Opinion
Case No. 03-2507, Bankruptcy Case No. 02-43582-H4-11 Jointly Administered
March 5, 2004
MEMORANDUM AND OPINION
The issue in this bankruptcy appeal is the effect of cross — default provisions on a chapter 11 debtor's ability to assume or reject unexpired leases, in this case leases for large numbers of fleet vehicles used in the debtor's business. The bankruptcy court held that a cross — default provision in a "master lease" between the debtor, appellee Encompass Services Corporation and Encompass Services Holding Corp. ("Encompass"), and appellant Automotive Rentals, Inc., ("ARI"), incorporated in the individual leases for specific vehicles, could not be enforced. (Bankr. Docket Entry No. 2773, Tr. at 127). Encompass rejected approximately 900 individual automotive leases and assumed and assigned — and cured outstanding defaults under — approximately 2,700 to 2,800 leases. (Id. at 54, 82). The bankruptcy judge denied ARI's motion to have the unpaid amounts under the rejected leases treated as administrative expenses with priority for payment over unsecured prepetition claims. (Bankr. Docket Entry No. 2630).
In this appeal, ARI asserts that the bankruptcy judge erred under both New Jersey contract law and federal bankruptcy law in finding the cross — default provisions unenforceable and in denying the motion for payment of the administrative claim. (Docket Entry No. 15). Encompass responds that the bankruptcy court properly applied In re Liljeberg Enterprises, Inc., 304 F.3d 410 (5th Cir. 2002) in finding that the cross — default provisions would not be enforced to make a default in any lease between Encompass and ARI a default of every such lease. (Docket Entry No. 19).
This court has carefully examined the briefs, the record, and the applicable law. Based on that review, this court finds that the cross — default provisions at issue are not enforceable. The bankruptcy court's denial of ARI's Motion for Recognition and Payment of Administrative Claim is AFFIRMED, for the reasons set out below.
I. Background
ARI leased fleet vehicles to Encompass. (Docket Entry No. 15, p. 5). When Encompass filed bankruptcy for itself and its subsidiaries, it had 3,400 vehicles leased from ARI. (Bankr. Docket Entry No. 2773, Tr. at 78). The parties executed two categories of agreements: master agreements that set general terms applicable to every lease and individual lease agreements for each vehicle or equipment leased. The individual lease agreements incorporated the terms of the master agreements.
The Master Lease Agreement was executed by ARI as lessor and Encompass's predecessor in interest, Group Maintenance America Corp.
ARI and Encompass executed the following master agreements:
a) Master Lease Agreement between ARI and Encompass, as successor to Group Maintenance America Corporation, dated April 8,1998, as amended (the "Master Lease Agreement"), (ARI Ex. 1);
b) Closed End Lease Agreement "between ARI and Encompass, dated March 28, 2000, as amended (the "Closed End Lease"), (ARI Ex. 3);
c) Master Equipment Lease Agreement between ARI and Encompass, dated March 28, 2000, (the "Equipment Lease"), (ARI Ex. 4); and
d) Lease Agreement between ARI and Encompass, the assignee of Robinson Mechanical Company, dated July 13. 1992 (the "Robinson Lease"), (ARI Ex. 5 j.
Under the Master Lease Agreement, ARI agreed to lease vehicles "as may be ordered" by Encompass. (ARI Ex. l, § 1). The Master Lease Agreement provided that Encompass was to submit written orders to ARI specifying the make, model, and delivery point of each vehicle to be leased. (Id., § 2a). ARI was to deliver the vehicles ordered, subject to ARI's ability to obtain sufficient inventories of the vehicles requested. (Id., § 2b). As ARI delivered a specific vehicle, Encompass would execute an individual motor vehicle lease agreement ("MVLA"). (Id., § 3b). Each MVLA specified the vehicle year, make, identification number, base cost, monthly rental payment, delivery date, delivery address, delivery term, depreciation term, the name and address of the Encompass subsidiary that would be using the vehicle, and the name of the Encompass employee who would be driving the vehicle. (ARI, Ex. 12 A).
The Master Lease Agreement provided generally applicable terms, which each MVLA incorporated. (ARI, Ex. 1, § 3b;Ex. 12A). Those generally applicable terms included the address and dates for making lease payments and the formula to calculate depreciation. (ARI Ex, l, §§ 4, 9c). The generally applicable terms incorporated into each MVLA included a requirement that Encompass would: pay ARI a penalty for any invoice paid over five days late; reimburse ARI for the costs of complying with state and local inspections, license tags, and similar laws, as well as all the costs of federal, state, and local taxes not included in the vehicle cost; return any vehicle replaced or retired at the place it was originally delivered or another agreeable place; pay any deficiency if the net proceeds of the resold vehicle were less than its depreciated value; maintain and repair each vehicle at its own expense and repair any damaged vehicle; insure the vehicles and bear risk of loss or damage; and indemnify ARI for loss or liability arising out of any delay in the delivery of a vehicle and the use of any vehicle. (Id.. §§ 4b, 6, 8a, 9, l lb, 14, 13a, 16, 17). The Master Lease Agreement also included an integration clause, stating as follows:
The Closed — End Lease, the Equipment Lease, and the Robinson Lease contained similar categories of provisions.
This Agreement, together with the Exhibits attached hereto and any Motor Vehicle Lease Agreements which may be executed hereafter, constitute and will constitute the full, complete, absolute and entire Agreement between ARI . . . and Lessee with respect to the subject matter hereof. There are no oral agreements or understandings affecting this instrument. Any future agreements, understandings or waivers to be binding upon the parties hereto must be reduced to writing and attached hereto . . .(Id., § 25).
On the same date that the parties executed the Master Lease Agreement, they executed the Fleet Management Services Agreement, under which ARI was required to provide certain fleet management services to Encompass, (ARI Ex. 2). By an amendment to the Master Lease Agreement executed in August 1999, the parties agreed that ARI would supply Encompass with a fleet coordinator and that ARI would pay the entire salary and benefits for the fleet coordinator if Encompass placed at least l,500 vehicle orders a year. (ARI Ex. 1B, § 28i, iii). If Encompass failed to meet this specified quota, it would pay a pro rata portion of the annual compensation for the fleet coordinator. (M, § 28iii). The Master Lease Agreement did not require any minimum number of vehicles to be leased. (See ARI Ex. 1).
The center of this appeal is the cross — default provision in Article 19 of the Master Lease Agreement. That provision, incorporated with the other provisions of the Master Lease Agreement in each of the MVLAs, stated that a breach under any lease between the parties, or `"any other Agreements between Lessee and ARI," was a breach of all leases or agreements between the parties, The cross — default provision specifically stated as follows:
Article 12 of the Closed — End Lease, Article 10 of the Equipment Lease, and Article 19 of the Robinson Lease included the same provision.
In the event Lessee shall default in any payments due ARI, or in performance of any covenant or condition under this Agreement or under any other Agreements between Lessee and ARI ("Agreements"), and ARI notifies Lessee of such default and it thereafter remains uncorrected for ten (10) days, ARI may pursue any remedies it may have under any Agreements between ARI and Lessee, including taking possession of any or all vehicles leased hereunder and the demand for payment of all sums due ARI and the immediate payment of any remaining unpaid charges for the balance of the terms of the individual Motor Vehicle Lease Agreements or Items of equipment under Agreements between ARI and Lessee.
(ARI Ex. 1, § 19).
On June l, 2000, the parties amended the Master Lease Agreement to include the following language:
The parties intend that each MVLA will he an independent lease agreement relating solely to the vehicle named in it and accordingly each MVLA will be separate and distinct from every other lease agreement between the parties.
(ARI Ex. ID, § 3). At the same time, the individual MVLAs were similarly amended to provide as follows:
This Motor Lease Agreement is entered into between Lessor and Lessee and constitutes a separate and independent lease agreement solely of the Vehicle(s). The Motor Vehicle Lease Agreement is separate and distinct from any other lease agreement or other agreement between Lessor and Lessee or to which Lessee is otherwise a party.
(ARI Ex. ID). The amendment was both proposed and drafted by ARI to accommodate its need to pledge each leased vehicle separately to the different lenders from which ARI sought to obtain financing. (Bankr. Docket Entry No. 2773, Tr. at 19,107).
Encompass filed for bankruptcy protection under chapter 11 on November 19, 2002. (Bankr. Docket Entry No. 1). At that time, as noted, Encompass leased approximately 3,400 vehicles from ALL (Bankr. Docket Entry No. 2773, Tr. at 78). Encompass filed approximately 40 motions with the bankruptcy court to sell certain operating assets and to assume and assign executory contracts and unexpired leases. The bankruptcy court entered orders approving the motions, including the assumption and assignment requests. (See ARI Ex. 20-48). Under those orders, Encompass assumed and assigned approximately 2,700 to 2,800 vehicle leases. Encompass satisfied the cure requirements imposed by 11 U.S.C. § 365(b) as to each of the leases it assumed and assigned. Encompass paid AL1 approximately $7. l million during the bankruptcy, which included the cure amounts as well as monthly lease payments and fleet maintenance payments. (Bankr, Docket Entry No. 2773, Tr. at 80).
On February 11, 2003, February 28, 2003, March 12, 2003, April 9, 2003, and May 7, 2003, the bankruptcy court entered orders approving Encompass's motions to reject certain executory contracts and unexpired leases. (ARI Ex. 6, 7, 8. 9,10). Encompass rejected over 900 vehicle leases under the orders.
On April 15, 2003, ARI filed its Motion and Application for Recognition and Payment of Administrative Claim, seeking an administrative expense claim for the lease rejection damages. (Bankr. Docket Entry No. 2142). Those damages included monthly payments due on each vehicle under the unexpired leases; late penalties; inspection, license, and similar costs; lease termination fees; deficiency if the proceeds from resale were less than the depreciated value of the sold vehicle; processing fees for summonses issued against any vehicle; repair costs; the fleet coordinator's compensation; and attorney fees. (Id., ¶¶ 5. 9,13). ARI sought $1.25 million in lease rejection damages and asked the court to treat that amount as an administrative expense claim, entitled to priority. (Id., ¶¶ 24, 26). ARI argued that the cross — default provisions required Encompass to "cure" the defaults under the 900 rejected leases because it had assumed approximately 2,700 to 2,800 leases. (Id., ¶ 22). Encompass and the creditors' committee both objected, arguing that the cross — default provisions were not enforceable under either the applicable state law of contract interpretation or federal bankruptcy law. (Bankr. Docket Entry No. 2624). The bankruptcy court held an evidentiary hearing and denied ARI's motion. (See Bankr. Docket Entry Nos. 2773, 2630). ARI timely appealed.
II. The Applicable Legal Standards
The Bankruptcy Code gives a debtor in possession the power, subject to court approval, to assume or reject executory contracts and unexpired leases. 11 U.S.C. § 365(a). The power to assume is particularly important in a chapter 11 reorganization, allowing the debtor to continue to receive the benefits of agreements needed to rehabilitate its business. The power to assume an unexpired lease cannot be exercised unless the debtor cures defaults in the lease or gives adequate assurance of prompt cure. See 11 U.S.C. § 365(b). "Section 365(b)(1) essentially allows a debtor to continue in a beneficial contract provided, however, that the other party is made whole at the rime of the debtor's assumption of said contract." In re Liljeberg, 304 F.3d at 438 (internal quotations and citations omitted). "Section 365 is intended to provide a means whereby a debtor can force another party to an executory contract to continue to perform under the contract if (1) the debtor can provide adequate assurance that it, too, will continue to perform, and if (2) the debtor can cure any defaults in its past performance." Id. (internal quotations and citations omitted). Therefore, "the debtor party must take full account of the cost to cure all existing defaults owed to the non — debtor party when assessing whether the contract is beneficial to the estate." Id. (internal quotations and citations omitted). Under section 365, "[a]n assumed lease or contract will remain in effect through and then after the completion of the reorganization," and "[t]he non — debtor party to the agreement is not released from its duties and must continue to perform; likewise, the debtor must continue to perform or pay for the services or other costs that arc not discharged." In re Nat'l Gypsum Co., 208 F.3d 498, 505 (5th Cir.), cert. denied, 531 U.S. 871, 121 S.Ct. 172, 148 L.Ed.2d 117 (2000). "The act of assumption must be grounded, at least in part, in the conclusion that maintenance of the contract is more beneficial to the estate than doing without the other parry's services." Id. (internal quotations and citations omitted). The issue is whether, because Encompass assumed 2,700 or 2,800 unexpired vehicle leases containing "cross — default" provisions, it must not only cure the defaults in those leases but must also cure defaults under the 900 unexpired vehicle leases it rejected.
It is common for parties with multiple agreements to provide that a default of an obligation under one agreement will constitute a default under a different agreement. In the bankruptcy context, the issue is whether a debtor must cure a default of an obligation under a contract as a condition to assuming a different executory contract or unexpired lease containing a cross — default provision. See, e.g., In re Liljeberg, 304 F.3d at 445 (cross — default provisions in agreement giving company exclusive right to provide pharmaceutical services at hospital, and in related lease agreement and collateral mortgage, prevented assumption of pharmacy agreement due to incurable default of collateral mortgage); In re Kopel, 232 B.R. 57, 64 (Bankr. E.D.N. Y. 1999) (chapter 11 debtor could not assume unexpired lease for the commercial real estate where he conducted his veterinary practice without first curing defaults under a promissory note signed in connection with his purchase of the veterinary' practice and under a related consulting agreement, where lease had a cross — default provision). Compare, e.g., In re Sambo's Restaurants, Inc., 24 B.R. 755, 757-58 (Bankr. C.D. Cal. 1982) (cross — default provision represents an impermissible restriction on the debtor's ability to assume a contract or lease). See also Alan N. Resnick and Brad Eric Scheler, The Effect of a Cross — Default Provision on the Ability to Assume an Executory Contract or Unexpired Lease, 32 UCC L. J. 338 (2000).
This appeal presents a contractual and a statutory challenge to the cross — default provision enforcement ARI seeks. The parties agree that the New Jersey law of contract interpretation applies. Under New Jersey law, if a contract is unambiguous, extrinsic evidence is inadmissible to contradict or vary the terms. Seidenberg v. Summit Bank, 348 N.J. Super. 243, 256, 791 A.2d 1068 (App.Div. 2002). To the extent such determinations turn on contested factual disputes, and not errors of law, this court's review is based on a clearly erroneous standard. To the extent such determinations turn on matters of law, review is de novo. Balsamides v. Protameen Chems., Inc., 160 N.J. 352, 372, 734 A.2d 721 (1999).
ARI argues that the bankruptcy court erred in finding that the June l, 2000 amendment to the Master Lease Agreement eliminated the cross — default provision. ARI also argues that, as a matter of federal bankruptcy law, the bankruptcy court erred in holding that the cross — default provisions were not enforceable so as to make a default in one vehicle lease a default in every lease. Each argument is considered below.
III. Analysis
Encompass's contractual argument is not, as ARI asserts, that the June l, 2000 amendment stating that each M VLA and the Master Lease Agreement were separate and independent agreements eliminated the cross — default provisions. Rather, Encompass argues that the June l, 2000 amendment made it clear that the relationship among the leases was not sufficiently close to make the cross — default provision enforceable.
The parties agree that the binding authority m this circuit on the enforceability of cross — default provisions is Liljeberg. In that case, the court began by examining case law on cross — default provisions, stating that "[t]here is non — binding authority from bankruptcy and district courts outside of this circuit . . . for the propositions that cross — default provisions do not integrate otherwise separate transactions or leases and that section 365 prohibits the enforcement of cross — default provisions where enforcement would restrict the debtor's ability to assume an executory contract." 304 F.3d at 444-45. The Liljeberg court adopted the reasoning of In re Kopel. In that case, the court examined existing case law in light of competing bankruptcy policies: (1) permitting "debtors to assume beneficial executory contracts and reject burdensome ones in order to facilitate reorganization"; and (2) protecting nondebtor contracting parties by requiring a debtor to assume an executory contract in its entirety and to cure any default or give adequate assurance of prompt cure in order to assume the contract. 232 B.R. al 63. The Kopel court synthesized the authorities in light of these competing policies and identified criteria for the enforceability of cross — default provisions. The Liljeberg court adopted these criteria, stating as follows:
The Liljeberg court cited cases such as EBO Midtown S. Corp. v. McLaren/Hart Envtl. Eng'g Corp. (In re Sanshoe Worldwide Corp.), 139B.R. 585, 597(S.D.N.Y.1992), In that case, die court read 11 U.S.C. § 365(1), which provides that anti — assignment clauses are not to be enforced unless they are within au enumerated exception in section 365(c), to apply to cross — default provisions and make them unenforceable as impermissibly infringing on a debtor's right to assume and assign leases, ln relevant part, section 365(f) states:
(f)(1) Except as provided in subsection (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection . . .
(2) The trustee may assign an executory contract or unexpired lease of the debtor only if —
(A) the trustee assumes such contract or lease in accordance with the provisions of this section; and
(B) adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.
(3) Notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law that terminates or modifies, or permits a party other than the debtor to terminate or modify, such contract or lease or a right or obligation under such contract or lease on account of an assignment of such contract or lease, such contract, lease, right, or obligation may not be terminated or modified under such provision because of the assumption or assignment of such contract or lease by the trustee.11U.S.C. § 365(f). See also In re Convenience USA, Inc., 2002 WL 230772,*7 (Bankr. M.D.N.C. 2002) (when a debtor is a party to a number of unexpired leases, cross — default clauses that would prevent the debtor from assuming some of the leases without assuming others arc unenforceable under 8 365(f)).
[W]hile `cross — de fault provisions are inherently suspect,' they are not per se invalid in the bankruptcy context, and `a court should carefully scrutinize the tacts and circumstances surrounding the particular transaction to determine whether enforcement of the provision would contravene an overriding federal bankruptcy policy and thus impermissibly hamper the debtor's reorganization.' Before finding that a cross — default provision involving a lease and non — lease agreements, including a note, similar to that here, was enforceable, the bankruptcy court concluded that `[f]ederal bankruptcy policy is offended where the non — debtor party seeks enforcement of a cross — default provision in an effort to extract priority payments under an unrelated agreement,' such that `[a] creditor cannot use the protections afforded it by section 3 65(b) (which requires curing of defaults and adequate assurances of future payments as a precondition to assumption o f an executory contract or unexpired lease) in order to maximize its returns by treating unrelated unsecured debt as a de facto priority obligation.' As such, `where the non — debtor party would have been willing, absent the existence of the cross — defaulted agreement, to enter into a contract that the debtor wishes to assume, the cross — default provision should not be enforced,' but `enforcement of a cross — default provision should not be refused where to do so would thwart the non — debtor party's bargain.'304 F.3d at 445 (quoting ln re Kopel, 232 B.R. at 64-66).
The Liljeberg court also drew on Kopel in stating that `"[t]he fact that legally separate entities are parties to the various contracts does not of itself preclude enforcement of the cross — default provision' and that, `[w]here documents are contemporaneously executed as necessary elements of the same transaction, such that there would have been no transaction without each of the other agreements, the fact that nominally distinct parties executed the agreements will not preclude enforcement of a cross — default provision in favor of a party whose economic interests are identical to those of the entity that is party to the document containing the cross — default provision.'" Id. (quoting ln re Kopel, 232 B.R. at 67).
In Kopel, a veterinarian sold his practice to an employee and provided seller financing for the transaction. 232 B.R. at 60-61. On the same day, the parties or related parties signed an asset acquisition agreement, a promissory note for a portion of the purchase price, a fifteen — year lease with the purchaser as the tenant, and a consulting agreement that provided for the seller to act as a consultant for an annual salary and restricted his ability to compete with the purchaser. Id. at 61. Each agreement had a cross — default provision, which would permit the seller to recapture the veterinary practice if the purchaser defaulted under any of the agreements. Id. at 62. The purchaser later filed a chapter 11 petition and sought a declaration that the cross — default provision was unenforceable so that he could assume the lease — which was current — without curing defaults under the promissory note and the consulting agreement. Id. at 60. The seller asked the court to enforce the cross — default provision to require the debtor to cure the defaults under the note and consulting agreement in order to assume the lease. Id. at 59.
The Kopel court based its decision on the relationship among the agreements. Examining the documents carefully in light of the economics of the transaction, the court concluded that the note and the lease were "essential elements of a single transaction. . . . The cross — default provision in the Lease must . . . be regarded as a necessary term, the absence of which would have halted the sale. . . . the cross — defaults are being asserted to protect the very essence of the bargain made with Debtors by the landlord and its principal. [The principal] entered into the Lease to facilitate a larger transaction, not simply to collect rent." Id. at 66-67. The court found a weaker connection between the lease and the consulting agreement than between the lease and the note. "Whether to enforce the Lease provision that renders a Consulting Agreement breach a default under the Lease thus turns on whether the parties would have entered into the Lease absent the Consulting Agreement." Id. at 68. The court concluded that the consulting agreement was a fundamental part of the transaction, which was intended to provide the selling veterinarian with ongoing cash income from the practice in addition to payments from the note and lease, while providing the purchasing veterinarian with a way to "reinforce the legal predicate for the non — competition agreement protecting [his] interest in the business. . . ." Id. at 69. The court enforced the cross — default provision, finding that the lease, note, and consulting agreement "were entered into as part of a single, integrated transaction," so that the debtor could not assume the lease without curing or providing adequate assurance of promptly curing defaults under the note and consulting agreement, Id. at 63,68.
In Liljeberg, the debtor, a corporation and its affiliates owned by two brothers, both licensed pharmacists, entered into several agreements Lo build, finance, and operate a hospital that would include a pharmacy, 304 F.3d at 418. The related documents included a loan agreement, a promissory note, a collateral mortgage and note, a lease agreement, and a pharmacy management agreement. Id. at 419. The note and lease payments were offsetting transactions; the monthly payment was merely a bookkeeping entry. Id. The pharmacy agreement contained a cross — default provision. Id. After extensive and extended litigation, the Liljebergs were in bankruptcy. Id. at 420. The district court concluded that they should be allowed to assume the executory pharmacy management agreement, rejecting the hospital's argument that the debtor's defaults under the collateral mortgage precluded their assumption of the pharmacy agreement based on the cross — default provision of that agreement. Id. at 421. The Fifth Circuit examined the relationship among the documents and found the cross — default provision enforceable:
Here, there is ample support for the conclusion that the lease and collateral mortgage of the hospital are interrelated with the pharmacy agreement and that there would have been no pharmacy agreement without the lease of the hospital or the loan secured by the collateral mortgage. Indeed, the parties agreed in the pre — trial order that St. Jude would not have entered into the lease of the hospital to Lifemark if Lifemark had refused to enter into the pharmacy agreement with Liljeberg Enterprises. It is true that the lease was signed a month after the pharmacy agreement was executed, but section 5.1(b) expressly contemplates "the lease relating to the Hospital" as an instrument covered by the cross — default provision. The parties also agreed that John Liljeberg signed a letter of intent dated December 20,1982, with Lifernark concerning a proposal to develop St. Jude Hospital. The district court, in considering the effectiveness of an alleged default under pharmacy agreement section 5. 1(e), found that "although it is evident that the [pharmacy agreement] was a part of the overall transaction, it is not evident from the documents executed one month after the [pharmacy agreement] that the [pharmacy agreement] was not severable from the remainder of the transaction," such that "a default under the [pharmacy agreement] would not collapse the loan or the Lease." That observation adds nothing. Non — enforcement of the cross — default provision, providing that a default under the collateral mortgage or lease would collapse the pharmacy agreement, would thwart Lifemark's bargain in agreeing to enter into the pharmacy agreement, all a part of the overall transaction to finance the building of the hospital through a loan secured by a collateral mortgage. Any finding, express or implied, to the contrary by the district court is clearly erroneous on the record before us.Id. at 445-46.
In the present case, ARI is invoking the cross — default provision in the Master Lease Agreement, incorporated into each of the MVLAs, to urge that a breach in any one of the 3,400 individual MVLAs constitutes a breach of all of the 3,400 individual MVLAs. Under Kopel and Liljeberg, this court must examine the relationship among the leases to determine whether they are sufficiently related to require the debtor to cure all defaults in every lease in order to assume any of the unexpired leases. The relationship is in part measured by examining whether all the leases are an integrated, single transaction — not a single contract, but a single transaction. In re Kopel, 232 B.R. at 63. This court must also examine whether ARI, the nondebtor party, would have been willing, absent the existence of the cross — defaulted leases, to enter into the leases that Encompass has assumed. If so, the cross — default provision should not be enforced. A court should enforce a cross — default provision where a refusal to do so would thwart the nondebtor party's bargain. Id. at 66.
It is undisputed that under New Jersey contract law, the leases in this case are separate contracts. See In re TH Diner, Inc., 108 B.R. 448,453-54 (D.N.J. 1989). The language of the June 1, 2000 amendment to the Master Lease Agreement, incorporated into the MVLAs, makes this explicit. That amendment provides that "[t]he parties intend that each MVLA will be an independent lease agreement relating solely to the vehicle named in it and accordingly each MVLA will be separate and distinct from every other lease agreement between the parties." (ARI Ex. 1D, § 3). Each MVLA contains a similar clause. At the hearing in the bankruptcy court, a witness for ARI testified that the amendment was executed to ensure that the individual vehicles would be pledged to a particular financing institution. (Bankr. Docket Entry No. 2773, Tr. at 19). The issue is not limited to whether the Master Lease Agreement and the individual MVLAs are separate contracts; rather, the issue is whether all the MVLAs and the Master Lease Agreement are a "single, integrated transaction," In re Kopel, 232 B.R. at 63, so interrelated as to be "essential elements of a single transaction," id. at 66. Unless the leases are a single, integrated transaction and the parties would not have entered into the assumed MVLAs without the cross — defaulted rejected MVLAs, a default in one MVLA cannot constitute a default in all MVLAs. See In re Liljeberg, 304 F.3d at 445-46.
The lease documents themselves reveal that they are not a "single, integrated transaction," but rather a series of thousands of individual lease transactions that occurred over a six — year period. The Master Lease Agreement, executed in 1998, set general terms that applied to any subsequent individual lease agreements; the individual lease agreements — the MVLAs — established varying and specific terms for each vehicle subsequently leased. The parties had to enter separately into each MVLA, on a vehicle — by — vehicle, lease — by — lease basis. (Bankr. Docket Entry No. 2773, Tr. at 75). Although each MVLA incorporated the Master Lease Agreement, the terms of the MVLAs varied according to the vehicle, the monthly payments, the interest rates, and the Encompass entity and employee using the vehicle. The individual vehicle leases are not wholly unrelated, but they are separate transactions as well as separate contracts. See, e.g., In re Wheeling — Pittsburgh Steel Corp., 54 B.R. 772, 780-81 (Bankr. W.D. Pa. 1985), aff'd, 67 B.R. 620 (W.D. Pa. 1986) (holding that a series of insurance policies containing a cross — default provision were not sufficiently interrelated to make that provision enforceable). "A loan agreement and accompanying security agreement are inherently related in a way that separate policies of insurance and separate leases are not." Id. at 779 n. 9.
ARI makes both a formal and functional argument for characterizing the MVLAs and the Master Lease Agreement as so interrelated as to make the cross — default provisions enforceable. ARI argues that without the Master Lease Agreement, there could be no MVLAs, and without the MVLAs, there could be no Master Lease Agreement, The Master Lease Agreement, however, did not require the parties to enter into any or every single MVLA and did not require a minimum number of vehicles to be leased. No MVLA required the execution of any other MVLA or had as an essential element the execution of any other MVLA, (Bankr. Docket Entry No. 2773, Tr. at 58). ARI's argument does not provide a basis for characterizing the MVLAs as having the necessary interrelationship to each other as to the make the cross — default provisions incorporated into each of the MVLAs from the Master Lease Agreement enforceable.
ARI offers two functional grounds for arguing that the Master Lease Agreement and each of the subsequent MVLAs were a single, integrated transaction and that the cross — default provision was an essential part of ARI's bargain in its business relationship with Encompass. The first is the argument that the cross — default provision was important to ARI's pricing decision to provide Encompass reduced lease rates. (Docket Entry No. 15, pp. 22-23). The second is the argument that ARI was attempting to avoid remaining responsible to provide Encompass all the services required under the Master Lease Agreement and the Fleet Services Agreement if Encompass was refusing to pay for any vehicle it leased (Id., pp. 23-24).
The first argument is inconsistent with ARI's testimony at the evidentiary hearing and with the lease provisions relating to pricing and settlement of deficiencies. The testimony at the hearing made it clear that the pricing was based on the large number of vehicle leases that were contemplated. As a witness for ARI testified before the bankruptcy court, "[p]ricing in this industry is driven by volume, primarily." (Bankr. Docket Entry No. 2773, Tr. at 53). If that volume had not been realized, according to the testimony, the remedy available to ARI would not have been to invoke the cross — default provision, but to "go back to the client and say, `Listen, on a go — forward basis, we need to change the pricing in this deal because the volume that we had assumed in the deal isn't being realized.'" (Id., p. 60).
ARI also argues that the cross — default provision was important because ARI did not want to be responsible for providing ongoing services if Encompass was in breach as to any of the vehicles leased. ARI was responsible for providing such services regardless of the number of MVLAs into which Encompass entered. If the volume fell below a certain number, Encompass had to pay a portion of the fleet coordinator's salary, but otherwise ARI's obligations did not vary depending on the number of vehicles leased. The Master Lease Agreement incorporated into each of the MVLAs specifically provided for a settlement process between the lessor and the lessee on a vehicle — by — vehicle, lease — by — lease basis. When a lease ended or was terminated, the vehicle was sold. If the price was higher than the book value, the lessee was credited; if lower than the book value, the lessee had to pay the deficiency. The testimony at trial was that although Encompass had defaulted on some of the MVLAs before the bankruptcy, ARI did not invoke the cross — default provision at that time to cease providing any services until Encompass cured any defaults in the MVLAs. (Bankr. Docket Entry No. 2773, Tr. at 106).
Daniel Willard, treasury manager of ARI, testified that the settlement process was an important part of the deal because it permitted ARI to ensure that a "back end" deficiency could be collected. This witness testified that without such a process, the agreement would have been converted to a closed — end agreement, rather than the open — ended Master Lease Agreement, (Bankr. Docket Entry No. 2773, Tr. at 64). The problem with attempting to apply this argument to the cross — default provision is that both the open — ended Master Lease Agreement and the Closed — End Lease between ARI and Encompass have a cross — default provision.
This is not a case in which failing to enforce the cross — default provision would thwart the nondebtor party's bargain. See In re Kopel, 23 2 B.R. at 66. ARI bargained for the right to lease vehicles to Encompass. ARI anticipated a large volume and priced on that basis, not on the basis of a contractual ability to make a default in a single vehicle lease constitute a default in thousands of other leases. The thousands of individual MVLAs entered into over the six — year period were separate contracts and related, but distinct, transactions. Each MVLA provided specific procedures for settling the amount due either to ARI or to Encompass at the end of each lease, on a vehicle — by — vehicle, lease — by — lease basis. ARI did not specifically negotiate for the cross — default provision and did not enforce it before Encompass declared bankruptcy. This court does not find that any of the MVLAs were an essential part of any other MVLA, or that the MVLAs that were assumed would not have been entered into had the panics not entered into the MVLAs that were rejected.
The bankruptcy court did not err in allowing Encompass to assume 2,700 to 2,800 MVLAs, curing any defaults under those leases, under 11 U.S.C. § 365, while rejecting 900 MVLAs. The amounts ARI claimed under those MVLAs are not properly treated as an administrative claim, but as unsecured lease rejection damage claims, not entitled to the priority ARI seeks.
IV. Conclusion
The order of the bankruptcy court denying ARI's Motion for Recognition and Payment of Administrative Claim is affirmed. This appeal will be dismissed by separate order.