U.S. Masters Residential Prop. (Usa) Fund v. N.J. Dep't of Envtl. Prot.- Fin. Servs. Element, A-78 September Term 2017

• Decision Date: 29 July 2019
• Docket Number: A-78 September Term 2017,081137
• Citation: 239 N.J. 145,216 A.3d 137
• Parties: US MASTERS RESIDENTIAL PROPERTY (USA) FUND, Petitioner-Appellant, v. NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION - Financial Services Element, Respondent-Respondent.
• Court: New Jersey Supreme Court

239 N.J. 145

216 A.3d 137

US MASTERS RESIDENTIAL PROPERTY (USA) FUND, Petitioner-Appellant,

v.NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION - Financial Services Element, Respondent-Respondent.

A-78 September Term 2017

081137

Supreme Court of New Jersey.

Argued March 11, 2019

Decided July 29, 2019

Lawrence S. Lustberg argued the cause for appellant (Gibbons and Ford O'Brien, attorneys; Lawrence S. Lustberg, Anne M. Collart, and Adam C. Ford, on the briefs).

A. Paul Stofa, Deputy Attorney General, argued the cause for respondent (Gurbir S. Grewal, Attorney General, attorney; Melissa H. Raksa, Assistant Attorney General, of counsel, and A. Paul Stofa, Lauren C. Brick, Deputy Attorney General, and Mark S. Heinzelmann, Deputy Attorney General, on the briefs).

JUSTICE LaVECCHIA delivered the opinion of the Court.

Since 1976, New Jersey and its residents have had the benefit of the Spill Compensation and Control Act, N.J.S.A. 58:10-23.11 to -23.34 ("Spill Act" or "Act"). The Act creates a means by which the State can "provide monies for a swift and sure response to environmental contamination" from the " ‘discharge of petroleum products and other hazardous substances.’ " Marsh v. DEP, 152 N.J. 137, 144, 703 A.2d 927 (1997) (quoting N.J.S.A. 58:10-23.11a ). The Spill Compensation Fund ("Spill Fund" or "Fund") was created to enable the State to respond with quick cleanups in emergency situations, as well as to address other cleanup needs. Ibid.; see N.J.S.A. 58:10-23.11i (creating the Spill Fund). With the creation of the Fund, the Legislature tasked the State, presently the Department of Environmental Protection (DEP), with the responsibility to "quickly deploy entrusted public funds to restore the environment and abate damages" and to act as the "keeper of the public purse." Buonviaggio v. Hillsborough Twp. Comm., 122 N.J. 5, 10, 583 A.2d 739 (1991).

So when a toxic disaster hits, claimants may seek relief in the form of assistance from the Spill Fund by following promulgated claims procedures. In order to resolve disputes over denied Fund monies quickly and fairly, the Fund uses arbitrators and flexible procedures to allow claimants the opportunity to demonstrate that the denial constituted arbitrary and capricious action.

Invocation of that system for claim review was neither swift nor, we fear, fair to the claimant in this instance. Disaster had hit in the form of Superstorm Sandy. Petitioner, US Masters Residential Property (USA) Fund ("US Masters"), submitted a claim for Spill Fund monies for its multi-lot property located in Bayonne that was affected by the storm's floodwaters, which allegedly carried petroleum-based toxins. Neighboring properties also affected by the storm's toxin-laden floodwaters were afforded Spill Fund relief. The process involved in the instant matter took a different course. Following some back and forth with the DEP, petitioner's claim was denied.

After petitioner filed an appeal, two years elapsed between the request for arbitration and the commencement of the arbitration proceeding. An extensively delayed discovery stage resulted in the DEP not filing its expert's report until mid-January 2016, shortly prior to the scheduled February 1, 2016 hearing start date.

Importantly, petitioner contends that in that report the DEP altered its reasons for supporting the denial. At the hearing, US Masters sought to use responsive expert material that was hurriedly obtained and shared with the DEP; however, the arbitrator rejected the use of the additional scientific material. The arbitration hearing then proceeded over scattered days, spanning weeks, resulting in an allegedly flawed decision, which petitioner contends is based on misconceptions by the arbitrator about the evidence of record. Those arguments focus chiefly on the import of the DEP expert's testimony and the new theory advanced about the contamination found on the site.

Generally, review of an arbitrator's decision is limited. Although an arbitration process is employed for Spill Fund disputes, the administrative decision that results remains reviewable for fundamental fairness and to ensure that the ultimate decision is not inconsistent with the evidence and the remedial purposes of the Spill Act. We have concerns about this proceeding. Although we are mindful of the deferential standard of review, flaws in the substantive reasoning of the arbitration decision as well as procedural fairness considerations undermine confidence in the outcome of this arbitration enough to persuade us, in the interest of fairness, to require that a new arbitration be conducted. Accordingly, we reverse and remand this claim for a new proceeding.

I.

A.

Petitioner US Masters owns several contiguous plots of land in the City of Bayonne ("the Property"). In the wake of Superstorm Sandy, police, the DEP, and news outlets reported that floodwaters had carried and deposited oil -- or an oil-like substance -- onto land in Bayonne near the Property. In the weeks following the storm, multiple employees of US Masters visited the Property and reported seeing and smelling what they believed to be oil deposited by floodwaters. They specifically noted two-and-a-half-foot-high stains on the interior and exterior walls of the homes and cars in the area, similar to a "tub ring."

Believing the damage to be the result of an oil spill caused by Superstorm Sandy, US Masters filed a Spill Compensation Fund Damages Claim with the DEP on November 28, 2012, in accordance with N.J.A.C. 7:1J-2.1 to - 2.6. In response to the claim, the DEP inspected the Property on December 20, 2012. As part of the claims process, US Masters also submitted a report from Gregory Brown, a licensed site remediation professional, who was hired to document the damage to the Property and its cause. On January 4, 2013, Brown collected six soil samples from the backyard of the Property and crawl spaces underneath the homes on the Property and sent the samples to an outside laboratory to have their chemical compositions analyzed.

Brown's report indicated that three of the samples contained hydrocarbons at levels that would require further screening under DEP regulations. Further, Brown stated that when visiting the property he saw and smelled oil. Brown did not test the chemical composition of the "tub ring" material inside the buildings but, based on the totality of his observations, he concluded that the site was unfit for human habitation due to oil contamination.

On July 2, 2013, the DEP issued a Notice of Intent to Deny (NOI) US Masters's claim, in accordance with N.J.A.C. 7:1J-6.6(b). The DEP attributed damage on the Property to non-oil causes -- such as floodwaters, a fire, and a broken water pipe -- making the damages ineligible for compensation under the Act. The DEP noted that its March 13, 2013 inspection found no visible or olfactory evidence of oil on the Property, contrary to the observations of US Masters's employees. The DEP acknowledged that there was staining on the interior walls of the homes on the Property but noted that US Masters had not provided a laboratory analysis of the staining to demonstrate that the material was a "discharge of a hazardous substance" as defined by the Act.

The DEP also noted that it interpreted the lab results in Brown's report to be indicative of soil contaminated by historic fill¹ rather than oil. Under its historic fill theory, the DEP maintained that US Masters had not proved a discharge compensable under the Spill Act because historic fill is not an oil discharge and the toxins pre-dated the enactment of the Spill Act. While it noted that one of the six soil samples contained a hydrocarbon inconsistent with historic fill -- naphthalene -- the DEP stated that the naphthalene levels required further testing in accordance with N.J.A.C. 7:26E-4.2 before the site could be deemed "unfit for human habitation." Therefore, the DEP concluded that US Masters had not shown that the damage to the Property was the result of hazardous discharge as defined by the Act.

In response to the denial, and in accordance with N.J.A.C. 7:1J-6.6(c), US Masters submitted an affidavit from Brown, contesting that the soil sample was indicative of historic fill. According to Brown, oil had "floated in a thick layer on the flood waters and then smeared vertically along all surfaces as the flood waters receded." We note that US Masters included in the record photos showing horizontal floodmarks with such vertical smears on buildings and cars in Bayonne. US Masters's submission did not include additional chemical testing of the previously collected soil samples or new testing of the wall stains.

On December 16, 2013, the DEP responded with an amended NOI which reiterated the same grounds for denial. See N.J.A.C. 7:1J-6.6(e)(2), (f).

B.

US Masters filed a Request for Arbitration on February 4, 2014, per N.J.A.C. 7:1J-6.6(g), and, after a convoluted history during which the DEP delayed providing discovery, obtaining an expert, and providing that expert's report, arbitration ultimately was not scheduled until February 1, 2016.

The DEP hired Dr. Dennis Stainken as its expert witness, and he visited the Property on January 5, 2016, more than five years after Superstorm Sandy. On January 11, 2016, Stainken submitted his expert report in which he analyzed the lab reports of the soil samples that had been procured by Brown back in January 2013. Stainken's report addressed the types of hydrocarbons found in the soil samples and asserted that the hydrocarbons were not of the type found in petroleum. Rather, he asserted that the hydrocarbons were more likely derived from vegetation or microbials. Stainken also opined that the ion chromatogram testing results in Brown's report resembled chromatograms for soot or diesel exhaust, not oil.

Based on his analysis, Stainken agreed with the DEP's position that the soil samples provided by Brown indicated the presence of historic fill; however, he added that, in his...