During the past year, the New Jersey Supreme Court issued five broadly defined environmental law rulings. In addition, a case involving the New Jersey Property-Liability Insurance Guaranty Association (PLIGA) was argued in January, and a decision should be issued in the near future.

Dune Construction

Borough of Harvey Cedars v. Karan, No. 070512 (N.J. July 8, 2013), was a condemnation case that involved a dispute as to the valuation methodology. The municipality condemned an easement over one-third of defendants’ beach-front property to construct a 22-foot-high shore protection dune. Although the dune provided protection from storm damage, it partially obstructed the homeowner’s spectacular beach and surf views. For additional discussion of Karan and its implications, see L. Goldshore, “Obstacle to Dune Construction,” 211 N.J.L.J. 483 (Feb. 18, 2013), and “Valuing an Ocean View,” 213 N.J.L.J. 351 (July 22, 2013).

The central issue in the case was whether the construction of the dune conferred a special benefit on the defendants’ beach-front property. Based on a Rule 104 hearing, the trial judge concluded that the dune conferred only a general benefit “to protect the island and its inhabitants from the destructive impact of hurricanes and nor’easters,” and the jury thereafter returned a $375,000 verdict.

The Appellate Division affirmed the trial court’s methodology and concluded that the dune’s protection was a classic example of a general benefit. Despite the fact that the Karan property might benefit to a somewhat greater degree from the dune than its inland neighbors, that did not constitute a special benefit for valuation purposes. The appeals court also commented on a practical just compensation issue that will need to be addressed in subsequent litigation: “[the Borough] did not present any expert testimony that a prospective buyer would be willing to pay the same price for a house with a largely-obstructed view of the ocean as for a house with a magnificent panoramic view, because the former house was safer from storm damage.”

The court heard oral argument on May 13, 2013, some six months after Superstorm Sandy resulted in catastrophic damages along the state’s shore and waterfront. While it was difficult to predict outcomes based on oral argument, it appeared that some of the justices were uncomfortable with the general/special benefit formula that had its roots in 19th century case law.

The justices found that the special/general benefits rule utilized by the lower courts was at odds with current just-compensation jurisprudence. In place of that rule, the court instructed that in a partial taking case the jury should be allowed to assess both sides of the story — the factors that decrease, as well as those that increase, the value of the remainder. But it cautioned that consideration should not be given to speculative or conjectural benefits — just compensation must be based on a consideration of all relevant, reasonably calculable and nonconjectural factors.

The calculation of the impact, if any, will require a determination of the difference between the fair-market value of the property before and after the partial taking. It is likely to prove more challenging for condemning authorities than it will be for condemnees to satisfy the evidential test. That is because market data is readily available to prove the value of an ocean view but it is far less certain how the market reacts to the provision of increased shore protection measures.

A Reasonable Nexus

In New Jersey Dep’t of Envtl. Prot. v. Dimant, 212 N.J. 153 (2012), the court clarified the standard of proof required in Spill Compensation and Control Act (Spill Act) contribution actions. Although it rejected the Department of Environmental Protection’s (DEP) and the Spill Fund administrator’s claims for groundwater investigation and remediation costs against the former operator of a dry cleaning operation, the ruling provided the roadmap for future recoveries. For additional discussion of the Dimant ruling, see L. Goldshore, “The Need for a Causal Connection,” 210 N.J.L.J. 290 (Oct. 15, 2012).

The DEP collected samples at two locations: an indoor pit at the dry cleaners that was not leaking, and a pipe that was slowly dripping elevated concentrations of perchloroethylene (PCE) onto a paved driveway. But that pipe was observed on only one occasion and no photographs were taken. After a lapse of more than 10 years, a DEP report linked the dry cleaner’s operations with well contamination in the area. However, the state agency failed to determine whether the contamination occurred during or prior to the defendant’s dry cleaning operations.

While the court noted that the common-law standard of proximate cause did not apply, a reasonable nexus was required to justify Spill Act relief:

[The defendant] must be shown to have committed a discharge that was connected to the specifically charged environmental damage of natural resources — the groundwater damage — in some real, not hypothetical, way. A reasonable nexus or connection must be demonstrated by a preponderance of the evidence. (Emphasis added.)

Based on the DEP’s evidence and the delay between the investigation and the institution of litigation, the court concluded that the reasonable nexus had not been established and that it would be unfair to impose investigation/cleanup responsibility on the defendant. Accordingly,

[t]here was no basis … to shift to … [the defendant] liability for compensatory damages for cleanup … or even for the investigatory expenses associated with remediation of the natural-resource damage, because the DEP never made the requisite connection showing how the dripping PCE … [by the defendant] reasonably could have made its way into the groundwater. Nor can the DEP credibly claim … that … [the defendant] must bear the expense of studying the various ways in which that drip might have contributed to the groundwater pollution and what must now be done to remediate the groundwater pollution.

Search of Residential Property

The court upheld a DEP inspector’s right to conduct a warrantless search of residential property to determine whether a permit issued pursuant to the Freshwater Wetlands Protection Act (FWPA), N.J.S.A. 13:9B-1 et seq., had been violated. NewJersey Dep’t of Envtl. Prot. v. Huber, 213 N.J. 338 (2013). For additional discussion of this decision, see L. Goldshore, “DEP’s Inspection of Residential Property,” 212 N.J.L.J. 483 (May 20, 2013).

Traditionally, the DEP’s efforts focused on industrial, commercial and land-development operations. But, over time, its land use programs have increasingly intruded on customary activities that occur in residential backyards. In Huber, the inspector sought entry to determine whether the homeowners’ activities — placing fill, mowing and maintaining the deck, patio and retaining wall — violated a FWPA permit issued to a predecessor.

Environmental lawyers generally advise their business clients that it would be counterproductive to impede a governmental inspection. That is because the inspector would return with a warrant and the client would regret the interference. The question here was whether different considerations applied when residential property was involved.

The court reviewed whether testimony concerning the DEP’s initial inspection should have been excluded due to the absence of a search warrant. While the decision in the state’s favor was upheld, the opinion rejected the Appellate Division’s reliance on Burger v. New York in its analysis (482 U.S. 691(1987)), where a warrantless search of an automobile junkyard was found not to offend the Fourth Amendment:

We thus dispense first with the Burger analysis that was used in part by the appellate panel — and reject it — simply to dispel any reliance on that aspect of the panel’s analysis in our determination in this matter. The regulatory inspection scheme of the FWPA was applied here to residential property and, in that setting, we hold that Burger‘s exception to the warrant requirement is inapplicable.

It noted that the FWPA’s administrative inspection regime did not provide for forcible entries without a warrant when consent is denied. Rather, where an owner of property subject to a FWPA permit objected to entry, the statute authorized the DEP to assess a penalty and seek judicial relief. N.J.S.A. 13:9B-21(b), -21(c).

The court sidestepped the necessity for the Hubers’ consent to the initial inspection by finding that the FWPA had been violated based on the agency’s subsequent site visits, the photographic evidence and the homeowners’ admissions. The Appellate Division’s judgment upholding the DEP’s administrative order and penalty assessment was affirmed.

The decision settled an issue for environmental and land-use lawyers, but very few homeowners — FWPA permittees, or otherwise — would bar the door when a DEP inspector knocks. Another issue, but one not within the court’s purview, was whether the DEP should be regulating typical activities that occur in residential backyards. While wetlands may need to be preserved, it is doubtful that the level of effort devoted to this case was a prudent allocation of limited public resources.

Sewer Connection Fees

612 Associates v. N. Bergen Mun. Util. Auth., No. 067931 (N.J. March 7, 2013), involved a dispute between two sewerage authorities concerning their respective entitlement to a sewer connection fee from a new development. That development consisted of a 52-unit condominium, which was directly connected to the North Hudson Municipal Regional Sewer Authority’s (NHRSA) sewer collection system. But the flow travelled only about 300 feet before it was discharged into the North Bergen Municipal Utilities Authority’s (NBMUA) collection system and was then conveyed to the NBMUA treatment plant.

The involvement of more than one governmentally owned utility in the collection and treatment of wastewater occurs frequently throughout the state. As a general rule, one of the utilities provides only collection services, while the other provides both collection and treatment services. This situation was somewhat unusual since NBMUA owned collection and treatment systems but only provided collection services for a short distance.

Connection fees constitute an important element of a sewerage utility’s financial structure. They are designed to assure that the user pays both the cost of the physical connection and its fair share of the system’s capital costs.

In this case, both utilities claimed entitlement to the $153,655 connection fee.The Appellate Division had previously construed the applicable statutes and held that the developer was obligated to pay a connection fee to NHRSA for its direct connection, and a nonduplicative connection fee to the NBMUA for its indirect connection. N.J.S.A. 40:14A-8(b) and 40:14B-2; 404 N.J. Super 531 (App. Div. 2009). Following remand, the panel upheld the trial court’s apportionment of 27.1 percent of the connection fee to NHSRA and the remaining 72.9 percent to NBMUA.

As expected, the Appellate Division’s well-reasoned decision was affirmed. The court found that, in situations where property is served by two sewerage entities, each may charge connection fees that reflect the relative use and are not duplicative. According to the court:

[E]ach connection fee must be tied to the cost of that part of the system that the particular connector uses, so that a property that merely has sewage transported for a distance through the piping system of one authority will be assessed based on the costs of that entity’s collection system, but will not be charged for the costs of that entity’s treatment system that it does not use. … [T]he same property may be charged a connection fee by the authority that actually treats the sewage which reflects a portion of that entity’s capital costs for its piping system and its treatment facility ….

Notice of Claim Failure — Collateral Estoppel

The court in In re Liquidation of Integrity Ins. Co./The Celotex Asbestos Trust, No. 068970 (N.J. June 19, 2013), considered whether an insured was collaterally estopped from obtaining coverage as a result of a bankruptcy court ruling that the excess policies’ notice-of-claim requirements had not been provided.

Celotex, a manufacturer and distributor of asbestos-containing materials, was a target of thousands of personal-injury and property-damage claims in the 1970s and early 1980s. Following a Chapter 11 reorganization filing in 1990, the Celotex Asbestos Settlement Trust was established to handle the claims and succeeded to the rights under excess insurance policies.

Between 1982 and 1984, Integrity Insurance Company issued $5 million excess policies, which required prompt notice of an occurrence that appeared likely to trigger excess coverage. While Celotex provided notice to its pre-1982 carriers in 1983, it did not provide notice to Integrity until 1985, if at all. The bankruptcy court applied Illinois law to the coverage dispute and found that the insured was not entitled to coverage due to its failure to comply with the notice obligation. The district and circuit courts affirmed.

This action arose in connection with a second attempt by the trust to secure coverage with regard to Integrity’s liquidation. But this effort was rejected by the trial court due to the dismissal of the claims based on late notice. The Appellate Division disagreed on the grounds that the bankruptcy court’s decision did not and could not address notice as to future claims.

The court reversed based on the collateral estoppel doctrine, which barred the trust from relitigating matters that had been previously adjudicated. The court noted that the circuit court had issued the earlier ruling and that it would apply federal law to determine its preclusive effect. The test, articulated by the 11th Circuit, where the original action arose, was whether the issue at stake in the subsequent action was identical to the one in the prior litigation. The court found that this test had been satisfied and that the trust’s claims filed with Integrity’s liquidator were barred by collateral estoppel.

PLIGA’s Duty to Insurers (Pending Decision)

The question in Farmers Mut. Fire Ins. Co. v. N.J. Prop.-Liab. Ins. Guar. Ass’n is whether PLIGA is obligated to indemnify a solvent insurer — Farmers Mutual — for a portion of the environmental cleanup costs where an insolvent carrier was also partially responsible for the cleanup costs. 2011 N.J. Super. LEXIS 1838 (App. Div.), certif. granted, 208 N.J. 600 (2011).

Farmers Mutual claimed that under the Owens-Illinois allocation methodology, PLIGA should be responsible for the insolvent insurer’s share of the remediation costs. Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994). The Guaranty Association’s response was that the damages should not be allocated since the solvent carrier’s policy limits had not been exhausted. N.J.S.A. 17:30A-5. That is, the Farmers Mutual policy fully covered the environmental remediation costs of the entire continuous-trigger periods for its insureds.

The Appellate Division agreed with PLIGA’s position that in environmental contamination cases, Owens-Illinois was inapplicable until the solvent insurer’s policy limits were exhausted. In light of the fact that “the PLIGA Act is meant to protect insureds not insurers,” it is likely that the court will uphold the panel’s ruling.

The court’s decisions this year once again demonstrated that environmental law continues to be an evolving field. As a result, practitioners need to track and stay current with the case law developments. •