On certified appeal from the Law Division of the Superior Court.
For reversal -- Chief Justice Vanderbilt, and Justices Heher, Oliphant, Burling, Jacobs and Brennan. For affirmance -- None. The opinion of the court was delivered by Vanderbilt, C.J.
The plaintiff Standard Accident Insurance Company appeals from a summary judgment entered in the Law Division of the Superior Court in favor of the Federal Trust Company, one of the defendants.
On January 10, 1946 Standard issued to the Columbus Trust Company two fidelity bonds totalling $175,000 to protect that institution, among other things, against loss arising out of any fraudulent, dishonest or criminal acts of its officers and employees, and effective March 1, 1948 this coverage was increased to $200,000. While these bonds were in effect P. James Pellecchia, Jr., also a defendant in this action, was vice-president and counsel of Columbus, the stock of which was largely controlled by his family. Between January 1946 and July 1948 Pellecchia looted Columbus of about $657,000 through his fraudulent handling of mortgage loan transactions as counsel of Columbus. On 20 different occasions during this period Pellecchia caused funds to be loaned by Columbus on notes purporting to be secured by real estate mortgages and then converted these monies to his own use.
Although all his defalcations involved mortgage loans by Columbus, Pellecchia adopted various techniques in carrying out his fraudulent activities. In 14 instances he prepared mortgage applications in the names of fictitious persons seeking loans on real property in or near Newark that was being advertised for public sale. After each application had been approved by the board of directors, it would be turned over to Pellecchia as the bank's attorney to make the necessary examination of title. In due course he would report to the
bank that the title was clear and the bank would then issue its treasurer's check in the full amount of the loan to the order of the fictitious mortgagors and deliver it to Pellecchia to consummate the mortgage transaction. He would thereupon endorse the check to his own order by signing the name of the fictitious payees and would give the bank fraudulent mortgage papers. In another instance the purported mortgagors were actual persons who held title to the property involved, but they had not submitted the mortgage application in question and had no knowledge of it. They, of course, received no part of the proceeds of the check of the bank to their order, for Pellecchia signed their names in endorsing the check and converted it to his own use. On two other occasions the mortgage applications were bona fide, but prior mortgages on the property were to be paid off by Pellecchia out of the checks of the bank, but instead he converted these monies to his own use and let these preexisting mortgages remain as prior liens on the properties on which the bank thought it was procuring first liens. In each of three remaining transactions Pellecchia used the name of one or another of the corporations he had formed on the mortgage applications and listed property therein which was not owned by the applicants. After depositing the proceeds of each of these mortgages to the account of the payee corporation, he soon withdrew the funds and appropriated them to his own use.
Of the 20 checks issued by Columbus in these fraudulent mortgage transactions only 18, totalling $587,000, were deposited by Pellecchia in the Federal Trust Company, 16 to his personal account and two to the accounts of the dummy corporations formed by him, the other two checks of Columbus clearing through other banks. In this action, however, only 15 of the checks of Columbus, representing some $516,500, are involved. After stamping the checks "prior endorsements guaranteed, Federal Trust Company," Federal forwarded them for collection to Columbus and credited the proceeds of 14 of them to Pellecchia's personal account in Federal while the fifteenth was credited to the account of a dummy corporation. Pellecchia drew the funds out of his personal
account and the corporate account in Federal for his own purposes, largely for the payment of gambling debts.
Pellecchia's personal account in Federal was opened on December 29, 1941 with a deposit of $1,900. From that date until January 23, 1946, a four-year period, Pellecchia drew 59 checks on this account, or an average of slightly more than one a month, while he made 29 deposits, or an average of approximately three deposits every five months. On the other hand, during the 2 1/2-year period of his defalcations from January 23, 1946 until July 13, 1948, Pellecchia drew approximately 700 checks on the account, or an average of about 24 a month, while at the same time he made about 350 deposits to the account, or approximately 11 a month. While withdrawals and deposits during the earlier four-year period totalled about $74,000, those in the later 2 1/2-year period amounted to approximately $1,600,000, including the sum of $587,000 fraudulently obtained by him from Columbus. Of the 15 checks here involved, 14 ran into five figures, ranging in amount from $24,000 to $50,000. One check in the amount of $45,000 deposited to this account was endorsed to the order of "P. James Pellecchia, Jr., attorney" while another in the amount of $35,000 was drawn to the order of "P. James Pellecchia, Jr., attorney." Both were deposited to his personal account. All the rest of the 15 checks in question were drawn to the order of the mortgagors and endorsed by Pellecchia personally and, except for the one check payable to the corporate mortgagor, were deposited in his personal account with Federal.
When Pellecchia's fraudulent activities became known in July 1948, Columbus collapsed, and on July 12, 1948 its assets were taken over by the Federal Deposit Insurance Corporation. Meanwhile Pellecchia pleaded guilty to criminal charges and was sentenced to prison, where he still remains. The Federal Deposit Insurance Corporation called on Standard to pay under its fidelity bonds to Columbus, which it did to the full extent of its liability of $200,000. While still in the possession of the assets of Columbus, the Federal Deposit Insurance Corporation in July and August
1949 made claim in writing against Federal for $516,500, based upon its guaranty of the forged or fraudulent endorsements on the 15 checks of the treasurer of Columbus deposited by Pellecchia in Federal. No suit was instituted to enforce this claim. Federal maintained that it had valid defenses to the claim, contending among other things that the loss was occasioned not by any negligence on its part but rather by the laxity of the officials of Columbus in permitting these fraudulent mortgage transactions by Pellecchia. Federal also claimed that many of the checks were drawn to the order of fictitious persons, giving rise to the contention that they should be construed as bearer checks drawn with knowledge imputable to Columbus through pellecchia, its vice-president and counsel, and that in some instances the payee was nonexistent and hence that there was no forgery by Pellecchia and therefore no liability on the part of Federal on its guaranty of endorsements.
Meanwhile the liquidating agents of Columbus were considering the purchase from the Federal Deposit Insurance Corporation of the assets of that bank, including any claim which Columbus might have against Federal on account of the guaranty of the endorsements on its checks. Before consummating any such transaction the liquidating agents negotiated with Federal to see if Federal would pay all or any part of the claim of Columbus on the guaranty of endorsements by Federal. On learning of these negotiations Standard notified Federal and the liquidating agents of Columbus of its claim to be subrogated to the rights of Columbus against Federal by reason of its payment to Columbus under the fidelity bonds and that it would not be bound by any settlement on account of this claim made without Standard's consent. The Commercial Casualty Insurance Company, which had insured Federal against loss by the negligence of its officers and employees, entered into the negotiations for a possible settlement of the claim of Columbus against Federal. Ultimately it was agreed that Federal would pay Columbus $175,000 (one-half of which was to be paid by Commercial Casualty and one-half by Federal) in full settlement
of the claim of Columbus against it on account of its guaranty of the check endorsements. The liquidators, aware of Standard's claim of subrogation, were reluctant to enter into any such settlement with Federal in the absence of some protection against the eventuality that Standard would attempt to hold them liable for settling a claim possibly worth $516,500 for a lesser figure, thus defeating Standard's subrogation rights. Federal therefore agreed to guaranty Columbus and its stockholders against any such claims asserted by Standard, and this guaranty was made a part of the agreement whereby Federal was to pay Columbus $175,000 in settlement of its claims on Federal's guaranty of the check endorsements.
On September 25, 1950 Columbus bought back its assets, including the claim against Federal, for $170,994.89, the full balance then due to the Federal Deposit Insurance Corporation, and on the same day consummated the proposed settlement with Federal and its surety, Commercial Casualty Insurance Company, for $175,000.
Standard refused to be bound by this settlement agreement between Federal and Columbus and made demand on Federal for $516,500 on account of the guaranty of check endorsements, which Federal declined to pay. Standard thereupon instituted this action against Federal and Pellecchia in the Law Division of the Superior Court but the action against Pellecchia is not involved here. Insofar as this appeal is concerned, Standard's complaint against Federal is based on its payment of $200,000 to Columbus in satisfaction of its liability to Columbus on its two fidelity bonds, as a result of which it became subrogated to the extent of $200,000 to the rights that Columbus had against Federal by reason of the latter's contractual guaranty of endorsements on the false or forged checks, Standard claiming that the settlement by Federal and Columbus of this claim for $175,000 after notice from Standard was without effect as to Standard.
After discovery proceedings had been completed, Federal moved for summary judgment. At the hearing of this motion it became apparent that further discovery was necessary.
The trial court thereupon adjourned the hearing on the motion until the discovery proceedings could be completed. Thereafter Federal's renewed motion for summary judgment was granted, the trial court holding that although Federal by guarantying the endorsements of the checks issued by Columbus had incurred a contractual liability to it, still Federal was innocent in equity and Standard could not recover because its "right of subrogation * * * is conditional and the condition, namely, a superior equity to that of Federal, is nowhere demonstrated in the pleadings, proof or inferences therefrom." The defendant appealed to the Appellate Division of the Superior Court and we certified the appeal on our own motion while it was pending there.
Subrogation is a device of equity to compel the ultimate discharge of an obligation by the one who in good conscience ought to pay it, Camden Trust Co. v. Cramer, 136 N.J. Eq. 261, 264 (E. & A. 1944), Restatement of the Law of Security, § 141, comment (a). It is a right of ancient origin, having been imported from the civil law to serve the interests of essential justice between the parties, Sullivan v. Naiman, 130 N.J.L. 278, 280 (Sup. Ct. 1943). It is most often brought into play when an insurer who has indemnified an insured for damage or loss is subrogated to any rights that the insured may have against a third party, who is also liable for the damage or loss. In such a case it is only equitable and just that the insurer should be reimbursed for his payment to the insured, because otherwise either the insured would be unjustly enriched by virtue of a recovery from both the insurer and the third party, or in the absence of such double recovery by the insured the third party would go free despite the fact that he has the legal obligation in connection with the loss or damage.
Subrogation is highly favored in the law, Schmid v. First Camden National Bank, 130 N.J. Eq. 254, 266 (Ch. 1941), although it is not an absolute right but rather is
applied under equitable standards with due regard to the legal and equitable rights of others, Gaskill v. Wales, 36 N.J. Eq. 527, 533 (E. & A. 1883):
"The right of subrogation must be founded upon an equity just and reasonable according to general principles -- an equity that will accomplish complete justice between the parties to the controversy. The one asserting the right cannot thereby profit from his own wrong; he must, himself, be without fault. Bater v. Cleaver, 114 N.J.L. 346. * * * The process is analogous to the creation of a constructive trust, the creditor being compelled to hold his rights against the principal debtor, and his securities, in trust for the subrogee." Camden Trust Co. v. Cramer, supra, 136 N.J. Eq. 261, at 264.
See Ganger v. Moffett, 8 N.J. 73, 79 (1951). Although subrogation is of equitable origin and is enforced on equitable principles, recovery is generally sought at law.
"While it is a doctrine of purely equitable origin and nature, it is now settled that, when the right or subrogation itself is practically conceded, and there remains to be enforced only the right of realizing the value of the subject-matter, such right may, on proper occasion, be within the cognizance of a court of law. * * * But the right of subrogation will not be recognized at law unless the right of action made the subject thereof is legal in its nature, and is cognizable at law." Bater v. Cleaver, 114 N.J.L. 346, at 353 (E. & A. 1935)
The right does not arise out of contract but rather exists without the consent of the insured, Fire Association of Philadelphia v. Schellenger, 84 N.J. Eq. 464, 465 (E. & A. 1915), although of course the parties may by agreement waive or limit the right, Ganger v. Moffett, supra, 8 N.J. 73, 80, Fire Association of Philadelphia v. Schellenger, supra, 84 N.J. Eq. 464, 466. The subrogee in effect steps into the shoes of the insured and can recover only if the insured likewise could have recovered, Sullivan v. Naiman, supra, 130 N.J.L. 278, 280, Connecticut Savings Bank of New Haven v. First National Bank & Trust Co. of New Haven, 138 Conn. 298, 84 A. 2 d ...