(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
Argued January 5, 1998 -- Decided June 12, 1998
POLLOCK, J., writing for a majority of the Court.
This appeal questions the authority of the Board of Public Utilities (BPU) to revoke the franchise of
Valley Road Sewerage Company (Valley Road) and to seek appointment of a receiver to sell the utility. The
appeal also questions the order of the Chancery Division appointing the receiver.
Valley Road, a small, privately owned sewerage company, collects and treats sewage from hundreds of
homes in Hillsborough and Tewksbury Townships. Until his death in 1996, Richard Schindelar was Valley
Road's chairman of the board of directors, president, and sole shareholder. Other than Schindelar, who was
responsible for the day-to-day operations of Valley Road, the company employed only two employees, a day
laborer and a part-time secretary.
Schindelar established Valley Road in 1962 to treat the sewage from certain residential developments.
From its inception, Valley Road has been beset with financial, managerial, and environmental problems. Most
of the company's extensive environmental violations have arisen from its failure to correct a serious inflow and
infiltration (I & I) problem with its sewerage collection system, ultimately causing unacceptable levels of pollutants
to be discharged into potable water supply sources.
Although it has known of the I & I problem since the mid-1970s and has promised the Department of
Environmental Protection (DEP) that it would correct its violations, Valley Road has failed to make the
corrections over the years. Despite two rate increases, the problem persists. Moreover, Valley Road entered into
an Administrative Consent Order (ACO) with the DEP in 1985 in which it promised, among other things, to hire
a full-time plant operator, to file for a rate increase, and to hire an independent contractor to fix the I & I
problem. That notwithstanding, Schindelar eventually retook control of the company because he was “dissatisfied”
with the operator's performance, and never hired the independent contractor to remedy the I & I problem. In
addition, Valley Road has failed to enter into various other ACOs that would settle its tax liabilities with the State
and with the Township of Tewksbury, and that would settle the substantial fines imposed by the DEP for the I
& I violations.
In 1992, Valley Road filed a petition for a rate increase. At a public hearing on the proposed rate
increase, eighteen of Valley Road's customers spoke in opposition to the increase, as did a lawyer appearing in
behalf of the Rutgers Environmental Law Clinic and Hillsborough Township. The Administrative Law Judge
(ALJ) recommended the denial of any rate increase, citing its egregious mismanagement. The BPU adopted the
ALJ's Initial Decision recommending denial of the rate increase. Like the ALJ, the BPU concluded that Valley
Road's management was so incompetent that it could not be trusted to take the necessary remedial action, even
if it received the requested rate relief. The Appellate Division found that the record amply supported that finding,
citing Valley Road's precarious financial position and “appalling record of environmental violations.”
Thereafter, the BPU ordered hearings on the revocation of Valley Road's operating authority “for failure
to render safe, adequate and proper service.” In response, Valley Road proposed a “business plan,” which called
for the relinquishment of managerial control to an independent contractor acceptable to the BPU, as well as for
various actions the BPU had requested over the years. Finding the business proposal to be “too little, too late,
and too costly,” the BPU directed the Attorney General to seek the appointment of a custodial receiver to operate
the company and to sell it to a qualified buyer. On appointment of the receiver, the BPU revoked Valley Road's
franchise and barred the Schindelars from owning or operating another public utility.
In an unpublished opinion, the Chancery Division sustained the BPU's request, finding that the
appointment of a receiver was necessary to implement the BPU's revocation. The Chancery Division ordered the
receiver to solicit proposals for the acquisition of the company or its assets. In response, Valley Road requested
the court to require the custodial receiver to apply for a rate increase that would yield a “reasonable return,” and
to take other measures aimed at obtaining the “highest possible net return” from the sale of the company. The
Chancery Division rejected that request.
The Appellate Division affirmed the orders of both the BPU and the Chancery Division. The court found
that the substantial credible evidence supported the BPU's findings, and that the BPU' rejection of Valley Road's
business plan “was not arbitrary and capricious.” It also sustained the BPU's implied power to bar the
Schindelars from owning or managing a public utility. Finally, the Appellate Division sustained the Chancery
Division's power to appoint an equitable receiver with the power to sell Valley Road's assets.
The Supreme Court granted Valley Road's petition for certification.
HELD: Where Valley Road has consistently failed to meet its public obligations, the Board of Public Utilities
had the authority to revoke its franchise and to seek the appointment of a custodial receiver with the power to sell
the utility.
1. The Legislature's sweeping grant of power to the BPU is “intended to delegate the widest range of regulatory
power over utilities.” Implicit in the BPU's statutory power to grant a franchise is the power to revoke it for
breach of the franchise's conditions. (pp. 11-12)
2. Whether implied from its authority to approve a franchise or its authority to revoke prior orders, the BPU
could revoke Valley Road's franchise rights. (pp. 12-13)
3. The authority to seek the appointment of a custodial receiver is fairly inferable from the expansive powers that
the Legislature has granted to the BPU when such action is necessary to ensure the continued provision of safe,
adequate, and proper utility service. That notwithstanding, the BPU should promulgate regulations to clarify the
exercise of that authority. (pp. 13-14)
4. Given the unique history of this case, the BPU's decision to reject Valley Road's proposed business plan, to
revoke its franchise, and to seek the appointment of a custodial receiver to operate and sell the company does not
constitute an abuse of discretion. (pp. 15-17)
5. Although, as a general rule, a receiver should try to obtain the highest possible price from the sale of property,
in the case of the sale of a public utility, the receiver's responsibility in that respect is limited by the public
interest. (pp. 17-19)
6. To postpone the sale would reward Valley Road for its failure to obey environmental requirements, pay taxes,
and fulfill its duty to its customers. (p. 19)
The judgment of the Appellate Division is AFFIRMED.
JUSTICE GARIBALDI filed a separate dissenting opinion in which JUSTICES HANDLER and STEIN
join. Justice Garibaldi found that there is no explicit statutory authority for the BPU's acts and that the BPU
exceeded the authority granted in its enabling legislation.
CHIEF JUSTICE PORITZ and JUSTICES O'HERN and COLEMAN join in JUSTICE POLLOCK's
opinion. JUSTICE GARIBALDI filed a separate dissenting opinion in which JUSTICES HANDLER and STEIN
join.
SUPREME COURT OF NEW JERSEY
A-
76 September Term 1997
IN THE MATTER OF ALLEGED VIOLATIONS
OF LAW BY VALLEY ROAD SEWERAGE
COMPANY, RICHARD H. SCHINDELAR,
Individually and as Officer,
Director and Shareholder and
MARJORIE Z. SCHINDELAR,
Individually and as Officer and
Director.
STATE OF NEW JERSEY, BOARD OF
PUBLIC UTILITIES,
Plaintiff-Respondent,
v.
VALLEY ROAD SEWERAGE COMPANY, a New
Jersey Public Utility, RICHARD H.
SCHINDELAR, Individually and as
Officer, Director and Shareholder
and MARJORIE Z. SCHINDELAR,
Individually and as Officer and
Director,
Defendants-Appellants.
Argued January 5, 1998 -- Decided June 12, 1998
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
295 N.J. Super. 278 (1996).
Michael E. Rodgers argued the cause for
appellants (Pinto, Rodgers & Kopf,
attorneys).
Elise W. Goldblat, Deputy Attorney General,
argued the cause for respondent New Jersey
Board of Public Utilities (Peter Verniero,
Attorney General of New Jersey, attorney;
Andrea M. Silkowitz, Assistant Attorney
General, of counsel; Sarah H. Steindel,
Deputy Attorney General, on the brief).
Anthony R. Francioso, Assistant Deputy
Ratepayer Advocate, argued the cause for
respondent Division of Ratepayer Advocate
(Blossom A. Peretz, Ratepayer Advocate of New
Jersey, attorney; Ms. Peretz, of counsel).
Frank N. Yurasko argued the cause for
respondent Township of Hillsborough.
The opinion of the Court was delivered by
POLLOCK, J.
This appeal questions the decision of the Board of Public
Utilities (BPU) to revoke the franchise of Valley Road Sewerage
Company (Valley Road), a small, privately owned sewerage company,
and to seek the appointment of a receiver to sell Valley Road.
The appeal also questions the order of the Chancery Division
appointing the receiver. The Appellate Division affirmed both
orders.
295 N.J. Super. 278, 284 (App. Div. 1996). We granted
Valley Road's petition for certification,
151 N.J. 71 (1997), and
now affirm.
The parties do not dispute the essential facts. Valley Road collects and treats sewage from approximately 623 homes in Hillsborough and Tewksbury Townships, New Jersey. Two plants,
known as the River Road and Fieldhedge Drive treatment Plants
serve approximately 547 residential customers in Hillsborough.
The Pottersville Treatment Plant serves approximately 76
customers in Tewksbury.
Until his death in December 1996, Richard Schindelar was
Valley Road's chairman of the board of directors, president, and
sole shareholder. Schindelar's wife, Marjorie, served as a
director and as Valley Road's corporate secretary. We
collectively refer to Valley Road, Richard Schindelar, and
Marjorie Schindelar, as "Valley Road." None of the Schindelars'
children live in New Jersey or have ever been involved in the
company.
Schindelar established Valley Road in 1962 to treat the
sewage from certain residential developments. After constructing
the system, the developers donated the system to Valley Road.
The BPU approved Valley Road's franchise in 1966. Other than
Schindelar, who was responsible for the day-to-day operations of
Valley Road, the company employed only two employees, a day
laborer and a part-time secretary.
From its inception, Valley Road has been beset with
financial, managerial, and environmental problems.
Notwithstanding rate increases in 1979 and 1984, the company has
never operated at a profit. Yet, its rates exceed substantially
those charged by the Hillsborough Township Municipal Authority
(HTMUA), which serves customers in adjacent areas of Hillsborough
Township. As of February 1993, moreover, Valley Road's financial
records reflected “negative retained earnings,” or a cumulative
deficit, of two million dollars. Its liabilities included
“loans” in excess of $760,000 owed to Schindelar, accrued but
unpaid “salary” totaling approximately $200,000 owed to him, past
due Franchise and Gross Receipts Taxes totaling over $400,000 due
the State of New Jersey, and municipal taxes totaling
approximately $94,000 due the Township of Tewksbury.
Most of the company's extensive environmental violations
have arisen from its failure to correct a serious inflow and
infiltration (I & I) problem with its sewerage collection system.
During periods of wet weather, large amounts of surface and
ground water infiltrate the company's sewerage collection lines,
causing the flow of wastewater entering the treatment plants to
exceed design capacity. As a result, the effluent discharged by
the plants has contained levels of pollutants that exceed
requisite permit levels (effluent limits). Valley Road has known
of the I & I problem since the mid-1970s when the New Jersey
Department of Environmental Protection, Division of Water
Resources (DEP) discovered that the Fieldhedge Drive Plant had
"severe infiltration/inflow problems in the sewerage collection
system." The I & I problem caused wastewater flows "grossly
exceeding its design capacity and permit flow limitations."
For over 20 years, Valley Road has incurred extensive fines
and penalties resulting from its broken promises to correct the I
& I problem. In 1978 Valley road promised the DEP that it would
correct several violations, including those arising from I & I.
Valley Road, however, failed to make the corrections.
In September 1979, the DEP fined Valley Road $2,000, finding:
As a direct result of the failure by Valley
Road to undertake the corrective actions
required by the [DEP], there has occurred and
is continuing to occur an unlawful discharge
of improperly and inadequately treated
wastewater from Valley Road's Fieldhedge
Plant into the waters of the State,
specifically a tributary to Royce Brook which
flows into the Millstone River, a potable
water supply source . . . .
Similarly, in 1985, Valley Road entered into an
Administrative Consent Order ("ACO") with the DEP to resolve
penalty assessments in 1983 for violations at River Road and
Fieldhedge Drive Plants. In the ACO, Valley Road agreed to pay
$12,600 in penalties and to undertake a number of remedial
measures, including replacing Schindelar with a full-time plant
operator, filing for a rate increase, and hiring an independent
contractor to correct the I & I problem. Consequently, the
company hired a plant manager and received a substantial rate
increase. Yet, Valley Road failed to hire the contractor to fix
the I & I problem. Schindelar, moreover, became "dissatisfied"
with the plant manager's performance. In violation of the ACO,
Schindelar resumed control over Valley Road's operations in July
1991. Because the I & I problem continued to cause effluent
limit violations, the DEP assessed Valley Road with $660,000 in
penalties in 1992.
Valley Road remains at risk of incurring additional
penalties. The company's New Jersey Pollution Discharge
Elimination System permit for the Fieldhedge Drive Plant required
that plant's connection to the HTMUA system by November 1987.
Connection to the HTMUA system would remedy prohibited discharges
from that plant. The company, however, has failed to take the
necessary steps to connect to the plant.
In an attempt to negotiate a settlement of its various
liabilities, Valley Road has entered into an agreement with the
State of New Jersey to settle its tax liability for $160,000.
Likewise, the Township of Tewksbury has agreed to accept $25,500
in full settlement of Valley Road's past due tax liability. Both
of these agreements, however, are contingent on Valley Road
settling with the BPU, a contingency that remains unsatisfied.
Additionally, the DEP has drafted ACOs that would, among other
things, settle Valley Road's outstanding penalty assessments for
$118,750. The draft ACOs are based, however, on the BPU's
agreement to the terms of a proposed "business plan," described
in greater detail below (infra at p. 8). In a letter dated
August 11, 1994, the DEP indicated that if a settlement was not
reached between the DEP and Valley Road by January 1, 1995, the
DEP "intend[ed] to pursue additional enforcement action in this
matter as it deems appropriate." To date, the ACOs have not been
executed.
In 1992, Valley Road filed a petition for a rate increase.
At a public hearing in Hillsborough Township on February 25,
1993, approximately 300 Valley Road customers appeared. Eighteen
customers spoke in opposition to the increase, as did a lawyer
appearing on behalf of the Rutgers Environmental Law Clinic and
Hillsborough Township. The record does not reflect that anyone
spoke in favor of the increase.
The Administrative Law Judge (ALJ) recommended the denial of
any rate increase, stating that Valley Road presented the “most
egregious example[] of corporate mismanagement [he] had [ever]
witnessed,” and that “the existing management ha[d] failed for
the past twenty years” to provide “safe, adequate, and proper
service to its customers.” He concluded:
In over 23 years of practicing in the area of
utility regulation, I have never seen an
instance of such managerial dereliction which
has resulted in the disastrous financial and
operational condition that the Valley Road
Sewerage Company now finds itself in. While
finding no evidence of willful misconduct on
the part of management it is nonetheless
apparent that for the Board to grant any rate
increase at this time would be inappropriate
and totally inadvisable.
The BPU adopted the ALJ's Initial Decision recommending
denial of the rate increase. Like the ALJ, the BPU concluded
that Valley Road's management was so incompetent that it could
not be trusted to take the necessary remedial action, even if it
received the requested rate relief. The Appellate Division found
that the record amply supported that finding. In re Valley Road
Sewerage Co.,
285 N.J. Super. 202, 208 (App. Div. 1995).
In affirming the denial of rate relief, the Appellate
Division recited Valley Road's precarious financial position and
“appalling record of environmental violations.” Id. at 207. The
court noted Valley Road's “chronic problems with 'infiltration
and inflow' of excessive amounts of extraneous water, such as
groundwater and sump pump discharge, into its sewage collection
system.” Ibid. Stating that “[DEP] penalty assessments continue
to be imposed at an alarming rate,” the court referred to Valley
Road's agreement to an administrative consent order “to pay over
$12,000 in penalties for numerous violations at the company's
River Road and Fieldhedge Drive plants.” Ibid. Similarly, the
court observed that Valley Road had failed to submit a plan to
remedy its I & I problems, which was a condition to DEP's
agreement to reduce the $660,000 in penalties. Ibid. Contrary to
a condition on the permit to operate its Fieldhedge Drive plant,
moreover, Valley Road failed to cease operations by November 1,
1987.
After denying Valley Road further rate relief, the BPU
ordered hearings on the revocation of Valley Road's operating
authority “for failure to render safe, adequate and proper
service . . . .” In response, Valley Road proposed a “business
plan,” which called for
the relinquishment of managerial control
to an independent contractor acceptable to the BPU, execution of
consent orders with the DEP to settle environmental issues and
fines, execution of agreements with the Division of Taxation and
Tewksbury to settle all tax claims and approval of a rate
increase from $375 per year to $827 per year.
In its Decision and Order of November 4, 1994, the BPU found
that the business proposal was "too little, too late, and too
costly." Supporting that decision were the Board's findings
regarding Valley Road's precarious financial condition, its non-compliance with applicable legal and environmental requirements,
and Schindelar's decision to use tax monies due the State and the
Township of Tewksbury as a “credit source.” Although Valley Road
was still serving its customers, the BPU was wary about the
company's continuing ability to provide such service.
Additionally, the BPU found that it would be "blatantly unfair to
allow current management to retain its franchises and operating
authority while attempting to remedy years of managerial neglect
at the expense of its ratepayers." Accordingly, the BPU directed
the Attorney General to seek the appointment of a custodial
receiver to operate the company and to sell it to a qualified
buyer. On appointment of the receiver, the BPU revoked Valley
Road's franchise and barred the Schindelars from owning or
operating another public utility.
In an unpublished opinion, Assignment Judge Wilfred P.
Diana, sitting in the Chancery Division, sustained the BPU's
request. Judge Diana reasoned that the appointment of a receiver
was necessary to implement the BPU's revocation of Valley Road's
franchise and removal of the Schindelars from the management and
ownership of Valley Road. Concerning the sale of Valley Road's
assets, the Chancery Division order stated:
The receiver is directed to solicit proposals
for the acquisition of the Company or its
assets by a qualified buyer or buyers, and
shall promptly notify [the] court and the
Board of Public Utilities of all such
proposals. The receiver shall provide at
least sixty days notice and a copy of any
proposal to the court, all known creditors
and other interested parties. Any objections
to or comments on the proposed sale shall be
submitted to the court within said sixty day
period after which the court shall render its
decision on the proposal.
Valley Road requested the court to require the custodial
receiver, among other things, to apply for a rate increase that
would yield a "reasonable return," and to take other measures
aimed at obtaining the "highest possible net return, consistent
with the law, from the sale of the company." Those measures
included appealing the BPU's denial of any rate increase that did
not yield a reasonable rate of return, selling the company at no
less than its condemnation value, and postponing any such sale
until the company was "put on a sound financial footing." Judge
Diana rejected the request in an opinion stating:
The receiver's function is not to obtain
the highest possible value for the company,
but to arrange a sale that is commercially
reasonable in light of the Company's current
condition. The reasonableness of the
proposed sale will be reviewed by the court
and the parties hereto at the time of the
proposal's submission pursuant to this order.
The Appellate Division affirmed the orders of both the BPU and the Chancery Division. 295 N.J. Super. at 284. The court found that substantial credible evidence supported the BPU's findings, id. at 286, and that the BPU's rejection of Valley Road's business plan “was not arbitrary and capricious.” Id. at 287. It also sustained the BPU's implied power to bar the Schindelars from owning or managing a public utility. Id. at 288. Finally, the Appellate Division sustained the Chancery
Division's power to appoint an equitable receiver with the power
to sell Valley Road's assets. Id. at 292-93.
In its petition for certification, Valley Road questions the
BPU's authority to revoke its franchise and to seek the
appointment of a custodial receiver with the power to operate and
sell the company. It also questions the fairness and
reasonableness of the Chancery Division's order of sale.
expressly granted by statute to include incidental powers that
the agency needs to fulfill its statutory mandate. A. A.
Mastrangelo, Inc. v. Commissioner of Dept. of Envtl. Protection,
90 N.J. 666, 683-84 (1982); New Jersey Guild of Hearing Aid
Dispensers v. Long,
75 N.J. 544, 562 (1978).
The statutory scheme establishes the BPU's authority to
revoke Valley Road's franchise. First, N.J.S.A. 48:2-14 provides
that "[n]o privilege or franchise granted . . . to any public
utility by a political subdivision of this State shall be valid
until approved by the [BPU]." In approving a privilege or
franchise, moreover, the BPU "may impose such conditions as to
construction, equipment, maintenance, service or operation as the
public convenience and interests may reasonably require." Ibid.
Implicit in the power to grant a franchise is the power to revoke
it for breach of the franchise's conditions. Board of Pub. Util.
Comm'rs v. Sheldon,
95 N.J. Eq. 408, 410 (Ch. 1924).
Second, N.J.S.A. 48:2-40 provides that the BPU "at any time
may order a rehearing and extend, revoke or modify an order made
by it." This provision encompasses the grant of a franchise to a
public utility. See Township of Deptford, supra, 54 N.J. at 424-25 (holding that under N.J.S.A. 48:2-40, BPU had authority to
revoke its prior approval of option clause in license granting
franchise, which permitted municipal government to purchase
franchise at later date for specified sum). We conclude that,
whether implied from its authority to approve a franchise or its
authority to revoke prior orders, the BPU could revoke Valley
Road's franchise rights.
Finally, the authority to seek the appointment of a
custodial receiver is fairly inferable from the expansive powers
that the Legislature has granted to the BPU. Those powers
include the authority to require compliance with State and local
laws, N.J.S.A. 48:2-16(1)(a), to require the provision of safe,
adequate, and proper service, N.J.S.A. 48:2-23, and to revoke a
franchise that fails to provide such service. Fairly inferable
is the legislative intent to vest the BPU with the discretion to
revoke a franchise and to seek the appointment of a custodial
receiver when such action is necessary to ensure the continued
provision of safe, adequate, and proper utility service. Cf.
Application of Pennsylvania & Newark R.R. Co.,
31 N.J. 146, 154
(1959) (stating that state may seek forfeiture of utility
franchise that fails to serve public).
In an analogous context, the Legislature has required the
BPU and the DEP to consider the acquisition of small water
companies. The Small Water Company Takeover Act, N.J.S.A. 58:11-59 to -63, provides:
Whenever any small water company is found . .
. to have failed to comply, within a
specified time, with any order of the [DEP]
concerning the availability of water, the
potability of water and the provision of
water at adequate volume and pressure, . . .
[the DEP and the BPU] shall,. . . conduct a
joint public hearing to determine: the
actions that may be taken . . . including,
but not necessarily limited to, the
acquisition of the small water company by the
most suitable public or private entity.
Our research has not uncovered any case, and counsel have not provided us with any, in which the BPU previously has sought to takeover a small sewerage company. Perhaps because the failure of small water companies is more common than that of small sewerage companies, the Legislature enacted the more specific provisions of the Small Water Company Takeover Act. Although we conclude that the BPU has the authority to revoke Valley Road's franchise and to seek the appointment of a custodial receiver with the power to sell the utility, we suggest that the BPU promulgate regulations to clarify the exercise of that authority.
BPU's choice of remedy only for illegality, arbitrariness, or
abuse of discretion. Mayflower Securities, supra, 64 N.J. at 93.
Valley Road no longer contests the BPU's findings describing
the utility's "abysmal" history of violating legal and
environmental requirements. Instead, Valley Road questions the
BPU's findings that the company's business plan was "too little,
too late, and too costly," and that it would be "blatantly unfair
to allow current management to retain its franchises and
operating authority while attempting to remedy years of
managerial neglect at the expense of its ratepayers." Valley
Road also contends that revocation of its franchise and
appointment of a custodial receiver to operate and sell the
company was inappropriate.
Ample evidence in the record, however, supports the BPU's
rejection of Valley Road's proposed business plan. First, Valley
Road has a history of making and breaking promises to regulatory
agencies. Consequently, the BPU could question Valley Road's
ability to comply with the proposed business plan. Since 1978,
Valley Road has promised the DEP that it would correct its I & I
problem. Despite two subsequent rate increases, the problem
persists. In fact, in its 1985 ACO with the DEP, Valley Road
promised, among other things, to hire a full-time plant operator,
to file for a rate increase, and to hire an independent
contractor to fix the I & I problem. Schindelar, however,
eventually retook control of the company because he was
"dissatisfied" with the operator's performance. Moreover,
despite receiving a rate increase in an amount stipulated by
Valley Road as fair and satisfactory, the company never hired the
contractor. Given Valley Road's failure to adhere to similar
agreements in the past, the BPU's reluctance to agree to Valley
Road's business plan was reasonable.
Second, the tax agreements and consent orders in the
business plan are contingent on the resolution of the issues in
this proceeding. The ACOs, moreover, remain unexecuted. In the
absence of executed ACOs, we decline to override the BPU's
conclusion that Valley Road has not settled its environmental
problems with the DEP.
Nor can we say that the BPU was unfair in preventing Valley
Road from imposing on its current customers the cost of decades
of neglect. Valley Road insists that none of the proposed rate
increases will pay for the costs of its past mismanagement. Yet,
Valley Road does not explain how, without substantial rate
relief, it plans to raise the funds needed to pay its debts.
Valley Road further maintains that Schindelar's financial
mismanagement actually benefitted Valley Road's customers. It
argues that by lending the company money instead of seeking rate
increases, Schindelar in fact "subsidized" the customers' rates
for thirty years. The argument is unpersuasive. Current
customers, many of whom never benefitted from Schindelar's
"subsidies," would be exposed to a tripling of their rates under
Valley Road's proposal.
Given the unique history of this case, the BPU's decision to
revoke Valley Road's franchise and to seek the appointment of a
custodial receiver to operate and sell the company does not
constitute an abuse of discretion. Contrary to Valley Road's
contention, moreover, the BPU is not restricted to revoking a
utility franchise only on a showing of "willful misconduct." The
BPU need not first make a finding of willful misconduct before
concluding that a utility is incapable of providing safe,
adequate, and proper service. We further reject Valley Road's
argument that the BPU may not seek the appointment of a custodial
receiver with the power of sale if there is any less onerous
remedy available. To assure that a utility provides safe,
adequate, and proper service, the BPU must have some latitude in
its choice of remedies. We anticipate that only in extreme cases
such as the present one will the BPU seek the appointment of a
custodial receiver with the power to sell a utility.
As a general rule, a receiver should try to obtain the highest possible price from the sale of property. Jackson v.
Smith,
254 U.S. 586, 588,
41 S. Ct. 200, 201,
65 L. Ed. 418
(1921). Unlike other corporations, however, utilities are
subject to a special obligation to serve the public interest. In
particular, the primary obligation of a utility is to provide
safe, adequate, and proper service at fair and reasonable rates.
N.J.S.A. 48:2-21; N.J.S.A. 48:3-3. The Legislature has entrusted
the BPU with the responsibility of assuring that utilities
fulfill that obligation. N.J.S.A. 48:2-23. It follows that the
sale of a utility or its assets is subject to the utility's
statutory obligation to provide safe, adequate, and proper
service. Any such sale also is subject to the regulatory
authority of the BPU. Satisfying those obligations may affect
the terms of the sale, including the number of qualified buyers,
the conditions of sale, and the sale price.
Consistent with that analysis, the Chancery Division order
directs the receiver to solicit and notify both the court and the
BPU of "proposals for the acquisition of the Company or its
assets by a qualified buyer or buyers." The court explained that
"[t]he receiver's function is not to obtain the highest possible
value for the company, but to arrange a sale that is commercially
reasonable in light of the company's current condition." The
term “commercially reasonable” is not self-defining. In this
context, we assume it implicitly recognizes that the public
responsibilities of a utility can affect the value of its assets.
Property affected with a public interest, such as the assets
of a public utility, fulfill a societal need while providing an
investment opportunity. In general, investors may expect a
utility
to earn a reasonable rate of return on its assets.
N.J.S.A. 48:2-21(b); In re Proposed Increase Intrastate Sand
Rates,
66 N.J. 12, 23-24 (1974). That expectation, however, is
subject to the utility's duty to provide safe, adequate, and
proper service. In re Valley Road Sewerage Co., supra, 285 N.J.
Super. at 209-11. Hence, the utility's duty to provide such
service limits the investment opportunity. Our dissenting
colleagues do not recognize that when a utility fails, as
miserably as this utility has failed, to meet its public
obligations, that failure can affect the value of the utility's
assets. Indeed, the dissent substitutes its opinion for the
concerns of the utility's customers and the BPU, the agency
entrusted with the responsibility of regulating utilities.
Contrary to the dissent, we believe that the Legislature did not
intend that the BPU should shrink from its delegated
responsibilities when confronted with so egregious a case of
utility mismanagement.
The record establishes that Valley Road will not be on a
sound financial footing in the foreseeable future. Decades of
mismanagement have undermined the utility's assets and its
ability to earn a reasonable return. To postpone the sale would
reward Valley Road for its failure to obey environmental
requirements, pay taxes, and fulfill its duty to its customers.
The judgment of the Appellate Division is affirmed.
CHIEF JUSTICE PORITZ and JUSTICES O'HERN and COLEMAN join in
JUSTICE POLLOCK's opinion. JUSTICE GARIBALDI has filed a
separate dissenting opinion, in which JUSTICES HANDLER and STEIN
join.
SUPREME COURT OF NEW JERSEY
A-
76 September Term 1997
IN THE MATTER OF ALLEGED VIOLATIONS
OF LAW BY VALLEY ROAD SEWERAGE
COMPANY, RICHARD H. SCHINDELAR,
Individually and as Officer,
Director and Shareholder and
MARJORIE Z. SCHINDELAR,
Individually and as Officer and
Director.
____________________________________
STATE OF NEW JERSEY, BOARD OF
PUBLIC UTILITIES,
Plaintiff-Respondent,
v.
VALLEY ROAD SEWERAGE COMPANY, a New
Jersey Public Utility, RICHARD H.
SCHINDELAR, Individually and as
Officer, Director and Shareholder
and MARJORIE Z. SCHINDELAR,
Individually and as Officer and
Director,
Defendants-Appellants.
GARIBALDI, J., dissenting.
Today, the majority holds that the Board of Public Utilities (BPU or Board) has the authority to revoke the franchise of Valley Road Sewerage Company (Valley or Company); to divest Valley's sole shareholder and his wife of any interest in their Company; to bar them from owning or managing any public utility in New Jersey; and to seek the appointment of a receiver to sell their Company. It is undisputed that there is no explicit
statutory authorization for such acts. Therefore, the issue is
whether the BPU exceeded the authority granted in its enabling
legislation. I find that it did.
I.
N.J.S.A. 48:2-23 provides that every New Jersey public
utility is required to:
furnish safe, adequate and proper service,
including furnishing and performance of
service in a manner that tends to conserve
and preserve the quality of the environment
and prevent the pollution of the waters, land
and air of this State, . . . and to maintain
its property and equipment in such condition
as to enable it to do so.
That same obligation is set forth in N.J.S.A. 48:3-3, which
prohibits any utility from "provid[ing] or maintain[ing] any
service that is unsafe, improper or inadequate."
I recognize "that the grant of authority to an
administrative agency is to be liberally construed in order to
enable the agency to accomplish its statutory responsibilities
and that the courts should readily imply such incidental powers
as are necessary to effectuate fully the legislative intent."
Department of Labor v. Titan Constr. Co.,
102 N.J. 1, 11 (1985)
(quoting New Jersey Guild of Hearing Aid Dispensers v. Long,
75 N.J. 544, 562 (1978)). I also recognize that the Legislature has
endowed the BPU with broad power to regulate public utilities and
that the BPU has considerable discretion in exercising those
powers. In re Elizabethtown Water Co.,
107 N.J. 440, 449 (1987);
see In re New Jersey Power & Light Co.,
9 N.J. 498, 508 (1952).
Nonetheless, we have repeatedly held, "[a]n administrative agency
may not under the guise of interpretation extend a statute to
include persons not intended, nor may it give the statute any
greater effect than its language allows." Kingsley v. Hawthorne
Fabrics, Inc.,
41 N.J. 521, 528 (1964).
Administrative agencies do not possess unbridled power to
adopt rules and regulations they deem necessary to effectuate
legislation. Therefore, the issue is not whether the BPU
believes because of corporate mismanagement that it is good
policy to revoke the franchise of a utility, but whether, in
enacting the Department of Public Utilities Act of 1948, N.J.S.A.
48:2-1 to -91 (the Act), the Legislature intended and authorized
such a drastic remedy. Revoking a franchise, divesting a person
from ownership of his or her property, barring a person from ever
owning and operating a public utility, and compelling the forced
sale of someone's property, are extreme remedies. An examination
of statutory language and prior decisions establishes that the
Legislature never intended to give the BPU such power under its
enabling legislation. Such a sweeping change of an agency's
authority must be made by the Legislature, not by an
administrative agency. To hold otherwise circumvents the
legislative intent.
II.
Valley is a small, privately owned sewerage company
servicing residential subdivisions in Hillsborough Township in
Somerset County and Tewksbury Township in Hunterdon County.
Valley operates three treatment plants: the River Road and
Fieldhedge Drive plants in Hillsborough, which serve 405 and 142
customers, respectively, and the Tewksbury plant, which serves 76
customers. Valley also operates three pump stations and
maintains approximately fourteen miles of collecting lines, most
of which are under the streets. At the time the rate petition
was filed in 1989, Valley had 537 customers; that number has
since grown to 619.
Valley was founded in 1962 by Richard Schindelar who, until
his death from leukemia in 1996, was Valley Road's Chairman of
the Board of Directors, President, and sole shareholder. His
wife, Marjorie, served as a director and as Valley Road's
corporate secretary. Mr. Schindelar devoted a substantial part
of his adult life and career to Valley and invested the bulk of
his life savings in Valley. In April of 1995, as a result of
Schindelar's failing health, Valley turned over operation of its
treatment plants and pump stations to U.S. Water, Inc., a company
specializing in the operation of sewerage treatment facilities on
a contract basis. U.S. Water continues to operate the facilities
at this time. In May of 1995, a receiver was appointed who
assumed supervisory responsibility for Valley's operations.
Since its inception, Valley has had only two rate
increases, one in 1979 and one in 1984. On August 21, 1992,
Valley filed a petition for interim rate relief and a permanent
increase in its rates. Unable to reach a settlement with the
BPU, the petition was sent to the Office of Administrative Law as
a contested case. At a public hearing on the rate increase, only
eighteen of the 300 Valley customers who attended opposed the
rate increase. An attorney who represented the Township of
Hillsborough and the Rutgers Environmental Law Clinic also
objected.
The Administrative Law Judge (ALJ) denied Valley's request
for rate relief. Instead, the ALJ adopted the BPU's
recommendation and, although expressly noting that Valley, which
has not had a rate increase since 1984, was "obviously in need of
funds," denied any rate increase, stating "it would be imprudent
for me to attempt to determine a revenue requirement at this
time." The ALJ also recommended that the Board direct Valley to
show cause pursuant to N.J.S.A. 48:2-23 why it "should not be
ordered to furnish safe, adequate and proper service as a public
utility of the State of New Jersey."
The BPU expanded the ALJ decision by ordering "the
initiation of hearings [the "revocation hearing"] into whether
the operating authority of Valley . . . should be revoked for
failure to render safe, adequate and proper service."
After the hearings, on November 4, 1994, the BPU ordered the
revocation of Valley's franchise and the permanent divestiture
and debarment of the Schindelars “from owning, operating,
managing, controlling, or having any interest in a New Jersey
public utility.” Additionally, the order sought the appointment
of a receiver to undertake the day-to-day operations of Valley
and to sell the Company.
At the BPU's request, the Chancery Division appointed a
receiver on May 16, 1995. The court, however, treated the BPU's
request as an enforcement proceeding pursuant to Rule 4:67-6 and
thereby refused to rule on whether the BPU had the authority to
revoke Valley's franchise and request a receiver to sell the
property. Further, in appointing the receiver, the Chancery
Division observed that the receiver would have to request a rate
increase to continue Valley's operation. The Appellate Division
affirmed the orders of the BPU and the Chancery Division.
295 N.J. Super. 278, 284 (1996). We granted Valley's petition for
certification.
151 N.J. 71 (1997).
Before turning to a discussion of the law, it is important to understand precisely what the BPU claims was wrong with Mr. Schindelar's management of Valley. The BPU order found that the Valley management was culpable of managerial neglect or dereliction based upon essentially four alleged circumstances: inflow and infiltration of ground water in Valley's system, penalty assessments by the Department of Environmental Protection (DEP), unpaid tax liabilities, and Valley's failure to seek a rate increase for eight years. Upon close scrutiny, however, it is evident that many of those problems have been resolved.
On September 20, 1994, Valley entered into an Agreement to Execute a Closing Agreement with the New Jersey Treasury Department, Division of Taxation, concerning the payment of its gross receipts and franchise tax, excise taxes, and administrative expenses. Article 7 of that Agreement states that although the Agreement will become effective immediately, the executed Closing Agreement will not be provided until the
taxpayer provides satisfactory evidence acceptable to the
Division that "it has reached full and complete settlement with
the BPU." Similarly, Valley entered into an Agreement to Execute
a Closing Agreement with the Township of Tewksbury, dated October
13, 1994, concerning settlement of its gross receipts and
franchise taxes and real estate taxes due Tewksbury. That
Agreement also provides that the Closing Agreement would be
contingent until Valley Road reached "a full and complete
settlement" with the BPU.
The DEP also entered into Administrative Consent Orders
(ACOs), drafted by the DEP, for Valley's Fieldhedge Drive and
River Road plants. The ACOs provide for waiver of the bulk of
the assessments, substantial reductions in the remaining
assessments, and interim (five year) modifications to Valley's
discharge permits that will prevent Valley from exceeding the
permit parameters, thus making future penalty assessments
unlikely. The ACOs also have not been finalized because of the
BPU's failure to resolve this matter. The BPU cites Valley's
environmental problems as a major reason for the sale of Valley,
and asserts that those problems are more properly within the
purview of the DEP. However, the DEP was never a party to this
action and no member of the DEP ever testified before the ALJ,
the BPU, or the Chancery Division.
The BPU also dismissed Valley's proposed plan to change
management as "too little, too late and too costly."
The plan basically included new professional management and
implementation of the settlement agreements with the DEP and
taxing authorities. Those agreements would have reduced Valley's
DEP assessments and outstanding tax liabilities and, by spreading
payment over an extended period in the future, would have a
significant effect on Valley's financial condition. Indeed, the
receiver appointed by the Chancery Division is in no better
position to address and settle those matters than the new
management proposed by Valley would have been.
Because the Board has determined that Mr. Schindelar was not
a good manager of Valley, Schindelar's wife and children stand to
lose the Company through a forced sale that may result in a
devastating loss of much of his hard work and investment. The
BPU reached its conclusion despite the fact that the BPU did not
find, and there is no suggestion, that Mr. Schindelar ever did
anything illegal or unethical; that Valley's ratepayers ever
received anything less than uninterrupted, reliable service; and
notwithstanding the substantial efforts that Valley has made to
comply with the BPU's November 4 order.
I now turn to an examination of statutory language and prior
cases to answer the fundamental question: under what
circumstances may the BPU, an administrative agency, take the
Schindelars' property by revoking Valley's franchise and sell
their Company against their wishes in a forced sale.
I begin with a brief observation about franchises. A franchise is a privilege of a public nature conferred by the government on an individual or corporation. South Lakewood Water
Co. v. Township of Brick (In re South Lakewood Water Co.),
61 N.J. 230, 238 (1972); see also
36 Am. Jur. 2d Franchise § 4
(1968). Franchise rights, although for the public benefit, are
private property rights subject to the protection of the law.
Public Service Gas Co. v. Board of Pub. Util. Comm'rs,
87 N.J.L. 581, 593 (E. & A. 1914). If a franchise is taken for public use,
the owner is entitled to just compensation. Id. at 595
(citations omitted).
Although a franchisee is entitled to just compensation for a
taking, no such compensation is required if the franchise is
forfeited for a breach of conditions, or if the granting
authority revokes or repeals the franchise under a reserved
express power to do so.
36 Am. Jur. 2d, supra, at § 5.
"Forfeitures are not favored." Id. at § 54. Courts "will always
lean against a forfeiture," unless the "legislature has
prescribed certain conditions upon which a corporation shall
forfeit its franchises." Ibid.
I now consider the statutory language. It is undisputed
that there is no explicit statutory language authorizing the
revocation of a franchise or the permanent barring of a
stockholder or an officer of a utility from ever owning or
managing a utility. In A.A. Mastrangelo, Inc. v. Commissioner of
DEP, this Court acknowledged that the absence of an express
statutory authorization in the enabling legislation will not
necessarily preclude administrative agency action.
90 N.J. 666,
684 (1992).
Equally important, however, is a court's
responsibility to restrain agency action
"[w]here there exists reasonable doubt as to
whether such power is vested in the
administrative body." In re Jamesburg High
School Closing,
83 N.J. 540, 549 (1980).
Where such doubt exists, and where the
enabling legislation cannot fairly be said to
authorize the agency action in question, the
power is denied. Id. See also Burlington
County Evergreen Park Mental Hospital v.
Cooper,
56 N.J. 579, 598 (1970); Swede v.
City of Clifton,
22 N.J. 303, 312 (1956).
The Legislature's authorization to revoke the franchises of
small water companies, and the absence of such a provision with
respect to small sewerage companies, indicates that the
Legislature did not intend to grant the BPU general authority to
revoke a franchise of sewerage companies for corporate
mismanagement. N.J.S.A. 58:11-59, referred to as the "Small
Water Company Takeover Act", provides in pertinent part:
Whenever any small water company is found,
after notice and public hearing, to have
failed to comply, within a specified time,
with any order of the Department of
Environmental Protection concerning the
availability of water, the potability of
water and the provision of water at adequate
volume and pressure, . . . the department and
the Board of Public Utilities shall, after
notice to capable proximate public or private
water companies, municipal utilities
authorities, . . . municipalities or any
other suitable governmental entities wherein
the small water company provides service,
conduct a joint public hearing to determine:
the actions that may be taken and the
expenditures that may be required, including
acquisition costs, to make all improvements
necessary to assure the availability of
water, the potability of water and the
provision thereof at adequate volume and
pressure, including, but not necessarily
limited to, the acquisition of the small
water company by the most suitable public or
private entity. (emphasis added).
The statutory provisions dealing with sewerage companies,
N.J.S.A. 48:13-1 to -14, do not provide for the takeover and sale
of those companies for failure to provide adequate service.
Likewise, the BPU's regulations specifically permit the Board to
order the sale of the small water company, but do not provide for
such an action with respect to sewerage companies. See N.J.A.C.
14:9-6.1 to -6.13. Moreover, the regulations provide procedural
protections to the small water company by limiting application of
that remedy to situations "concerning actual or imminent public
health problems," N.J.A.C. 14:9-6.6, and requiring that other
"appropriate and available enforcement options" be pursued prior
to implementation of the takeover and sale procedures, N.J.A.C.
14:9-6.7(a). Those regulations were enacted to implement
N.J.S.A. 58:11-59. The lack of similar regulations regarding
sewerage utilities can only be interpreted to indicate that the
BPU has not construed its general enabling legislation as
conferring such authority. That conclusion is further supported
by the statement at oral argument of the Counsel for the BPU that
the BPU has never authorized the revocation of a sewerage company
franchise for mismanagement.
Moreover, N.J.S.A. 58:11-60 provides that
[c]ompensation for the acquisition of a small
water company shall be determined:
a. By agreement between the parties, subject
to the approval of the [BPU], in consultation
with the [DEP], and after a joint public
hearing by the board and the department; or
b. Through use of the power of eminent domain.
In enacting the Small Water Company Takeover Act, the
Legislature has shown its concern that drastic actions, such as
revocation and forced sale of a franchise, should be undertaken
only when there are "actual or imminent public health problems"
and, in those situations, the owners should be accorded fair and
just compensation for their property. None of those
considerations are reflected in the pending takeover and sale of
Valley. There are no allegations of actual or imminent public
health problems nor is there any provision for the owners to
receive fair and just compensation for their property.
Accordingly, in view of the specific provisions of N.J.S.A.
58:11-60, it is inconceivable that the Legislature intended the
revocation and forced sale of a small sewer company like Valley
under the BPU's general enabling language.
An examination of prior law also supports my conclusion that the BPU has no authority to revoke Valley's franchise for poor management, to permanently divest and bar the Schindelars from the public utility business, and to compel the forced sale of Valley. Although the BPU relies on Township of Deptford v. Woodbury Terrace Sewerage Corp., 54 N.J. 418 (1969), for the proposition that the Board has the power to revoke a utility's franchise, that case is distinguishable. In Deptford, supra, the Court was asked to determine whether the Board had the authority to modify a previous order approving the franchise of a public utility. Id. at 420 (emphasis added). In upholding the BPU's
power to modify its order approving the franchise, the Court
simply cited N.J.S.A. 48:2-40, which states that the Board "'at
any time may order a rehearing and extend, revoke or modify an
order made by it.'" Id. at 425. The Deptford Court did not
provide any other analysis.
Indeed, Deptford is not generally cited for the proposition
that the Board has the power to revoke a franchise, but for the
simple proposition that the BPU was granted "the widest range of
regulatory power over public utilities." See, e.g., A.A.
Mastrangelo, Inc., supra, 90 N.J. at 685; South Lakewood Water
Co., supra, 61 N.J. at 247; In re Scioscia,
216 N.J. Super. 644,
653 (App. Div.), certif. denied,
107 N.J. 652 (1987). Deptford
did not specifically address whether the Board, based solely on
its enabling legislation, had the authority to revoke a franchise
and bar an individual from participating in any utility in the
State.
There are only two reported cases that have upheld the BPU's
power to revoke a franchise and bar an individual from
participating in a specific utility's business. See In re Inter
County Refuse Serv., Inc.,
222 N.J. Super. 258 (App. Div.),
certif. granted,
111 N.J. 618 (1988), certif. dismissed,
114 N.J. 485 (1989); In re Scioscia, supra,
216 N.J. Super. 644.
In Scioscia, supra, the appellant had been convicted of
participating in a complex conspiracy to rig bids on garbage
collection contracts, in violation of N.J.S.A. 56:9-3. Id. at
648-49. As a result of appellant's conviction, the BPU revoked
appellant's certificate of public convenience and necessity, and
prohibited appellant from participating in the solid waste
disposal business. The BPU based its decision on the ALJ's
conclusion that appellant's actions, which had resulted in his
criminal conviction, also constituted violations of both the
Solid Waste Utility Control Act of 1970, N.J.S.A. 48:13A-1 to -13, which prohibits monopolization in the solid waste collection
and disposal business, and the Board's implementing regulation,
N.J.A.C. 14:3-10.12. In re Scioscia, supra, 216 N.J. Super. at
649-50.
Relying on the Solid Waste Utility Control Act, which
"extended the general regulatory authority of the BPU over public
utilities to waste collectors, . . . and specifically conferred
rule making authority upon the BPU with respect to the 'public
utility aspects of the solid waste collection industry,'" the
Scioscia court upheld the BPU's actions. Id. at 653. The court
also found that the BPU had authority to bar appellant from
participating in the waste disposal business. The court based
its decision on the "numerous sections [of the Solid Waste
Utility Control Act] which confer pervasive power and
responsibility upon the BPU to regulate individuals involved in
the solid waste business and to determine qualifications for
participation in the business." Id. at 655 (citing N.J.S.A.
48:13A-6 (prohibiting any person from participating in solid
waste collection business until found qualified by BPU); N.J.S.A.
48:13A-9a (allowing Board to revoke or suspend certificate of
public convenience and necessity); and N.J.S.A. 48:13A-12a
(holding officers, agents, directors, principals, managers, or
employees of solid waste collector individually accountable for
certain violations)).
The Appellate Division also upheld the BPU's authority to
revoke a utility's franchise in In re Inter County Refuse
Service, Inc., supra,
222 N.J. Super. 258, a case factually
similar to In re Scioscia. Like Scioscia, supra, Inter County
involved a criminal conviction for conspiracy to restrain trade
in the solid waste business. The two cases are also related in
that the appellant in Inter County was Scioscia's co-conspirator.
After the appellant was criminally convicted, the BPU issued an
order to show cause why Inter County's certificate of public
conve