The U.S. District Court for the District of Delaware recently denied the debtors’ attempt to assume a software license agreement while simultaneously rejecting related agreements with the same vendor. In Huron Consulting Svcs., LLC v. Physiotherapy Holdings, Inc. (In re Physiotherapy Holdings, Inc.), Chief Judge Leonard P. Stark overturned an earlier decision of the Delaware bankruptcy court and concluded, among other things, that related agreements can form a single contract, even if they contain some conflicting provisions and are executed at different times. In so ruling, the district court rejected the debtors’ attempt to selectively assume and reject different agreements with the same counterparty.

Huron provided consulting services and licensed customized revenue-management software to the debtors pursuant to six separately-executed agreements, including a software license agreement (the “License Agreement”), an engagement letter, a master agreement (the “Master Agreement”), and three other related agreements. The debtors viewed the License Agreement as critical to their post-confirmation operations, but did not want to assume liability under the other agreements, particularly the Master Agreement, which contained a broad indemnification provision.

Huron objected when the debtors sought to confirm a plan of reorganization that would allow them to assume the License Agreement while rejecting the other agreements. The bankruptcy court confirmed the plan, overruling Huron’s objection.

On appeal, the district court overturned the bankruptcy court’s decision, in part because language in the agreements evidenced that the parties intended the agreements to constitute a single, integrated contract. In reaching its decision, the court analyzed two separate legal determinations made by the bankruptcy court, as discussed below.

A.     Whether the License Agreement is Assumable in the First Place

The district court affirmed the bankruptcy court’s conclusion that the License Agreement was assumable under section 365(c) of the Bankruptcy Code. Section 365(c) prohibits a debtor from assuming or assigning an executory contract, whether or not the contract prohibits assignment, if applicable law excuses the non-debtor contract party from accepting assignment and the party refuses to consent to assignment.

To determine assumability, the court applied the Third Circuit’s “hypothetical test” for interpreting section 365(c)(1). Under the hypothetical test, whether a debtor can assume an executory contract depends on whether it can hypothetically assign it (even if the debtor has no intention of assigning the contract). This required the court to analyze language in both the License Agreement and the Master Agreement. Under the License Agreement, the debtors were permitted to assign their rights without the consent of Huron, subject to Huron’s termination rights in the Master Agreement. Under the Master Agreement, Huron was allowed to terminate a project “immediately” upon, among other things, the filing of a bankruptcy case by the debtors.

The district court disagreed with Huron that, once triggered, its termination rights under the Master Agreement lasted indefinitely. Because Huron had failed to timely exercise its immediate termination rights, the court found that the License Agreement was assignable and, under the section 365(c)(1) hypothetical test, was assumable.

B.     Whether All of the Agreements Constitute One Contract

Next, the district court overturned the bankruptcy court’s conclusion that the agreements represented separate contracts. The bankruptcy court’s decision was based on three observations: (i) the six agreements were executed on three different dates; (ii) the “Entire Agreement” clauses in both the Master Agreement and the License Agreement operated to eliminate parole evidence and not to evidence the parties’ intent to create one contract; and (iii) the indemnity provisions in the agreements contradicted each other.

First, the district court cited to numerous decisions under governing Pennsylvania law that held that a single contract can be comprised of separately drafted agreements if the parties intend that the agreements be construed as a single agreement.

Second, the district court disagreed with the bankruptcy court’s conclusion that so-called “Entire Agreement” provisions in the agreements were incompatible. The Master Agreement’s Entire Agreement clause provided, in part that “[t]his Agreement, [and other agreements] … represent the entire, final and complete agreement between Client and Huron with regard to the services Huron will perform.” Similarly, the License Agreement, which was executed at a later date, provided that “[t]his Agreement, and the relevant portions of the Consulting Agreement, constitute the entire agreement of the parties with respect to the subject matter of this Agreement.” The bankruptcy court found that the parties included these clauses to eliminate parole evidence. The district court agreed, but also emphasized the next sentence of the License Agreement, which stated “[t]he terms and conditions of the Master Agreement are incorporated into this Agreement by this reference.” This integration language was held by the district court to be clear evidence that the parties intended the agreements to operate as a single contract.

Finally, the district court found that, while the License Agreement indemnity provision was narrower than the one in the Master Agreement, potentially creating a conflict, both agreements contained a “Conflict Clause,” providing that in the event of a conflict, the License Agreement controls. Upon determining that the various agreements between Huron and the Debtors made a single contract, the court remanded the case back to the bankruptcy court and ordered the debtors to choose between rejecting or assuming the agreements together as one.

Going forward, debtors should anticipate that they may not be able to selectively assume some contracts with a counterparty while rejecting others. The Huron decision should cause parties to review termination, assignment, integration and entire agreement provisions (and to carefully draft these provisions in new contracts in the future), especially in the Third Circuit. In light of this decision, it is particularly important that non-debtor counterparties review termination and assignment provisions in their contracts to determine whether prompt action is required. Had Huron promptly exercised its right to terminate, the debtors would not have been able to assume or assign the License Agreement.