VINCENT CRAPELLI v. BOARD OF TRUSTEES OF THE RED BANK CHARTER SCHOOL

(NOTE: The status of this decision is .)
 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-6216-07T36216-07T3

VINCENT CRAPELLI, WILLIAM M. MOORE and JOSEPHINE LEE,

Petitioners-Appellants,

v.

BOARD OF TRUSTEES OF THE RED BANK CHARTER SCHOOL, MONMOUTH COUNTY,

Respondent-Respondent.

________________________________

 

Submitted: April 1, 2009 - Decided:

Before Judges C.L. Miniman and Baxter.

On appeal from the New Jersey Department of Education, Agency Docket No. 336-11/07.

Vincent Crapelli, William M. Moore, and Josephine Lee, appellants pro se.

Kenney, Gross, Kovats & Parton, attorneys for respondent Board of Trustees of the Red Bank Charter School (Malachi J. Kenney, of counsel and on the brief).

Anne Milgram, Attorney General, attorney for respondent Department of Education (Sookie Bae, Deputy Attorney General, on the statement in lieu of brief).

PER CURIAM

Petitioners Vincent Crapelli, William M. Moore and Jose phine Lee, former members of respondent Board of Trustees of the Red Bank Charter School (the Board), appeal from a final deci sion of the Commissioner of Education (the Commissioner) dis missing their petition pursuant to N.J.S.A. 18A:6-9. Because the agency's final decision was not arbitrary, capricious, unreasonable, or contrary to law, we affirm.

On November 6, 2007, petitioners filed a petition of appeal with the Commissioner along with a request for emergent relief and summary disposition. The petition requested that the Com missioner overturn a September 6, 2007, resolution adopted by the Board approving a Settlement Agreement among the Red Bank Charter School, Patock Construction Company, Inc., and Short Term Money, LLC, on the ground that the action of the Board was ultra vires, as were the transactions underlying the Settlement Agreement. The emergent relief requested that the Commissioner immediately restrain the Board "from paying out any public mon ies in settlement of the civil actions now being pursued against the school."

These are the admitted factual allegations in the Petition for Appeal on which the Commissioner's final decision was based. The Red Bank Charter School Corporation (School Corporation) was created under the Charter School Program Act of 1995, N.J.S.A. 18A:36A-1 to -18. The School Corporation was granted a charter by the Board of Education in 1997 and is charged with governing and operating the Red Bank Charter School (the School). The nine-member Board is the School Corporation's principal governing body. From 1998 until June 2005, Michael Stasi was the Board's president and Gayle Horvath was its treas urer. In August 1999, Meredith Pennotti became the Educational Administrator of the School.

On July 30, 2000, the Board formed the Red Bank Charter School Foundation (the Foundation) as an independent corporate entity for the purpose of raising money for the operations of the School. Foundation letterhead from October 12, 2004, indi cated that the following persons were its members at that time: Isabella Hertz, president; Jeffrey MacPherson, vice president; Horvath, treasurer; Betsy Brown; Sheryl Herrema; Pen notti; Richard and Gale Scharer; Stasi; and Alice Van Wagner.

During the 2002-03 school year, the School Corporation used the Century House, an historic building located on property of Riverview Hospital, East Front Street, Red Bank, for its kinder garten through third-grade classes. In the Fall of 2002, the Board decided to locate a permanent facility to house all School operations on one campus and to use the Foundation as the entity to acquire such a facility. Stasi worked closely with the Foundation in this effort.

On May 29, 2003, the Foundation purchased the Oakland House Restaurant, 58 Oakland Street, Red Bank, to use as a school cam pus. It then acquired the Century House building, and proposed to relocate it to 58 Oakland Street and contract for construc tion of a link between the Century House building and the Oak land House Restaurant, renovating both buildings. On September 8, 2003, the Foundation entered into a contract with Patock Con struction for this work. At that time, there were only seven trustees on the Board: Stasi; Horvath; Josephine Lee, vice president; Darrell Jackson, secretary; Debra Lock; Ellen Herman; and Barbara O'Hern. Stasi and Horvath would usually inform the Board of developments in the Foundation's project.

The Patock Construction contract was awarded by the Founda tion without following the requirements of the Public School Contracts Law, N.J.S.A. 18A:18A-1 to -59, for bidding and award ing public-school contracts. The estimated cost of the project was about $1,853,610, which included a ten-percent fee representing Patock Construction's "overhead and profit for the project." There was no cap on the cost of the project. Both Horvath and Stasi, who were actively involved in this project, believed that it was legal for the Foundation to award a con tract for this work on a no-bid basis. To fund this project, the Foundation was approved for a $2,500,000 loan from Commerce Bank under the aegis of the New Jersey Economic Development Authority (EDA) to be secured by a first mortgage to Commerce Bank.

On October 8, 2003, Stasi informed the Board that the reno vation project was about $300,000 over its originally estimated cost of $2.9 million. The minutes of that meeting reflect that the Foundation would engage in fundraising to cover the overage so there would be no cost to the School Corporation.

On October 21, 2003, Stasi in his role as president of the School Corporation signed a contract of sale pursuant to which the School Corporation agreed to purchase the 58 Oakland Street property from the Foundation. The contract called for the School Corporation to close title on May 31, 2004, at which time it was to pay the Foundation $500,000. This sum was to be used "to pay amounts due and owing by the [Founda tion] to the contractor for renovation of the Property." In addition, the School Corporation was to "assume the mortgage and all remaining debts and liabilities incurred by [the Foundation] with respect to the acquisition, development, renovation and equipping of the Property for use as a school (collectively the 'Net Debt')." The net debt was anticipated to be $2,500,000 that is, the amount of the Commerce Bank promissory note but the actual amount of the net debt was not limited to this amount. Furthermore, the actual amount of the net debt at this time was not disclosed to the Board. The Board never adopted a resolution by vote at a public or any other meeting that author ized Stasi to execute this contract on behalf of the School Corporation and assume the net debt.

Also on October 21, 2003, the Foundation closed on the EDA loan and distributed $1,951,000 to various creditors of the Foundation other than Patock Construction, despite the Founda tion's obligation for the construction contract price of $1,853,610. Some of this money was paid to the law firm that represented the Foundation and the School Corporation with respect to the sale of the School property, although minutes of Board meetings do not indicate that the full Board was aware of this dual representation. The balance of $549,000 was held in a Foundation account at Commerce Bank. Thus, as of October 21, 2003, the Foundation knew that the net debt was at least $1.6 million higher than the estimate it gave in the contract for sale executed that same day.

In connection with the October 21, 2003, closing of the EDA loan, Stasi signed a "Resolution" stating that he and Darrell Jackson, the secretary of the School Corporation, had been authorized and empowered to execute all documents necessary to enter into the contract of sale and assume the $2,500,000 debt pursuant to a resolution duly and legally adopted at a meeting of the Board on October 20, 2003.

A deed and affidavit of consideration were also executed on October 21, 2003, by Hertz as president of the Foundation, which transferred title to the School property from the Foundation to the School Corporation. The affidavit of consideration indicated that title was transferred for "$1.00 and assumption of all debts and obligations pertaining to the premises." Horvath acted as the witness to Stasi's execution of the deed. The deed indi cates that it was delivered on January 29, 2004.

The project ran significantly over budget to a total of $2,226,365, which petitioners allege was due in part to $453,495 for change orders requested by the Foundation but not approved by vote of the Board at a public session. Despite the passage of title to the School Corporation, the Foundation borrowed about $600,000 from Short Term Money on May 25, 2004, and paid $540,000 of that sum to Patock Construction, leaving a balance due at that time of $151,450. The promissory note was a demand note signed by Hertz as president of the Foundation. On June 27, 2004, a ribbon-cutting cere mony was held on the Oakland Street property. On July 28, 2004, the Foundation paid an additional $100,000 to Patock Construction, which by then had billed another $500,000.

On August 11, 2004, Crapelli and Hughes, who had been newly appointed to the Board on May 12, 2004, learned from Stasi and Horvath that the Foundation was attempting to borrow additional monies from Commerce Bank to cover construction cost overruns. The bank was requiring the Foundation to obtain a pledge of collateral from the School Corporation in the form of a second mortgage as well as a guarantee of repayment in the event of a default by the Foundation. Stasi told Crapelli and Hughes that he would soon present a resolution to the Board agreeing to these conditions. As a result, five of the Board trustees Herman, Lee, O'Hern, Hughes, and Crapelli sought to review pertinent documents relating to the creation of the new school building before they would consider granting approval for the Commerce Bank loan guarantee resolution. This demand cre ated a split in the Board, with four trustees Stasi, Horvath, Lock, and Jackson favoring immediate approval of the required resolution. On September 1, 2004, the Board voted five to four against approving the required resolution. Thereafter, Herman, Lee, O'Hern, Hughes, and Crapelli continued to press for review of the pertinent documents. This investigation ultimately disclosed the $600,000 loan from Short Term Money.

The Foundation borrowed another $200,000 from Short Term Money on September 24, 2004, which it also paid to Patock Construction. Neither of the loans from Short Term Money were discussed at a public Board meeting or authorized or approved by the Board. As of September 27, 2004, Patock Construction had been paid $1,690,050 none of which was paid by the School Cor poration or authorized by the Board, nor did the Foundation request such payment. It was not until October 13, 2004, that Stasi informed the Board that the Foundation had borrowed an additional $200,000 from Short Term Money.

On October 27, 2004, Frank J. Patock, apparently at the invi tation of Stasi, attended a Board meeting to discuss his outstanding invoice and provide support to the Commerce Bank request for a loan guarantee. The attorney for the School Cor poration and the Foundation also attended this meeting and con firmed that Short Term Money was due $800,000 and urged adoption of a resolution guaranteeing the Commerce Bank loan. Neither Patock nor the attorney sought payment of the sums due them directly from the School Corporation. The four trustees urging adoption of such a resolution steadfastly maintained that the sums due Patock Construction and Short Term Money were obligations of the Foundation, not the School Corporation.

On November 15, 2004, Patock wrote to the Board advising it that the balance due on the contract was $536,315 and requesting prompt payment. On November 16, 2004, the Board voted to adopt a resolution appointing special counsel to the Board. At the December 8, 2004, regular Board meeting, O'Hern made a motion regarding the election of Crapelli and Hughes, because the Department of Education (DOE) had questioned why there was no recorded majority vote approving them as trustees in May 2004. Stasi, Horvath, Lock, and Jackson voted against their appointment, which left the Board with seven members. Thereafter, Jackson moved the resolution guaranteeing the Commerce Bank loan, sec onded by Horvath, and the resolution passed by a vote of four to three.

This triggered a written request in December 2004 by Her man, Lee, O'Hern, Hughes, and Crapelli that the OCI investigate the transactions that created the new school campus. On Febru ary 1 and 2, 2005, the OCI conducted a review of bank records, payments, contracts, board minutes, loan documentation, and other docu ments to determine whether there was any truth to the allega tions. The OCI also interviewed the Board president and treasurer and issued a report of its examination in March 2005.

In its report, the OCI found the School Corporation had an EDA loan with a February 1, 2005, balance of $2,433,051 and owned property appraised on May 29, 2003, at $3.7 million. It found that the Foundation had unsecured debt of $800,000 to Short Term Money and outstanding bills in the amount of $706,112 for work performed on the School buildings, making its total debt $1,506,112. The combined debt of the School Corporation and the Foundation was $3,939,163, which was in excess of the value of the property.

Although the Board president and treasurer claimed that the Foundation debt was not an obligation of, and did not affect, the School Corporation, the OCI concluded that the Foundation was not a truly autonomous body because "the school and the Foundation are so intertwined as to be the same entity." As a result, it found that the Foundation's debt belonged to the School Corporation as well as the Foundation, reasoning that "[s]ince the charter school is the only member of the Founda tion, the two entities are equally responsible." The OCI con cluded that the School Corporation had thus violated N.J.A.C. 6A:23-9.6 by having debt in excess of the appraised value of the property securing the debt. The OCI also found that the original budget was $3 million; the actual costs were $4,546,062; $2,769,545 of the actual costs should have been bid in accordance with N.J.S.A. 18A:18A-4(a); and the work was done for the school and the school assumed the debt.

The OCI reviewed the Board's minutes from December 2002 to January 2005 and determined that "there were no board resolutions for purchase of the property, to approve contracts or to apply for the EDA loan assumed by the charter school." Despite Stasi's representation to the EDA that the Board approved the loan at its October 21, 2003, meeting, there was no such meeting, nor was there any Board approval for assumption of the $2.5 million EDA loan. Because the School Corporation was liable for the debt, the OCI concluded that it had violated N.J.S.A. 18A:18A-5 and N.J.S.A. 18A:19-2. The OCI also found serious con flicts of interest regarding the role of the attorney for the School Corporation and the Foundation.

The OCI summarized its findings as follows:

The charter school and the Foundation are in essence the same organization. Since the school is the only member of the Founda tion, what the Foundation does affects the school. The Foundation has incurred massive debt through a poorly managed building pro ject. The bidding laws that are mandatory for public schools were ignored and the result is debt in excess of the value of the property. The Foundation is operating inde pendently and incurring debt for the charter school board of trustees expecting the char ter school to be responsible for what it did not approve.

The Board President [Stasi] seems to be acting independently of the rest of the board. The certification indicating that the board approved the EDA loan at the Octo ber 20, 2003 board meeting was not true, as the board did not have a meeting on that date. There were no resolutions approving this debt.

The OCI required the School Corporation to refund State Aid in the amount of $1,001,620.44 and to establish and implement procedures to ensure compliance with N.J.S.A. 18A:18A-4(a), barred it from increasing its debt, and required it to immedi ately institute policies to ensure that the Board approve all expenditures and debt. The OCI also required that Board mem bers be kept informed regarding all Foundation actions for the School and that the Board vote using Board resolutions for all expenditures affecting the school. The Board was required to review the OCI report at its next regularly scheduled public Board meeting and either develop a corrective action plan or file an appeal of the findings.

In late June 2005, Stasi was not reappointed to the Board for another three-year term and he left the Board shortly there after. In August 2005 all members of the Foundation resigned from their positions. Also that month, Patock sued the Board and the Foundation for $491,315, the balance due on its contract with the Foundation on theories of unjust enrichment and quantum meruit. When Short Term Money filed a similar action on similar legal theories in April 2006, the total amount of debt in litigation grew to about $1,291,315.

While the litigation was pending, School Corporation repre sentatives met with the DOE on June 14, 2006, to explore the possibility of settling the penalty assessed by the OCI. On August 14, 2006, the DOE agreed to reduce the $1,001,620.44 pen alty to $55,000 and on September 14, 2006, the DOE Division of Finance proposed a payment plan consisting of $2,750 quarterly payments to be completed by April 15, 2011.

In the meantime, the trial judge assigned to the Patock case required mediation and a retired judge was selected as the mediator. The judge suggested to the Board that its defenses were weak and that Patock was entitled to be paid, and subse quently special counsel to the Board could not give any assurances of a significant likelihood of success on its defenses to either the Patock or Short Term Money suits. Bruce Whittaker, the Board's president in 2007, averred that, in light of the slim chances of prevailing in court and the resentment the situation was causing with benefactors, he thought a settle ment was the best way to ameliorate the situation. The settle ment made it possible "to initiate discussions with Commerce Bank . . . about refinancing to absorb the Patock and Short Term Money debts into a manageable long-term mortgage[, which] could not begin until the litigation was resolved."

Settlements of both lawsuits were successfully negotiated, absolving the School Corporation from paying any interest or other costs if the principal was paid by a date certain. The settlement documents were drawn up and approved by the Board by a seven-to-one vote at a public meeting on September 6, 2007. Appellants then filed their petition of appeal and motion for emergent relief with the Commissioner on November 6, 2007.

On November 13, 2007, an Administrative Law Judge (ALJ) heard oral argument on the emergent application from petitioners and the Board. The Board opposed the application. The ALJ issued a decision denying emergent relief on November 20, 2007, finding that petitioners had failed to show a likelihood of suc cess on the merits. He explained that "petitioners must show that the [Board's] settlement decision is likely to be seen as arbitrary. This has not been done." He did not at that time address the request for summary disposition. On December 18, 2007, the Commissioner concurred with the ALJ's decision and adopted it as a final decision denying emergent relief.

On December 21, 2007, the Board filed an answer to the petition and one month later filed a cross-motion and supporting brief seeking a summary judgment or a dismissal for lack of jurisdiction. On February 15, 2008, the ALJ issued an initial decision granting the Board's cross-motion for summary disposi tion, mainly for the reasons stated in his earlier decision denying emergent relief, without deciding the jurisdictional issue. He added that the Board enjoys "wide discretion in the conduct of school affairs and the settlement falls well within that exercise," citing Thomas v. Board of Education of Morris, 89 N.J. Super. 327 (App. Div. 1965), aff'd, 46 N.J. 581 (1966), and Kopera v. Board of Education of West Orange, 60 N.J. Super. 288 (App. Div. 1960). On May 15, 2008, the Assistant Commissioner of Education again adopted the ALJ's initial decision, noting that the Board's resolution settled "claims against which they had only poor defenses, according to their lawyers and a mediat ing judge. In so doing, they avoided further litigation costs, were forgiven a significant amount of interest payments, kept judgment creditors away and won back former benefactors. Such action was neither arbitrary nor unreasonable."

Petitioners filed a motion for reconsideration by the Com missioner on May 28, 2008. The Commissioner denied the motion on June 6, 2008. Petitioners then filed a notice of appeal with the New Jersey State Board of Education on June 15, 2008; how ever, on July 8, 2008, the Commissioner informed them that the State Board no longer heard appeals of agency decisions under its aegis and that the proper avenue of appeal lay with the Appellate Division. Petitioners filed their notice of appeal with us on August 21, 2008.

As best we can understand the confusing m lange of argu ments made by petitioners, they urge that we should employ a summary-judgment model of review in this matter. They contend that the Commissioner erred in reviewing the matter for an abuse of discretion by the Board in approving the settlement rather than determining whether the Board's actions were ultra vires as a matter of law. They urge that Borough of Fanwood v. Rocco, 33 N.J. 404, 414-415 (1960), did not permit the Commissioner to employ dis cretion in deciding the issues presented in their petition on appeal. As a consequence, they argue that the Commissioner did not fulfill the duty to decide legal controversies and disputes under the school laws as required by N.J.A.C. 6A:2-1.2(a)(1). Lastly, petitioners assert that the action of the Board in set tling the actions against the School Corporation "is a de facto and de jure ratification after the fact of prior unlawful and ultra vires actions and, as such, is itself ultra vires and null and void."

The Commissioner, although not filing a merits brief, argues that the scope of review is whether the agency action was "arbitrary or capricious, that it lacks support in the record, or that it violates legislative policies expressed or implied in the statutory scheme administered by the agency," citing Dore v. Board of Education of Bedminster, 185 N.J. Super. 447, 453 (App. Div. 1982).

The Board agrees with the Commissioner on the scope of review and argues that the "central issue in the case is whether [the] Board . . . abused its discretion in approving the September 6, 2007 settlement agreement," submitting that it did not. It argues that the Commissioner applied the correct legal standards when she determined that the Board did not abuse its discretion in settling the lawsuits, which it was legally authorized to do by virtue of N.J.S.A. 18A:11-2. Lastly, the Board contends that its September 6, 2007, approval of the settlements was not a ratification of prior illegal acts, but the resolution of claims made against it for improvements to its property and loans made to pay for some of those improvements.

Although we ordinarily would determine the scope of review first, the true nature of the Board's action on September 6, 2007, will clarify the propriety of our determination of that issue. Without a doubt, the actions of Stasi and possibly others were not authorized by the Board; the OCI found that the Board attorney had a conflict of interest; and, arguably, Patock ought to have known that public bidding was required before a contract could be awarded for the construction work on a school.

Additionally, it is undisputed that the OCI made findings adverse to the School Corporation, resulting in the imposition of a significant penalty. The OCI specifically found that Stasi was "acting independently" of the Board. It also found that the debts of the Foundation also belonged to the School Corporation, triggering violations of N.J.S.A. 18A:18A-4(a), N.J.S.A. 18A:18A-5(a), N.J.S.A. 18A:19-2, and N.J.A.C. 6A:23-9.6. The Board did not appeal these violations or the fact-finding on which they were based, giving the final agency action preclusive effect. Hinfey v. Matawan Reg'l Bd. of Educ., 77 N.J. 514, 532 (1978).

As of September 6, 2007, the School Corporation was a direct defendant in the Patock and Short Term Money lawsuits at risk of an adverse judgment for the principal sums plus interest and costs of suit. At the very least, the School Corporation became the beneficiary of the Patock and Short Term Money obli gations that the Foundation incurred for school construction when it unwittingly acquired the property on which all of the improvements were being made and then did not subsequently dis avow the transfer of title and reconvey the property to the Foundation once the Board learned of Stasi's improper actions. Cf. Messeka Sheet Metal Co. v. Hodder, 368 N.J. Super. 116, 118, 131 (App. Div. 2004) (subcontractor could recover against homeowner despite the fact homeowner contracted with a general contractor).

Indeed, Patock and Short Term Money alleged causes of action based on unjust enrichment and quantum meruit. Such causes of action have long been recognized. E.g., St. Barnabas Med. Ctr. v. County of Essex, 111 N.J. 67, 79-80 (1988); Summer Cottagers' Ass'n of Cape May v. City of Cape May, 19 N.J. 493, 505-506 (1955). Neither cause of action was based on the allegedly improper actions of Stasi vis- -vis the Board and the School Corporation. In fact, those supposedly improper actions were limited to the transaction respecting transfer of the property to the School Corporation, its liability for the EDA loan, nei ther of which petitioners ever sought to set aside, and the alleged guarantee of the $600,000 promissory note in favor of Short Term Money, which they do dispute here, but was not the sole basis for the School Corporation's liability to Short Term Money. As such, the School Corporation was clearly exposed to an adverse judgment.

Even more to the point, the OCI found that the School Cor poration and the Foundation were "so intertwined as to be the same entity," making it directly liable for the debts of the Foundation, even though some of Stasi's actions were improper as to the School Corporation, because those improper actions did not create the debts of the Foundation. Both Patock and Short Term Money might have relied on this final agency decision to collat erally estop the School Corporation from disputing its direct liability for the money due them without relying on theories of unjust enrichment and quantum meruit. Kortenhaus v. Eli Lilly & Co., 228 N.J. Super. 162, 164 (App. Div. 1988). In Kortenhaus, we observed,

Collateral estoppel is a branch of the broader law of res judicata which bars relitigation of issues previously litigated and determined adversely to the party against whom the doctrine is asserted. It is said to have as its purposes the protec tion of litigants from relitigating identi cal issues and the promotion of judicial economy. It is primarily a rule of effi ciency. When used by a defendant to bar a claim plaintiff has previously litigated and lost against a different defendant, it is referred to as defensive collateral estop pel. When used to bar a defendant from asserting a defense previously litigated and lost against a different plaintiff, it is referred to as offensive collateral estoppel.

[Ibid. (citations omitted).]

Thus, what the School Corporation faced was a lawsuit where, irrespective of the improper action of Stasi in executing the contract for the sale of the property, accepting liability for the EDA loan, and purportedly guaranteeing the $600,000 note, it was exposed to claims that could be enforced directly against the School Corporation. This is wholly different from the situation in Bauer v. City of Newark, 7 N.J. 426, 434-35 (1951), cited by petitioners for the proposi tion that corporations are not liable for the improper action of their officials and board members.

In Bauer, after a partial payment, the plaintiff sued to recover the balance due for expert economic services it provided after it was engaged to do so by the mayor and corporation counsel for the city. Id. at 429. The city's motion to dismiss was granted on the ground that the mayor and corporation counsel did not have the authority to obligate the city to pay for such services and the city did not ratify the employment. Id. at 429-30. The Supreme Court found that the contract was ultra vires and void by virtue of N.J.S.A. 40:2-2 (repealed by L. 1960, c. 169, 2), which at that time prohibited any municipal officer from entering into any contract in the absence of an appropriation and provided that any such contract was null and void. Bauer, supra, 7 N.J. at 432-33. As such, the Court held that no implied promise to pay would arise from the acceptance of the service nor could there be any recovery in quantum meruit. Id. at 435.

N.J.S.A. 40:2-29, of course, has no application here and we have found no current parallel provision in the school laws. In any event, petitioners have not established that the contract between the Foundation and Patock was the result of any ultra vires action by anyone at the Foundation. Similarly, they have not established that Hertz acted ultra vires when she signed the promissory notes in favor of Short Term Money. As such, these were valid obligations of the Foundation that were not null or void. As a consequence, on September 6, 2007, the Board was required to decide whether to risk an adverse judgment in light of the OCI's final determination or to settle the direct claims made against it. In making that decision, the Board took no action that can reasonably be construed to be a ratification of any ultra vires action.

This brings us to the scope of review. As we explained in Borough of Fanwood v. Rocco, 59 N.J. Super. 306, 315-19 (App. Div.), aff'd, 33 N.J. 404 (1960), not every agency decision is entitled to the same degree of deference, or any deference at all. When an agency head applies a purely legal standard to decide a question of law, we apply the same standard of review as we apply to legal determinations by trial courts. Id. at 315. When an agency head decides a disputed question of fact, if "the evidence is not there, no amount of 'discretion' can supply the deficiency" and we reverse. Id. at 317. The "third and last of the classes into which we have chosen to divide the cases for the purpose of this analysis is that in which the appeal to the [agency head] is from action taken by the local agency which involved the local agency's discretion." Ibid. In this latter class of cases,

When there is an appeal to this court from the action of the [agency head] in cases involving the exercise of municipal discretion, we take into consideration and give due weight to the fact that the [agency head] has special expertness and broad experience in this general field. But our obeisance to that expertness and experience is not equally deep in all cases. It depends on the issues in each case. If the case is one which he is plainly better equipped than we are to decide, because of his expertness, knowledge and experience, we naturally defer to his judgment. In some cases that deference would be almost to the point of considering his judgment conclu sive. On the other hand, where the issues are such that we can evaluate them as well as he, we do not defer to his expertness to the same degree.

[Id. at 319 (citations omitted).]

Here, the Commissioner acted in a quasi-judicial capacity in deciding the summary issues. Id. at 315; N.J.S.A. 18A:6-9. As such, this case falls within the third class we identified in Fanwood.

The School Corporation was granted the power to sue and be sued to the same extent as a public entity, N.J.S.A. 18A:36A-6(b), to receive and disburse monies for school purposes, N.J.S.A. 18A:36A-6(d), and to have such other powers as are nec essary to fulfill its charter consistent with the requirements of the Commissioner, N.J.S.A. 18A:36A-6(h). The Board had "the authority to decide matters related to the operations of the school including budgeting . . . , subject to the school's char ter." N.J.S.A. 18A:36A-14(a). The Board thus had the discre tionary authority to decide whether to settle the pending law suits. Cf. Bd. of Educ. of Garfield v. State Bd. of Educ., 130 N.J.L. 388, 392 (Sup. Ct. 1943) (holding that a board of educa tion "may and should, if it can possibly do so, avoid the costs and expenses of useless litigation"). Thus, the legal standard the Commissioner correctly utilized was a review for abuse of discretion. See Kopera, supra, 60 N.J. Super. at 294 (discretionary action of local board "may not be upset unless patently arbitrary, without rational basis or induced by improper motives").

In conducting that review, the Commissioner employed spe cial expertise in the area of public schools generally and charter schools in particular. This is so because the Commis sioner is charged with the responsibility to supervise "all schools of the state receiving support or aid from state appro priations." N.J.S.A. 18A:4-23. The Commissioner must "inquire into and ascertain the thoroughness and efficiency of operation of any of the schools of the public school system of the State." N.J.S.A. 18A:4-24. These clearly are matters involving signifi cant financial expertise, which the Commissioner exercised in reviewing the Board's settlement of the pending lawsuits. We therefore deem it appropriate to defer to that expertise here.

It is well-settled that the "'judicial capacity to review administrative actions is severely limited.'" In re Morris Sch. Dist. Bd. of Educ., 310 N.J. Super. 332, 340 (App. Div.) (quot ing In re Musick, 143 N.J. 206, 216 (1996)), certif. denied, 156 N.J. 407 (1998). This court will not reverse an agency's deci sion unless it "'it is clearly demonstrated to be arbitrary or capricious,'" Edison Twp. Bd. of Educ. v. Edison Twp. Prin cipals & Supervisors Ass'n, 304 N.J. Super. 459, 464 (App. Div. 1997) (quoting In re Hunterdon County Bd. of Chosen Freeholders, 116 N.J. 322, 329 (1989)), that is, an abuse of discretion. In other words, the scope of review "is limited to a determination of whether the Board's decision is 'unreasonable, unsupported by the record or violative of the legislative will.'" D.L. ex rel. T.L. & K.L. v. Bd. of Educ. of Princeton Reg'l Sch. Dist., 366 N.J. Super. 269, 273 (App. Div. 2004) (quoting Capodilupo v. Bd. of Educ. of W. Orange, 218 N.J. Super. 510, 515 (App. Div.), certif. denied, 109 N.J. 514 (1987)). The burden of demonstrating that the agency's action was arbitrary, capricious or unreasonable rests upon the person challenging the administrative action. McGowan v. N.J. State Parole Bd., 347 N.J. Super. 544, 563 (App. Div. 2002) (citing Barone v. Dep't of Human Servs., Div. of Med. Asst. & Health Servs., 210 N.J. Super. 276, 285 (App. Div. 1986), aff'd, 107 N.J. 355 (1987)).

Here, the Commissioner's decision to approve the settlement and the Board's decision to settle were supported by substantial evidence and were not an abuse of discretion. That is, the decisions were not arbitrary, capricious or unreasonable and were sup ported by substantial evidence. The Board president at the time considered the very real possibility that continued litigation against Patock and Short Term Money might well foment discontent among benefactors and bankrupt the school. After attending court-ordered mediation and consulting with counsel, he "was unable to obtain any assurances that the Charter School had a significant likelihood of success" in the pending litigation. He concluded that settling was the best option for the school, as it would allow it to restructure creditor debt, avoid further attorney's fees, and pursue a loan from Commerce Bank. This explanation was reasonable and more than supports the Board's decision to settle. The Commissioner's decision to approve the Board's exercise of discretion is entitled to our deference due to the Commissioner's expertise with the impact of financial decisions upon the operation of public and charter schools.

As the ALJ aptly explained:

Petitioners characterize the Trustees' action as ratification and then rely on principles that forbid governmental units from embracing illegal or ultra vires con duct, to conclude that the Board may not settle the Patock/Short-Term Money claims. Yet, the matter does not rest alone on prior errors and misdeeds, but upon the totality of circumstances before the Trustees now. Petitioners would have the Charter School reject a significant body of legal opinion and continue to defend these suits on the strength of their understanding of the law. As interest, costs and attorney's fees could be substantial[,] the Trustees were unwilling to bear further risk.

We are satisfied in these circumstances that we may not "'sub stitute [our] own judgment for the [Board's or the Commis sioner's] even though [we] might have reached a different result.'" Thurbur v. City of Burlington, 191 N.J. 487, 502 (2007) (quoting Greenwood v. State Police Training Ctr., 127 N.J. 500, 513 (1992)).

Affirmed.

 

The New Jersey Department of Education, Office of Charter Schools, was originally a named respondent but has been dismissed by agreement of the parties.

N.J.S.A. 18A:6-9 provides in pertinent part, "The Commissioner shall have jurisdiction to hear and determine . . . all controversies and disputes arising under the school laws."

This figure is based on the $1,853,610 construction contract price plus the $300,000 overage of which the Board was apprised on October 8, 2003, less the $549,000 held in the Foundation account at Commerce Bank. Petitioners alleged that the net debt was $800,000 in excess of the Commerce Bank loan, but did not provide the basis for their calculations. The discrepancy is not material to the issues on appeal.

The New Jersey Department of Education Office of Compliance Investigation (OCI) subsequently determined that there was no such meeting and no Board approval of the assumption of the EDA loan.

Short Term Money was formed and managed by the attorney for the School Corporation and the Foundation.

This note was given to the Board on September 28, 2004. On November 3, 2006, the attorney for the School Corporation and the Foundation signed a certification to which he attached as an exhibit a copy of the May 25, 2004, note. The following language had been added to the note: "The obligation set forth above is hereby guaranteed by the Red Bank Charter School, Inc." The guarantee was executed by Stasi as president of the School Corporation. Additionally, the date on this copy of the note was handwritten rather than typed and the signatures of Hertz are not identical. The Board never authorized Stasi to give this guarantee.

O'Hern, Crapelli, and Hughes filed a petition for appeal and on April 19, 2005, the Commissioner ordered Crapelli and Hughes reinstated based on their appointment in May 2004, despite the absence of a recorded majority vote at that time because any defect in the election process had been cured by the Board's recorded vote to accept the Annual Report on July 14, 2004.

This statute provides in pertinent part, "Any contract, the amount of which exceeds the bid threshold, shall be negotiated and awarded by the board of education by resolution at a public meeting . . . ."

"No claim or demand against a school district shall be paid by the treasurer unless it is authorized by law and the rules of the board of education of the district, is fully itemized and verified, has been duly audited as required by law, has been presented to, and approved by, the board at a meeting thereof, or presented to, and approved by, a person designated by the board for that purpose, and the amount required to pay the same is available for said purpose."

This appeal is timely pursuant to L. 2008, c. 36, 1b (now codified at N.J.S.A. 18A:6-9.1(b)), which provides, "Any appeal of the commissioner's decision to the Appellate Division of the Superior Court shall be filed within 45 days of the effective date of this act," i.e., July 7, 2008.

(continued)

(continued)

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A-6216-07T3

June 23, 2009