IN THE MATTER OF DISTRIBUTION OF LIQUID ASSETS UPON DISSOLUTION UNION COUNTY REGIONAL HIGH SCHOOL DISTRICT NO. 1, UNION COUNTY

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NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0211-04T50211-04T5

IN THE MATTER OF DISTRIBUTION

OF LIQUID ASSETS UPON

DISSOLUTION OF THE UNION

COUNTY REGIONAL HIGH SCHOOL

DISTRICT NO. 1, UNION COUNTY

_____________________________

Submitted September 19, 2005 - Decided

Before Judges Alley, C. S. Fisher, and Yannotti.

On appeal from the State Board of Education.

Sills Cummis Epstein & Gross, P.C., attorneys for appellants Berkeley Heights, Clark, Kenilworth and Springfield Boards of Education (Cherie L. Adams, of counsel and on the brief).

Post, Polak, Goodsell, MacNeill & Strauchler, P.A., attorneys for respondent/cross-appellant Borough of Mountainside (Robert A. Goodsell and Holly English, on the brief).

Peter C. Harvey, Attorney General, attorney for respondent State Board of Education (Patrick DeAlmeida, Assistant Attorney General, of counsel; Allison Colsey Eck, Deputy Attorney General, on the statement in lieu of brief).

Apruzzese, McDermott, Mastro & Murphy, P.C., attorneys for respondent Garwood Board of Education (Linda Ganz Ott, of counsel and on the brief).

Palumbo & Renaud, attorneys for respondent Borough of Garwood, relied on the brief submitted by respondent Borough of Mountainside.

David B. Rubin, attorney for respondent Mountainside Board of Education, relied on the brief submitted by respondent/cross-appellant Borough of Mountainside.

Respondents Borough of Kenilworth did not submit briefs.

Respondent Fiscal Agent did not submit a brief.

PER CURIAM

This appeal is from a final determination by the New Jersey State Board of Education and arises from the dissolution of a regional school district and the resulting distribution of liquid assets among the six municipalities that had been included in the district. Mountainside cross-appeals from the denial of its claim for pre-judgment interest.

The subject of the distribution of the district's assets was addressed earlier by the New Jersey Supreme Court, to whose opinion we turn for the backdrop of the present proceeding. There, the Court stated in In re Dist. of Liquid Assets, 168 N.J. 1, 3-10 (2002):

Union County Regional High School District No. 1 was established in 1935 by the joint efforts of six municipalities: Clark, Garwood, Kenilworth, Springfield, Mountainside, and Berkeley Heights. The District was a limited purpose school district, serving only high school students. In 1993, the school boards for the six municipalities commissioned a study to consider the feasibility of dissolving the District. Thereafter, five of the six municipalities--all but Garwood--applied to the Union County Superintendent of Schools pursuant to N.J.S.A. 18A:13-51, to "make an investigation as to the advisability of the dissolution of the regional district." Ibid. Pursuant to N.J.S.A. 18A:13-52, Dr. Leonard Fitts, the Union County Superintendent, issued a report in April 1995 that was intended to enable the municipalities to

form an intelligent judgment as to the advisability of the proposed . . . dissolution and the effect thereof upon the educational and financial condition . . . of the constituent districts in the event of a dissolution, and setting forth the amount of indebtedness, if any, to be assumed ... by each constituent district in the event of a dissolution . . . .

[N.J.S.A. 18A:13-52.]

Dr. Fitts recommended against dissolution. However, in the event that the District was dissolved and the four school buildings and accompanying real estate were deeded to their host municipalities, Dr. Fitts recommended that Mountainside and Garwood alone share all liquid assets, with Mountainside receiving 76% and Garwood 24% based on an October 1, 1994 equalized valuation of property. The value of the assets each municipality would receive under Dr. Fitts' recommendation is set forth in Table A.

TABLE A: UNION COUNTY SUPERINTENDENT RECOMMENDATION FOR DISTRIBUTION OF REAL PROPERTY AND LIQUID ASSETS

Community Real Property Liquid Assets % of % of 1996-97

(totaling (totaling Total Budget

$110,000 $3.3 Assets Contribution

million) million)

Kenilworth $24,519,284 $0 22% 13%

Berkeley $30,214,543 $0 27% 27%

Heights

Clark $30,119,535 $0 27% 22%

Springfield $25,755,082 $0 23% 19%

Mountainside $0 $2,483,160 2% 15%

Garwood $0 $784,156 0.7% 5%

Notwithstanding Dr. Fitts' recommendation to the contrary, the five municipalities that favored dissolution petitioned the State Commissioner of Education in May 1995, pursuant to N.J.S.A. 18A:13-54, for permission to submit to the legal voters of each constituent district the issue of "whether the regional district shall dissolve." The petition set forth a series of objections to dissolution noted by Dr. Fitts, and provided answers to those objections. Paragraph 31(g) of the petition notes Dr. Fitts' objection that "[t]wo of the six municipalities would not acquire high school buildings of the Regional District." The petition responds by endorsing Dr. Fitts' liquid asset distribution alternative as a method of preserving the equity of the dissolution: "Pursuant to the recommendations contained in the County Superintendent's Report, the two constituent school districts which did not acquire buildings, namely Garwood and Mountainside, would not be responsible for any debt service or liabilities and would receive all liquid assets of the Regional District." (Emphasis added).

As required by N.J.S.A. 18A:13-56, the Commissioner of Education submitted the dissolution petition to the Board of Review, which consists of the Commissioner of Education, a member of the State Board, the State Treasurer, and the Director of the Division of Local Government Services in the Department of Community Affairs. Ibid. The Board of Review is responsible for determining "whether or not the petition should be granted, and if so, the amount of indebtedness, if any, to be assumed . . . by each of the constituent Districts . . . ." Ibid. In its November 1995 letter opinion, the Board of Review granted the petition to dissolve with one condition--that Kenilworth agree to accept Garwood High School students in a sending-receiving relationship if Garwood chose to enter that relationship. The Board noted that the indebtedness of the District--totaling approximately $572,000--would not burden any of the constituent municipalities, and added that it was not "convinced that following the statutory scheme for distribution of assets and liabilities results in an inequity of such proportion as to provide a basis for denying the petition." The Board of Review elaborated on the basis of its decision in an amplification letter issued in December 1995. There, the Board of Review wrote:

Pursuant to statute, Garwood and Mountainside, because they do not have high school buildings within their municipalities, will not be apportioned any of the equity in the land and buildings. However, any equity that is retained by the four municipalities that hold high school structures is offset by the remaining debt, albeit minimal, to be allocated among the same four municipalities. The Board of Review recognizes that the statutory scheme for distribution does not provide Mountainside and Garwood any share of the equity in these buildings even though the two districts contributed a share of the buildings' construction costs. However, this "loss" of equity is consistent with the statutory scheme and is not significant enough to warrant denying the petition.

Without explicitly rejecting the agreement of the five municipalities to distribute the District's liquid assets exclusively to Mountainside and Garwood, the Board of Review added that the liquid assets would be distributed to each of the six municipalities in accordance with their proportionate property valuations pursuant to N.J.S.A. 18A:8-24. That statute provides as follows:

The county superintendent in a written report filed by him at the end of the school year preceding that in which [the district is dissolved] shall make a division of the assets, except school buildings, grounds, furnishings, and equipment, and of the liabilities, other than the bonded indebtedness of the original district, between the new district and the remaining district on the basis of the amount of the ratables in the respective districts on which the last school tax was levied . . . .

[N.J.S.A. 18A:8-24.]

The Board of Review concluded:

The apportionment of the remaining assets and liabilities, as defined by N.J.S.A. 18A:8-24 as those assets other than school buildings, grounds, furnishings, and equipment, is directly proportional to the amount of local contribution that each of the municipalities has contributed to the regional district. Therefore, each municipality will leave the regional district structure with the same percentage share of these assets as its contribution to them.

On March 8, 1996, Acting Union County Superintendent of Schools David S. Livingston informed the municipalities that the liquid assets would be distributed proportionally to each municipality, in accordance with N.J.S.A. 18A:8-24.

. . . .

In July 1996, Mountainside wrote to the Commissioner of Education to request that the liquid assets be distributed only to Mountainside and Garwood, as recommended in Dr. Fitts' report and endorsed by the five municipalities in the dissolution petition. By letter dated September 10, 1996, Assistant Commissioner Peter B. Contini declined Mountainside's request.

Mountainside formally petitioned the Commissioner of Education to distribute the liquid assets only to Mountainside and Garwood. Among other claims of error, Mountainside argued that the Assistant Commissioner incorrectly interpreted Egg Harbor as requiring that the ballot question include information about the liquid assets. Mountainside challenged as inequitable the Assistant Commissioner's decision to distribute liquid assets to municipalities that already had been given title to the District's real property, citing the 1995 petition's statement that only Mountainside and Garwood would receive the liquid assets as evidence that all six municipalities intended that result.

Commissioner of Education Leo Klagholz reaffirmed the substance of Assistant Commissioner Contini's letter in a ruling dated May 5, 1997, and dismissed Mountainside's petition pursuant to N.J.A.C. 6:24-1.9 (authorizing Commissioner to dismiss petition outright prior to transmittal of pleadings to Office of Administrative Law "on the ground that no sufficient cause for determination has been advanced, lack of jurisdiction, failure to prosecute or other good reason.").

Mountainside appealed to the State Board. Mountainside also petitioned the Commissioner to stay the distribution of the $3.3 million in liquid assets, claiming that it would suffer irreparable harm if the funds were distributed. The Commissioner rejected that request, stating that a financial remedy would redress any harm. On June 30, 1997, the new Union County Superintendent of Schools, Frances Lobman, issued a report specifying the final division of assets and liabilities of the District, as required by N.J.S.A. 18A:13-62. Following Acting Superintendent Livingston's March 8, 1996 memorandum, the report divided the District's liquid assets proportionally to each municipality in accordance with N.J.S.A. 18A:8-24. The liquid assets and real property were ultimately distributed as reflected in Table B. [FN1]

FN1. The four communities that received real property shared responsibility for $300,000 in debt, thereby reducing the value of the assets each received by approximately $75,000.

TABLE B: ACTUAL DISTRIBUTION OF REAL PROPERTY AND LIQUID ASSETS

Community Real Property Liquid Assets % of % of 1996-97

(totaling (totaling Total Budget

$110,000 $3.3 Assets Contribution

million) million)

Kenilworth $24,519,284 $417,757 22% 13%

Berkeley $30,214,543 $881,374 27% 27%

Heights

Clark $30,119,535 $719,353 27% 22%

Springfield $25,755,082 $612,598 23% 19%

Mountainside $0 $483,973 0.4% 15%

Garwood $0 $152,260 0.1% 5%

The State Board modified and affirmed the decision of the Commissioner dismissing Mountainside's petition . . . . [T]he State Board upheld the dismissal of Mountainside's petition, concluding that "[n]othing presented to us in this case reflects that application of the statutory scheme to the division of liquid assets involved here would result in an inequity such as to provide a basis for denying the finality of the resolution of this issue that is embodied in the Board of Review's determination." The State Board relied heavily on the earlier disposition by the Board of Review, finding that "there is no indication in the record that the Board of Review intended a departure from the statutory method for distributing the assets at issue" . . . . The State Board also questioned its own jurisdiction over the appeal, noting that previous appeals of judgments of the Board of Review had been filed directly with the Appellate Division, and that the "character of the composition" of the Board of Review made direct appeal to the Courts a more appropriate mechanism for review.

Mountainside appealed the State Board's decision to the Appellate Division, and the Appellate Division summarily rejected Mountainside's claims of error in an unpublished opinion. We granted certification. 164 N.J. 189 (2000).

In reversing our decision, the Court explained:

Mountainside seeks judicial review of a decision by the State Board. In reviewing executive agency actions, we are guided by well-settled principles flowing from the doctrine of separation of powers. The "fundamental consideration" in reviewing agency actions "is that a court may not substitute its judgment for the expertise of an agency 'so long as that action is statutorily authorized and not otherwise defective because arbitrary or unreasonable.'" Williams v. Dep't of Human Servs., 116 N.J. 102, 107 (1989) (quoting Dougherty v. Dep't of Human Servs., 91 N.J. 1, 12 (1982)). That principle of deference applies to policymaking and fact-finding, and to a lesser extent to statutory interpretation by an agency. Nelson v. Board of Educ., 148 N.J. 358, 364 (1997) ("The interpretation of a statute by the administrative agency charged with its enforcement is entitled to great weight."); Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844, 104 S. Ct. 2778, 2782, 81 L. Ed. 2d 694, 703 (1984) ("[C]onsiderable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer"). Referring to the State Board, we have held that "'the ultimate administrative decision-maker in reviewing . . . school matters is the State Board, whose final decision will not be upset unless unreasonable, unsupported by the record or violative of the legislative will.'" Nelson, 148 N.J. at 364 (quoting Capodilupo v. Board of Educ., 218 N.J. Super. 510, 515 (App. Div.), certif. denied, 109 N.J. 514 (1987)). We are, however, "in no way bound by the agency's interpretation of a statute or its determination of a strictly legal issue," Mayflower Sec. Co. v. Bureau of Sec., 64 N.J. 85, 93 (1973), and we will intercede if the agency's action exceeds the bounds of its discretion. In re Taylor, 158 N.J. 644, 657 (1999) (noting that "an appellate court's review of an agency decision is not simply a pro forma exercise in which [the court] rubber stamp[s] findings that are not reasonably supported by the evidence"); L.M. v. State Div. of Med. Assistance and Health Servs., 140 N.J. 480, 490 (1995) ("When an agency's decision is manifestly mistaken . . . the interests of justice authorize a reviewing court to shed its traditional deference to agency decisions.").

. . . .

Properly framed, then, our review is of the State Board's order affirming the asset distribution order of the Union County Superintendent of Schools. County Superintendent Lobman's June 1997 report ordering the liquid asset distribution simply adopted the proportional formula for distributing liquid assets as set forth in N.J.S.A. 18A:8-24, without reference to Mountainside's objections.

. . . .

The State Board, Commissioner of Education, Superintendent Fitts and Acting Superintendent Livingston all either expressed or implied that deviations from the specific formula for asset distribution set forth in N.J.S.A. 18A:8-24 can be appropriate under certain circumstances. The legislative history and the statutory scheme for dissolution of regional districts illustrate clearly that the overriding goal of the statutory scheme is to distribute equitably the regional district's assets and liabilities. To that end, the Board of Review generally allocates debt, based on the value of real property, as a percentage of the total worth of all real property owned by the regional district. See N.J.S.A. 18A:13-61 ("In the event of a dissolution, the county superintendent and board of review, in determining the amount of indebtedness to be assumed by each constituent district, shall give due regard to the value of school buildings and grounds being conveyed to the constituent district in which those buildings are located."). If a withdrawing district receives a building and its withdrawal imposes an excessive burden on the regional district, then it may be required to assume debt in excess of its presumptive share. According to the legislative history, even withdrawing districts that do not receive real property may be required to assume debt. [FN3] Further, in keeping with the spirit of equalization, the county superintendent is required by N.J.S.A. 18A:13-61 to "allot a fair proportion of the shared or rotated furnishings and equipment . . . to each of the constituent districts in the event of a [dissolution]."

FN3. The statutory scheme that controls the dissolution of a regional District became law in 1993. See N.J.S.A. 18A:13-51-81. That legislation paralleled the existing law that controlled the withdrawal of constituent communities. Assembly Education Committee, Statement to Bill No. 2294, March 4, 1993. The Senate Education Committee statement accompanying the original legislation (which in 1975 applied only to withdrawing communities, but applies now to dissolving Districts as well) notes in part that in the event that there are no buildings within the withdrawing District and the withdrawal would significantly reduce the 'equalized valuation per pupil,' it is the judgment of the Senate Education Committee that the intent of this provision would empower the board of review to adjust the apportionment of indebtedness by requiring the withdrawing District to assume a share of indebtedness.

[Senate Education Committee, Statement to Bill No. 825, October 6, 1975, 1- 2]

The principal tool for equalizing the overall dissolution package is the shifting of debt. The county superintendent is first charged with calculating the overall indebtedness of the regional district. N.J.S.A. 18A:13-53. The Board of Review is then charged with determining the amount of indebtedness to be assumed by each community in the event of a dissolution. N.J.S.A. 18A:13-56. A community's potential indebtedness, as determined by the Board of Review, must be included in the notices, advertisements, and ballots for the referendum. N.J.S.A. 18A:13-58. Although the value of the real property and the municipality receiving that property are known, the debt burden is subject to allocation. In the event of dissolution, debt can be divided among constituent communities, and the indebtedness of communities that did not receive real property can be reduced to adjust for the value of the real property received by other communities.

That scheme presumably can result in equalization for all constituent communities, including those without real property, only when the debt load is significant (or when all communities received real property). Here, however, the District was established in 1935 and most of its debt has been paid off. The debt that remains is dwarfed by the value of the District's assets. When the debt load is small and the real property is valuable, equalization among constituent municipalities cannot be achieved simply by shifting debt.

This case illustrates the point. As noted in Table B, supra, adhering strictly to the proportional liquid asset distribution formula set forth in N.J.S.A. 18A:8-24 leaves Mountainside with $483,973, or .4% of the District's total assets, a proportion 37.5 times less than the 15% share of the District's overall budget in 1996-97 attributable to Mountainside's contribution. On the other hand, as noted in Table A, supra, the distribution scheme adopted in Dr. Fitts' report, and by the five municipalities in their petition for dissolution, leaves Mountainside with $2,483,160, or 2% of the District's total assets. Although still not reaching parity compared to Mountainside's budget contributions, the latter figure represents the most proportional result-- measuring proportionality by asset allocation against budget contribution--that is possible in this context because of the disproportionate value of the District's real estate and the relative absence of debt.

Given the obvious purpose of the statutory scheme to distribute assets and liabilities equitably, and the generalized assumption in the statute that debt allocation is a sufficient mechanism for ensuring equity, we are persuaded that in these circumstances insistence on strict application of the asset distribution scheme in N.J.S.A. 18A:8-24 is unwarranted, particularly where, as here, the parties entering into dissolution have agreed to an alternative liquid asset distribution formula that represents a more equitable asset allocation. To hold otherwise would be to ignore the clear overriding purpose of the statutory framework in favor of ritualistic application of statutory language divorced from context. "In discharging our interpretive responsibility, we are admonished that 'each part or section [of the statute] should be construed in connection with every other part or section so as to produce a harmonious whole,' and that 'it is not proper to confine *18 interpretation to the one section to be construed.' " In re Passaic County Utilities Auth. Petition Requesting Determination of Financial Difficulty and Application for Refinancing Approval, 164 N.J. 270, 300 (2000) (quoting Norman J. Singer, Sutherland Statutory Construction 46.05 at 103 (5th ed. 1992)).

Having determined that the statutory framework permits deviation from the asset distribution formula set forth in N.J.S.A. 18A:8-24, we must consider whether the State Board's decision not to deviate from that formula in this case was "unreasonable . . . or violative of the legislative will." Nelson, supra, 148 N.J. at 364.

As noted, the State Board, in affirming the proportional distribution formula, relied heavily on the Board of Review order. The State Board noted, for instance, that "there is no indication in the record before us that the Board of Review intended a departure from the statutory method for distributing the assets at issue," that the Board of Review found that proportional distribution of the liquid assets would not result in "such inequity of such proportion as to provide a basis for denying the petition[.]" None of those justifications, as we have noted, was a proper basis for denying Mountainside's petition, because it was not the Board of Review's responsibility to direct the distribution of the District's liquid assets. The only indication of the State Board's reasoning independent of its deference to the Board of Review is the State Board's conclusion that "Mountainside has not shown any circumstances that would warrant a departure from the statutory scheme."

We find that conclusion untenable. As noted, strict application of N.J.S.A. 18A:8-24 would leave Mountainside and Garwood with a substantial shortfall, and the remaining municipalities with a windfall, of the District's assets based on the proportions of the District's operating budget that each municipality contributed. Because of the composition of the District's assets, weighted heavily with real property and burdened by little debt, inequity is perhaps inevitable under any alternative. But allocating liquid assets exclusively to Mountainside and Garwood certainly helps ameliorate that disproportion, and neither the agency personnel who reviewed this issue--including three Union County superintendents, the Assistant Commissioner of Education, the Commissioner of Education, and the State Board-- nor any of the parties opposing Mountainside's petition have articulated any policy justification for insisting on distributing the liquid assets to each municipality, and thereby exacerbating the overall disproportion of the municipalities' asset shares.

We are also mindful of Mountainside's argument that, when it agreed to join the dissolution petition, it did so in reliance on the expectation that it and Garwood would receive the entirety of the District's liquid assets. Although Superintendent Lobman was not bound by the recommendations in Dr. Fitts' report, we find troubling the notion that parties to a dissolution can agree to a specific method of asset distribution, and thereafter reverse course and support a distribution method that substantially disfavors one of the petitioning parties. That the five municipalities had agreed to distribute the liquid assets exclusively to Mountainside and Garwood strongly supports Mountainside's argument that the State Board erred in not deviating from the statutory framework and implementing that agreement. [FN4]

FN4. Berkeley Heights argues that there was, in fact, no agreement by the municipalities to distribute liquid assets in accordance with Dr. Fitts' report. We reject that argument outright. Berkeley Heights points to language in paragraph 34 of the dissolution petition stating that "the constituent districts should be allowed to agree on an alternative plan [to Dr. Fitts' report] for the distribution of the Regional District's assets and liabilities." That language, however, must be read in the context of the petition's specific adoption, noted above, of Dr. Fitts' liquid asset distribution formula in paragraph 31 of the petition. At most, the language Berkeley Heights cites indicates that the municipalities agreed to Dr. Fitts' formula but also agreed to have the flexibility to reach a different agreement later in the process if they so chose. But no later agreement was reached, so we are left with the municipalities' very clear and unanimous endorsement (with the exception of Garwood, which rejected the petition in its entirety but certainly would have endorsed Dr. Fitts' formula over that ordered by the Board of Review) of Dr. Fitts' formula in paragraph 31 of the dissolution petition.

III

We reverse the judgment of the Appellate Division and remand this matter to the State Board of Education, and order that Mountainside and Garwood be awarded that sum of the District's liquid assets allotted to them in Dr. Fitts' report. As noted, the liquid assets of the District already have been distributed to each of the six municipalities in accordance with Superintendent Lobman's report. We instruct the State Board, on remand, to formulate appropriate payment schedules so that Mountainside and Garwood receive their share of the District's liquid assets from the other municipalities in a timely and efficient manner.

[In re Dist. of Liquid Assets, supra, 168 N.J. at 10-20.]

Charged with the responsibility of developing a redistribution plan, the State Board of Education observed that the issue on remand was mainly "what constitutes the liquid assets that are to be distributed pursuant to the Court's decision." It also noted that

[a]s set forth in their briefs, the basic dispute between the parties is a simple one. Mountainside and Garwood take the position that the liquid assets that must now be distributed included all assets held by the regional district as of June 30, 1997 other than those assets subject to N.J.S.A. 18:13-62 and N.J.S.A. 18A:8-24 and which were distributed pursuant to N.J.S.A. 18A:13-61.[] Under this formulation, the amount distributed to Mountainside and Garwood would total approximately $10.6 million.

Not surprisingly, Clark, Kenilworth, Springfield, and Berkeley Heights[] have a different view of what constitutes the liquid assets that must be distributed [under] the New Jersey Supreme Court's decision. These districts take the position that the liquid assets at issue are limited to $3.3 million, which was the amount of such assets accounted for in the June 30, 1997 report submitted by Dr. Francis Lobman, who was then the County Superintendent for Union County, and which was the amount set forth in the tables referenced by the Court in its decision.

The parties have also raised a variety of issues regarding the specific amounts that Mountainside and Garwood should receive, including the question of whether Mountainside and Garwood should be awarded interest on any amounts to which they are entitled. However, the threshold issue that must be addressed before these disputes can be resolved is the question of what constitutes the liquid assets that are subject to distribution under the New Jersey Supreme Court's decision. After careful review of that decision, we find that the view held by Mountainside and Garwood is the correct one.

The thrust of the New Jersey Supreme Court's opinion was the achievement of equity. The fact that the four districts in which the school buildings were located had received assets that were valued at approximately $110 million and which were unencumbered by any significant debt was pivotal to the Court's decision. [FN6] It was in this context that the Court agreed with the State Board of Education's determination and reject[ing] the asset allocation set forth in Dr. Lobman's June 1997 report.

FN6. The Court noted that the four districts that received the real property shared responsibility for $300,000 debt, which reduced the value of the assets each received by $75,000. In re Distribution of Liquid Assets, supra, at 9.

As set forth above, the Court repeatedly stressed that the overriding goal of the statutory scheme is to distribute equitably the regional district's asset and liability and that the principal tool for achieving such equity is the shifting of debt. The Court observed that when some of the constituent communities do not own any real property, equalization can be achieved only when there is significant outstanding dept. As explained by the Court, the regional district in this case:

was established in 1935 and most of its debt has been paid off. The debt that remains is dwarfed by the value of the District's assets. When the debt load is small and the real property is valuable, equalization among constituent municipalities cannot be achieved simply by shifting debt.

[Id. at 16-17.]

To illustrate this point, the Court turned to the tables set forth earlier in its opinion. Referencing these tables permitted the Court to specify for the sake of comparison the amount that Mountainside would have received under the statutory scheme as compared to that which it would have received under the distribution scheme in Dr. Fitts' Report. Although the Court's opinion reflects that it assumed that the liquid assets of the regional district had already been distributed to each of the six municipalities, nowhere in the opinion is there any indication that the Court had intended to limit the amounts that Mountainside and Garwood received to the specific amounts set forth in the tables it had referenced. To the contrary, in rejecting the application of the statutory scheme in this case, the Court found that the "alternate liquid assets distribution formulation" to which the parties had agreed prior to dissolution and which was embodied in the 1995 Fitts Report represented a "more equitable asset allocation." Id. at 17.

Quite simply, a careful reading of the opinion shows clearly that the Court's review was focused on the method by which the regional district's liquid assets should be distributed, not on the amount of those assets. In this respect, it bears repeating that the Court stressed in its opinion that inequity might be inevitable in this case under any distribution scheme because of the composition of the regional district's assets, but that allocating the liquid assets exclusively to Mountainside and Garwood would help ameliorate the situation. It would be inconsistent to limit the liquid assets to be distributed now to an amount that the Court recognized would be inadequate to achieve equity when distribution of the actual amount of those assets would better help to ameliorate the situation.

We therefore hold that the amount of the liquid assets to be distributed to Mountainside and Garwood pursuant to the New Jersey Supreme Court's remand included that entire amount of those assets and not just the $3.3 million identified in Dr. Lobman's report of June 1997 as available for distribution at that time. It appears that this amount includes approximately $8.6 million in liquid assets that has been distributed among the six municipalities which comprise the regional district, approximately $6.9 million of which will need to be redistributed, and that approximately another $2 million is now available for distribution subject to certain contingencies. However, we are not able to ascertain on this record the exact amount to be distributed. Accordingly, we remand this matter to the Commissioner to establish that amount and effectuate its distribution so that 76% of the total liquid assets are received by Mountainside and 24% by Garwood.[] We direct that upon verification by the Fiscal Agent of the amount of the liquid assets remaining and available for distribution, the Commissioner order the immediate distribution of those asset to Mountainside and Garwood. [FN8] We further direct that once he establishes the amount of liquid asset that has already been distributed, the Commissioner establish a payment schedule whereby 76% of that amount is redistributed to Mountainside within a five year period and 24% to Garwood. Finally, we find that any award of interest is governed by N.J.A.C. 6A:3-1.17, and we therefore reject Mountainside's request for such award.

FN8. From the submissions of the parties, it appears that certain amounts have been reserved, including approximately $2,400,000 for the "Settlement Pending Lawsuits." Hence, we recognize that not all of the liquid assets remaining are currently available for distribution. Pursuant to our remand, the Commissioner is charged with the responsibility for establishing the amount in this category and for effectuating the ultimate distribution of the amounts remaining once the Regional High School District's obligations have been satisfied.

In light of this directive, the Commissioner then transferred the matter to the Office of Administrative Law (OAL), as noted in a letter addressed to the parties and dated April 29, 2002. The letter stated that the OAL would

determine the amount of all liquid assets in accordance with the State Board decision, which includes all liquid assets of the former district as of June 30, 1997; determine the current amount of such liquid assets in the possession of the fiscal agent available for immediate distribution to Mountainside and Garwood, 76% to Mountainside 24% to Garwood; ascertain the total amount of all liquid assets already distributed to the constituent districts of the former district; and, establish a five-year plan for the redistribution of all liquid assets from the districts that received them to Mountainside and Garwood, 76% to Mountainside and 24% to Garwood.

Berkeley Heights, as the fiscal agent for the former district, will be directed to provide an accounting of all liquid assets of the former district as of June 30, 1997, the accounts thereof currently in its possession and the portion thereof ready for immediate distribution, and the amounts already distributed to each of the constituent districts. The remaining parties may then present evidence/testimony to contest the figures presented. All parties may also present evidence/testimony as to the configuration of the five-year re-distribution plan for the liquid assets previously distributed to districts other than Mountainside and Garwood.

An ALJ held conferences on June 1, 2002, and January 1, 2003, during which the parties decided that respondents would move for summary decision, which occurred on February 24, 2003, and February 18, 2003, respectively. The Garwood Board of Education also filed a motion for summary decision on February 20, 2003, and the Mountainside Board of Education joined in the Mountainside Borough's motion on February 27, 2003. Briefs in opposition from the Boards of Education of Berkeley Heights, Clark, Kenilworth, and Springfield followed.

An initial decision was rendered on November 24, 2003, by ALJ Robert J. Giordano. The ALJ's initial decision set forth findings of fact and summaries of the relevant law in a well-detailed decision. On the issue of liquid assets, the ALJ found that

[t]he parties to the instant matter have raised the issue of what is the definition of liquid assets as such pertains to the dissolution of a regional school district. The provisions of N.J.S.A. 18A:8-24 and N.J.S.A. 18A:13-61, previously noted herein, give guidance in examining that issue.

The Act provides, in part, that the constituent districts shall take title to and control of all school grounds and buildings, and all the furnishings and equipment therein, other than those which had been rotated or shared among the regional schools, situated in their respective districts on the effective date of dissolution. A fair proportion of shared or rotated furnishings and equipment shall be allotted to each of the constituent districts. N.J.S.A. 18A:13-61.

Alternatively, the statutory scheme to be utilized in the distribution of assets is found at N.J.S.A. 18A:8-24. The County Superintendent is to make a division of assets, "except school buildings, grounds, furnishings and equipment, . . . on the basis of the amount of the ratables in the respective districts on which the last school tax was levied, and in determining the amount of assets to be divided, he shall take into account the present value of the school books, supplies, fuel, motor vehicles and all personal property other than furnishings and equipment." (emphasis added).

Additionally, the Lobman report as well as the Fitts report was reviewed in order to afford a broad perspective as to the definition of assets. It is noted that the Lobman report identified assets in categories. These included fuel, supplies, food service inventories, pupil transportation vehicles, other vehicles, maintenance equipment, school books and person property (Lobman report, III(A), p. 5). In addressing the allotment of shared or rotated equipment and furnishings, pursuant to N.J.S.A. 18A:13-61, the Lobman report explained that these "shared and rotated" furnishings and equipment will be distributed by the same methodology as the other assets (Lobman report, III(D), p.9). The Fitts report referenced furniture and equipment in the section of that report addressing the replacement cost of buildings, grounds, furnishings and equipment (Fitts report, IX(A), pp. 43 and 44). Dr. Fitts alluded to the distinction between equipment in general and "building equipment" in the section regarding the distribution of assets. He recommended that in the event of dissolution, Berkeley Heights, Clark, Kenilworth and Springfield districts would assume the building grounds, furnishings and building equipment. [FN6] The Garwood and Mountainside districts would receive all liquid assets of the regional school district such as free balances, excess transportation equipment and other non-building equipment. (Fitts report, XI(B), p. 47).

FN6. There has been no explanation found as to the rationale for including shared and rotated furnishings in the total assets, when the other furnishing and equipment at the various sites were included in the replacement cost. N.J.S.A. 18A:8-24 distinguishes assets from furnishings and equipment.

Ultimately, the Supreme Court adopted the method for defining distributable assets from the Lobman report. The division of assets included the value attributed to the assets physically located on the properties of the District including the shared and rotated furnishings and equipment in arriving at the $3,267,315.95 figure.

REDISTRIBUTION PLAN

To the extent that monies are to be redistributed, the Commissioner has directed that a five-year plan for the redistribution of all liquid assets from the four constituent districts, 76% to Mountainside and 24% to Garwood. The various proposals submitted included plans for payouts of sums in excess of those in the Supreme Court decision; a payout over thirty years (Berkeley Heights); a payout over fifteen years (Clark); a payout over fifteen years (Springfield); and a payout over five years for the undisputed amounts only (Kenilworth). The responsive proposals all contained similar suggestion along the lines of two equal semi-fiscal year payments.

Since redistribution under the directive of the State Board of Education includes the value attributed to the "physical assets" distributed at the time of dissolution and the liquid cash assets distributed in 1998 and 2000, it is reasonable to conclude that those funds are not readily available in the respective budgets of the four constituent districts. A five-year repayment schedule that commences during the second half of the school budget year would extend over six school budget years.

CONCLUSIONS OF LAW

Clearly, the Supreme Court had directed a divergence from the strict application of the statutory distribution scheme in N.J.S.A. 18A:8-24, finding that such strict application of the statute would leave Mountainside and Garwood with a shortfall and the other four districts with a windfall, of the District's assets based on the proportions of the District's operating budget that each municipality contributed. The Court directed the State Board to formulate payment schedules so that Mountainside and Garwood receive their fair share of the District's liquid assets from the other constituent districts in a timely manner.

In turn the State Board directed the Commissioner to carry out that directive. The matter was transmitted to the OAL for implementation of that directive, in establishing the amount of assets previously distributed, and to formulate a payment schedule for the redistribution of those previously distributed assets, 76% to Mountainside and 24% to Garwood over a five-year period. Additionally, there was to be a determination of the current amount of such liquid assets in the possession of the fiscal agent available for immediate distribution to Mountainside and Garwood, 76% to Mountainside and 24% to Garwood.

I CONCLUDE that I am constrained to follow the directive prescribed by the agency in transmitting the matter to the OAL. There is no such independent basis to consider the matter. The procedural history of the case is such that the directive from the State Board of Education reflects the law of the case. There is no judicial function to be applied here. The task is simply to identify the assets distributed and available to be distributed, and to formulate a plan for redistribution of the assets. In that regard, I CONCLUDE that there is no genuine issue of material fact as it relates to the task at hand. The parties have proffered all the financial information available that would shed light on the issues of what constitutes those assets contemplated by the Supreme Court and thereafter the State Board of Education. The four constituent districts seek a hearing to relitigate the underlying issues of value, the definition of assets, and the applicability of the statutory scheme in fulfilling the legislative intent. That is not the function here. I CONCLUDE that the matter is one that can be properly resolved by way of summary decision.

From the documentary evidence reviewed and considered in accordance with the law of the case, I CONCLUDE that the amount of assets previously distributed and now subject to redistribution, 76% to Mountainside and 24% to Garwood includes the value of the assets, including the shared and rotated furnishings and equipment, distributed upon dissolution in the amount of $3,267,315,95. Additionally, those assets distributed in 1998 and 2000, in the amount totaling $5,336,683 are also to be redistributed, 76% to Mountainside and 24% to Garwood. Of the assets still remaining in the possession of the Fiscal Agent, the amount of $577,221 is immediately available for distribution, 76% to Mountainside and 24% to Garwood. The amounts remaining in the possession of the Fiscal Agent, including the amount of $903,469 for tuition refunds payable, $100,000 for closing cost and $1,900,000 for pending litigation are not subject to release by the Fiscal Agent at this time. The Fiscal Agent is charged with the responsibility to distribute the surplus of any of those reserves, after all current liabilities and reserves for contingent liabilities have been taken into account, as it may become available for distribution, 76% to Mountainside and 24% to Garwood. The employee contribution for unemployment insurance is properly distributed to the constituent districts employing the respective employees, in accordance with the provision of the New Jersey Department of Labor. The employer contribution is an asset subject to the distribution scheme outlined herein, 76% to Mountainside and 24% to Garwood.

I further CONCLUDE that there is no basis to deviate from the directive of the State Board of Education regarding the formulation of a redistribution plan for the previously distributed assets. The payments from the four constituent districts shall reflect the total of assets previously distributed at the time of dissolution and thereafter in 1998 and 2000, over a five-year period. To fulfill the requirements imposed by the State Board of Education regarding redistribution, I CONCLUDE there should be ten semi-yearly payments in accordance with the fiscal year. To accommodate the districts' budget cycles, the first payment shall be made April 15, 2004. Thereafter payments shall be made in equal amounts on October 15, 2004, April 15, 2005, October 15, 2005, April 15, 2006, October 15, 2006, April 15, 2007, October 15, 2007, April 15, 2008 and October 15, 2008. Each of the four constituent districts shall make ten equal payments from the total amount of assets previously distributed, 76% to Mountainside and 24% to Garwood.

ORDER

It is hereby ORDERED that the Fiscal Agent release immediately the sum of $577,211 to Mountainside and Garwood, $438,680.36 to Mountainside and $138,530.64 to Garwood.

. . . .

It is further ORDERED that the Fiscal Agent shall continue to account for the current liabilities and reserves for contingent liabilities, and accumulate accounts receivable until those have been fully accounted for. Thereafter, upon completion and acceptance of the final audit, the Fiscal Agent shall disburse the remaining funds, 76% to Mountainside and 24% to Garwood.

The Initial Decision also contained a schedule of payments to be made by each of the constituent districts, Berkeley Heights, Clark, Kenilworth, and Springfield to Mountainside and Garwood.

The Commissioner of Education adopted the ALJ's recommendation in its entirety on February 5, 2004. The Commissioner issued a detailed opinion that supported the adoption of the recommendation and also considered all of the exceptions filed by Berkeley Heights, Clark, Kenilworth and Springfield Boards of Education.

On August 6, 2004, the State Board of Education affirmed the Commissioner of Education's decision.

Before us in this appeal, Berkeley Heights, Clark, Kenilworth, and Springfield challenge the decision of the State Board of Education, and they have raised the following issues:

POINT ONE: THE SUPREME COURT ORDERED REDISTRIBUTION OF UNDER 3.3 MILLION DOLLARS TO PETITIONERS. DESPITE THIS DIRECTIVE, THE COMMISSIONER'S DECISION IMPROPERLY ORDERS THAT MOUNTAINSIDE AND GARWOOD RECEIVE A TOTAL WHICH COULD EXCEED 12.5 MILLION DOLLARS

The Supreme Court awarded Mountainside and Garwood a finite amount of $3,267,316, not a sum in excess of 12.5 million dollars as ordered by the State Board of Education

The Supreme Court took the trouble to calculate and specify the amount of money to be received by Petitioners; the State Board was not free to totally disregard this determination

Petitioners identified the very amount awarded by Supreme Court as the sum at issue in the case and confirmed the amount of the award following the Supreme Court decision

POINT TWO: ASSUMING, ARGUENDO, THE SUPREME COURT HAS NOT AWARDED A SPECIFIC SUM TO MOUNTAINSIDE AND GARWOOD, IN GRANTING SUMMARY JUDGMENT, THE ALJ, COMMISSIONER AND STATE BOARD OF EDUCATION FAILED TO ACCURATELY ASSESS THE ECONOMIC REALITIES OF THE REGIONAL DISTRICT

The ALJ failed to consider facts presented by constituent districts concerning the amount of liquid assets at issue in this case

The ALJ and Commissioner overvalued the assets received by Respondents

The ALJ and Commissioner and State Board improperly considered replacement costs as the value of the school buildings at issue, despite recognizing other facts impact upon the value received

The ALJ failed to exclude from the calculation of liquid assets those physical assets outlined in the Lobman report

POINT THREE: THE STATE BOARD DECISION FAILED TO PROVIDE FOR A MEANS OF FINANCING THE PAYMENTS TO MOUNTAINSIDE AND GARWOOD WITHOUT VIOLATING BUDGETARY CONSTRAINTS

Additionally, Mountainside's cross-appeal challenges the portion of the State Board's decision which denied its request that pre- and post-judgment interest be included in the amounts paid to them by the other districts.

Generally, we will not interfere with the ultimate determination of an agency unless it was arbitrary, capricious or unreasonable, or violated legislative policies expressed or implied in the act governing the agency. Campbell v. Dep't of Civil Serv., 39 N.J. 556, 562 (1963). An agency's interpretations of a statute and case law, and its other conclusions of law, are not entitled to this deference, however. Tamburelli v. Hudson County Police Dept., 326 N.J. Super. 551, 564 (App. Div. 1999), certif. denied, 163 N.J. 397 (2000).

Appellants argue that the liquid assets to be received under the alternative framework by Mountainside and Garwood were limited by the Court's direction that respondents be "awarded that sum of the District's liquid assets allotted to them in Dr. Fitts' report," In re Dist. of Liquid Assets, supra, 168 N.J. at 20. They essentially contend that the State Board erred in directing a distribution greater than what they allege was specified by the Court. Respondents, however, counter that the amounts referred to in the Court's decision were given by way of example, not by way of limitation. As a result, they claim, the State Board correctly carried out the Court's decision in calculating the sum to be received by respondents, even though the sum ultimately to be distributed was much greater than that referred to by the Court.

We reject appellant's position as being without merit. We conclude that the agency was correct in its determination of the award to be made to respondents.

The State Board properly recognized that its purpose on remand was to determine what exactly constituted "liquid assets" and the value of assets to be split by Mountainside and Garwood. The express directive of the Court was:

[In re Dist. of Liquid Assets, supra, 168 N.J. at 20.]

There is no merit in the assertion that the Board's function on remand was limited to directing that Mountainside and Garwood receive the sum of the $3.3 million considered in Dr. Fitts's report, and determining an appropriate payment plan so that respondents could receive this sum over some amount of time to be determined by the State Board. True, Table A of the Court's decision referred to an amount of $3.3 million, with 76% going to Mountainside and 24% going to Garwood. Id. at 5. The Court did not, however, limit the Board to a specific sum in its work of determining what constituted "liquid assets." In our view, extensive discussion is not necessary to show that the State Board, as well as the ALJ and Commissioner, acted as contemplated by the Court, and not contrary to the Court's direction, when including in the amounts distributable to Mountainside and Berkeley Heights the more than $5 million in other distributions that took place.

In essence, the State Board's distribution directive carries out the Court's overriding purpose of achieving equity for all the members of the former district. As we have already mentioned, the State Board observed in its March 8, 2002 decision that

Mountainside and Garwood take the position that the liquid assets that must now be distributed included all assets held by the regional district as of June 30, 1997 other than those assets subject to N.J.S.A. 18:13-62 and N.J.S.A. 18A:8-24 and which were distributed pursuant to N.J.S.A. 18A:13-61.[] Under this formulation, the amount distributed to Mountainside and Garwood would total approximately $10.6 million.

. . . .

We therefore hold that the amount of the liquid assets to be distributed to Mountainside and Garwood pursuant to the New Jersey Supreme Court's remand included that entire amount of those assts and not just the $3.3 million identified in Dr. Lobman's report of June 1997 as available for distribution at that time. It appears that this amount includes approximately $8.6 million in liquid assets that has been distributed among the six municipalities which comprise the regional district, approximately $6.9 million of which will need to be redistributed, and that approximately another $2 million is now available for distribution subject to certain contingencies. However, we are not able to ascertain on this record the exact amount to be distributed. Accordingly, we remand this matter to the Commissioner to establish that amount and effectuate its distribution so that 76% of the total liquid assets are received by Mountainside and 24% by Garwood.[] We direct that upon verification by the Fiscal Agent of the amount of the liquid assets remaining and available for distribution, the Commissioner order the immediate distribution of those asset to Mountainside and Garwood. [FN8] We further direct that once he establishes the amount of liquid asset that has already been distributed, the Commissioner establish a payment schedule whereby 76% of that amount is redistributed to Mountainside within a five year period and 24% to Garwood. Finally, we find that any award of interest is governed by N.J.A.C. 6A:3-1.17, and we therefore reject Mountainside's request for such award.

To summarize, we agree that the OAL was constrained to follow this directive, and the Board later appropriately carried it out in its August 4, 2004 decision, and we are persuaded that appellants' arguments to the contrary lack merit.

We also find to be without merit appellants' argument that the means by which they will be forced to finance the payments ordered by the State Board violate budgetary constraints, an argument for which they do not set forth any supporting legal principles. R. 2:11-3(e)(1)(E).

In its cross-appeal, Mountainside argues that it is entitled to pre-judgment interest on the amount due to it, inasmuch as respondents allegedly acted in bad faith and a computation of interest may be appropriate when the payor and recipient of such payments are both governmental entities. On March 8, 2002, the State Board determined that "any award of interest is governed by N.J.A.C. 6A:3-1.17, and we therefore reject Mountainside's request for such award."

N.J.A.C. 6A:3-1.17 provides that "[t]he Commissioner shall award prejudgment interest when he or she has concluded that the denial of the monetary claim was an action taken in bad faith and/or has been determined to have been taken in deliberate violation of statute or rule." A claim of bad faith is simply unsupported, because as we view the record, all parties involved have acted in good faith to obtain the directives of various agencies and courts concerning distribution of the money at issue and have never acted in deliberate violation of statute or court order.

Mountainside argues that even if bad faith is not found, the equity that the Court emphasized in its opinion mandates that interest be included. We disagree. If the Court intended that pre-judgment interest be included, it presumably would have so stated.

Finally, Mountainside argues that where two governmental entities are involved, the payment of pre-judgment interest is appropriate. Even assuming that pre-judgment interest may be appropriate in some instances where two governmental entities are involved, there is no basis on which such interest is justified in this case.

Affirmed.

(continued)

A-0211-04T5

October 11, 2005

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