Valley Road Sewerage Co., Matter of

• Decision Date: 12 June 1998
• Parties: 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.
• Court: New Jersey Supreme Court

Page 224

154 N.J. 224

712 A.2d 653

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.

Supreme Court of New Jersey.

Argued Jan. 5, 1998.

Decided June 12, 1998.

Michael E. Rodgers, Morristown, for defendants-appellants (Pinto, Rodgers & Kopf, attorneys).

Elise W. Goldblat, Deputy Attorney General, for plaintiff-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, for respondent Division of Ratepayer Advocate (Blossom A. Peretz, Ratepayer Advocate of New Jersey, attorney; Ms. Peretz, of counsel).

Frank N. Yurasko, Somerville, 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, 685 A.2d 11 (App.Div.1996). We granted Valley Road's petition for certification, 151 N.J. 71, 697 A.2d 544 (1997), and now affirm.

I.

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, however, are based on the BPU's agreement to the terms of a proposed "business plan," described in greater detail below (infra at p. 657). 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, 666 A.2d 992 (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, 666 A.2d 992. The court noted Valley Road's "chronic problems with 'infiltration and inflow' of excessive amounts of...