lost . . . outside of bankruptcy.”

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