author: SBnrMAn, J. S. C.

text:
    WILLIAM J. BULMAN, PLAINTIFF, v. JOSEPH M. McCRANE, JR., TREASURER, STATE OF NEW JERSEY; WALTER T. PETERS, JR., DIRECTOR, DIVISION OF BUILDING AND CONSTRUCTION, DEPARTMENT OF THE TREASURY, STATE OF NEW JERSEY; AND JAMES A. O’CONNOR, DIRECTOR, DIVISION OF PURCHASE AND PROPERTY, DEPARTMENT OF THE TREASURY, STATE OF NEW JERSEY, DEFENDANTS.
    Superior Court of New Jersey Chancery Division
    Decided March 7, 1973.

      Mr. Kenneth L. Estabrook for plaintiff (Messrs. Linda-bury, McCormick & Estabrook, attorneys; Mr. Richard R. Width and Mr. Peter A. Somers, on the brief).

      Mr. Morton I. Greenberg, Assistant Attorney General, for defendants (Mr. George F. Kugler, Jr., Attorney General of New Jersey, attorney; Mr. Alan B. Rothsiein, Deputy Attorney General, on the brief).
   SBnrMAn, J. S. C.

This is a taxpayer’s suit to enjoin defendants from entering into a preliminary contract and lease, with option to purchase, for a building to be constructed on state-owned property. The litigation raises complex and difficult issues which, in the factual context here present, have not been fully resolved by our appellate courts.

Put concisely, the problem presented is whether a lease-purchase arrangement whereby a state agency contracts with a builder to erect a facility on state-owned land and lease the same to the State for a term of years at stipulated annual rentals, with an option to purchase at intervals during the term, title to revert to the State at the expiration thereof, violates the debt limitation clause of the State Constitution.

Plaintiff obtained an order directing defendants to show cause why a preliminary injunction should not issue, and defendants countered with a motion for summary judgment. The court denied the latter motion and granted the application for the preliminary injunction. At the State’s request, the court heard further argument on the issuance of a preliminary injunction, during which both sides agreed to have the court adjudicate the issues on the basis of the pleadings, affidavits and exhibits on file, without proceeding to trial.

The basic facts are not in substantial dispute. The State owns a parcel of land in Ewing Township upon which it intends to have constructed a building to be used as a records storage center and printing facility. Through the Division of Building and Construction in the Department of the Treasury it solicited proposals for an agreement of lease, with option to purchase, for a building containing about 60,000 square feet of net usable space, to be designed and constructed by a responsible, qualified ifbuilder-developer,” in accordance with plans and specifications prepared by the Division’s architect and designated as “performance specifications.”

Prospective bidders were advised to base their proposals on private financing, since no progress or other advance payments would be made available. The proposals were to contain, among other things, a fixed annual rental figure as well as lump sum selling prices should the State elect to exercise its option to purchase the building at the intervals set forth in the lease. The successful bidder would be required to enter into a preliminary contract, to be executed by the Director of the Division of Building and Construction, obligating the builder-developer to construct the building and thereafter lease it to the State.

The proposed lease, to be executed by the Director of the Division of Purchase and Property, was to be for a term of 25 years, commencing on the date of the State’s acceptance of the building, at an annual rental charge payable in equal monthly installments. Included was an option whereby, at any time during the 10th, 15th or 20th year of the lease, the lessee could purchase the lessor’s right, title and interest in and to the demised premises for stipulated fixed prices. There was a further provision that “[i]n the event of the failure by the Lessee to exercise any of these options, then and in that event all of the Lessor’s title in and to the demised premises shall revert to the Lessee upon the expiration of the term of the within lease.”

After the receipt and review of bids, the Director of the Division of Purchase and Property issued a letter of commitment accepting, subject to “Legislative and Executive approval,” the proposal of the lowest qualified bidder, Lewis C. Bowers and Sons, Inc., to lease the building to be constructed, at an annual rental of $145,763, based upon a square-foot rate of $3.69 for 54,187 square feet, with an option to the State to purchase the building for $866,000 during the 10th year of the term, $669,000 during the 15th year, and $393,000 during the 30th year.

Because of the institution of this suit, nothing further took place. Plaintiff challenges the validity of the plan devised by the State. He contends, in essence, that the aggregate of the rentals to be paid under the agreement constitutes a debt or liability exceeding the debt limitation provision of the State Constitution; that the lease with option to purchase is in reality a purchase agreement; that the Division of Purchase and Property is without authority to enteT into the proposed agreement, and that a public building is being constructed in derogation of the public bidding law.

In response the State argues that the debt, if it is one, will not exceed the constitutional limitation; that, in any event, no debt or liability will be created within the meaning of the constitutional provision, and that, since a lease is involved, there is no violation of the bidding law.

At the core of the controversy is the debt limitation clause in N. J. Const. (1947), Art. VIII, § II, par. 3, the pertinent provisions of which are these:

The Legislature shall not, in any manner, create in any fiscal year a debt or debts, liability or liabilities of the State, which together with any previous debts or liabilities shall exceed at any time one pereentum of tile total amount appropriated by the general appropriation law for that fiscal year, unless the same shall be authorized by a law for some single object or work distinctly specified therein. Regardless of any limitation relating to taxation in this Constitution, such law shall provide the ways and means, exclusive of loans, to pay the interest of such debt or liability as it falls due, and also to pay and discharge the principal thereof within thirty-five years from the time it is contracted; and the law shall not be repealed until such debt or liability and the interest thereon are fully paid and discharged. No such law shall take effect until it shall have been submitted to the people at a general election and approved by a majority of the legally qualified voters of the State voting thereon. * *’ *

Over the years the need of government to provide facilities for the burgeoning demands of the citizenry has come into conflict with restrictive and often cumbersome statutory or constitutional provisions limiting the creation of debts or liabilities. On the one hand, there is public pressure for projects requiring long-term financing; on the other, there is the necessity for responsible fiscal management. The result has been the development of plans intended to achieve the desired goals without offending the debt limitation provisions. With particular reference to buildings required for the housing of governmental departments and agencies, two methods have been employed frequently. One involves the creation by the Legislature of public building authorities or commissions empowered to issue bonds, construct facilities, and lease them to governmental units. The other is the lease-purchase contract. Morris, “Evading Debt Limitations with Public .Building Authorities: The Costly Subversion of State Constitutions,” 68 Yale L. J. 234 (1958); Rogers, “Municipal Debt Restrictions and Lease-Purchase Einancing,” 49 A. B. A. J. 49 (1952). It is the lease-purchase contract which is involved herein.

Lease-purchase contracts have engaged the courts throughout the country for many years, with results that, even today, have been far from uniform. Fundamentally, the concern is whether such contracts create a debt or liability which is prohibited unless incurred in accordance with the procedures set forth in the applicable debt limitation provisions. Because of variations in the plans, as well as differences in the types of debt limitations involved, the extracting of specifically applicable principles of law is difficult. In addition, sympathetic courts have, on occasion, ruled favorably on the plan under consideration by a somewhat strained construction or interpretation of the facts and the law. A widely accepted tost for determining the validity of a lease-purchase contract is the one set forth in the case of City of Los Angeles v. Offner, 19 Cal. 2d 483, 122 P. 2d 14 (Sup. Ct. 1942) :

It lias been held generally in the numerous eases that have come before this court involving leases and agreements containing options to purchase that if the lease or other agreement is entered into in good faith and creates no immediate indebtedness for the aggregate installments therein provided for but, on the contrary, confines liability to each installment as it falls due and each year’s payment is for the consideration actually furnished that year, no violence is done to the constitutional provision, [citing cases] * * *. If, however, the instrument creates a full and complete liability upon its execution, or if its designation as a “lease” is a subterfuge and it is actually a conditional sales contract in which the “rentals” are installment payments on the purchase price for the aggregate of which an immediate and present indebtedness or liability exceeding the constitutional limitation arises against the public entity, the contract is void.

Set; also Annotation, “Lease of property by municipality or other political subdivision, with option to purchase same, as evasion of constitutional or statutory limitation of indebtedness,” 71 A. Ij. B. 1318, 1326 (1931), supplemented 145 A. L. B. 1362 (1943).

The use of lease-financing to evade debt restrictions has been criticized by writers on the subject, and it has been observed that the courts have had difficulty in applying the test of City of Los Angeles v. Offner, supra, with any degree of consistency. See Rogers, “Municipal Debt Restrictions and Lease-Purchase Financing,” supra; Magnusson, “Lease-Financing by Municipal Corporations as a Way around Debt Limitations,” 25 Geo. Wash. L. Rev. 377 (1957); Bowman, “The Anachronism Called Debt Limitation,” 51 Iowa L. Rev. 863 (1967); Lillich, “Lease-Purchase Agreements by Yew York Municipalities,” 34 N. Y. State B. J. 459 (1962). In a large number of cases in which leases to governmental bodies have been upheld, the courts have found some reason, not always sound or realistic, for declaring the instrument under review to be a bona fide lease. Bowman, op. cit., supra, comments that the “rapidly growing volume of court cases offers a bewildering array of judicial rulings on the concepts and issues involved in these various approaches to the avoidance of debt limitations.”

A proper analysis of the problems presented herein requires, first, a consideration of whether the state agency concerned has the authority to lease or purchase real property. If it has, then one must examine the arrangement to determine whether it is a lease, or lease with an option to purchase, or whether it is an installment contract of purchase. The ultimate inquiry is whether the debt or liability created thereby, if any, exceeds the permissible debt limit.

If the transaction now before the court is a bona fide lease not in contravention of the constitutional debt limitation, there is no question of the competence of the Division of Purchase and Property to enter into it. The Division is empowered to “lease from time to time such office space as may be required for the conduct of the state’s business at such terms and under such conditions as it may deem appropriate.” N. J. S. A. 52:20-7. It may also maintain and operate warehouses and other storage places. N. J. S. A. 52:25-13. A purchase, contract or agreement may, with the written approval of the State Treasurer, be made, negotiated or awarded by the Director of the Division of Purchase and Property without advertising, when the subject matter consists of “the lease of such office space, office machinery, specialized equipment, buildings or real property as may be required for the conduct of the State’s business.” N. J. S. A. 53:34-8, 52 :34-9(c).

By implication, if not expressly, the Division also has authority to purchase real property. The Director may, with the written approval of the State Treasurer, make, negotiate or award, without advertising for bids, any purchase, contract or agreement, when the subject matter thereof consists of “the acquisition of any real property by gift, grant, purchase or any lawful manner in the name of and for the use of the State for the purpose of the administration of the State’s business.” N. J. S. A. 52:34-9(d). The significant limitation, however, is that such acquisition must be “in accordance with appropriations made therefor when moneys are required for the acquisition.” Id.

The document, called an “Agreement of Lease with Option to Purchase,” is substantially in the form of a standard lease and purports to demise to the lessee for a term of 25 years the designated number of square feet of office, records storage, printing and related space, “in a new building which has been constructed by the lessor in accordance with plans and specifications heretofore prepared by the Lessee and approved by both Lessor and Lessee.” The annual rental is calculated on the basis of the square feet of space within the exterior walls. Boiler rooms and machine rooms for heating and air conditioning equipment are excluded from the rentable areas.

The lessee is obligated to maintain the demised premises, except for damage by fire, the elements, or other causes beyond its control, and to provide heat, power and light. It is the lessor’s responsibility to make all structural repairs. In the case of damage or destruction by fire, rent is suspended until the structure is restored by the lessor, but if the time for restoration will exceed six months, the lessee has the option of terminating the lease upon written notice.

In the event a mortgage is placed on the premises, the lease is subordinated thereto, with the proviso that the lease cannot be terminated so long as the lessee is not in default.

Provision is made for the upward or downward adjustment of the rent in case of increases or decreases in realty taxes on the demised premises.

It is noteworthy that, aside from a standard quiet enjoyment clause, there is no provision reserving to the lessor the right of termination and reentry in the event of default. The lease merely stipulates that should the lessee default in the performance of any of the terms of the agreement, and fail to cure the same after notice, the lessor may do so at the cost and expense of the lessee, to be paid following the submission of a voucher therefor.

As stated earlier herein, the lessee has the option to purchase the lessor’s right, title and interest in the demised premises at stipulated fixed prices during the 10th, 15th, or 20th year of the lease, but if the options are not exercised, then all of the lessor’s right, title and interest reverts to the lessee upon the expiration of the term of the lease without further payment.

The form of the instrument is not conclusive in determining whether it is a lease or a contract of purchase, or whether it will violate the debt limitation clause; and this is particularly so where, as here, the structure is to be erected on state-owned land and leased to the State at an annual “rental” with title to revert to the State automatically and at no additional cost at the end of the term, unless the State, in the exercise of its option, has purchased the structure earlier.

If the instrument here in question is in fact a lease and the rentals are intended as rentals, no indebtedness would result within the meaning of the constitutional limitation. This is so because, as stated in Clayton v. Kervick, 52 N. J. 138 (1968), and supported by the weight of authority elsewhere, the aggregate amount of future rent is not an immediate debt or liability. See Doland v. Clark, 143 Cal. 176, 76 P. 958 (Sup. Ct. 1904) ; Vandegrift v. Riley, 16 P. 2d 734 (Cal. Sup. Ct. 1932) ; Krenwinkle v. Los Angeles, 4 Cal. 2d 611, 51 P. 2d 1098 (Sup. Ct. 1935) ; Heberer v. Board of Com'rs of Chaffee County, 88 Colo. 159, 293 P. 349 (Sup. Ct. 1930) ; South Bend v. Reynolds, 155 Ind. 70, 57 N. E. 706 (Sup. Ct. 1900); Jefferson School Tp. v. Jefferson Tp. School Building Co., 212 Ind. 542, 10 N. E. 2d 608 (Sup. Ct. 1937) ; Protsman v. Jefferson-Craig Consol. School Corp., 231 Ind. 527, 109 N. E. 2d 889 (Sup. Ct. 1953) ; Teperich v. North Judson-San Pierre H. S. Bldg. Corp., 275 N. E. 2d 814 (Ind. Sup. Ct. 1971); Hall v. Baltimore, 252 Md. 416, 250 A. 2d 233 (Md. Ct. App. 1969); Ambrozich v. Eveleth, 200 Minn. 473, 274 N. W. 635 (Sup. Ct. 1937) ; Giles v. Dennison, 15 Okl. 55, 78 P. 174 (Sup. Ct. 1904); Kelley v. Earle, 325 Pa. 337, 190 A. 140 (Sup. Ct. 1937) ; Blair v. Layton City Corp., 6 Utah 2d 138, 307 P. 2d 895 (Sup. Ct. 1957) ; Stedman v. Berlin, 97 Wis. 505, 73 N. W. 57 (Sup. Ct. 1897); State ex rel. Thomson v. Giessel, 267 Wis. 331, 65 N. W. 2d 529 (Sup. Ct. 1954). But see People v. Public Building Commission of Chicago, 11 Ill. 2d 125, 142 N. E. 2d 67 (Sup. Ct. 1957); Davis v. Board of Education of Newport, 260 Ky. 294, 83 S. W. 2d 34 (Ct. App. 1935) ; Brewster v. Deschutes County, 137 Or. 100, 1 P. 2d 24, 607 (Sup. Ct. 1931).

Generally, the inclusion in a lease of a simple option to purchase the property creates no present debt or liability, since there is no obligation to pay out funds unless and until the option is exercised. Dean v. Kuchel, 35 Cal. 2d 444, 218 P. 2d 521 (Sup. Ct. 1950) ; Corhran v. Mayor and Council of Middletown, 14 Del. Ch. 295, 125 A. 459 (Del. Ch. 1924) ; City of South Bend v. Reynolds, supra; Jefferson School Tp. v. Jefferson Tp. Building Co., supra; Kirk v. Union Graded School District No. 1, 180 Okl. 198, 68 P. 2d 769 (Sup. Ct. 1937); Stedman v. Berlin, supra. However, it is iu those instances where a structure is to be erected and then leased to a governmental entity-lessee, with an option to purchase, that one finds a lack of uniformity and consistency in the reported cases; and a review of those cases can do no more than suggest the circumstances in which the arrangement will be upheld as a bona fide lease which does not infringe upon debt restrictions, and those in which the arrangement is to be struck down as a purchase contract creating an invalid immediate debt or liability.

A pertinent comment appears in State v. Yelle, 47 Wash. 2d 705, 289 P. 2d 355 (Sup. Ct. 1955) :

The state may contract to lease property from private corporations or individuals if the obligations can be met out of current revenues. If it is good business to enter into a long-term lease, it may do so. Likewise, it may enter into a long-term lease with a “body politic and corporate,” provided rentals can be paid, when due, from current appropriations. Our problem is to determine whether this plan is a leasing arrangement, or whether it is the acquisition by purchase of capital improvements, for which the state eannot now pay and payment for which is therefore to be made in annual installments extended over a period of thirty years.

It has been said that the lease arrangement which has the best chance of being sustained under debt limitation provisions is one where the rentals are reasonable compensation for use, the option to purchase is truly noncompulsory, and the amount at which the option is to be exercised is approximately the reasonable value of the property, but where the property is to pass automatically to the governmental body at the end of the term, the arrangement is almost certainly a purchase contract and a debt. 2 Antieau, Municipal Corporation Law (1971 ed.), § 15.34 at 437. See also Comment, “Municipal Debt Limitations in Pennsylvania,” 15 Vill. L. Rev. 613 (1970).

This is essentially the rationale, as well, of Hall v. Baltimore, supra, which involved the publishing by the city of a request for bids on a lease and leaseback arrangement under which the successful bidder would construct a one-story warehouse on land owned by the city and to be rented to the bidder at a nominal rent, the completed structure to be subleased back to the city at a yearly rent to be submitted with the bid. Eorms of the lease and sublease accompanied the request for bids. The successful bidder proposed to erect the warehouse and accept an annual rent of $96,000 for 15 years. The proposed leases contained an option entitling the city to purchase the leasehold at any time after the first six months at an appraised value of the premises and appurtenances. If the option was not exercised by the end of the term, the lessor had to remove the building and restore the land. A taxpayer sought to enjoin the arrangement, claiming it was an unconstitutional creation of a debt without legislative authorization and referendum approval. The court affirmed the holding below that the transaction was a bona fide lease at a fair and reasonable rental and was not, because of the option, a disguised purchase contract. It said:

We come then to the question whether the option given the City to purchase the property during the term of the lease changes the bona fide valid lease into an agreement to purchase the warehouse, which constitutes a debt and thereby violates the constitutional restriction. We think it clear that the option to purchase has no such effect. The rentals are fair and reasonable compensation for the occupancy and use of the warehouse, no part of the rent is to be applied to or credited on the purchase price * * * the option is completely and truly non-compulsory, and the purchase price is to be determined by appraisal of real value at the time of the exercise of the option. * * *
The rationale of the cases upholding a lease of real estate containing a true option to purchase as a lease is that of the Uniform Oommereial Code, Code (1964 Repl. Yol.), Art. 95B, § 1-201 (37), in its tests of whether an instrument is a lease or a security instrument, the primary tost being the intent of the parties revealed by the facts of each case with these guides and standards:
“however, (a) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security.”

In Book v. State Office Building Comm’n, 238 Ind. 120, 149 N. E. 2d 273 (Sup. Ct. 1958) the court, while recognizing the majority rule that a contract is one of purchase rather than a lease if the so-called rentals are sufficient, if paid throughout the term of the lease, to cover the entire purchase price, held, nevertheless, that the rule was not applicable to the facts before it, inasmuch as the proposed leases were for an indefinite term with a right of cancellation. Thus, said the court, the rentals could not be considered as sufficient to cover the purchase price of the building. See also Protsman, v. Jefferson-Craig Consol. School Corp. and Jefferson School Tp. v. Jefferson Tp. School Building Co., supa, upholding leases granting a school corporation a non-compulsory option to purchase the property at a price equal to the amount required for the liquidation of the building corporation’s indebtedness.

The case of Krenwinkle v. Los Angeles, supra, held that where the lease contained an option to purchase the demised premises if all rentals and other charges were paid, and the purchase price did not decrease with the amount of rent paid, and the rentals could not be applied on the purchase price, the lease was bona fide.

Obviously, if title is not to pass to the lessee, the instrument is a lease and cannot be construed as a contract of purchase, even though there is involved a legislatively created authority or commission empowered to construct buildings and lease the same to state agencies. Kelley v. Earle, supra; Greenhalgh v. Woolworth, 361 Pa. 543, 64 A. 2d 659 (Sup. Ct. 1949); State ex rel. Thompson v. Giessel, 271 Wis. 15, 72 N. W. 2d 577 (Sup. Ct. 1955); Petition of Board of Public Buildings, 363 S. W. 2d 598 (Mo. Sup. Ct. 1963).

Where a transaction has been held to be a contract of purchase rather than a lease, it is usually because the rentals are so calculated as to constitute actually the cost of construction; or, in the case of an option to purchase, credit is given for rents paid; or, at the expiration of the lease, ownership is acquired by the lessee either at no additional cost or for a nominal consideration. The following cases are illustrative.

City of Phoenix v. Phoenix Civic Aud. & Con. Cent. Ass'n, 99 Ariz. 270, 408 P. 2d 818 (Sup. Ct. 1965), involved an agreement whereby the city was to condemn land and lease it to a nonprofit association which would lease both to the city for 35 years the land and the auditorium to be constructed thereon, the city to pay a monthly rental from its general funds. At the end of the 35-year period the city was to receive the property. Although the proposed lease provided for reentry and recovery of possession in the event of default, and the monthly rental was stated to be for and in consideration of use aud occupancy, the court, nevertheless, held the contract to be nothing more than a purchase agreement creating a debt which would exceed the constitutional debt limit. It noted that the rentals were fixed at a figure sufficient to pay for the cost of the auditorium, including interest and incidental expenses, payment of which was to come from general taxation.

In Mahoney v. City and County of San Francisco, 201 Cal. 248, 257 P. 49 (Sup. Ct. 1927), the proposed arrangement called for leasing to the city and county for park purposes a tract of land for a term of 10 years at a stipulated annual rental figure. The lease contained an option whereby the lessee could purchase the property at any time for $240,000, with credit to be given for such payments as had been made on account of rent. The court held that the total rent payments were actually equivalent to the purchase price plus interest; consequently, the transaction was, in reality, a contract of purchase with payment to be made in installments.

A similar situation was involved in Baltimore & O. S. W. R. Co. v. People, 200 Ill. 541, 66 N. E. 148 (Sup. Ct. 1902), in which it was proposed to lease an electric light plant to a city for a 13-year term at a yearly rental of $1,000. It appeared that the light company was indebted on its plant in the sum of $13,000. The city was given the right to purchase the plant at any time during the lease for the amount of the debt, with credit given for rent payments already made. The transaction was held to be a contract of purchase.

Where a nonprofit corporation was organized to acquire real estate and construct thereon a civic center, and to lease the same to the city for 25 years, with a proviso that upon dissolution of the corporation all remaining property and assets should vest in the city without consideration, the lease was held to be a transparent purchase and sale of a civic center. Bachtell v. Waterloo, 200 N. W. 2d 548 (Iowa Sup. Ct. 1972).

McKinley v. Alamogordo Municipal School Dist. Auth., 81 N. M. 196, 465 P. 2d 79 (Sup. Ct. 1970), involved a plan for the erection of a school building by a school district authority and the leasing of the same to the school district at a basic annual rental. The lease contained an option to purchase at a price sufficient to cover the authority’s debt. This was held to violate the constitutional debt limit.

The leasing to a village of parcels of land for public parking lots, for a term of 20 years, with an option to purchase for $1 at the end of the term, was held to be nothing more than a purchase of the premises by paying monthly installments for 20 years, since the $1 consideration was no reflection of the reasonable value of the property. Marine Midland Trust Co. v. Waverly, 42 Misc. 2d 704, 248 N. Y. S. 2d 729 (Sup. Ct. 1963).

A proposal to construct a swimming pool on property to be conveyed by the city and to lease the same to the city for ten years, at a stated rental, with a waiver of the right to reentry for default and title to be acquired by the city at the expiration of the term, was held to be an installment contract which created an invalid present indebtedness. State ex rel. Kitchen v. Christman, 31 Ohio St. 2d 64, 285 N. E. 2d 362 (Sup. Ct. 1972).

See also City and County of San Francisco v. Boyle, 195 Cal. 426, 233 P. 965 (Sup. Ct. 1925) (agreement by municipality to acquire land and buildings for public use, though denominated a lease, held to constitute an agreement to purchase, where the ultimate intent was concededly the purchase of the property by the municipality); Deti v. Durango, 136 Colo. 272, 316 P. 2d 579 (Sup. Ct. 1957) (leasing of building by city at fixed rental, to be derived from charges for use of building and other sources of revenue, or, if those funds were insufficient, from the city’s general funds, held, on dubious reasoning, to violate debt limit); People v. Doyle and Associates, Inc., 374 Mich. 222, 132 N. W. 2d 99 (Sup. Ct. 1965) (lease-back agreement between contractor and city providing for construction and equipment of medical facility and the use thereof by the county at monthly specified sums, with title to be in the county at the end of ten years, was held to be a purchase by deferred payments).

Both sides make extended reference to the cases of McCutcheon v. State Building Authority, 13 N. J. 46 (1953); Clayton v. Kervick, 52 N. J. 138 (1968); and Holster v. Bd. of Trustees of Passaic County College, 59 N. J. 60 (1971). Plaintiff argues that McCutcheon supports his thesis that the proposed transaction is an invalid attempt to evade the constitutional debt limit. Defendants claim Mc-Cutcheon has been substantially overruled by Clayton and, in any event, is distinguishable from the case at bar. However, the cases have only limited application to the issues involved herein.

McCutcheon dealt with the State Building Authority, empowered to issue bonds, to acquire, construct and operate building facilities, and to lease them only to the State or any of its agencies and departments. The bonds, expressly declared not “[to] be deemed to constitute a debt or liability of the State or of any political subdivision thereof or a pledge of the faith and credit of the State or of any such political subdivision,” were to be repayable from rentals, the only income of the Authority. In striking down the statute the court held that the bond issues were sustained by the State’s promise to supply, in the guise of rentals, but actually through annual appropriations, sufficient money to liquidate the bonds. It said that since, upon retirement of the bonds, the State could acquire title to the buildings simply by dissolving the Authority, the leases were really contracts of purchase, and the real design of the statute was to enable the State to acquire buildings which it could not have done except in compliance with the debt limitation clause of the Constitution. The entire purchase price, the court concluded, became a liability at the time the leases were entered into, thus violating the debt limitation clause.

Justice Jacobs, joined by Justice Brennan, dissented. He argued that, inasmuch as the bonds were expressly stated not to constitute a debt or liability of the State, no burden was assumed with respect to the payment thereof; the only obligation of the State being to pay for the current yearly occupancy, presumably out of an appropriation for that year. The weight of authority, he said, was that future rents are not a present debt or liability; consequently, no immediate liability was created in the aggregate amount of all the future rents, and no violation of the constitutional debt limit resulted.

In Clayton the court upheld a statute creating the Educational Facilities Authority for the purpose of constructing projects and leasing them to participating educational institutions. The Authority was authorized to issue bonds, not to be deemed a debt or liability of the State, payable from annual rentals on the leases. Justice Jacobs now spoke for the majority of the court. After noting once more that future rents were not recognized as present debts or liabilities, and observing that in other jurisdictions statutes have been sustained establishing independent authorities to construct public buildings and lease them to state agencies, he specifically distinguished the building authority involved in Mc-Cutcheon, in that it could lease its buildings only to designated state agencies whose rental payments would come entirely from legislative appropriations, whereas, in the case of the Educational Facilities Authority, the rentals were to come mainly from sources other than such appropriations. Thus, the debt limitation clause was not violated.

Although McCutcheon was not expressly overruled, it was, as noted by Justice Hall in his concurring remarks, 52 N. J. at 158, whittled down so that substantially nothing was left.

The last of the trilogy, Holster, did not involve either an authority created by statute or a lease. It held that where counties issued bonds under the County College Bond Act, to be devoted to making up the State’s share of the cost of capital outlays for county colleges, which bonds were not to constitute a debt or liability of the State or a pledge of the State’s faith and credit, but the payment of which were to be met by state appropriations, the bonds did not become the obligation of the State, but only of the issuing counties. Since the statute did not impose a legally enforceable obligation upon the State either to pay the bonds or to reimburse the counties therefor, the debt limitation provision of the Constitution was not infringed.

It is evident that these cases do not squarely resolve the issues in the litigation now before the court. The common element in all of them is the issuance of bonds expressly declared by the authorizing statute not to constitute debts or liabilities of the State. Clayton stands for the proposition, not relevant here, that where such bonds, issued by a legislatively created authority, are to be paid from moneys received mainly from sources other than legislative appropriations, no obligation is assumed by the State which contravenes the debt limitation clause of the Constitution. The significance of Holster is chiefly that even though such bonds, issued by a subdivision of the State, are to be paid out of state appropriations, there is no binding or enforceable obligation on the part of the State to do so.

In view of Clayton, very little is left of McOutcheon. The conclusion that rentals falling due in future years should be regarded as present debts or liabilities is no longer tenable. What is left, however, may have some bearing on the issues involved herein. Neither McOutcheon nor Clayton deals with a lease-purchase type of arrangement not involving a legislatively created authority. In McOutcheon, as here, the proposed lease was to be to the State or one of its agencies, and the rentals were to come solely from state appropriations. Clayton does not resolve the issue of whether, in such case, the debt limitation clause is violated. In his concurring opinion Justice Hall thought that it did:

* * * I believe the case [Me Guteheon] still ought to remain as sound law to the extent of its general holding that the debt limitation provision is violated (assuming the amount involved is sufficient) where the revenue to pay for state governmental (or for that matter, educational) buildings furnished through an authority, and thus to satisfy that authority’s obligations, must and will come, in reality, only from state appropriations. The interposition of a so-called autonomous agency between the Legislature and the state agency or department benefited in such a situation is to me, realistically, only doing indirectly by means of a conduit what may not validly be done directly, absent referendum approval.
If it is felt we can no longer live with the debt limitation and public aid project provisions of the 1947 Constitution, they ought to be amended by the prescribed method rather than through legislative nullification or evasion and judicial sanction thereof. [52 N. J. at 158-159]

In instances where bonds are issued by legislatively created authorities to pay for the cost of construction of buildings to be leased to governmental or gwasi-publie bodies, and the only income of the authority is rentals paid solely out of state appropriations, Justice Hall's views are supported by cases in other jurisdictions. People v. Green, 382 Ill. 577, 47 N. E. 2d 465 (Sup. Ct. 1943); State ex rel. Nevada Bldg. Authority v. Hancock, 86 Nev. 310, 468 P. 2d 333 (Sup. Ct. 1970); McKinley v. Alamogordo Municipal School Dist. Auth., supra; State Office Bldg. Commission v. Trujillo, 46 N. M. 29, 120 P. 2d 434 (Sup. Ct. 1942) ; State v. Yelle, 47 Wash. 2d 705, 289 P. 2d 355 (Sup. Ct. 1955). Where, however, the rentals are substantially paid from sources other than appropriations, and are thus self-liquidating, the principles set forth in Clayton prevail. Book v. State Office Building Comm’n, supra.

The problems presented by McCutcheon, Clayton, and other eases involving the payment of bonds issued by autonomous bodies arise out of situations different from the one now under consideration. Here there is no intervening, legislatively created authority. The arrangement is directly between a state agency and a private builder-lessor. The State is the proposed lessee and the rentals will necessarily come only from legislative appropriations. Whether, in such case, Justice Hall’s caveat applies has not been resolved.

Nevertheless, taking into account the principles which can be gleaned from the cases cited and discussed hereinabove, the court is convinced that the arrangement in this case is an installment contract of purchase and not a lease, and that it violates the debt limitation provisions of the Constitution. Because of factual variations, as well as differences in debt limitation provisions, one is unable to point to a case on all fours; nonetheless, a careful examination of the proposed lease reveals its deficiencies.

One or more elements of the lease, standing alone, could be consistent with a bona fide instrument; taken as a whole, they are not. Eor instance, the lease contains a basic annual rental, subject to adjustment should taxes increase or decrease. If that were the only factor to be considered, the rental, by itself, might be deemed to be reasonable compensation for the use of the structure; at least, there is no evidence to the contrary. However, as one looks at other provisions, a different picture emerges.

It is significant that the State retains ownership of the land on which the proposed facility is to be erected by the so-called “builder-developer,” unlike the arrangement in many of the cited cases, by which the structure is constructed either on the builder’s own land or on land leased to it by the governmental body, and then, along with the land, is leased back. There would be an incongruous result if, at the expiration or earlier termination of the lease, the builder-developer should own a building on land title to which was in the State.

There is a purported noncompulsory option to purchase. But if the option is not exercised, title reverts to the State in any event at the expiration of the lease, without additional compensation. Actually, therefore, the option is not one whereby the lessee has the choice of either purchasing or surrendering the premises at the end of the term. It is merely a provision for accelerating the acquisition of title by the payment of stipulated amounts.

The State’s ownership of the land, coupled with the fact that it will automatically own the building at the expiration of the term, unless the option is exercised earlier, is more consistent with a design to acquire the structure rather than to lease it.

The case of 405 Monroe Co. v. Asbury Park, 40 N. J. 457 (1963), is distinguishable. The complaint in that case sought specific performance (or alternatively damages for its breach) of an agreement whereby plaintiff leased its property to defendant municipality for a term of 25 years. The property consisted of a ramp garage, erected in the mid-1920’s, which the owners offered to the city. Needing a jail, municipal court facilities, police headquarters and parking space, the city negotiated a lease with the plaintiff corporation, and the instrument was signed on December 31, 1956.

To effect the required alterations, plans and specifications were prepared by the combined efforts of both parties, each selecting an architect, and the two so selected choosing a third. The total cash outlay by plaintiff was in excess of $264,000. On March 25, 1958 plaintiff tendered the completed structure to the city; however, by that time a new administration had taken office, and the city refused to accept it. The answer filed by the city alleged, among other things, that the agreement was a legal subterfuge in that it was an installment contract of purchase which would exceed the debt limitation of the city, contrary to the provisions of the Constitution.

In reversing the judgment below in favor of defendant, the trial court having ruled that certain statutory requisites had not been met, the court held, first, that where the difficulty is an irregularity in the exercise of a power the municipality does have and the Legislature, has not decreed the consequences of the irregularity, a just result must be sought, and one who deals with the municipality in good faith may he permitted to invoke the concept of ratification. With respect to the contention that the transaction was an installment sale rather than a lease, the court pointed out that the constitutional provision was not pertinent, since it applied only to the State. It also held that the agreement did not clash with certain statutes cited by plaintiff, and that the parties “could and did deem the agreement to be a lease and should be barred from disputing its nature at this late date.”

The agreement in the cited case called for the payment of net rental and contained other provisions consistent with conventional long-term leases. It also contained a provision that the city would receive title upon paying $1 at the end of the 25-year term. On this point the court held as follows:

* * » The trial court held the city had to accept title and had no choice in the matter. We think it is not crucial whether that is so, and for convenience we refer to this provision as creating an option. The city argues that the option price of a dollar demonstrates that the periodic payments represent the purchase price, and hence the transaction must be a sale. Ordinarily that would he so, hut not under the peculiar facts of this transaction.
Since a lessor expects to recover out of rent the depreciation in Ills investment in addition to a return upon that investment, the amount of rent necessarily depends upon the life expectancy of the structure. If the term of a lease equals the expected life of a building, the lessor will seek to recapture its full value within that period. In such circumstances an option to buy the residual value at the end of the term for a small sum is compatible with the concept of a lease.
Here we have a structure which as a ramp garage was quite single in its purpose and with the alterations we have described became uniquely so, since a jail, a courtroom, police headquarters and pistol range are of no general utility. Hence the lessor would expect to recoup his investment during the period of the lease. A realtor testified that after 25 years the structure would be of no value to the owner and the cost of demolition would equal the land value. * * *
In these circumstances the parties could understandably have intended the stipulated periodic payments to constitute rent and nothing else. On the one hand, the lessor, doubtful of any residual value to it of a building altered for those municipal purposes, would insist upon recapturing the investment within the term of the lease, while the lessee, accepting and yielding to the lessor’s thesis for fixing rental value, would then expect a terminal option to buy for a nominal sum in the hope that the structure will still be fit to serve the city’s special needs. In terms of fiscal integrity, the essence of a lease transaction is that the annual rent shall represent what the parties believe to be the annual value of the use and enjoyment. Two realtors testified the agreed rent represented a fair rent and no expert testified to the contrary. The parties could believe their arrangement was one of lease, [at 455-456; emphasis supplied]

In the above case, aside from the issue of estoppel, there was proof that at the end of the lease term the structure would be of no value to the owner and the cost of demolition would equal the land value. Recognizing the general rule to be that an option to purchase for a nominal amount demonstrates that the periodic rent payments represent the purchase price, the court held the lease to be bona fide under the peculiar facts of the case.

Here, however, the State does not contend that the proposed facility would have no value at the end of 25 years. No details have been given to explain either the computation of the rental amount or the stated purchase price. Undoubtedly, the builder-developer has calculated his cost of construction, including overhead and profit, and has taken into account what will be required to amortize a mortgage loan. It is a reasonable assumption that the amounts to be paid during those years when the option to purchase can be exercised are what will be needed to pay off whatever indebtedness exists at that time.

All of these factors lead to the conclusion that the clear intent of the arrangement is an installment purchase of the storage facility, and not a lease. As such, it creates a debt or liability in violation of the constitution’s debt limit provision.

It should be noted that the Attorney General, in the past, has disapproved arrangements substantially similar to the one now before the court. In 195? the Director of the Division of Purchase and Property inquired concerning his power to secure additional building space by arranging for the erection of certain structures by private contractors either upon state-owned or privately-owned land, payment to be made over a period of time in the form of rentals, with title to the structures (and to the land, where privately owned) to remain in the contractor until the completion of all payments. The Attorney General ruled {Formal Opinion No. 10, 195?) that the proposed transaction was not a true lease, but was in essence tthe installment purchase by the State of a building. The payments, though designated rentals, would not be compensation for the use of the building but would constitute the purchase price. McCutcheon v. State Building Authority, supra, was cited in support.

Even though it is doubtful that McCuicheon, as drastically limited, is in point, the Attorney General’s conclusions are in accord with the weight of authority, and there is nothing in Clayton v. Kervick, supra, to the contrary.

The Attorney General’s opinion went on to say that authority to contract for the erection of buildings must be found in line items of appropriation acts or in some other statute dearly setting forth the power in question. No funds, however, had been appropriated for the contemplated construction, nor was there any other legislation empowering the Director of the Division of Purchase and Property to act.

In Formal Opinion No. 2, 1959, the Attorney General reaffirmed that a lease-purchase agreement between the State and a private contractor for the construction of buildings to house state agencies would be improper, where title to the property would remain in the contractor until the completion of all rental payments, whereupon it would vest automatically in the State. Such transaction, it was said, would be an installment purchase which violated the debt limitation provision of the Constitution. However, under the agreement being reviewed, the builder would erect a structure to be leased to the State, with an option empowering the State, at given intervals, to purchase the building at a price in accordance with a sliding scale reflecting the depreciated value of the building and the fair market value at the time of purchase. There was no provision for the automatic acquisition of title at the expiration of the lease. This arrangement, the Attorney General ruled, was proper, since the option to purchase was not compulsory, and, if it was exercised, the prior rental payments would not be credited against the purchase price.

In Formal Opinion No. 21, 1961, the Attorney General again stated that lease-purchase agreements, at the conclusion of which the State is vested with title, are not long term rentals but installment purchases.

This court is not bound by the views of the Attorney General, and it recognizes that the opinions all cite McOuicheon. Nevertheless, the State has not shown in what respects the arrangement now before the court substantially differs from the kinds disapproved by the Attorney General, or that post-M cOutcheon cases support the proposed transaction.

It is, of course, true that it is never an illegal evasion to accomplish a desired result, lawful in itself, by discovering a legal way to do it. Book v. State Office Bldg. Comm’n, supra; Kelley v. Earle, supra; McFarland v. Barron, 83 S. D. 639, 164 N. W. 2d 607 (Sup. Ct. 1969). Unfortunately, the proposed transaction is not the way.

Counsel for defendants contends that even if the total to be paid, should the purchase option not be exercised, is a present debt or liability, the amount, about $3,600,000, does not exceed the constitutional debt limit. The theory advanced is that “[t]he only possible reading of the constitutional provision is to exclude from the calculation of the prior debt or liabilities debt funded bjr vote of the people under the Constitution itself,” and that if this is done, there is no prior debt; consequently, the agreement in question, even if it gives rise to a debt, would not exceed the constitutional debt limit. The contention is without merit since the simple fact is that the State has no present capacity to create debts or liabilities in excess of the amount annually appropriated by the Legislature, unless the constitutional procedure is followed. The present bonded indebtedness of the State exceeds $2,000,000,000, the principal and interest of which, except in the case of dedicated funds, must be paid by appropriations in annual budgets. Counsel’s far-fetched notion seems to be that a bonded indebtedness is not the kind of debt contemplated by the Constitution, and that the State can appropriate up to about $20,000,000, or 1% of the current State budget. If th concept were sound, it is unlikely that the financial bonanza envisaged by counsel would have gone unnoticed by those charged with the fiscal affairs of the State.

The Court concludes that the proposed arrangement, on the facts here present, is not a bona fide lease, but is a contract to purchase the storage facility on installments and, as such, violates the debt limitation provisions of the Constitution. Having reached this conclusion, it is unnecessary to consider plaintiff’s additional argument that the statute pertaining to bidding has not been observed. N. J. S. A. 52:32—2.

Judgment will be entered restraining the defendants from entering into or executing the preliminary contract and agreement of lease for the construction of the Central Record Storage and Central Printing Eacilities Building which is the subject-matter of this lawsuit.

       Tbe Division of Purchase and Property was established within the Department of the Treasury by L. 1948, c. 92, § 3 (N. J. S. A. 52:18A-3), with all the functions, powers and duties of the Division of Purchase and Property of the former Department of Taxation and Finance. N. J. S. A. 52:18A-16. The latter Division had succeeded to the powers theretofore vested in the State Purchasing Department and the State Purchase Commissioner, N. J. S. A. 52:27B-55, including the maintenance and operation of warehouses and other storage places, N. J. S. A. 52:25-13; and also to some of the powers of the State House Commission, N. J. S. A. 52:27B-64, including the leasing of office space, N. J. S. A. 52:20-7.


source: Caselaw Access Project

author: Demos. J. S. C.

license: Public Domain

text:
    ATLANTIC MUTUAL INSURANCE COMPANY, A CORPORATION AUTHORIZED TO TRANSACT INSURANCE BUSINESS IN THE STATE OF NEW JERSEY, PLAINTIFF, v. CONTINENTAL NATIONAL AMERICAN INSURANCE COMPANY, A CORPORATION AUTHORIZED TO TRANSACT INSURANCE BUSINESS IN THE STATE OF NEW JERSEY, DEFENDANT.
    Superior Court of New Jersey Law Division
    Decided February 26, 1973.

      Mr. Vincent D. Enright, Jr., for plaintiff (Messrs. En-right, Bright & Saviet, attorneys).

      Mr. John B. Stone, Jr., for defendant (Messrs. Ryan, Saros, Dmis & Stone, attorneys).
   Demos. J. S. C.

This is a declaratory judgment action to decide which of two insurance carriers is responsible for a previously agreed upon settlement. In Victor Gortfai v. Elson T. Killam Associates, Inc. v. Ernest Renda Construction Co., (L-16594—68) and Columbus Glenn v. Elson T. Killam Associates, Inc. v. Ernest Renda Construction Co., (L-27168-68), the two insurance carriers for Killam Associates, Atlantic Mutual Insurance Co. and Continental National American Insurance Co., agreed that one of them would compensate plaintiffs Gortfai and Glenn a total of $68,500. Since each carrier denied coverage under its policy, it was agreed that the issue of responsibility be decided by the court upon a stipulation of the essential facts.

On November 13, 1961, Killam Associates, a professional engineering firm, entered into a contract with the Township of Green Brook under which it agreed to “furnish general supervision of the work of the contractor as the construction progresses, to assist in a correct interpretation of the plans and specifications and to safeguard the Township against defects and deficiencies on the part of the contractor.”

On August 16, 1967 the Ernest Eenda Contracting Company, Inc., was the contractor performing the sewer work referred to under defendant’s contract with the township. On that day Victor Gortfai and Columbus Glenn, two employees of the Ernest Benda Contracting Company, were injured when the sewer trench in which they were working collapsed. As a result of this accident both men instituted suit against both Killam Associates and the Ernest Eenda Contracting Company.

Paragraph 3 of the Gortfai complaint and paragraph 6 of the Glenn complaint charged that Killam Associates “negligently and carelessly supervised, controlled and directed” the work of the contractor, thereby proximately causing their injuries. Plaintiffs’ factual and legal contentions as set forth in the pretrial order alleged that defendant Killam Associates maintained a supervisory engineer at the job site and was therefore in actual control of the work being done. That Killam Associates through its employees, in opposition to a safe method of bracing the trench, approved the use of a steel cage device to protect workers in the excavation. The route taken for excavation did not permit sufficient area for storage of the dirt removed, creating a dirt mound 18' high close to the slope of the trench. Plaintiffs asserted that “despite these indications of eave-in likelihood and absence of sound engineering practice, Killam, through its employees and agents, permitted plaintiffs * * * to descend into the excavation to perform labor.”

The bracing used in the trench violated the New Jersey Construction Safety Code and it was the express responsibility of Killam Associates to advise the township of any such deviation.

It was this violation, coupled with the daily log of Jubanowsky, Killam’s employee at the job site, which contained numerous notations on the safety of the cut that apparently caused defendants to seek a settlement on November 9, 1971. As stated, the total settlement was for $68,500, said amount to be paid by which ever' insurance company was found hy adjudication to be responsible by way of insurance coverage.

It is stipulated that all times material, plaintiff Atlantic Mutual Insurance Co., had issued to Elson T. Killam Associates, Inc. a comprehensive general liability insurance policy. It is also agreed that defendant Continental National American Ins. Co. had issued to Elson T. Killam Associates, Inc. an Architects and/or Engineers’ Professional Liability Policy.

The Atlantic Mutual policy contains two clauses which are important to the instant controversy. It contains a “pro rata” clause under the title “other insurance” as follows:

If the insured has other insurance against a loss covered by this policy the company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of libality stated in the declarations bears to the total applicable limit of liability of all valid and collectible insurance against such loss.

It also contains an endorsement dated September 10, 1965, headed “Exclusion of Malpractice and Professional Services” as follows:

It is agreed that as respects any classification stated above [Architect and Engineering, Draftsman] or designated in the policy as subject to this endorsement, the policy does not apply to injury, sickness, disease, death or destruction due to the rendering of or failure to render any professional service. [Emphasis added]

The Continental National American policy also contains two pertinent clauses: (1) an “Excess” clause which reads:

This policy is in excess of all other vaild and collectible insurance and shall not be called upon in contribution.

and (2) a “Professional Errors and Omissions Clause” which states:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages if legal liability arises out of the performance of professional services for others in the insured’s capacity as an architect or an engineer and if such legal liability is caused by an error, omission or negligent act. [Emphasis added]

Defendant argues in view of the excess clause in the Continental National American policy and the pro rata clause in the Atlantic Mutual coverage that if both policies cover the acts or omissions allegedly committed by Killam Associates, Atlantic Mutual would he responsible for the full $68,500. In support thereof defendant cites First Ins. Co. of Hawaii, Ltd. v. Continental Cas. Co., 313 F. Supp. 808, 814 (D. Ct. Hawaii, 1970).

In situations where one policy contains a pro rata clause, and the other an excess clause, the excess clause governs and the insurer under the excess clause is not liable until the company having the pro rata clause has paid to the extent of its policy liability. Travelers Ins. Co. v. Peerless Ins. Co., 287 F. 2d 742, 748 (9 Cir. 1961); General Accident Fire and Life Assur. Corp., Ltd. v. Continental Cas. Co., 287 F. 2d 464, 467 (9 Cir. 1961).

This court finds, and plaintiff concedes, that if both policies cover the cause of action against Killam Associates, that plaintiff Atlantic Mutual must pay the full amount.

The key question is whether the alleged acts of Elillam Associates were in the nature of professional services specifically excluded under the Atlantic Mutual Policy. There is no question that the Continental' National American policy covers such professional services.

Continental National American argues that noncomplianee with the safety code and the failure to report this violation were nonprofessional acts. Defendant’s sole support for this point is First Ins. Co. of Hawaii, Ltd. v. Continental Cas. Co., supra. The facts in that case are somewhat similar to those here. The original defendant in First Ins. Co. was covered by both general comprehensive and professional liability insurance policies. Defendant negligently supervised the grading of soil, which resulted in a cave-in and injuries .to workers in a trench. The court therein found that the general policy as well as the professional liability policy' covered defendant’s negligent acts. However, that decision is eleraly distinguishable. The allegations in that case charged general negligence — not a specific safety code violation. The court made its findings on the ground that defendant’s acts did not fall within any of the specific exclusions contained in the general comprehensive policy. Rather than excluding any professional act, as does the Atlantic Mutual policy, the policy exempted from coverage only “the hazard arising out of faulty design, maps, plans and specifications.”

A standard test as to what does fall within the meaning of a professional act is set forth in 7A Appleman, Insurance Law and Practice § 4504.3 (1973 Supp. at 77).

A “professional” act or service within a malpractice policy is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor or skill and the labor or skill is predominantly mental or intellectual, rather than physical or manual * * * [Emphasis added]

See also Multnomah County v. Oregon Auto Ins. Co., 256 Ore. 34, 470 P. 2d 147, 150 (Sup. Ct. 1970).

A judicial definition of “professional services” is set out in Aker v. Sabatier, 200 So. 2d 94 (La. Ct. App. 1967).

Professional services, in its usual connotation, means services performed by one in the ordinary course of the practice of his profession, on behalf of another, pursuant to some agreement, express or implied, and for which it could reasonably be expected some compensation would be due. [at 97]

The contract herein reads:

The supenision by the Engineer contemplated by this contract shall be that normally provided by a Consulting Engineer. The Engineer shall watch and report on the progress of the work and shall promptly report to the Township any substantial deviations from the contract.

The supervision by Killam Associates with both parties contracted for is predominantly mental or intellectual. It required observation and constant evaluation of the work being done. The main thrust of the original plaintiffs’ cause of action was the alleged failure of Killam Associates to observe that the contractor was violating the New Jersey State Construction Safety Code as to the manner in which the trench was fortified. The acts of Killam Associates in this respect clearly required the specialized knowledge and mental skill of a professional engineer.

The service performed herein was within the ordinary practice of Killam Associates as professional engineers. It was done on behalf of another, the township, pursuant to a contract which provided Killam Associates with monetary compensation. It is generally held that under statutes relating to the licensing of professional engineers, the field of engineering involves the making of plans and designs as well as the supervision of construction. Smith v. American Packing and Provision Co., 102 Utah 351, 130 P. 2d 951, 957 (Sup. Ct. 1942) ; Perfecting Service Co. v. Product Develop. and Sales Co., 261 N. C. 660, 136 S. E. 2d 56, 65 (Sup. Ct. 1964).

It is the decision of this court that Killam Associates was derelict in providing professional services specifically excluded from coverage under the Atlantic Mutual Insurance Company policy. The full amount of the settlement of $68,500 is to be paid by the Continental National American Insurance Company which under its policy specifically covered this type of professional activity.

Judgment is entered in favor of the plaintiff.


author: Earner, A. J. S. C.

text:
    MARGARET McMULLEN, ADMINISTRATRIX OF THE ESTATE OF CHARLES McMULLEN, DECEASED, PLAINTIFF, v. MARYLAND CASUALTY CO., A CORPORATION, DEFENDANT.
    Superior Court of New Jersey Law Division
    Decided March 20, 1973.

      Mr. Nathan Baker for plaintiff (Messrs. Baker, Garber, Duffy and Baker, attorneys).

      Mr. Edward E. Kuebler for defendant.
   Earner, A. J. S. C.

Plaintiff, as administratrix ad prosequendum, instituted a wrongful death action against Conforti & Eisele, Inc., an assured of defendant Maryland Casualty Co. That litigation was settled for the sum of $250,000. Thereafter, a hearing was held and an order of distribution was entered providing for the payment of attorney’s fees pursuant to the schedule in R. 1:21-7 and the allocation of the balance to the next of kin.

The negligence action arose out of an accident compensable under the Workmen’s Compensation Act. As of the time of the settlement Maryland Casualty Co., which was also the compensation carrier, had made voluntary compensation payments amounting to approximately $16,000. However, the projected total compensation liability of the carrier for the death claim was $39,450.

In the order of distribution the court deducted the total projected compensation liability from the gross settlement in arriving at the amount of the attorney’s fee. This was done for the sole purpose of assuring that the fee on this portion of the recovery would be assessed against the workmen’s compensation carrier and not against the next of kin.

In the meantime, the attorney for plaintiff filed a workmen’s compensation claim in order to formalize the amount due thereunder by an appropriate judgment, and also to have the attorney’s fee computed on the subrogated portion of the third-party recovery.

In the Workmen’s Compensation Division counsel for Maryland Casualty Co. took the position on the record that the company had no liability for counsel fees because the order of distribution did not allocate any fee to the subrogated figure of $39,450 nor assess any fee on that sum to the administratrix or next of kin. The compensation judge thereupon refused to award a fee, but left open in equivocal language whether such a fee would be due in the future by application to the Superior Court. A subsequent application to the Superior Court in the negligence action was unavailing, and plaintiff was shunted to the Appellate Division for relief. In the meantime, defendant, in its dual position as liability and workmen’s compensation carrier, remitted to plaintiff the settlement funds of $250,000, deducting however the gross amount of its lien for paid compensation benefits amounting to $16,574.

In an effort to extricate himself from the aforesaid procedural morass, plaintiff’s counsel brought this independent action against Maryland Casualty Co. for the payment of the attorney’s fee due on the total projected compensation award. Both parties moved for summary judgment.

At the hearing of these motions counsel for defendant backed away from the wholly untenable position which he asserted before the Workmen’s Compensation Division and conceded that defendant is legally obligated to pay an attorney’s fee on the amount of the total projected compensation claim regardless of the form of the distribution order or the lack of actual payment by the client.

The parties thereupon stipulated that this court assume jurisdiction of the controversy and proceed to determine the sole issue, namely, the quantum of attorney’s fees to be paid by defendant. Moreover, plaintiff’s counsel committed himself to dismiss the appeal from the Workmen’s Compensation Division, so that the matter could be resolved on the merits before this court.

In passing, it should be noted that the Workmen’s Compensation Division and the Superior Court have concurrent jurisdiction to determine liability of a compensation carrier for legal fees arising out of a third-party recovery so long as the carrier is a party to the litigation. Cf. Caputo v. The Best Foods, 17 N. J. 259 (1955); McDermott v. Standard Accident Ins. Co., 40 N. J. Super. 119 (App. Div. 1956). Hence, the court will now undertake to determine the method of computation of the fee to be paid by the workmen’s compensation carrier.

Plaintiff’s counsel asserts that (a) such fee is not controlled by the contingent fee schedule contained in B. 1:21-7 and that he should receive 33-1/3% of the financial benefit gained by defendant through the third-party recovery; (b) if B. 1:21-7 is applicable, the percentage rates should be computed on the projected liability of the carrier in an independent manner, without consideration of the contingent fee applied to the client’s recovery and with a maximum limitation of 33-1/3%.

The application or manner of application of B. 1:21—7 to the subrogative recovery of a workmen’s compensation carrier has not been determined as yet in any reported opinion.

N. J. S. A. 34:15-40, which is the underlying statute establishing the liability of the workmen’s compensation carrier for its share of the counsel fees incurred in a third-party recovery provides that the attorney’s fee shall not be “in excess of 33-1/3%” plus expenses not in excess of $200. It is settled that where the third-party recovery exceeds the liability of the employer or his insurance carrier, the latter is liable for the fee computed upon the total compensation liability regardless of the amount actually paid or unpaid at the time of the third-party recovery. Dante v. Gotelli, 17 N. J. 254 (1955); Caputo v. The Best Foods, supra.

it is also clear that the contingent percentage fee provision of the statute is but an outside limit subject to the caveat that “the fee ratio shall not exceed that actually borne by the injured workman.” Caputo v. The Best Foods, supra. Thus, in the latter case, it was held that the spirit and reason of the statute dictated that the fee assessable against the compensation carrier was only one-sixth of its recovery in view of the fact that the agreement between the employee and counsel provided for a contingent fee of one-sixth of the settlement of the tort action.

In view of the foregoing controlling precedents, it follows that the fee payable by defendant cannot exceed the fee payable by the administratrix of the employee’s estate. The gross fee payable by the estate was measured not by the retainer agreement between attorney aud client but by the graduated scale contained in R. 1:21~7, and computation of the gross fee on the recovery of $250,000 averages out to 16.8%.

R. 1:21—7(c) excepts from the operation of the rule a case in which the client is a subrogee. This exception was to leave to mutual agreement the fee arrangement between attorneys and insurance carriers or others whose claims arise out of rights of subrogation. However, in this instance of the statutory subrogation of a carrier under the Workmen’s Compensation Act the carrier is not the client. The carrier’s right of recovery arises rather because of its statutory lien, with the attorney at all times acting on behalf of the employee. (A different result might obtain in the situation where the employee fails to seek recovery and an independent action is instituted by the compensation carrier under N. J. 8. A. 34:15-40(f)). The exception in the fee rule does not apply to the subrogative recovery of a carrier under the Workmen’s Compensation Act. Moreover, as already noted, the rationale of Gapulo would bar any fee percentage in excess of that paid by the employee.

If, therefore, the fee assessable against the carrier is controlled by the applicable court rule and cannot exceed the fee ratio borne by the workman, how is it to be computed in view of the pattern of different percentages applicable to several portions of the total recovery? The queries presented by plaintiff’s argument are: Should the company’s recovery be considered as a separate claim so that the fee on $39,450 would be 33-1/3%, in view of the fact that the rule ratio on that sum would exceed the statutory limit? Should the carrier’s recovery be considered as the initial portion of the total tort recovery because of its status as a lien so as to lead to the same result?

These suggestions run counter to the purpose, spirit and intent of the statute and the Gaputo opinion. The third-party recovery on behalf of the workman’s estate should be considered as an entity, and the fee imposed upon the carrier should be no more nor less than that computed upon the total third-party settlement. There is no reason or logic to support the treatment of the carrier’s share as separate and apart from the whole. By the same token, it is unfair and inequitable to apply the higher fee ratio at the beginning of the scale merely because the carrier’s payment is founded upon a statutory lien.

The only fair method of computation is to use the percentage factor applicable to the total recovery of $250,000, for that is the overall fee payable by the client. Judgment will therefore be entered in favor of plaintiff and against defendant based upon 16.8% of the total liability of defendant on the compensation claim, plus the statutory cost allowance of $200.


author: Yanoef, J. C. C.,

text:
    FREEDOM FINANCE CO., INC., PLAINTIFF, v. NEW JERSEY BELL TELEPHONE CO. ET AL., DEFENDANT
    District Court Essex County
    Decided January 19, 1973.

      Mr. John 8. Giava, Esq., attorney for plaintiff.

      Mr. Chauncey L. Barrett, attorney for defendant.

      Mr. Bertram, P. Goltz, Jr., Deputy Attorney General, for the Attorney General.
   Yanoef, J. C. C.,

Temporarily Assigned. The issue here is whether N. J. 8. A. 2A :150A-1, which became effective in 1971, may constitutionally be applied retroactively. The statute reads:

It shall be unlawful for any person to withhold or pay to another or purchase or have assigned to him, other than by order of court, any salary, wages, commissions, pay or other compensation for services, or any part thereof, due or to be become due to any employee and any such purchase or assignment, whenever executed, shall be void and unenforcible.

The dispute revolves around the words “whenever executed.”

The factual context is simple. On or about October 12, 1966, plaintiff obtained in New York State a wage assignment from Helen Ruth Keys, also known as Helen Ruth Brown, in connection with a loan of money. Borrower defaulted, as a result of which plaintiff claims to be entitled to exercise its rights under the wage assignment. Defendant employer, New Jersey Bell Telephone Company, refused to pay on the ground that payment was prohibited by N. J. 8. A. 2A:150A-1. Plaintiff instituted suit against Bell, and asserted that the statute in question was unconstitutional. The Attorney General was brought in pursuant to the rules.

The burden of argument on a summary judgment motion has been borne by the Attorney General. Plaintiff contends that

1. The contract, having been executed in New York, is valid under New York law.
2. If New Jersey law is applied, U. 8. Const. Art. I, § 10, and N. J. Const. (1947), Art. IY, § VII, para. 3, prohibit retroactive effect because plaintiff would thereby be deprived of a remedy for enforcing the contract which existed when made.

At oral argument plaintiff conceded that the State had the right to change statutory remedies affecting the enforcement of the contract. The gravamen of plaintiff’s complaint is that the State may not impair a remedy upon which the parties had agreed by contract.

The language of the statute, its history, and other statutes relating to the same subject matter make it clear that the Legislature intended it to have retroactive effect. It must stand or fall on that basis.

The statute must be classified as among the enactments which protect the minimum living standards of the people of this State. Other statutes of similar tenor are minimum wage laws (N. J. S. A. 34:11-1, affecting public contracts; N. J. S. A. 34:11-34 et seq., fixing minimum wage standards) ; statutes exempting assets from assignment or levy (N. J. S. A. 2A:19—12, 2A:26-4, 2AA7-24, 34:15-29) ; a statute controlling the order of income executions (N. J. S. A. 2A.T7-52); a statute specifically exempting a minimum amount of wages from levy (N. J. S. A. 2A:17-50); and laws directing prompt payment of wages and the methods of paying wages (N. J. S. A. 34:11-4.2, 4.3, 4.4, 4.5). Such statutes manifest the State’s concern with the welfare of its citizens and are unquestionably within the Constitutional power.

In light of the foregoing there is no doubt in my mind that the transaction in so far as the enforcement of the wage assignment is concerned, is governed by New Jersey law. While it may be true that a contract is normally controlled with respect to its enforcement by the law of the place where made, the problem in this case is the impact which the enforcement of the contract may have upon the subsistence level of New Jersey residents. Viewed in that light, Oxford Consumer Discount Co. v. Stefanelli, 102 N. J. Super. 549 (App. Div. 1968), 104 N. J. Super. 512 (App. Div. 1969), mod. 55 N. J. 489 (1970), is determinative. There, the question was whether the New Jersey Secondary Mortgage Loan Act (N. J. S. A. 17:11 A-l et seq.) controlled the enforcement of a contract made in Pennsylvania; the court held that it did. Judge Conford, speaking for the court (102 N. J. Super. 549) analyzed the impact of the equal protection, due process, commerce, and full faith and credit provisions of the United States Constitution upon the transactions and concluded that they did not bar application of the New Jersey statute. The ruling rested ultimately upon the power of the State to protect its citizens from oppressive financing transactions wherever made. Judge Conford stated:

In the instant case, giving this transaction the protective umbrella of the Pennsylvania statute would not only offend New Jersey policy in a most sensitive area, but would negate a New Jersey statute embodying that policy in terms read above by this court to control the very transaction involved * * *
The Pennsylvania statute does not have a claim for recognition to validate this transaction superior to that of the New Jersey statute for subjection of the transaction to its requirements.
The freedom of plaintiff ordinarily to contract bow and with whom it will does not rationally outweigh the decree of the New Jersey Legislature, born of the baneful background circumstances related above, that whoever, wheresoever resident, would lend to residents, of New Jersey on the security of a secondary mortgage on property in that State must comply with the regulatory requisites it has laid down at peril of losing its right of recovery on such a loan in New Jersey Courts, [at 575-576]

The Supreme Court’s modification (55 N. J. 489) did not affect this conclusion.

HIMC Investment Co. v. Siciliano, 103 N. J. Super. 27 (Law Div. 1968), is to the same effect.

The strength of the public policy involved is attested not merely by the statutes already cited, which demonstrate a strong state interest in reserving to its residents, particularly wage earners, a minimum subsistence, not reached by process of any nature, but by the history of N. J. S. A. 2A:150A-1 itself. New Jersey has considered wage assignments an area appropriate for regulation since at least 1884. L. 1884, e. 166 (N. J. S. A. 34:11—25) made wage assignments unlawful when secured by usurious loans. L. 1896, c. 179, § 2, invalidated wage assignments which relieved the employer from the obligation to pay weekly. L. 1948, c. 71, § 5, regulated wage assignments to some degree, providing for allocation to interest and charges in a wage assignment, of the excess over the amount loaned. L. 1967, c. 94 (N. J. S. A. 17:10-17) amended this statute to invalidate assignments “hereafter made.” After the Appellate Division, in an unreported decision cited by plaintiff, had held that the statute did not prevent enforcement of an assignment made six weeks prior to its effective date, the Legislature enacted, N. J. S. A. 2A:150A-1. The legislative statement accompanying the statute reflected the public policy which the Legislature deemed served by the statute:

An employee with a good defense to a wage assignment is in no position to defend because there is no court process whatever and the employer withholds the moneys to avoid personal liability. The result is inequitable economic duress on the employee. Wage assignments today serve no legitimate economic or social interest and should he abolished. This bill is one more step in the effort to protect the consumer public.

Obviously, tbe Legislature had in mind the difference between a wage assignment and a wage execution under N. J. S. A. 2A :17-50, where a debtor is given notice pursuant to court rule, and the order is made by a judge who has the opportunity to weigh the economic impact of the wage deduction upon the debtor’s basic living requirements.

Trial courts should not declare a statute unconstitutional unless the violation is clear. Legg v. Passaic County, 122 N. J. L. 100 (Sup. Ct. 1939), aff’d 123 N. J. L. 263 (E. & A. 1939); State v. Packard-Bamberger & Co., Inc., 123 N. J. L. 180 (Sup. Ct. 1939); State v. Cannarozzi, 77 N. J. Super. 236 (App. Div. 1962).

U. S. Const., Art. I, § 10, forbids a State to “pass any * * * Law impairing the Obligation of Contracts * * N. J. Const. (1947), Art. IV, § VII; par. 3 provides, “The Legislature shall not pass any * * * law impairing the obligation of contracts, or depriving a party of any remedy for enforcing a contract which existed when the contract was made.”

A review of the cases demonstrates that neither the United States nor the New Jersey courts have considered these provisions as absolutes; rather, they have determined the question of whether there has been an impairment of obligation or deprivation of remedy by balancing the extent to which a contract party is deprived of the benefit of his contract against the social interests involved. Naturally, such a weighing of interests involve questions of judgment which may vary from time to time. At one end of the resulting range of decisions are cases such as emerged in the 1930’s as the result of economic depression. Thus in Home B. & L. Ass’n v. Blaisdell, 290 U. S. 398, 54 S. Ct. 231, 78 L. Ed. 413 (1934), a two-year moratorium on mortgage foreclosures was sustained, and in Veix v. Sixth Ward B. & L. Ass’n of Newark, 123 N. J. L. 356 (E. & A. 1939), aff’d 310 U. S. 32, 60 S. Ct. 792, 84 L. Ed. 1061 (1940), a statute which delayed substantially the time of withdrawal of shares in building and loans was held constitutional, on the theory that a shareholder in a building and loan was subject to statutory modifications of his right to withdrawal.

In Veix v. Seneca B. & L. Assn, 126 N. J. L. 314 (E. & A. 1941), the shareholder had given notice of withdrawal prior to enactment of the statutes delaying payment. He claimed as does plaintiff here, impairment of contract obligations, and invoked the same constitutional provisions as those upon which plaintiff relies. The Court of Errors & Appeals nevertheless adhered to its previous ruling. Justice Perskie, for the court, stated appropriately:

From all that has been written, it becomes incx’easingly clear that we have steadfastly adhered to the well recognized rule of law determinative of the constitutional exercise of the reserved police power of the state over property and contract rights. That rule of law is that every contract is made subject to the implied condition that is fulfillment may be frustrated by a proper exercise of the police power. But such a result can only be effected if the exercise of the power is for an end which is in fact public and the means adopted is reasonably adapted at that end. [at 320]

The same principle is exemplified by a number of cases where, at least in my view, pressures of social necessity for modification of the contract, were not as great as in the Blaisdell situation. Stone v. Mississippi, 101 U. S. 814, 25 L. Ed. 1079 (1879); Louisiana v. New Orleans, 102 U. S. 203, 26 L. Ed. 132 (1880); Manigault v. Springs, 199 U. S. 473, 26 S. Ct. 127, 50 L. Ed. 274 (1905); Marcus Brown Holding Co. v. Feldman, 256 U. S. 170, 41 S. Ct. 465, 65 L. Ed. 877 (1921); Lincoln Fed. L. U. v. Northwestern I. & M. Co., 335 U. S. 525, 69 S. Ct. 251, 93 L. Ed. 212 (1948).

At the other end of the range of cases are those which hold that statutes which affect only procedural matters are ordinarily given retrospective operation. Howard Savings Institution v. Kielb, 38 N. J. 186 (1962); Pennsylvania Greyhound Lines v. Rosenthal, 14 N. J. 372 (1954); Morin v. Becker, 6 N. J. 457 (1951); Lapp v. Belvedere, 116 N. J. L. 563 (E. & A. 1936); Avon Sheet Metal Co. v. Heritage House Associates, 107 N. J. Super. 487 (Cty. D. Ct. 1969). But to say that the questioned statute affects only procedure and remedy is not a complete answer, since sufficiently drastic changes in those areas may drain a contract of its substance. The question still remains whether a plaintiff has in reality been deprived by this statute of the value of its contract. City of El Paso v. Simmons, 379 U. S. 497, 515, 85 S. Ct. 577, 13 L. Ed. 2d 446 (1965); W. B. Worthen Co. v. Kavanaugh, 295 U. S. 56, 62, 55 S. Ct. 555, 79 L. Ed. 1298 (1935).

But on these issues plaintiff’s attack on N. J. S. A. 2A:150A-1 fails since the change effected by it is essentially procedural and does not deprive plaintiff of a whit of the substance of its contract. It requires qnly that plaintiff submit its claim to a court before it can collect from a person’s wages. Its impact upon plaintiff’s rights is of the same nature as the amendment by A. 1969, c. 92, § 1 of N. J. S. A. 2A: 17-50, which increased the amount of wages exempted from execution from $18 to $48, the constitutionality of which has not been questioned, and probably less onerous. Plaintiff’s argument that there is a distinction between a statutory remedy and a remedy created by contract could deprive the State of all power, if carried to, its logical consideration. It would mean that a State is required to enforce a contract, no matter how repugnant to its public policy. Clearly, this is not so. In this case we are dealing, not with an insignificant aspect of public policy, but with a strongly enunciated and long held policy protecting the basic living standards of the State. It would be strange indeed if the State could not require a creditor to suffer the very minor deprivation involved here to effectuate that policy.

The Attorney General’s motion for summary judgment will therefore be granted.


author: Per Curiam.

text:
    DORIS E. FISCHER, APPELLANT, v. BOARD OF REVIEW, DIVISION OF EMPLOYMENT SECURITY, DEPARTMENT OF LABOR AND INDUSTRY, STATE OF NEW JERSEY, RESPONDENT.
    Superior Court of New Jersey Appellate Division.
    Submitted February 27, 1973
    Decided March 22, 1973.

      Before Judges Kolovsky, Matthews and Cbahay.
    Appellant Doris E. Fischer filed a brief pro se.

      Messrs. Yankowiiz & Tessler filed a brief for respondent Pressman, Frohlich & Frost, Inc.

      Mir. George F. Kugler, Jr., Attorney General, filed a Statement in lieu of Brief on behalf of respondent Board of Keview (Mr. I. Leo Moiiuk, Deputy Attorney General, of counsel; Miss Mary Ann Burgess, Deputy Attorney General, on the brief).
   Per Curiam.

Appellant worked for almost 21 months as a sales (registered) representative of respondent Pressman, Frohlich & Frost, Inc., a broker engaged in the selling of stock, mutual funds and shares in oil ventures. On October 24, 1969 she was laid off because of lack of work. On October 30, 1969 she applied for unemployment compensation benefits and thereafter for 26 weeks received benefits totalling $1,690.

On September 22, 1971 appellant was notified by the Division of Employment Security that she had not been entitled to benefits and that her employer had “erroneously reported [her] commissions as wages.”

On appellant’s appeal to the Appeal Tribunal the administrative agency found that:

The employer for whom the claimant performed services during the base year of the claim was a broker engaged in the selling of stock, mutual funds and shares in oil ventures. The claimant received no salary. Her remuneration was based on the income that she produced as an agent for the employer. She received commissions based on a percentage of this income as compensation for her services.
The claimant performed no services for any other employer during the base year of her claim.

After referring to N. J. S. A. 43 :21—19 (i) (7), which provides :

[T]he term “employment” shall not include:
* * * *>
(J) Service performed by agents of mutual fund brokers or dealers in the sale of mutual funds or other securities *’ * * if the compensation to such agents for such services is wholly on a commission basis.

the Appeal Tribunal concluded:

Since the claimant’s earnings were derived wholly from services -performed as an agent on a commission basis, they are not earnings in employment and hence cannot be used in the computation of the weekly benefit amount or the maximum benefit amount of this claim.
5k* 5¡: sk # 5¡S * * *
Since the claimant did not have 17 base weeks, or in the alternative, not earn $1,350.00 in employment during the base year, she did not meet the * * * provisions of the statute. The claim dated October 30, 1969 is invalid and the claimant is ineligible for unemployment benefits thereon.
Because the claim is invalid, the claimant is liable to repay the sum of $1,690 received as benefits for the 26 week period from October 30, 1969 through April 29, 1970.

The appeal before us is from the decision of the Board of Review which, on claimant’s appeal, had affirmed the decision of the Appeal Tribunal.

We are satisfied from our review of the record that the evidence supports the findings of the administrative agencies and their conclusion that N. J. S. A. 43 :21—19 (i) (7) (J) precludes the recognition of the commissions earned by appellant as “earnings in employment.” Plaintiff was therefore not eligible for benefits, see N. J. 8. A. 43 :21-4, 43:21-19(c) and (t), and despite her conceded good faith in applying for the benefits she received, she is obligated to refund them. The Division is not estopped from demanding the refund. The statute authorizes it to proceed to recover benefits improperly paid at any time within four years after the benefits in question were paid. N. J. 8. A. 43 :21-16(d).

Appellant’s obligation to refund is not affected by the fact her employer reported her commissions as wages and deducted from her “wages” and transmitted to the Division the “worker’s” contributions provided for by N. J. 8. A. 43 :21-7(d).

The record before us does not disclose the total amount of employee’s contributions so transmitted out of appellant’s “wages.” However, appellant would appear to be equitably entitled to a credit, against the $1,690 she is required to refund, in an amount equal to the total amount of her “contributions,” subject however to the limitations set forth in N. -7. 8. A. 43 :21-14(f) which reads as follows:

If not later than 2 years after the calendar year in which any moneys were erroneously paid to, or collected by the division, whether such payments were voluntarily or involuntarily made or made under mistake of law or of fact, an employer, employing unit, or employee who has paid such moneys shall make application for an adjustment thereof, the said moneys shall, upon order of the director, be either credited or refunded, without interest, from the appropriate fund. For like cause and within the same period, credit or refund may be so made on the initiative of the director.

Since more than two years have elapsed since appellant’s “contributions” were made, she could not now successfully prosecute an independent application for refund or credit of the contributions erroneously made. Cf. Lazar v. Board of Review, 77 N. J. Super. 251, 261 (App. Div. 1962). Nevertheless, we are satisfied that the last sentence of N. J. 8. A. 43:21-14(f), quoted above, mandated that when the Director decided, on September 22, 1971, that appellant’s employer had erroneously reported appellant’s commissions as salary —• thus obligating her to refund the benefits she had received — that he, at the same time, on his own “initiative,” proceed to credit appellant with such of her contributions as were made within the two-year period referred to in N. J. 8. A. 43:2J~14(f) which preceded September 22, 1971.

The cause is remanded to the Board of Review with directions that the credit for contributions paid by mistake, to which appellant is so entitled, be determined and that the total of such credits be applied against the $1,690 which she is otherwise obligated to refund. As so modified, the decision of the Board of Review is affirmed. No costs on this appeal.