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Housing Authority of the City of New Brunswick v. Suydam Investors

July 10, 2003

THE HOUSING AUTHORITY OF THE CITY OF NEW BRUNSWICK, ACTING AS REDEVELOPMENT AGENCY, PLAINTIFF-RESPONDENT AND CROSS-APPELLANT,
v.
SUYDAM INVESTORS, L.L.C., DEFENDANT-APPELLANT AND CROSS-RESPONDENT,
AND TINTON FALLS STATE BANK, THE CITY OF NEW BRUNSWICK, A MUNICIPAL CORPORATION, GTL INVESTMENTS, L.P., AMERICAN BANKERS LIFE ASSURANCE COMPANY OF FLORIDA, JOHN DOES 1-10, PUBLIC SERVICE ELECTRIC & GAS COMPANY AND JOHN DOES, 11-20, DEFENDANTS.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 355 N.J. Super. 530 (2002).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

[NOTE: This is a companion case to New Jersey Transit Corporation v. Cat in the Hat, LLC (A-42-02)]

The issue before the Court is the extent to which evidence of environmental contamination is admissible at the property valuation stage of a condemnation action. A secondary issue is whether a condemnor is entitled to an order that requires a portion of the estimated fair market value to be held on deposit until final resolution of the environmental claims.

Suydam Investors, LLC (Suydam) is the owner of three parcels of land located on George Street and Remsen Avenue in downtown New Brunswick. Housing Authority of the City of New Brunswick (Authority) sought by eminent domain to acquire the Suydam property for a redevelopment project known as the "Lower Ge orge Street Redevelopment Area" in New Brunswick. In March 1999, the Authority, through its developer, retained the firm of Adler Geoscience, Inc. (Adler) to provide environmental engineering services in connection with the redevelopment project. Adler inspected the Suydam property and subsequently prepared a Phase I environmental site assessment. The report revealed that underground gasoline tanks had been maintained on the property; automobile body repair and service businesses that typically used hazardous substances had been conducted on the property; a spill of hazardous substances had occurred on an adjoining site; and the property housed structures that could contain asbestos and lead paint. The Phase I report recommended that further investigation be conducted at the site.

In January 2000, without the benefit of the Phase I report and before filing its condemnation action, the Authority offered Suydam $972,000 for the property based on it's expert appraiser's evaluation. The appraiser concluded that the highest and best use of the property would be to demolish the existing improvements and utilize the site as zoned for commercial and residential purposes. He noted that in valuing the property, he did not consider the existence of potentially hazardous material that may or may not be present on the property. Accordingly, the Authority informed Suydam that its offer was contingent on the satisfactory environmental status of the property, as the appraisal did not take into account any environmental problems that could affect fair market value. Suydam made a counter offer of approximately $2,500,000. In response to Suydam's request for environmental studies, the Authority provided a copy of the Phase I report.

Following unsuccessful attempts to negotiate a fair value price for the property, the Authority, on March 22, 2000, filed a verified complaint, an order to show cause, and a declaration of taking. The Authority deposited $972,000 in court pursuant to statute. Suydam did not oppose the taking and, in May 2000, the trial court entered a final judgment declaring that the Authority had the power to condemn the property and appointing three commissioners to determine its fair market value. In July 2000, the trial court granted Suydam's unopposed motion to withdraw the $972,000 deposited in court.

From October 2000 through March 2001, Adler performed Phase II of its environmental assessment of the Suydam property. The report indicated, among other things, the presence of asbestos, underground storage tanks, and lead-based paint and provided cost estimates for asbestos abatement and storage tank removal. Based on that report, the Authority moved for leave to amend its complaint to allege the presence of environmental contamination affecting the value of the property; to reserve, through a reservation of rights clause, its right to recover environmental cleanup costs; and to stay the commissioners' hearing for no longer than one year pending final resolution of all environmental liability and cost issues.

Suydam opposed the motion, claiming that the Authority withheld "critical" information concerning the alleged environmental contamination on its property. Suydam argued that the grant of the Authority's motion would result in an unfair and prejudicial delay in the determination of just compensation for the taking.

The trial court granted the Authority's motion for leave to file an amended complaint. The court also granted a six-month stay to enable the Authority to try to complete its environmental investigations and initiate any actions necessary to address all issues relating to environmental liability and remediation costs. The court further ordered that, if the environmental issues were not fully adjudicated within six months, the commissioners are to determine the value of the property as if clean and any litigation regarding the environmental issues would be severed from the condemnation action. The court also ordered that any award exceeding the $972,000 Suydam received as just compensation should be deposited in court pending final resolution of the environmental issues.

Suydam appealed. The Appellate Division held that: 1) environmental contamination is relevant to a determination of the fair market value of a condemnee's property; 2) a court may not order a portion of the condemnation award to be held on deposit to satisfy the condemnor's environmental claims because that would constitute an interdicted prejudgment attachment; 3) the Authority did not breach its duty to engage in bona fide negotiations; and 4) the doctrines of waiver and judicial estoppel did not preclude the Authority from asserting that environmental contamination adversely affected the fair market value of the Suydam property.

The Supreme Court granted certification.

HELD: Contaminated property that is the subject of condemnation is to be valued as if it has been remediated and the condemnor should reserve the right to maintain a separate cost-recovery action to obtain remediation/cleanup costs. The value of the condemnation award should be deposited in a trust-escrow account with the court and the condemnor may seek an order requiring a portion of that award to be set aside to satisfy the condemnee's clean-up and transfer obligations.

1. The Eminent Domain Act, the federal and State Constitutions, and environmental laws such as the Spill Act and CERCLA all come into play when a property to be condemned is or may be environmentally contaminated. Here, it is the interplay between the Eminent Domain Act and the Spill Act that is at the forefront. Under the Eminent Domain Act, private property shall not be taken for public use without just compensation, which is the fair market value of the property at the time of the taking. Under the Spill Act, governmental entities that acquire property by eminent domain have immunity from costs associated with the cleanup and removal of hazardous substances that either began or occurred prior to the transfer of title or were acquired for redevelopment purposes. (Pp. 13-22)

2. Jurisdictions throughout the nation are divided over the issue of whether evidence of contamination should be a consideration in assessing the fair market value of property in a condemnation proceeding. The pivotal concern is the reality of a condemnee's liability under the Spill Act and similar statutes. When property is devalued for contamination in condemnation, landowners/condemnees first receive discounted compensation in the condemnation proceeding and then must pay for the full cleanup costs, thereby suffering a "double-take." The condemnor, on the other hand, receives a windfall by obtaining the property in a remediated state at the condemnee's cost while paying a discounted price due to the contamination. This is fundamentally unfair. Thus, valuing the property as if remediated assures just compensation insofar as it relates to the "highest and best use." (Pp. 22-27)

3. The treatment of these disparate issues in their appropriate forums is an important factor. Property valuation is something with which commissioners are experienced. Thus, omitting the complications of contamination from the valuation process advances the speed and efficiency of eminent domain proceedings. Addressing the environmental issues in the cost-recovery proceeding makes the most sense because that proceeding allows third-party claims against insurers, title companies, and prior owners, none of whom have a place in a condemnation proceeding. More importantly, the Spill Act defenses are available in the cost-recovery process, not in a condemnation proceeding. Thus, where property is contaminated, the condemnor should appraise the property as if remediated and deposit that amount into a trust-escrow account with the court. In addition, the condemnor should reserve its right to initiate a separate action to recover remediation costs. (Pp. 27-30)

4. Because the Court holds that the condemnation valuation scheme excludes evidence of contamination, and that the property should be valued as if remediated, placing a limit on what the condemnee may withdraw does not constitute prejudgment attachment. The "trust-escrow approach" is a well-established methodology that has received widespread recognition. Thus, withholding a portion of the condemnation award sufficient to cover cleanup costs is not an attachment and there is no unfairness to the condemnee. (Pp. 30-33)

5. There is no factual basis for finding that the Authority's conduct violated its obligation to engage in good faith negotiations. (Pp. 33-34)

Judgment of the Appellate Division is AFFIRMED IN PART and REVERSED IN PART insofar as it declared that evidence of contamination is admissible in valuing condemned property and interdicted the trust-escrow approach. The matter is REMANDED to the trial court for application of the valuation methodology established herein.

CHIEF JUSTICE PORITZ and JUSTICES COLEMAN, VERNIERO, LaVECCHIA, and ZAZZALI join in JUSTICE LONG'S opinion. JUSTICE ALBIN did not participate.

The opinion of the court was delivered by: Long, J.

Argued April 29, 2003

Eminent domain is the awesome power of the sovereign to take property for public use without the owner's consent. 1 Nichols on Eminent Domain § 1.11, at 1-7 (Sackman ed. 3d ed. 2002). Although that power has been exercised in one form or another since Roman times, 1 Nichols, supra, § 1.12, at 1-14 (citing Annals of Tacitus, Bk. I, p. 75), the actual term "eminent domain" was not coined until 1625 when Hugo Grotius described the power this way:

[T]he property of subjects is under the eminent domain of the state, so that the state or he who acts for it may use and even alienate and destroy such property, not only in the case of extreme necessity, in which even private persons have a right over the property of others, but for ends of public utility, to which ends those who founded civil society must be supposed to have intended that private ends should give way. But it is to be added that when this is done the state is bound to make good the loss to those who lose their property.

[Id. at 1-15 (citing Hugo Grotius, De Jure Belli et Pacis).]

In general, eminent domain springs from two separate legal doctrines. The right of the State to take private property for the public good arises out of the necessity of government, whereas the obligation to make "just" compensation stands upon the natural rights of the individual guaranteed as a constitutional imperative. 1 Nichols, supra, § 1.11, at 1-10 (citing 1 Thayer's Cases on Constitutional Law 953); U.S. Const. amend. V; N.J. Const. art. 1, ¶ 20. There is an inherent tension between those notions in every condemnation case. Nowhere is that tension more obvious than at the point at which contaminated property is taken by condemnation.

In this appeal, we are called on to address several questions arising out of the intersection of eminent domain and environmental law. Primary among them is the extent to which evidence of environmental contamination is admissible at the valuation stage of a condemnation action to determine the fair market value of the property. A secondary issue is whether a condemnor is entitled to an order that requires a portion of the estimated value to be held on deposit until final resolution of the environmental claims against the condemnee. We hold that contaminated property that is the subject of condemnation is to be valued as if it has been remediated and that the condemnor may seek an order requiring a portion of the award to be set aside to satisfy the condemnee's clean-up and transfer obligations.

I.

Defendant Suydam Investors, LLC (Suydam) is the owner of three parcels of land located on George Street and Remsen Avenue in downtown New Brunswick. Plaintiff Housing Authority of the City of New Brunswick (Authority) sought to acquire Suydam's property for a redevelopment project as part of the "Lower George Street Redevelopment Area" in New Brunswick. The parcels at issue can be described as follows: Fifteen (15) Remsen Avenue is the site of a 2.5 story dwelling that houses two residential apartments and a detached three-car garage. Two hundred forty-four to two hundred forty-six (244-246) George Street is the site of a one-story building that houses four commercial retail units. Two hundred fifty-two to two hundred fifty-four (252-254) George Street is the site of a three-story building that houses two commercial units and eight residential apartments. The Authority intends to construct approximately sixty-one residential rental units and associated commercial units on the property.

In March 1999, the Authority, through its developer, The Community Builders, Inc. (Developer), retained the firm of Adler Geoscience, Inc. (Adler) to provide environmental engineering services in connection with the redevelopment project. Adler inspected the property and subsequently prepared a Phase I environmental site assessment.*fn1 The Phase I report revealed that underground gasoline tanks had been maintained on the property; automobile body repair and services businesses that typically use hazardous substances had been conducted on the property; a spill of hazardous substances had occurred on an adjoining site; and the property housed structures that could contain asbestos and lead-based paint. The Phase I report recommended that "further investigation be conducted at the site." Apparently Adler sent the Phase I report to the Developer but not to the Authority.

In January 2000, without that report and before filing its condemnation action, the Authority offered Suydam $972,000 for the property based on an expert appraiser's valuation. In order to comply with its statutory requirement the Authority had invited Suydam to accompany the appraiser, Jerome T. Gall, during his inspection of the property but Suydam did not do so. Gall employed a sales comparison approach and a capitalized income approach in valuing the property. Gall concluded that the highest and best use of the properties would be to demolish the existing improvements and utilize the site as zoned for commercial and residential purposes. It was Gall's opinion that the land value exceeded the total value of the property in its existing use and that the present use of the property was an interim use. He stated that, in valuing the property, he did not consider "the existence of potentially hazardous material used in the construction or maintenance of the building, such as the presence of toxic waste, which may or may not be present on the property." Accordingly, the Authority informed Suydam that its offer was "contingent on the satisfactory environmental status of the property, as the appraisal does not take into account any environmental problems that could affect value."

Suydam made a counter offer of approximately $2,500,000. Suydam also requested the Authority to provide "any environmental studies which may have been performed by [the Authority] or any parties working in conjunction with or on behalf of [the Authority] with regard to the [subject] property[.]" In response, although the Authority for some reason indicated that it had "neither obtained nor authorized any other appraisals, opinions of value, or environmental studies of the subject property" except the appraisal performed by Jerome Gall, it provided Suydam with a copy of the Phase I report which by that time, it had obtained.

After several unsuccessful attempts to negotiate an agreement regarding the property's value, the Authority filed a verified complaint, an order to show cause, and a declaration of taking on March 22, 2000. The complaint did not allege that the property was contaminated but stated:

17. Plaintiff's offer of $972,000 is based upon the assumption that the Property is not subject to any matters not of record, including any assessment, cleanup requirement, penalty or reversion of title that may be imposed pursuant to any environmental ...


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