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Deron School of New Jersey v. New Jersey Dep't of Education


June 4, 2008


On appeal from a Final Decision of the State Board of Education, Docket No. 6-1/05.

Per curiam.


Submitted May 13, 2008

Before Judges Winkelstein, Yannotti and LeWinn.

The Deron School of New Jersey (Deron or the school), located in Montclair, is a private school for disabled students. Pursuant to regulations promulgated by the New Jersey Department of Education (DOE), the school receives reimbursement from sending public school districts for the tuition costs of each disabled student. The school appeals from a decision by the State Board of Education (Board) that, for the school year 2002-2003, certain fringe benefits the school paid to its employees were not includable in the calculation of the school's actual cost per student. The Board disallowed pension fringe benefit costs of $8,778.00.

On appeal, the school claims that the Board should be equitably estopped from enforcing its regulation for the 2002-2003 school year because it had not enforced it in the past. The school further argues that the Administrative Law Judge (ALJ) improperly denied the school the right to depose two of the DOE's employees during the proceedings before the Office of Administrative Law (OAL). We conclude that the school's arguments are without merit and affirm the decision of the Board.

In calculating the amount of reimbursement from the sending school district for each student, the tuition rate shall not "exceed the actual cost per pupil as determined under rules prescribed by the [C]commissioner [of Education] and approved by the State Board of Education." N.J.S.A. 18A:46-21. One of those rules, N.J.A.C. 6A:23-4.5(a)23i, requires an equitable standard of distribution. The agency concluded that Deron's formula to calculate pension benefits did not meet this standard.

Since 1978, the school's pension contributions have been calculated using a formula referred to by the parties as "social security integration." Applying the social security integration formula, employees whose annual salaries exceed the "integration level" receive greater pension benefits than employees whose salaries do not reach the integration level. Those higher benefits are in the form of increased employer contributions to the employees' pension benefits, equal to 5.7% of their salary above the integration level.

Each year, Deron provides the DOE with its audited financial statements. Those financial statements have indicated that the school has provided its employees with social security integration pension benefits. Prior to 2002, the DOE did not question whether the school's formula met the regulatory requirements.

That changed during the audit for fiscal year July 1, 2002 to June 30, 2003. The DOE determined that as a result of the school's use of social security integration, its pension did not conform to DOE requirements. The DOE's Office of Compliance Investigation issued a report that included the following findings and recommendations:

1. The pension contributions calculation of the school's directors exceeded the same benefit made available to all other employees by 5.7% of their earnings. This does not conform to the requirements of N.J.A.C. 6A:23-4.5(a)(23) and is therefore disallowed.

The audit disclosed that four of the school's directors are given a 5.7 percent of earnings higher contribution to the Pension Plan than all other full time employees due to Social Security Integration. N.J.A.C. 6A:23-4.5(a)(23) requires an equitable standard of distribution that is attainable for all full-time employees in order for a fringe benefit to be considered an allowable cost in the calculation of the actual certified cost per pupil. The audit identified non-allowable pension fringe benefit costs of $8,778.00.


The private school must exclude $8,778.00 of pension benefit costs from the certified actual cost per pupil for the fiscal year ended June 30, 2003. In addition, any pension benefit costs incurred using the same formula must be excluded from the calculation of the 2003-2004 certified actual cost per pupil.

N.J.A.C. 6A:23-4.5(a)(23) requires an equitable standard of distribution that is attainable for all full-time employees in order for a fringe benefit to be considered an allowable cost in the calculation of the actual certified cost per pupil.

Accordingly, the DOE disallowed $8778 in pension costs in the cost-per-pupil calculation. The DOE has issued similar findings and recommendations to other schools, but the record does not contain any such findings prior to fiscal year 2001-2002.

Deron appealed from the DOE's decision to the Office of Compliance Investigation. The Office's Chief of Staff denied that appeal. Among the reasons for the denial was that:

A pension contribution is a fringe benefit that must comply with N.J.A.C. 6A:23-4.5(a)(23)(i) and N.J.A.C. 6A:23-4.5(a)31.

The governing sections deal specifically with the equitable standard of distribution for all full-time employees. Based on our evaluation, the excess pension benefits are based on salary; therefore, it is considered inequitable, as such, your appeal is denied.

Deron appealed to the Commissioner of Education. The case was transferred to the OAL. In that proceeding, Deron moved to take the depositions of two DOE employees with alleged knowledge of the DOE's policies concerning enforcement of N.J.A.C. 6A:23-4.5(a)23. The ALJ apparently denied the motion without a written order or decision.

The parties subsequently cross-moved for summary decision. At oral argument, the parties conceded that no factual disputes would preclude summary decision. The ALJ ruled that the school's "social security integration pension benefit is a non-allowable expense because it is not equitably distributed." The judge found that the DOE's interpretation and application of N.J.A.C. 6A:23-4.5(a)23 was reasonable and consistent with legal precedent, and did not constitute new rule-making, as Deron had argued. He also rejected Deron's argument that the DOE should be equitably estopped from applying the regulation. The Commissioner, and subsequently the Board, adopted the ALJ's decision for the reasons expressed by the ALJ.

On appeal to this court, Deron does not assert that its formula did not meet the requirements of N.J.A.C. 23:4.5(a)23i, but claims that the DOE should be equitably estopped from contesting Deron's social security integration formula for the school year in question based upon the DOE's failure to enforce the regulation in the past. Deron further claims that the ALJ erred by failing to allow it to depose the DOE employees to obtain discovery as to the DOE's enforcement policy. We begin our discussion with Deron's equitable estoppel argument.

Deron asserts that the DOE should be equitably estopped from applying the regulation for several reasons. It argues that the DOE had knowledge of the school's use of social security integration benefits, and prior to 2002-2003, the DOE had a policy of not enforcing the regulation; that it was not merely lax in its enforcement, as the ALJ found. Deron claims that it relied to its detriment on the DOE's non-enforcement policy because it "expanded its social security integration benefit to include additional employees," it "paid out increased benefits in proportion to increasing employee salaries," and it maintained social security integration pension benefits in the 1990 version of its pension plan. The school further claims that it would be manifestly unjust to permit the DOE to enforce the regulation because the school operates on a statutory profit margin of only 2.5%, and it should not have been deprived of the reimbursement it reasonably expected without prior notice and "an opportunity to alter its Pension Plan to eliminate the benefit and find an alternative, comparable and potentially reimbursable benefit for its employees."

The agency, adopting the reasoning of the ALJ, rejected the equitable estoppel argument. In so doing, the ALJ reasoned as follows:

The Deron School disclosed its social security integration pension benefits to the DOE in its audited financial statements, and from 1998 to 2004 the DOE accepted and approved the Deron School's financial statements. As indicated by the School, it was not until the DOE's Office of Compliance Investigations issued a fiscal monitoring report for the 2002-2003 school year that the DOE informed the Deron School that its use of social security integration was improper.

For all intents and purposes, the Deron School estoppel argument mirrors the estoppel argument set out in the residency requirement cases. In the residency cases, the public employees asserted the municipalities and counties should not be able to terminate them because they had been allowed to work for a number of years without the requirement being enforced against them. Nevertheless, despite the municipalities' or counties' lax enforcement of the existing ordinance, equitable estoppel was found to be inapplicable to the situation.

Equitable estoppel may only be invoked against a public entity to prevent manifest injustice. Here, it would appear that barring the School from passing on the cost of its social security integration pension benefits to the sending school districts is not a "manifest injustice" because the School was not induced to integrate its pension system with Social Security because of some action or statement made by the DOE.

In actual fact, the Deron School's board of directors adopted a pension plan that was integrated with social security almost twenty-five years ago. The regulation (formerly N.J.A.C. 6:20-4.4, now N.J.A.C. 6A:23-4.5), which set forth that certain fringe benefits and pension costs were not allowable costs in the calculation of tuition, became effective on September 4, 1984[,] years after the Deron School's board of directors adopted its integrated pension plan. 16 N.J.R. 2358 (September 4, 1984). In addition, it was not until December 17, 1990 that the regulation was amended to require fringe benefits to be rooted in "an existing written uniform policy based on an equitable standard of distribution" so that they were reimbursable as tuition. 22 N.J.R. 3739 (December 17, 1990). Accordingly, the School's equitable estoppel argument should fail because it has not "detrimentally relied" on the DOE's purported non-enforcement of the regulation. Instead, the School had its integrated pension benefits system in place years before the DOE even proposed N.J.A.C. 6A:23-4.5(a)23.

Equitable estoppel does not apply because the Agency never failed to enforce the regulation though they knew it was violated preventing the doctrine from being applied. Equitable estoppel can only be invoked against a public entity to prevent manifest injustice. Not allowing the school to pass on the cost of its social security integration pension benefit does not equal a "manifest injustice."

Our role in reviewing the agency's findings is limited.

[T]he judicial role is generally restricted to three inquiries: (1) whether the agency's action violates express or implied legislative policies, that is, did the agency follow the law; (2) whether the record contains substantial evidence to support the findings on which the agency based its action; and (3) whether in applying the legislative policies to the facts, the agency clearly erred in reaching a conclusion that could not reasonably have been made on a showing of the relevant factors. [Mazza v. Bd. of Trs., Police & Firemen's Ret. Sys., 143 N.J. 22, 25 (1995).]

"Unless a Court finds that the agency's action was arbitrary, capricious, or unreasonable, the agency's ruling should not be disturbed." Brady v. Bd. of Review, 152 N.J. 197, 210 (1997). Nevertheless, "[a]n appellate tribunal is . . . 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). We do not substitute our judgment for that of the agency, even if we come to a different conclusion. In re Carter, 191 N.J. 473, 483 (2007).

Here, the agency did not violate legislative policies, it followed the law, and the record supports its decision. Equitable estoppel is not a defense to its action. That doctrine applies when one party engages in voluntary conduct, upon which another party relies in good faith and to his detriment, precluding the first party from asserting rights that he might otherwise have had. County of Morris v. Fauver, 153 N.J. 80, 104 (1998). "The essential elements of equitable estoppel are a knowing and intentional misrepresentation by the party sought to be estopped under circumstances in which the misrepresentation would probably induce reliance, and reliance by the party seeking estoppel to his or her detriment." O'Malley v. Dep't of Energy, 109 N.J. 309, 317 (1987).

"The requirements of equitable estoppel are quite exacting." W.V. Pangborne & Co. v. N.J. Dep't of Transp., 116 N.J. 543, 553 (1989). The doctrine is rarely applied against governmental entities. Middletown Twp. Policemen's Benevolent Ass'n Local No. 124 v. Twp. of Middletown, 162 N.J. 361, 367 (2000). It will be applied against a governmental entity only under "compelling circumstances," County of Morris, supra, 153 N.J. at 104, to prevent a "manifest injustice." O'Malley, supra, 109 N.J. at 316.

Equitable estoppel may be applied against a governmental entity where the party seeking estoppel shows "evidence of a 'studied policy not to enforce'" the law. Commc'n Workers of Am. Locals 1040 & 1081 v. Treffinger, 291 N.J. Super. 336, 353, 359 (Law Div. 1996). Evidence of a mere "laxity" in enforcement is insufficient to establish a studied policy of non-enforcement. Newark Council No. 21 v. James, 318 N.J. Super. 208, 217 (App. Div. 1999).

For several reasons, Deron has shown no compelling circumstances to warrant the application of equitable estoppel against the DOE. It has offered no evidence that the DOE made any affirmative misrepresentation. Nothing in the record suggests that the DOE affirmatively told the school that it was permitted to use the social security integration formula to calculate pension benefits.

The school contends that it detrimentally relied upon the DOE's failure to enforce the regulation, by extending social security integration pension benefits to additional employees; and by readopting the pension plan in 1990 with social security integration benefits retained. The record contains no documentary or testimonial evidence to support those allegations.

The record does contain, however, a certification from the school's director, in which he stated that: "[s]ince the School began using social security integration pension benefits to attract and retain employees in 1978, it has relied on the Department's decisions to reimburse the School for the costs of the social security pension benefit it has paid to its employees." Yet, as the ALJ found, the school began paying social security integration pension benefits in 1978, six years prior to the regulation's 1984 effective date. See 16 N.J.R. 2358, 2360-61 (Sept. 4, 1984).

It is also significant that the "equitable distribution" requirement of the regulation only became effective on December 17, 1990. See 22 N.J.R. 3734, 3738-39 (Dec. 17, 1990). Thus, the DOE's enforcement could only have begun on that date, which was twelve years after the school began providing social security integration pension benefits in 1978, and three months after the school adopted the September 27, 1990, version of its pension plan. Although the school may have believed that its social security integration pension benefits were reimbursable based upon the DOE's failure to enforce the regulation, there is no evidence that the school detrimentally relied upon any affirmative representation by the DOE to arrive at that conclusion. The facts simply do not support the school's reliance argument.

Nor does the record support a conclusion that applying N.J.A.C. 6A:23-4.5(a)23 to the school for the 2002-2003 fiscal year would work a manifest injustice. Although the school would be required to incur the social security integration pension benefits at its own expense, or eliminate them entirely in order to avoid the expense, as the ALJ found, those obligations must be balanced against the consequences of requiring the sending school districts to reimburse Deron for employment benefits that are not permitted under the regulation. These circumstances do not demonstrate a manifest injustice warranting the application of equitable estoppel.

We turn next to the school's claim that the failure of the ALJ to permit the school to depose two DOE employees requires a reversal of the Board's decision. We disagree.

Appellate courts review the resolution of discovery motions for an abuse of discretion. Rivers v. LSC P'ship, 378 N.J. Super. 68, 80 (App. Div.), certif. denied, 185 N.J. 296 (2005); Smith v. Estate of Kelly, 343 N.J. Super. 480, 503 (App. Div. 2001). Information is discoverable if it "appears reasonably calculated to lead to the discovery of admissible evidence."

N.J.A.C. 1:1-10.1(b). In an administrative proceeding, "[t]he purpose of discovery is to facilitate the disposition of cases by streamlining the hearing and enhancing the likelihood of settlement or withdrawal. These rules are designed to achieve this purpose by giving litigants access to facts which tend to support or undermine their position or that of their adversary." N.J.A.C. 1:1-10.1(a).

Depositions in administrative proceedings are governed by N.J.A.C. 1:1-10.2(c). That regulation states:

Depositions upon oral examination or written questions and physical and mental examinations are available only on motion for good cause. In deciding any such motion, the judge shall consider the policy governing discovery as stated in N.J.A.C. 1:1-10.1 and shall weigh the specific need for the deposition or examination; the extent to which the information sought cannot be obtained in other ways; the requested location and time for the deposition or examination; undue hardship; and matters of expense, privilege, trade secret or oppressiveness. . . . [N.J.A.C. 1:1-10.2(c).]

Here, the school moved to take the depositions of two DOE employees who appeared to have knowledge of the agency's policy with regard to the enforcement of N.J.A.C. 6A:23-4.5(a)23. The ALJ denied the motion, although the record does not reflect any written or oral decision explaining his reasons for doing so.

It is arguable that the discovery the school sought would have shed light on whether the DOE was merely lax in enforcing the regulation or had a studied policy of non-enforcement. This was a relevant consideration based upon the school's equitable estoppel argument. Nevertheless, the school obtained written discovery on the same issue. That discovery included documentary evidence that the DOE had enforced the regulation in other instances as of the 2001-2002 fiscal year, and there was no documentary evidence to show enforcement of the regulation prior to that time. Thus, at least a portion of the information sought was obtained in other ways. N.J.A.C. 1:1-10.1(c); N.J.A.C. 1:1-10.2(c). And notably, in the administrative proceeding, the school conceded that the relevant facts were undisputed and the case was ripe for summary decision. The school is bound by that representation. Cf. Puder v. Buechel, 183 N.J. 428, 430, 437 (2005) (litigant bound by representation to trial court that settlement "acceptable" and "fair").

That said, as we have explained, the school's equitable estoppel argument fails for reasons unrelated to whether the school had a studied policy not to enforce the regulation. Deron has failed to show that the DOE made an affirmative misrepresentation to the school; that it detrimentally relied on the DOE's inaction; or that a manifest injustice resulted from the DOE's application of the regulation to the school. Thus, under the totality of the circumstances, the ALJ's refusal to permit the school to depose the DOE employees does not provide a basis to disturb the agency decision.

We affirm substantially for the reasons expressed by the ALJ.


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