All Or Nothing: Delaware Bankruptcy Court Decision In Physiotherapy Holdings Addresses Contract 'Integration' For Purposes Of Assumption Under Section 365(a)

Among the many tools the Bankruptcy Code provides a debtor in bankruptcy is the ability to assume and reject executory contracts and unexpired leases. This powerful tool is not without limits, however. Among other things, it is an "all or nothing" proposition—a debtor must assume or reject the entire agreement. It cannot assume or reject only portions of the agreement. This rule ensures that a debtor must assume or reject the benefits of the contract with the burdens, "cum onere." Though simple in theory, application of this principle can become complicated where the relationship between a customer and vendor is actually governed by a number of related agreements. It is not uncommon for commercial parties to have a relationship governed by a "master agreement" and related license, leasing, maintenance, operating, and other similar agreements. The recent case of In re Physiotherapy Holdings, Inc., No. 13-12965 (Bankr. D. Del.), highlights the risks to intellectual property rights when a debtor requests that a bankruptcy court treat each of the related agreements separately for purposes of assumption and rejection. In In re Physiotherapy Holdings, Inc., Judge Gross of the United States Bankruptcy Court for the District of Delaware allowed the debtor to assume a license agreement while simultaneously rejecting other agreements with the licensor. The licensor objected on the grounds that the contracts were all a single, integrated agreement—but the court effectively permitted the debtor to keep the one contract that was valuable to it, and to disavow the rest of the agreements. The Context: A License Related to a Master Agreement

In January 2011, Physiotherapy Holdings, Inc. and its affiliates (the "Debtors")providers of outpatient physical therapy serviceshired Huron Consulting Services LLC ("Huron"), a healthcare consulting company, to assess opportunities for improving their revenue cycle. In connection with that engagement, in 2011 and 2012, the Debtors and Huron entered into various agreements (the "Huron Agreements"), including a "Master Agreement" and a "License Agreement." Pursuant to the License Agreement, Huron granted the Debtors the right to use certain computer software necessary to the Debtors' billing and collection activities. Also of note, although the License and Master Agreements each contained provisions requiring the Debtors to indemnify Huron, the indemnity under the Master Agreement was much broader than under the License...