November 22, 2013
BOROUGH OF LODI, a Municipal Corporation of the State of New Jersey, and THE HOUSING AUTHORITY OF THE BOROUGH OF LODI, Plaintiffs-Respondents,
PASSAIC VALLEY WATER COMMISSION, a Public Body of the State of New Jersey, Defendant-Appellant
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued April 22, 2013
On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-1526-09.
James M. Hirschhorn argued the cause for appellant (Sills, Cummis & Gross, P.C., attorneys; Mr. Hirschhorn and Theodora McCormick, of counsel; Brian P. Scibetta, on the brief).
Andrew T. Fede argued the cause for respondent Borough of Lodi (Archer & Greiner, P.C., attorneys; Thomas J. Herten, of counsel; Mr. Fede, on the brief).
Before Judges Graves, Ashrafi and Espinosa.
In 2008, defendant Passaic Valley Water Commission (PVWC or Commission) concluded that, for approximately one decade, it had erred in failing to raise the rates it charged to plaintiff Borough of Lodi (Lodi or Borough) pursuant to a lease provision that permitted rate increases based on increases in wholesale water costs. PVWC made "corrective rate increases" totaling 49% over two years that were designed to bring the rates charged to the level where they would have been if increases in wholesale water costs had been passed on to Lodi. Lodi filed this suit, challenging the increases. PVWC appeals from a judgment, following a bench trial, that ruled its rate increases to Lodi in 2009 and 2010 were unconscionable; required it to roll back rates to 2008 levels with defined annual increases; required the refund of rates deemed excessive; and restricted future annual rate increases. We affirm in part and reverse in part.
PVWC, a waterworks commission established by the cities of Paterson, Passaic, and Clifton, pursuant to N.J.S.A. 40:62-109, sells water at wholesale prices to both municipal and privately owned water utilities. Prior to 1997, Lodi operated its municipal water system, purchasing its water from PVWC pursuant to a wholesale water supply agreement and then sold it to retail customers in Lodi. In February and March 1997, Lodi and PVWC entered into a fifteen-year Water Supply Agreement (the Agreement) and a thirty-year lease agreement (lease). Under the lease, PVWC leased Lodi's water system and assumed all the responsibilities for operating Lodi's municipal water system.
PVWC is authorized to set and change the rates it charges. N.J.S.A. 40:62-127. However, it is required by statute to set rates for a particular "class of service" that are "uniform in all the municipalities supplied." N.J.S.A. 40:62-127(a). PVWC has four classes of customers: retail in-house, retail in-town, retail out-of-town, and wholesale. Lodi is in a class by itself because its agreement with PVWC is governed by the 1997 lease. However, the Agreement states that Lodi agreed to pay "the charge for water delivered by [PVWC] which shall be at the same bulk or wholesale rate which other bulk or wholesale customers of [PVWC] pay." (Agreement § 4A). Lodi and PVWC also agreed that the rates paid by Lodi would be subject to the increases and decreases in wholesale rate charges to other wholesale customers:
B. In the event that the bulk or wholesale rate charges by COMMISSION to other purveyors is raised or lowered during the term of this Agreement or any renewal period thereof, COMMISSION agrees to sell and MUNICIPALITY agrees to buy and pay for water delivered at such new rate from the date any such change in rate shall become effective. [Agreement § 4B.]
The establishment of rates and rate increases for Lodi is governed by Article V of the lease, which provides three categories of rate increases: an annual "Inflation Rate Increase, " defined as the greater of 3.5% or the increase in the applicable consumer price index plus one-half percent (§ 5.02(a)); an increase based upon the increase in "Wholesale Water Rates" (§ 5.02 (b)); and an increase "Due to Excess Capital Expenditures" (§ 5.03). PVWC has neither made any excess capital expenditures in Lodi nor used this provision as the basis for a rate increase. The only rate increases from 1998 through 2008 were annual 3.5% increases made pursuant to Section 5.02(a).
In late 2007, Yitzchak Weiss, PVWC's chief financial officer, discovered that PVWC had erred in increasing rates by only 3.5% annually since 1997 because those increases failed to account for increases in wholesale water rates. Weiss testified that rates for Lodi customers had to be increased by 49.8% to bring the rates to the level they would have been had appropriate rate increases been made. If the rates were not changed, he stated, there would be an additional, annual $1.2 million shortfall for the remaining eighteen years of the lease, which would have to be paid by PVWC's other customers. Weiss also calculated "uncollected revenues, " i.e., the amount that would have been collected "had the rates been raised properly throughout the life of the lease for those years" and determined that PVWC had collected approximately $3.7 million less from Lodi customers between 1997 and 2008 than it should have collected. PVWC proposed that the increase be phased in over two years. For 2009, the rate increase would be 21%, which included a 12% "corrective" component and 9% as the wholesale water cost increase. For 2010, a 30.7% increase included a 26.7% "corrective" component and a 4% wholesale water cost increase. According to Weiss, these increases were intended "not to recoup the losses, but to just set the rates where they should be going forward."
A fact emphasized by PVWC is that it is required by statute to be "self-supporting, " that is, its "earnings [must] be sufficient to provide for all [the] expenses of operation and maintenance . . . so as to prevent any deficit to be paid by taxation from accruing." N.J.S.A. 40:62-127(b). Weiss testified that PVWC was required to maintain a certain amount of reserves on hand, based on PVWC's bond ordinance.
In 2009, PVWC's reserves were depleted. Weiss testified that PVWC decided to issue bonds in part to increase the reserves to obtain a better standing with rating agencies and "to refill the reserves because we were having some cash flow issues in 2009 related to . . . bonding and/or debt service." He stated that if PVWC had not refilled the reserves, PVWC would have been in default on its bonds. After obtaining authorization from the local finance board, PVWC issued the bonds for over $7 million in December 2009.
Weiss testified that "part of the need to borrow" those funds was the shortfall in collections from Lodi. However, he also testified that although there was a shortfall in 2007, there was none in 2008. Moreover, despite the shortfalls in collections from Lodi, Weiss testified that the reserves were fully funded at the end of 2007 and 2008.
In March 2009, the Borough and the Housing Authority of the Borough of Lodi filed suit against PVWC, challenging the increases. Following a bench trial, the trial court concluded that "wholesale water costs, " a term undefined in the lease, was "properly interpreted to mean any extraordinary costs incurred by PVWC that were specifically associated with supplying water to Lodi customers, and [did] not include any costs associated with other water supply systems." Finding the evidence failed to show that PVWC's increases for 2009 and 2010 correlated with increases in wholesale water costs specific to Lodi, the trial court concluded that the rate increases violated the terms of the lease and were improper.
The trial court entered judgment in favor of Lodi and ordered, inter alia, that the rates for Lodi customers be rolled back to the 2008 level with defined annual increases; that refunds be issued to customers who paid the increased rates; and that future rate increases be restricted. The trial court granted PVWC's motion to stay the judgment pending appeal. In this appeal, PVWC argues that the trial court erred in its interpretation of "wholesale water costs" as used in Section 5.02(b), and in admitting and relying upon the testimony of Frank Di Maria in concluding the corrective rate increases violated the lease.
PVWC's first argument requires the interpretation of the term "wholesale water costs" in Section 5.02(b). Because this issue concerns the interpretation of a contract, our review is de novo and the trial court's interpretation is entitled to no special deference. Kieffer v. Best Buy, 205 N.J. 213, 222-23 (2011). For the reasons that follow, we agree with PVWC's interpretation that "wholesale water costs" means the costs incurred in delivering water to the Lodi retail distribution system.
"[T]he judicial interpretative function is to consider what was written, in the entire context of the circumstances under which it was written, and to accord the language a rational meaning in keeping with the expressed general purpose." Jacobs v. Great Pac. Century Corp., 104 N.J. 580, 586 (1986); see also Dontzin v. Myer, 301 N.J.Super. 501, 507 (App. Div. 1997). "Extrinsic evidence is admissible as an aid to understand the significance of the contract language, but not to give effect to an intent at variance with that language." Ibid. Some of the ways in which we derive assistance in discovering the parties' intent include "consideration of the particular contractual provision, an overview of all the terms, the circumstances leading up to the formation of the contract, custom, usage, and the interpretation placed on the disputed provision by the parties' conduct." Jacobs, supra, 104 N.J. at 582 (quoting Kearny PBA Local No. 21 v. Town of Kearny, 81 N.J. 208, 221 (1979)).
Here, the lease defines "Wholesale Water Rates" as "those rates that [PVWC] charges to its wholesale customers as enacted by [PVWC]." However, the lease does not define "wholesale water costs." We find context for the term at issue here in the parties' practices and custom, ibid., as well as in the Agreement that was a companion contract to the lease. See Restatement (Second) of Contracts § 214(c) (1981) ("Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in evidence to establish . . . the meaning of the writing, whether or not integrated[.]"); see also Conway v. 287 Corporate Ctr. Assocs., 187 N.J. 259, 268-69 (2006) (stating that the Supreme Court has followed Professor Corbin's "expansive view" of the parol evidence rule, as adopted in the Restatement).
Looking first at the Agreement, Section 4A explicitly states that Lodi agrees to pay "the same bulk or wholesale rate which other bulk or wholesale customers of [PVWC] pay." The parties further agreed that if the rate charged to bulk or wholesale customers is raised or lowered, "[PVWC] agrees to sell and [Lodi] agrees to buy and pay for water delivered at such new rate." (Agreement § 4B). Thus, in the accompanying Agreement, Lodi agreed to pay the same wholesale rate as other wholesale customers and also agreed to increases in that rate as charged to wholesale customers. Nothing in the Agreement supports an interpretation that the wholesale rate to be charged to Lodi differed from that charged to wholesale customers or that it would be based only on costs incurred within Lodi. Although conflicting, the testimony received regarding the negotiation of the lease does not reveal that a contrary interpretation was negotiated.
The Borough introduced the testimony of its former mayor, Phillip Toronto, who signed the lease and approved the details of the negotiations. He could not specifically recall if he had ever negotiated or discussed the term "wholesale water costs." Nonetheless, he testified that section 5.02(b) only permitted the Commission to recoup wholesale water costs that were "specific to Lodi, " and did not permit costs associated with the operations of the Commission as a whole. Toronto also testified that PVWC was required to submit documentation to the Borough for the Borough's approval before seeking a rate increase pursuant to Section 5.02(b). He could not identify any language in that section that required PVWC to document the basis for the rate increase or required Lodi's approval for the increase.
Joseph Bella, the Commission's executive director at the time that the lease was entered into, negotiated the lease with Joseph Dominic, Lodi's municipal manager. Bella testified that, during the negotiations, he repeatedly conveyed to Dominic that "the rates in Lodi had to be set in such a way that [the Commission's] rate payers would never be subsidizing [Lodi's] rate payers." Bella testified that the phrase "wholesale water costs" was placed into section 5.02(b) "as a mechanism to recover costs that normal wholesale customers would be incurring, " ensuring that Lodi "customers would be no better off -- or no worse [off] than any other wholesale customers."
To give the term "wholesale water costs" a "rational meaning, " we also consider the history of arrangements between the parties and the physical operations of PVWC. Both before and after the lease was entered into, PVWC obtained its water supply from the Passaic River and the North Jersey District Water Supply Commission and used two treatment plants, located in Wanaque and Totowa. No treatment facilities are located in Lodi. PVWC does not collect, treat, purify or perform any "wholesale" operations in Lodi. The lease agreement did not signal a change in that arrangement. Rather, the lease agreement had the effect of adding the retail operations formerly conducted by Lodi to the wholesale functions PVWC already performed for Lodi. Therefore, to limit Section 5.02(b) to increases in wholesale water costs incurred within Lodi's borders would be to provide for no increase based upon wholesale costs at all.
We next turn to the expert testimony presented. Experts "may not render opinions on matters which involve a question of the law." Healy v. Fairleigh Dickinson Univ., 287 N.J.Super. 407, 413 (App. Div.), certif. denied, 145 N.J. 372, cert. denied, 519 U.S. 1007, 117 S.Ct. 510, 136 L.Ed.2d 399 (1996). Therefore, an expert's opinion as to the interpretation of the contract itself is properly disregarded. Boddy v. Cigna Prop. & Cas. Cos., 334 N.J.Super. 649, 659 (App. Div. 2000).
There are, however, times when a contract contains a term that is commonly used in an industry and has a meaning understood within that industry. In such cases, an effort to parse the meaning from the words themselves, uninformed by how the term is used in the industry, may fail to provide an accurate explanation of the parties' intent in using a specific term. Therefore, when we interpret a contract concerning a transaction in a technical field, we give such technical terms and words of art their technical meaning. Restatement (Second) of Contracts § 202(3)(b). Under such circumstances, an expert's specialized knowledge as to the use of specific terms within an industry "will assist the trier of fact to understand the evidence or to determine a fact in issue, " and therefore will be admissible pursuant to N.J.R.E. 702.
There were two expert witnesses: Howard Woods on behalf of PVWC and Frank Di Maria on behalf of Lodi. Woods was qualified as an expert on utility rate-making and water utility operations without objection. In contrast, Di Maria's qualifications and opinion were challenged in the trial court and in this appeal.
Woods, a rate-making consultant for PVWC, has a master's degree in civil engineering and is self-employed, providing "consulting engineering services to a host of water-related activities; water utilities, sewer utilities; state agencies that are involved in water rates, [and] consumer advocate groups also involved . . . in water and sewer utility rates." He is a trustee of the New Jersey Section of the American Water Works Association, a member of the National Association of Ground Water Scientists and Engineers, and the International Water Association.
Woods defined "wholesale water costs" as "the cost of providing wholesale service, " which includes "the cost of collecting water supply, the cost of treating it, the cost of pumping it, and the transmission cost to deliver it to the wholesale customer." He also explained that "[w]holesale customers do not bear the cost of local distribution mains . . . that you'd find in an average residential street."
Woods was fully familiar with the way in which a utility determines wholesale water costs, stating a cost of servicestudy is the source for the wholesale water costs in Section 5.02(b). He explained why the cost of service entails an engineering, rather than accounting, analysis; that a cost of service study consists of "taking a look at the current existing costs that are incurred by the utility to provide service and allocating them on a causative basis . . . to the different customer classes that caused the cost." Once the costs are determined, an engineering analysis is conducted of the service characteristics required by each class of service. The baseline characteristic applied to all retail classes and to wholesale is an allocation based on average daily demand. Woods testified that it is "absolutely" appropriate for these wholesale water costs to be passed through to Lodi rate payers.
Lodi presented Di Maria, as both a fact and expert witness, over PVWC's objection. Di Maria is a certified public accountant, a certified municipal finance officer, and a registered municipal accountant with a master's degree in taxation. PVWC filed and lost a motion in limine to bar the expert testimony of Di Maria and moved again at trial, unsuccessfully, to strike Di Maria's reports from the record and declare his testimony inadmissible as expert testimony. The trial court admitted Di Maria as an expert in public accounting and municipal accounting but not as a water utility expert.
Di Maria became the municipal auditor for Lodi in 1999, after the lease was negotiated, and was not directly involved in the negotiation of the lease. He has never been employed by a utility and is not a member of any professional association that relates to utilities. He has never prepared a cost of service study for a utility although he believed he had seen them a number of times. He admitted he did not know how a utility used a cost of service study to decide what rates to charge its wholesale customers. He testified he understood "wholesale water costs" to be the cost the utility charges a municipality that will then resell the water to retail customers. Di Maria stated he did not know how the wholesale water provider sets the costs charged to the municipality.
Di Maria testified that the "wholesale water costs" in Section 5.02(b) referred to costs incurred physically within the boundaries of Lodi. He admitted the language of that section did not "specifically" provide for that interpretation and that nothing in generally accepted accounting principles limited wholesale water costs to costs physically incurred in Lodi. His opinion that wholesale water costs were so limited was based on what he was told by Lodi officials over the years regarding their intentions at the time the lease was negotiated.
In this appeal, PVWC argues the trial court erred in permitting Di Maria to offer an opinion as to the technical meaning of "wholesale water costs" and in relying upon that testimony in reaching its conclusion. The determination whether a witness may testify as an expert lies within the sound discretion of the trial court and is reviewed against an abuse of discretion standard. Pomerantz Paper Corp. v. New Cmty. Corp., 207 N.J. 344, 371 (2011); Carey v. Lovett, 132 N.J. 44, 64 (1993); Kuehn v. Pub Zone, 364 N.J.Super. 301, 319-21 (App. Div. 2003), certif. denied, 178 N.J. 454 (2004).
However, the admission of an expert's opinion remains subject to the "fixed, clear guidelines that govern the admissibility of expert opinions and against which trial courts must make their evaluations." Pomerantz, supra, 207 N.J. at 372. Those guidelines impose standards for the qualifications of the expert and the basis for the opinion offered:
Expert testimony must be offered by one who is "qualified as an expert by knowledge, skill, experience, training, or education" to offer a "scientific, technical, or . . . specialized" opinion that will assist the trier of fact, see N.J.R.E. 702, and the opinion must be based on facts or data of the type identified by and found acceptable under N.J.R.E. 703.
Because the issue here involves the purely legal issue of contract interpretation, the scope of permissible expert testimony was limited to how the term "wholesale water costs" is used within the industry. It follows that, to have the requisite qualifications, the proffered witness must have sufficient knowledge, based upon experience with or in the industry, to justify the expression of an opinion as to the use of the term in the industry. See Carey, supra, 132 N.J. at 64; Koseoglu v. Wry, 431 N.J.Super. 140, 159 (App. Div. 2013). In addition, the basis for the opinion must have its roots in facts and data that would be acceptable under N.J.R.E. 703. See Pomerantz, supra, 207 N.J. at 372.
In providing a basis for his opinion, an expert is generally permitted "to detail for the trier of fact all of the materials . . . on which he relied in deriving his opinion, so long as they are of a type reasonably relied upon by experts in his field." Agha v. Feiner, 198 N.J. 50, 62 (2009). The supporting materials may include a hearsay statement, "such as a medical report by a non-testifying expert . . . for the purpose of apprising the jury of the basis for his opinion." Id. at 63. However, the "hearsay is not admissible substantively as establishing the truth of the statement." Konop v. Rosen, 425 N.J.Super. 391, 406-07 (App. Div. 2012) (quoting State v. Vandeweaghe, 351 N.J.Super. 467, 480 (App. Div. 2002), aff'd, 177 N.J. 229 (2003)). And, N.J.R.E. 703 "does not allow expert testimony to serve as a vehicle for the wholesale [introduction] of otherwise inadmissible evidence." Agha, supra, 198 N.J. at 63 (quoting Vandeweaghe, supra, 351 N.J.Super. at 480-81) (internal quotation marks omitted).
"The weight to which an expert opinion is entitled can rise no higher than the facts and reasoning upon which that opinion is predicated." Johnson v. Salem Corp., 97 N.J. 78, 91 (1984). Therefore, when the expert's opinion is no more than a bare conclusion unsupported by factual evidence, it is a net opinion and inadmissible. Polzo v. Cnty. of Essex, 196 N.J. 569, 583 (2008); Buckelew v. Grossbard, 87 N.J. 512, 524 (1981). In addition to "ensur[ing] that the proffered expert does not offer a mere net opinion, " Pomerantz, supra, 207 N.J. at 372, the court may not consider expert testimony that lacks an appropriate factual foundation. Id. at 373; Polzo, supra, 196 N.J. at 583; Buckelew, supra, 87 N.J. at 524.
In reviewing the qualifications and basis for Di Maria's opinion, we are mindful of the narrow scope of permissible expert opinion in this case. Although Di Maria had extensive experience as a municipal auditor, he lacked the specialized skill, training, education, or experience to justify his expression of an opinion as to what "wholesale water costs" means within the water utility industry. He was not personally involved in the negotiation of the lease and admitted that his understanding of the meaning of that term was based upon what Lodi officials told him they intended the term to mean. In essence, the "opinion" he provided to the court was little more than a recapitulation of self-serving hearsay statements made by Lodi officials. These hearsay statements did not prove the truth of the Lodi officials' statements or provide an adequate factual basis for the formulation of an opinion that could assist the trier of fact. Therefore, his opinion regarding the meaning of "wholesale water costs" should have been excluded from evidence and not considered by the trial court in reaching its conclusion.
In our view, the reasonable meaning of "wholesale water costs" within the context of this lease refers to the costs associated with delivering the water to the wholesale customer, a status that Lodi agreed to assume in the Agreement. This conclusion is supported by the history of the parties' practices prior to the lease; the fact that PVWC performs only retail functions and no wholesale operations within Lodi's boundaries; and the competent expert opinion.
Finally, we address whether the lease authorized PVWC to make the "corrective rate increases." PVWC does not deny that, as the trial court found, "nothing in the language of the Lease expresses or implies that PVWC could collect for rate increases from previous years." It argues that the corrective rate increase is authorized, however, because the lease does not prohibit it, and PVWC did not waive the right to seek this increase by virtue of its inaction. In addition, PVWC argues that if the rate is not corrected, the requirement that it operate on a self-sustaining basis will result in shifting the burden that Lodi would bear to its other customers. We find none of these arguments persuasive.
Section 5.01 authorizes PVWC to "increase its rates for the supply of water service to customers of the System by the amounts set forth in this Article V." This plain language limits the grounds for rate increases to those set forth in Article V. The relevant provision, Section 5.02(b), states:
If, as determined by the [Commission] based on the amount of wholesale water supplied by the [Commission] for the preceding year, the increase in the Wholesale Water Rates exceed the Inflation Rate Increase, the increase in water rates pursuant to Section 5.02(a) shall be further increased by the amount necessary to recoup the increase in wholesale water costs in excess of the Inflation Rate Increase.
PVWC contends that its failure to seek such increases for approximately one decade does not foreclose its implementation of a corrective increase now because, pursuant to Section 22.01, a party's failure to enforce any provision shall not be a waiver of the right to enforce it in the future. However, the right to increase the rate based upon an increase in wholesale water rates is not an open-ended right but, rather, a right explicitly limited to the cost "for the preceding year." Therefore, neither Section 22.01 nor Section 22.05, which requires all waivers to be in writing, eviscerates that limitation on the right to increase rates based upon wholesale water rates.
PVWC has also argued that the interpretation it advocates should be adopted by the court in light of the preference for an interpretation that serves the public interest. This argument is also unpersuasive. The Restatement provides, "In choosing among the reasonable meanings of a promise or agreement or a term thereof, a meaning that serves the public interest is generally preferred." Restatement (Second) of Contracts § 207. In light of the fact, admitted by PVWC, that the plain language of the lease does not provide for a decade-long review of missed opportunities to increase rates, the interpretation pressed by PVWC is not a "reasonable meaning" of the language of the lease. Further, we note that the other party to this agreement is a public entity as well. Moreover, although PVWC has linked the shortfall in collections to its need to issue bonds in 2009, it has also acknowledged that the shortfall was only part of the reason the need arose.
In summary, we conclude that the trial court was mistaken in its exercise of discretion in allowing Di Maria to offer an expert opinion as to the meaning of "wholesale water costs" in Section 5.02(b) of the lease. We further conclude that the term means the costs incurred in delivering water to the Lodi retail distribution system. As for rate increases based upon the increase in "wholesale water costs, " PVWC was authorized to implement such increases only based upon increases in the wholesale water rates for the year preceding the rate increase. To the extent the "corrective rate increases" exceeded the increases available pursuant to this interpretation of the lease, they were not authorized by the lease. Those increases must be rescinded and any amount collected pursuant to the unauthorized increases must be credited or returned to the retail customers.
Affirmed in part and reversed in part.