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Bankruptcy Court Determines Multiple Agreements are Not Integrated; Allows Debtor-Licensee to Assume License Agreement Over Objection of Licensor

In re Physiotherapy Holdings, Inc., No. 13-12965 (KG), 2014 WL 1053117 (Bankr. D. Del. March 19, 2014)

When faced with the question of whether a debtor-licensee was entitled to assume a software license agreement (the “License Agreement”) while rejecting five other agreements with the licensor, the Honorable Kevin Gross held in the affirmative, relying upon the express language of the various agreements and the necessity of the License Agreement to the debtors’ ability to successfully reorganize.

Prior to the petition date, Physiotherapy Holdings Inc. and its various affiliates (together, the “Debtors”) entered into six agreements with Huron Consulting Services, LLC (“Huron”) for Huron to assess the Debtors’ revenue cycle in order to optimize its performance.  One of those agreements was the License Agreement, which at the time of the proposed assumption was “an absolute necessity for the operation of [the Debtors’] businesses.”  Accordingly, the Debtors sought to assume the License Agreement so that their businesses could continue to use the underlying software until it could be replaced.  Despite its importance to the reorganization, however, the Debtors made it clear to the Court that they would abandon their assumption efforts if they were forced to assume the remaining five agreements with Huron.  One of the five agreements – the so-called Master Agreement – contained broad indemnification language that would open the Debtors to unknown costs relating to future claims against Huron for software problems.  The indemnification language of the License Agreement was more limited.  In an effort to retain its broad indemnification right under the Master Agreement, Huron argued that the six agreements were integrated and thus, must be assumed or rejected in their entirety.

As a threshold matter, the Bankruptcy Court determined that the business necessity of the License Agreement and the indemnification costs arising from the remaining agreements supported the Debtors’ sound business judgment to assume the former and reject the latter.   Moreover, the Court held that Huron’s consent was not required for assumption of the License Agreement under section 365(c)(1) of the Bankruptcy Code because the terms of the License Agreement permitted non-consensual assignment in the circumstances presented and the right to assign results in the right to assume.  Finally, turning to the “central issue,” the Court analyzed the terms of the agreements and determined them to be singular.  The agreements were not executed at the same time and included provisions setting forth which agreement controlled in the event of conflicts.  Importantly, while the Master Agreement contained an integration clause providing for the six agreements to “represent the entire, final and complete agreement between [the Debtors] and Huron with regard to services Huron will perform,” the Court viewed the purpose of such clause to eliminate parol evidence rather than to reduce the License Agreement to a component of the Master Agreement.  If that were the intention, the Court noted that there would be no need for the limited indemnity language of the License Agreement given the broad provision of indemnification in the Master Agreement.