On certification to the Superior Court, Appellate Division, whose opinion is reported at 169 N.J. Super. 109 (1979).
For affirmance -- Chief Justice Wilentz and Justices Sullivan, Pashman, Clifford, Schreiber, Handler and Pollock. For reversal -- None. The opinion of the Court was delivered by Schreiber, J.
On or about December 18, 1975, plaintiff, Montefusco Excavating & Contracting Co., Inc. (Montefusco), entered into a contract with defendant County of Middlesex to construct part of a water and sewer system in the Raritan Arsenal County Park in Edison, N.J. The contract price was $147,451. During the performance of the work, the contractor asserted that the County owed it additional monies for extra work arising out of unusual subsurface conditions. A dispute arose and apparently Montefusco stopped the job when these funds were not paid.
Montefusco instituted this action seeking recovery of the sums allegedly due because of the extras. The County counterclaimed, asserting that its expenditures to complete the contract resulted in costs beyond the contract price. The litigation was settled. The County agreed to pay $9500 in settlement of all claims against it and to dismiss its counterclaim.
At Montefusco's behest U.S. Fidelity & Guaranty Co. (USF&G) had executed as surety a statutory form construction bond, N.J.S.A. 2A:44-147, relating to the construction contract under which Montefusco was principal and the County was obligee. USF&G paid $101,456 to ten creditors -- laborers and materialmen -- of Montefusco upon its failure to do so. The settlement check was payable to Montefusco, its attorneys, and USF&G. When USF&G refused to endorse and deliver the check to Montefusco's attorneys, Montefusco obtained an order to show cause why a new check should not be issued eliminating USF&G as a payee. USF&G then filed a motion for an order directing that a check be made payable only to it or, in the alternative, requiring the other payees to endorse the existing check.
After being advised that USF&G had paid Montefusco's creditors, the trial court granted USF&G's motion to compel the other payees to endorse the check. The Appellate Division reversed and remanded the matter to the trial court, 169 N.J. Super. 109, 40 A.2d 337 (1979), because USF&G's claim was subject
to the claim of Montefusco's attorneys for legal fees. It held that USF&G's claim was premised on its right to reimbursement from Montefusco and that, as such, it was a right of subrogation which carried with it the requirement that the subrogee (USF&G) pay its pro rata share of counsel fees. Stating that the fund was impressed with a trust under N.J.S.A. 2A:44-148*fn1 in favor only of materialmen and laborers, the Appellate Division concluded that USF&G as surety was not entitled to the benefit of the statute. We granted USF&G's petition for certification. 81 N.J. 352, 407 A.2d 1226 (1979).
The basic questions which must be resolved are: (1) What are the subrogation rights of the surety USF&G? (2) What does the $9500 check represent? (3) What is USF&G's obligation, if any, with respect to the counsel fee owing in connection with the litigation which resulted in the $9500 settlement?
Subrogation is an equitable remedy by which a surety, upon performance, is placed in the position of the creditor with respect to that creditor's rights and available securities. See Ambassador Ins. Co. v. Montes, 76 N.J. 477, 484 (1978). Thus, in the case of a surety on a bond guaranteeing payment of laborers and materialmen, the surety's payment of indebtedness to a laborer or materialman would entitle the surety to stand in his shoes and to pursue all the rights which had been available to that laborer or materialman.*fn2 See Stevlee Factors, Inc. v. State, 136 N.J. Super. 461, 466 (Ch.Div.1975), aff'd o.b. 144 N.J. Super. 346 (App.Div.1976).
The general rule has been stated by Stearns in the Law of Suretyship (5th ed. 1951), as follows:
The scope of the right of subrogation consists in the immediate transfer, by operation of law, to the promisor in suretyship of all the rights of the creditor against the principal whenever the promisor ...