Manasquan River Regional Sewerage Authority v. Ocean County Utilities Authority
| Decision Date | 06 July 1989 |
| Citation | 117 N.J. 239,566 A.2d 186 |
| Parties | MANASQUAN RIVER REGIONAL SEWERAGE AUTHORITY, a body politic and corporate of the State of New Jersey, Plaintiff-Appellant, v. OCEAN COUNTY UTILITIES AUTHORITY, a body politic and corporate of the State of New Jersey, Defendant and Third-Party Plaintiff-Respondent, v. BOLAND, SAFFIN, GORDON & SAUTTER, Third-Party Defendant. |
| Court | New Jersey Supreme Court |
On certification to the Superior Court, Appellate Division, whose opinion is reported at 234 N.J.Super. 530, 561 A.2d 272 (1988).
Charles E. Starkey, for plaintiff-appellant (Starkey, Kelly, Blaney & White, Brick Town, attorneys).
Richard H. Woods, for defendant and third-party plaintiff-respondent (Hiering, Dupignac & Barnes, Toms River, attorneys).
The members of the Court being equally divided, the judgment of the Appellate Division, 234 N.J.Super. 530, 561 A.2d 272, is affirmed.
We would affirm the judgment of the courts below substantially for the reasons expressed in the opinion of the Appellate Division, reported at 234 N.J.Super. 530, 561 A.2d 272 (1988).
In this case the Manasquan River Regional Sewerage Authority (Manasquan) alleged that a 111% rate increase imposed on it in 1984 by the Ocean County Utilities Authority (Ocean) was unlawful to the extent that it reflected rates lower than those required by law during the period prior to Manasquan's affiliation with Ocean. The trial court ruled that the Manasquan/Ocean service agreement, which provided that Manasquan's rates could not be more favorable than the rates of other users, superseded any illegality inherent in Ocean's rate structure prior to Manasquan's affiliation. Based largely on that legal conclusion, the trial court granted Ocean's motion for summary judgment, and the Appellate Division affirmed. 234 N.J. Super. 530, 561 A.2d 272 (1988). This Court granted Manasquan's petition for certification, 111 N.J. 610, 546 A.2d 530 (1988), and now affirms on the basis of the opinion below. I dissent.
Manasquan, a regional sewerage authority, was created by parallel ordinances adopted by the Boroughs of Freehold and Farmingdale, and the Townships of Freehold, Howell, and Wall, in Monmouth County. Manasquan was established to provide for the collection and treatment of wastewater in western Monmouth County at the headwaters of the Manasquan River.
Ocean, the respondent and third-party plaintiff, was originally established in 1970 as the Ocean County Sewerage Authority, but was reconstituted as the Ocean County Utilities Authority in 1978. Ocean was created to provide for the collection and treatment of wastewater throughout Ocean County. Third-party defendant, Boland, Saffin, Gordin & Sautter, was Ocean's financial consultant.
From its inception, Manasquan had planned to construct a sewerage-treatment facility in Monmouth County. The Manasquan plan required the approval of both the United States Environmental Protection Agency (EPA) and the New Jersey Department of Environmental Protection (DEP). While Manasquan was pursuing the necessary approvals, Ocean proposed to both agencies that Manasquan sewage be diverted to Ocean's northern treatment facility for processing.
In August 1980, DEP's Division of Coastal Resources conducted a public hearing to review Manasquan's proposal to construct its own treatment facility. At the hearing, DEP officials suggested that diverting the Manasquan flow to the Ocean treatment facility would eliminate environmental problems resulting from the discharge of treated wastewater into the Manasquan River. Subsequently, DEP retained an independent engineering firm to prepare a report on the proposed diversion to Ocean's treatment plant.
Among other conclusions, the DEP consultant's report determined that Ocean could absorb Manasquan's flow without a significant rate increase:
The OCUA user charge of $850 per million gallons which became effective January 1, 1981 is expected to remain constant for approximately four years. We have made the assumption that future increases in this charge will approximate the rate of inflation and therefore is consistent with the cost methodologies used throughout this analysis since all costs have been brought to January 1981 with no adjustment for future inflation.
Relying on its consultant's report, DEP concluded that the Manasquan flow should be diverted to Ocean's northern treatment facility. Consequently, DEP and EPA denied Manasquan the funding necessary to construct its own facility.
Manasquan and Ocean entered into a service agreement in September 1981. Section 702 of the agreement provides that Ocean may not enter into a service contract with any other entity on terms more favorable than those provided to Manasquan. Section 502 provides that the annual rates imposed by Ocean shall be "uniform" to all participants in the Ocean district and such rates "shall not be more favorable" to the Manasquan users.
When the Manasquan/Ocean service agreement was signed, Ocean charged a bulk rate of $850 per million gallons of wastewater. This rate became effective January 1, 1981, and was an increase over the rate of $625 that had existed since 1976. During the period prior to the Manasquan/Ocean agreement, Ocean officials represented to Manasquan, its own customers, the EPA and the DEP that the $850 rate would remain stable until 1985, based on the current rate of inflation. In 1983, however, Ocean sought an additional rate hike, this time more than doubling the $850 rate to $1,800 per million gallons. This rate became effective January 1, 1984.
Manasquan alleges that Ocean's 1984 rate increase was required largely to cover past operating deficits. According to Manasquan, from 1976, when a portion of Ocean's system became functional, through 1983, Ocean failed to charge its users annual rates adequate to cover costs of operation, maintenance, and debt service attributable to the operational portion of the system. As a result, Ocean experienced large annual deficits, which it funded with the proceeds of short-term notes. These deficits were capitalized on Ocean's financial statements and recorded in an account entitled "construction-in-progress."
Portions of the record before the trial court on the summary judgment motion appear to lend support to Manasquan's allegations. Thus, the 1982 audit report of Arthur Young & Company, prepared in anticipation of Ocean's $207,000,000 refunding-bond issue, criticized Ocean's capitalization of operating deficits as a practice that "differs from generally accepted accounting principles." Accordingly, the Arthur Young audit report made adjustments in Ocean's financial statements in order "to properly establish fund balances (deficits) at January 1, 1982 to reflect results of operations, interest income and interest expense from phased project completion." (Emphasis added.) The interest-expense adjustment at January 1, 1982, totaled $38,097,662, and the unfunded interest expense incurred in the year 1982 was an additional $16,001,732. Stated simply, the import of the auditor's adjustments was that Ocean's customers had enjoyed the benefit of a completed sewer system without paying interest on debt attributable to the facility they were using.
Moreover, an analysis of Ocean's financial statements by accountants retained by Manasquan concluded that Ocean's total operating deficit through March 1985, attributable to its inadequate rate structure prior to Manasquan's affiliation with Ocean, was $64,933,230. Manasquan's accountants concluded that the effect of the increased rates would cause Manasquan's users to pay off approximately thirty million dollars of that deficit over the period in which Ocean's permanent refunding bonds were outstanding.
When Ocean raised its rate from $850 to $1,800 per million gallons, Manasquan filed this action seeking damages and a new rate schedule. Manasquan alleged that it relied on Ocean's representation of facts regarding projected rates that Ocean "knew or should have known were inaccurate and misleading." Specifically, Manasquan alleged that because of Ocean's failure to charge adequate rates since 1976, Ocean knew or should have known that the $850 rate was wholly inadequate and would not remain in effect through 1984. Further, Manasquan alleged that Ocean's failure to charge its users rates sufficient to cover operating costs on the functional portions of Ocean's system was contrary to law and constituted an improper diversion of past costs to future users. Ocean filed a third-party complaint against its financial consultant, Boland, Saffin, Gordon & Sautter. Ocean alleged that any liability resulting from the Manasquan suit was a consequence of the consultant's fraudulent or negligent actions or advice.
Ocean moved for summary judgment. Ocean asserted that the rates charged to Manasquan were "uniform" with those of other participating municipalities in accordance with the service agreement. The trial court granted Ocean's motion for summary judgment. In construing the contract, the court concluded that Manasquan could not be charged a rate "more favorable" than that charged to any other participant in Ocean's system, notwithstanding any factual issue concerning the adequacy or legality of Ocean's rates prior to Manasquan's affiliation. In the opinion of the trial court, no fraud existed because the rate projections were mere "predictions," and "there was no fraudulent action taken to prevent Manasquan from discovering any information it deemed necessary." The Appellate Division affirmed, holding that the statements concerning rates were merely approximations and not material misrepresentations. The court also rejected plaintiff's allegation that the rate increase resulted from illegally inadequate rates prior to Manasquan's affiliation, concluding that the service agreement...
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