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State v. East Shores Inc.

Decided: October 10, 1974.


Muir, J.s.c.


[131 NJSuper Page 302] The essential proposition presented in this action by amended complaint after appointment of a custodial receiver for the water utility of defendant corporation is whether this court should transfer title to certain corporate assets to the receiver, presently outside his control,

for liquidation to provide funds for improvements to the utility to implement a presently unsatisfied Board of Public Utility Commission (PUC) order.

PUC ordered defendant East Shores, Inc. (East Shores) on November 14, 1971, after determining it to be a public utility within its jurisdiction, to provide potable water to its customers and to institute an engineering study to ascertain what work was required to render "safe, adequate, and proper water service," and then, after PUC approval, to proceed and complete such work. The failure of East Shores to comply precipitated this action, which initially constituted an order to specifically perform the PUC order and ultimately resulted on July 12, 1972 in Edward Saputa, president and principal stockholder of East Shores, signing a consent order appointing John H. Dorsey as receiver "to take charge of the property relating to the water operations [to] complete the required construction as ordered by the Public Utilities Commission * * * until the Court is satisfied that the public is receiving potable water and being provided with safe, adequate and proper service * * * thereafter [with] approval by the court, to return the said assets of the company to the Defendant."

The consent order also provided, that defendant, through its president, was to continue operating the utility under the receiver's supervision, and upon failure to do so the receiver or the PUC "shall make application * * * for [a] receivership of all the assets of Defendant Corporation * * *." East Shores was restrained from divesting itself of its nonwater utility-related assets.

Upon the failure of East Shores to continue operation of the water utility and due to the absence of funds to undertake an engineering study, the State applied to amend its complaint to have the other assets of East Shores, consisting essentially of vacant real estate, turned over to the receiver to be sold, with the proceeds being utilized for improvements to the water utility. The application resulted in the inclusion of additional defendants under R. 4:32, necessitated by

the facts that certain lands of East Shores are burdened with deed-covenanted rights of adjoining landowners for recreation and related uses and the refusal of certain landowners to pay the receiver a PUC-established tariff for water use which exceeded deed-covenanted amounts.

The facts are essentially uncontroverted. East Shores, under the aegis of Julius Benedict, its principal stockholder, commenced in the 1940s a subdivision of substantial lands located on the east shore of Lake Hopatcong. A map was prepared, with at least one section being filed in the Morris County Clerk's Office, and lots were then sold using, in most instances, the map as a reference. The deeds of conveyance contained the following covenant:

The [grantee(s)] shall automatically become menber [ sic ] of the Community Club, which shall entitle [them] to the uses and privileges pertinent thereto, said privileges are as follows: Use of the Club House as and when built, beaches, docks, roads, rights of ways to shore front and beach, water for drinking and household use, provided however that the [grantee(s)] shall pay to [East Shores], its successors and assigns, the sum of [various amounts set forth] for the privilege of tapping the water line and a charge yearly, payable on or before the first day of June of each year for community dues. It is understood and agreed that the membership and all privileges pertinent thereto, shall terminate upon change of ownership of the above mentioned premises or upon failure to pay community dues when due.

Some deeds contained the additional provisions:

Community dues not to exceed $50.00 [ sic ] yearly. The [grantees] as members of the Community Club have the exclusive use of the water front in front of [their] lot for the purpose of bathing, boating and recreation, also have the privilege of erecting a solid boat dock not to extend more than 15 feet into the waters of the Lake in front of their lot, 8 feet from the side line. If [grantees] sell to person or persons acceptable to the Community or to [East Shores] in that event transfer of Community privileges will be made by East Shores, Inc. its successors and assigns.

Each deed contained a provision that East Shores, "its successors and assigns reserved a right and easement to contruct,

lay and maintain water pipes and control water supply therein on, under and across the premises conveyed."

The map of the East Shores subdivision designated beach areas with docks and proposed docks, as well as strips of land called "reserve" that are rights of ways to the beach areas from roadways. It also showed a parcel of land to be used for a clubhouse which has never been built.

As the lots were sold off the water supply system developed. Initially, water was supplied from two wells that were interconnected. The wells were abandoned in 1958 due to high iron content and lack of yield, and infiltration beds were installed in Lake Hopatcong. A pumping, treatment and storage system, later discussed, was also installed. The distribution mains and lines were installed across various lots. None was installed in street beds except where crossing from one section of the development to the other was required.

During the 1950s and early 1960s there are no recorded problems with the water system. In 1964 Julius Benedict's widow sold the entire stock of East Shores to Edward Saputa. As part of the transaction a mortgage was given to Josephine Benedict by East Shores in the amount of $36,384.35. The amount, priority and security of that lien are not in issue at this time.

By the late 1960s East Shores had approximately 260 water customers. (Records of the receiver presently show 284 household connections.) Some of the customers were year-round residents while others were just summer residents.

Subsequent to the change in ownership of East Shores problems arose with the quality and distribution of the water. In 1966 the State Board of Health found polluted, contaminated water being distributed by East Shores and ordered improvements made and the "ceasing of distribution of polluted water by July 1, 1966." East Shores failed to make adequate ...

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