On Monday, July 29, 2019, the New Jersey Supreme Court held that an arbitrator’s decision dismissing a property owner’s claim for coverage under the Spill Compensation Fund was arbitrary and capricious because the decision was procedurally and substantively flawed. US Masters Residential Property (USA) Fund v. N.J. Dept. of Envt’l Prot., __ A.3d __, 2019 WL 3402917 (N.J. 2019) (slip opn.). The Court’s 4-3 opinion suggests that despite the deference afforded arbitrators in these cases, they remain subject to a searching judicial review.

US Masters’ Spill Act Claim

The New Jersey Spill Compensation and Control Act created the Spill Compensation Fund, which provides “swift and adequate compensation” to businesses and persons damaged by discharges of petroleum products and other hazardous substances. N.J.S.A. § 58:10-23.11a. The State, acting through the Department of Environmental Protection, manages the Fund and may provide relief to claimants that show by a preponderance of the evidence that their property was damaged by a qualifying discharge. 48 N.J.A.C. 7:1J-2.3.

In the wake of Superstorm Sandy, many property owners, including US Masters Residential Property (USA) Fund, filed claims for relief with the Department, alleging property damage from floodwaters carrying petroleum-based toxins. US Masters, 2019 WL 3402917 at *4. With its claim, US Masters submitted the expert report of Gregory Brown, a licensed site remediation professional. Id. Brown discussed six soil samples that he had taken from the property, three of which suggested petroleum contamination. Id. He confirmed the observations of US Masters’ employees who had seen and smelled oil when visiting the property, and he noted that there was a “tub ring” that indicated the flood line on the walls inside and outside of buildings at the property. Id.

The Department disagreed and responded to US Masters’ claim with a Notice of Intent to Deny. Id. The agency attributed the damage at the property to non-petroleum causes, such as flooding and fire, and it interpreted Brown’s lab results to be indicative of soil contaminated with historic fill rather than petroleum. Id. at *5. After further discussions, Department officially denied the claim.

Arbitration Proceedings

US Masters filed a Request for Arbitration, a procedure authorized by the Spill Act. Id. During arbitration proceedings, the arbitrator has “complete discretion regarding discovery” and may “relax any of the procedural requirements” of the Spill Act regulations when necessary. N.J.A.C. 7:1J-6.8(a), 9.7(a). The arbitrator’s decision is considered the agency’s final quasi-judicial decision on a claim, and is disturbed on appeal only if “there is a clear showing that it is arbitrary, capricious, or unreasonable, or that it lacks fair support in the record.” US Masters, 2019 WL 3402917 at *10 (quoting Allstars Auto Grp., Inc. v. N.J. Motor Vehicle Comm’n, 243 N.J. 150, 157 (2018)).

The arbitration with US Masters was set for February 1, 2016, two years after the Department denied the company’s claim. Id. at *6. Less than three weeks before that date, the Department submitted the report of its expert witness, Dr. Dennis Stainken. Id. at *5. In addition to confirming the Department’s historic fill theory, Stainken opined that Diffuse Anthropogenic Pollution, or “DAP”, was likely an additional source of contamination at the property. Id. The Department defines DAP as “contamination from broadly distributed contaminants arising from multiple sources,” including atmospheric deposition. Id. at *5 n. 2. As for the “tub ring” stains on walls at the property, Stainken opined that they were caused by clay that was stirred up and carried in floodwaters, not by petroleum. Id. at *5. In response to Stainken’s new theory about DAP, US Masters submitted a report from Brown, but the arbitrator excluded the response report on the Department’s objection. Id. at *6.

At the end of the proceeding, the arbitrator dismissed US Masters’ claim, concluding that the company had failed to “prove by a preponderance of the evidence that the damage to its property was caused by a post-Act discharge of hazardous substances.” Id. at *7. The arbitrator found instead that the contamination was caused by DAP that had settled in the bottom of nearby waterways and was then churned up and deposited on land during Superstorm Sandy. Id. He stated that Stainken’s testimony supported this theory. Id.

New Jersey Supreme Court Decision

On appeal, the New Jersey Supreme Court vacated the arbitrator’s ruling. Id. at *13. Justice LaVecchia authored the majority opinion, which was joined by Justices Albon, Solomon, and Timpone. The Court held that the arbitrator’s decision was substantively defective because it rests in part on a misperception of Stainken’s testimony. Id. at *10. Contrary to the arbitrator’s conclusion, Stainken had opined that the storm had caused clay, not DAP, to create the “tub ring” at the Property. His discussion of DAP came in the context of Brown’s soil samples. Id. at *11. The Court concluded that the arbitrator’s DAP finding “appears to have combined different parts of Dr. Stainken’s testimony to create a hypothetical scenario that Stainken did not express or endorse on this record.” Id. at *11. And that misperception about the facts “constitutes the type of misperception . . . that can render an agency decision infirm, as arbitrary and capricious, and that warrants our intervention.” Id. at *12.

The Court then held that its “confidence in the results of this arbitration proceeding is further undermined by the arbitrator’s pre-hearing determination to prevent US Masters from presenting its late-produced responsive scientific evidence pulled together after receipt of the late-shared expert report of Stainken.” Id. Although the arbitrator “enjoys much discretion over discovery,” the Court did “not believe the wholesale denial of petitioner’s presentation, especially after Stainken’s report introduced a new theory to support the [Department]’s denial, was in keeping with the fulfillment of the truth-seeking function of adversarial proceedings.” Id. The Court remanded the case for a new arbitration proceeding. Id. at *13.

Justice Fernandez-Vina, in a dissent joined by Chief Justice Rabner and Justice Patterson, did not agree that the arbitrator’s decision was substantively and procedurally flawed. Id. Substantively, the dissent concluded that the arbitrator “reasonably inferred” from Stainken’s testimony that “DAP fell from the atmosphere into nearby bodies of water,” where it was churned up by waves and deposited on US Masters’ property. Id. at *15. And “[m]ost importantly, because US Masters failed to prove by a preponderance of the evidence that a post-Spill Act discharge of oil damaged its property, the arbitrator’s determination that flood waters containing DAP were the actual source of the damage is inconsequential.” Id. at *16. As for the majority’s procedural holding, the dissent concluded that the arbitrator had the discretion to exclude Brown’s second report because that report did not respond to Stainken’s DAP theory and consisted “solely of information that had been available to US Masters” for years. Id. at *14.

Although they reached different conclusions, both the majority and the dissent emphasized the high level of deference afforded the allocator. But despite that deference, the majority refused to overlook what it found were substantial flaws in the allocator’s handling of the case. The opinion suggests that appellate courts will not blindly apply deference in these types of Spill Act determinations, and will use a probing eye to ensure “that such proceedings adhere to basic principles of fairness.” Id. at *12.