In Re Integrated Telecom Express, Inc.

Broadband-software and equipment supplier Integrated Telecom Express, Inc. (Integrated) (debtor) leased property in Silicon Valley for $200,000 monthly for 10 years in 2001. That year, Integrated suffered losses over $36 million as its product market declined. Shareholders filed a class action exposing Integrated to $5 million in potential liability. In 2002, the company’s board prepared a liquidation plan, approved selling intellectual property for $1.5 million to a new corporation called Real Com some Integrated executives formed, and tried to negotiate an accord and satisfaction of its lease for $8 million. The board sent the landlord a letter threatening to file for bankruptcy to take advantage of a cap on amounts landlords can recover for lease terminations. Two months later, Integrated filed for Chapter 11 reorganization. At the time, it was financially healthy, with over $105 million cash, $1.5 million in other assets, and other liabilities totaling only $430,000. The landlord filed a proof of claim for $26 million. Meanwhile, Integrated renegotiated a deal for Real Com to buy intellectual property for $2 million, sold remaining assets for $500,000, and moved to reject the lease. The landlord moved to dismiss the proceeding as not filed in good faith. The bankruptcy court refused, reasoning that Integrated was financially distressed when it filed and its directors were obligated to fulfill its obligations to investors. The district court affirmed. The landlord appealed.