Huron Consulting Services, LLC v. Physiotherapy Holdings, Inc. (In re Physiotherapy Holdings, Inc.)

538 B.R. 225
CourtDistrict Court, D. Delaware
DecidedJuly 13, 2015
DocketBankr. Case No. 13-12965-KG; Civ. No. 14-693-LPS
StatusPublished
Cited by2 cases

This text of 538 B.R. 225 (Huron Consulting Services, LLC v. Physiotherapy Holdings, Inc. (In re Physiotherapy Holdings, Inc.)) is published on Counsel Stack Legal Research, covering District Court, D. Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Huron Consulting Services, LLC v. Physiotherapy Holdings, Inc. (In re Physiotherapy Holdings, Inc.), 538 B.R. 225 (D. Del. 2015).

Opinion

MEMORANDUM OPINION

STARK, U.S. District Judge:

Pending before the Court is Huron Consulting Services, LLC’s (“Huron”) appeal from the Bankruptcy Court’s Opinion and [228]*228a series of Orders (D.I. 1-1,1-2,1-3,1-4)1 granting Physiotherapy Holdings, Inc. and related entities’ (“the Debtors”) motion to assume one executory contract and reject five other related agreements (“Motion to Assume”). (D.I. 1) For the reasons stated below, the Court will reverse and remand the Bankruptcy Court’s Opinion and Order.

I. BACKGROUND

The Debtors are providers of outpatient physical therapy services throughout the United States. (D.I. 24 at 2) Huron is a national provider of professional consulting services. (D.I. 15 at 4) The parties entered into a series of agreements in 2011, providing that Huron would assist the Debtors in improving their revenue cycle management. {Id.) On November 12, 2013, the Debtors filed petitions for chapter 11 bankruptcy relief in the United States Bankruptcy Court for the District of Delaware. Huron objected to the Debtors’ proposed plan of reorganization (“the Plan”) insofar as it permitted the Debtors to assume certain terms of Huron’s software licensing agreement, but allowed the Debtors to reject other less favorable terms. (D.I. 1-1 at 3) The Debtors and Huron resolved this objection by adding the following language to the Plan: “Notwithstanding any provision of the Plan or the Confirmation Order to the contrary, all of Huron’s rights, title, interest, claims, defenses or the like with respect to the assumption, assumption and assignment, or rejection of the Huron Agreements are reserved and preserved .... ” (D.I. 21-22 at DA-1003) On December 23, 2013, the Bankruptcy Court entered an order confirming the Debtors’ Plan. (D.I. 1-1 at 3)

Post-confirmation, the Debtors revived this dispute by filing the Motion to Assume pursuant to 11 U.S.C. § 365(c) in the Bankruptcy Court. (D.I. 21-24 at DA-1068) Huron filed an objection to that Motion. (D.I. 21-26 at DA-1126) Out of six total agreements, the Debtors sought to assume (i) the May 19, 2011 Methodology/Software License Agreement (“License Agreement”), and reject (ii) the January 24, 2011 Engagement Letter, (iii) the January 24, 2011 Business Associate Agreement, (iv) the May 19, 2011 Master Agreement (“the Master Agreement”), (v) the May 19, 2011 Project Arrangement Letter (“the Project Letter”), and (vi) the February 1, 2012 Sustained Performance Services Agreement (collectively, “the Agreements”). (D.I. 1-1 at 4 n.3)2

' In a Declaration attached to the Motion to Assume (“the McGahan Declaration”), the Debtors’ Chief Executive Officer and Chief Restructuring Officer details how assuming the License Agreement will aid the Debtors’ reorganization. (D.I. 21-24 at DA-1113) The McGahan Declaration explains that Huron had licensed a customized software system to the Debtors to manage their revenue cycles. {Id. at DA-1116) He claims that this software is vital to the Debtors’ operations moving forward. (Id.) Although the Debtors have been actively seeking alternative software systems, this search will last several months. {Id.) In the interim, the Debtors claim [229]*229that they require the licensing rights to continue using the Huron software. (Id.)

Conversely, the Debtors believe that the terms of the Master Agreement are too burdensome to assume. The Master Agreement provides Huron with broad indemnification rights against the Debtors, while the indemnity clause in the License Agreement provides Huron much narrower rights. (Compare D.I. 25-1 at RA-3, § 2 with D.I. 25-2 at RA-10, §§ 4.1-4.2) Because third-party litigation against Huron is foreseeable, the Debtors argue that if they assume the terms of the Master Agreement they risk exposing themselves to greater indemnity liability that would threaten their reorganization. (Id.; see D.I. 21-24 at DA-1118)

The Bankruptcy Court held a hearing on the Debtors’ Motion to Assume and Huron’s objection on February 20, 2014. The parties presented the Bankruptcy Court with three issues: (1) whether the assumption of the License Agreement is a sound exercise of the Debtors’ business judgment, (2) whether the License Agreement is assumable regardless of Huron’s consent, and (3) whether the Debtors can assume the License Agreement and simultaneously reject the other Agreements. (D.I. 1-1 at 5) In its March 19 Opinion and Order, the Bankruptcy Court answered all three questions in the affirmative and granted the Debtors’ Motion to Assume. This allowed the Debtors to assume the License Agreement and reject the five other Agreements. (D.I. 1-2 at ¶ 1) Huron’s timely appeal to this Court followed.

II. CONTENTIONS

Huron first contends that the Bankruptcy Court incorrectly determined that the License Agreement was assumable. (D.I. 15 at 11) Huron alleges that because it maintains the right to terminate the License Agreement, the Debtors cannot assign or assume that agreement by operation of 11 U.S.C. § 365(c)(1). (Id.) Conversely, the Debtors assert that § 365(c)(1) permits assumption of the License Agreement because Huron failed to exercise its right to terminate. (D.I. 24 at 6)

Next, Huron argues that the Bankruptcy Court incorrectly found that the Debtors exercised sound business judgment by assuming the License Agreement since it “is not an exercise of business judgment to pick and choose between provisions of a single contract.” (Id. at 19) The Debtors disagree, arguing that assuming the License Agreement is a sound exercise of business judgment because they fully paid for the software and it is necessary for their ongoing reorganization. (D.I. 24 at 19)

Lastly, Huron alleges that the Bankruptcy Court failed to recognize that the parties intended for all Agreements to constitute one complete contract; thus, the Debtors cannot assume the License Agreement without also assuming the terms of all Agreements. (D.I. 15 at 13) Huron relies on In re Fleming Cos., 499 F.3d 300, 308 (3d Cir.2007), for the proposition that a debtor can only assume a contract cum onere — accepting the burdens along with its benefits. (D.I. 15 at 13) The Debtors claim that the Bankruptcy Court correctly determined that all Agreements did not form a single contract, and therefore, their individual assumption of the License Agreement did not violate the principle of cum onere. (D.I. 24 at 12-13)

Though Huron principally argued below that all six Agreements form one contract, it now argues on appeal that only the three May 19 Agreements form a single contract. (D.I. 15 at 15) The Debtors contend that Huron cannot raise this “new” theory on appeal. (D.I. 24 at 12-13) The Bankruptcy Court only considered whether all [230]*230six Agreements created one contract; however, there is evidence in the record that Huron did raise the narrower theory below. (See D.I. 17 at DA-1449-53) Further, the parties agree that the ultimate focus of this dispute is whether the Debtors can assume the License Agreement with or without the more burdensome indemnity clause in the Master Agreement.

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Bluebook (online)
538 B.R. 225, Counsel Stack Legal Research, https://law.counselstack.com/opinion/huron-consulting-services-llc-v-physiotherapy-holdings-inc-in-re-ded-2015.