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LBK, LLC v. State


August 5, 2009


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-8288-05.

Per curiam.


Submitted June 1, 2009

Before Judges Lisa, Reisner and Sapp-Peterson.

Plaintiffs, LBK, LLC (LBK) and Goodyear Motors, Inc. (Goodyear) (collectively plaintiffs), appeal from the September 23, 2008 order denying their motion for an order directing their insurer, Pawtucket Mutual Insurance Company (Pawtucket), as subrogee, to pay a portion of their legal fees and expenses incurred as a result of litigation they commenced against a number of defendants following damage to their property. We reverse.

LBK is the owner of property located at 86 and 100 Route 46 in Lodi (the property). Goodyear is the owner of a business that is located on the property. Plaintiffs purchased an insurance policy for the property that was effective from April 1, 2003 through April 1, 2004. In March 2004, the property was damaged during the course of a construction project sponsored by the New Jersey Department of Transportation (DOT). Plaintiffs filed a claim with Pawtucket seeking recovery for their damages and losses. Pawtucket denied the claim. Plaintiffs filed a complaint in March 2006, alleging that DOT, the general contractor, various subcontractors and unnamed defendants were negligent, and such negligence proximately caused damage to the property.

The complaint was amended in December 2006, adding counts in which Pawtucket was named as a defendant. The amended complaint alleged that Pawtucket breached its contract with plaintiffs and acted in bad faith. Plaintiffs sought declaratory relief, declaring "that all of the damages and losses sustained by LBK and Goodyear Motors . . . identified in [the] complaint are covered by the Policy." By order dated April 13, 2007, Pawtucket was permitted to file an amended cross-claim for subrogation against the liability defendants. The order also directed that plaintiffs' claim, in connection with their Pawtucket policy, be stayed pending the conclusion of the appraisal process set forth in the policy.

The appraisal process was completed on December 20, 2007, resulting in a payment to plaintiffs from Pawtucket of $500,000 for the building located at 86 Route 46, and $7071 for the building situated at 100 Route 46. Thereafter, Pawtucket moved for partial summary judgment dismissing plaintiffs' claim for counsel fees and costs. That motion was denied, without prejudice, as premature.

On February 1, 2008, Judge Jonathan N. Harris heard Pawtucket's motion for partial summary judgment dismissing plaintiffs' claim for counsel fees and costs. Although recognizing that the doctrine of equitable subrogation may apply, Judge Harris nonetheless denied the motion, without prejudice, ruling that the motion was premature.

Three months later, a number of the liability defendants settled plaintiffs' claim for $85,000 and Pawtucket's subrogation claim for $400,000. On August 1, 2008, plaintiffs once again filed a motion seeking an order directing Pawtucket to share litigation costs. That motion was heard by a different judge, who denied the motion in a written opinion. The judge found that there was no basis under Rule 4:42 (the rule) or under the insurance policy for plaintiffs to recover a portion of the legal fees they incurred from Pawtucket. The court ordered that "[e]ach party is to pay their own attorney's fees and costs of this litigation." The present appeal followed.

On appeal, plaintiffs contend that they do not seek to recover counsel fees under Rule 4:42-9; rather, as Judge Harris had recognized, they claim they are entitled to a contribution towards their legal fees and other litigation expenses in their capacity as subrogors. We agree.

Rule 4:42-9 reflects the so-called American Rule that each party is responsible for his or her own legal fees. In re Estate of Vayda, 184 N.J. 115, 120-21 (2005). The rule, however, "does not preclude an allowance of reasonable counsel fees if the incurring thereof is a traditional element of damages in a particular cause of action." See Pressler, Current N.J. Court Rules, comment 2.9 on Rule 4:42-9 (2009). Counsel fees awarded to a subrogor whose litigation efforts have inured to the benefit of the subrogee are recognized as an element of damages. See Montefusco Excavating & Contracting Co. v. County of Middlesex, 169 N.J. Super. 109, 112-13 (App. Div. 1979), aff'd, 82 N.J. 519 (1980). In Montefusco, Judge Pressler expansively wrote:

We are satisfied that the rule now prevailing in this jurisdiction requires that a person seeking a right of subrogation in respect of the proceeds of litigation conducted by the subrogor is chargeable with the subrogor's legal fees incurred in obtaining that recovery or, if the right of subrogation extends to less than the full recovery, with a pro rata portion of the legal fees. This rule was unequivocally and unqualifiedly adopted by the Supreme Court in Hedgebeth v. Medford, 74 N.J. 360, 368-369 (1977), in which it declared that "in this State a right of subrogation carries with it the equitable requirement of paying a pro rata share of counsel fees." The rule rests upon the fundamental and obvious unfairness of permitting the subrogee to itself avoid the incurring of legal expenses in prosecuting the claim while at the same time obtaining the full benefits of that prosecution. As a matter of simple equity, then, if a subrogatable fund was produced by litigation, the ultimate beneficiary of the fund, the subrogee, should contribute to the cost of its production. As noted in the seminal opinion in Klacik v. Kovacs, 111 N.J. Super. 307, 312 (App. Div. 1970), certif. den., 57 N.J. 237 (1970), a case involving contractual subrogation:

To establish an artificial rule which would provide an insurer with the right to sit back and permit its insured to proceed with an action, expecting to share in the avails of that proceeding without the burden of any of the expense, occurs to us to be anomalous.

And in Hedgebeth v. Medford, supra, 74 N.J. at 369, a case involving the statutory right of subrogation of the State itself, the court again articulated the basis of the rule as "the equitable principle that a carrier should not be entitled to enjoy the fruits of the assured's judgment against the tortfeasor without contributing in any way to the costs or burden of litigating that claim." [Ibid.]

In affirming, Justice Schreiber, writing for the Court, stated:

Subrogation is not an absolute right but is to be applied with due regard to the legal and equitable rights of others. See Gaskill v. Wales, 36 N.J. Eq. 527, 533 (E. & A. 1883). Accordingly, a surety, when exercising its subrogation right, may be required to pay its pro rata share of counsel fees incurred by the subrogor in establishing the judgment which enures to the surety's benefit. See Hedgebeth v. Medford, 74 N.J. 360, 369 (1977); Klacik v. Kovacs, 111 N.J. Super. 307 (App. Div. 1970), certif. den. 57 N.J. 237 (1970). When the principal incurs counsel fees to collect funds belonging to the subrogor which enure to the surety's benefit in the same manner as if the subrogor had himself incurred those counsel fees, the same rule should apply. This would be particularly so when the surety acquiesces in the legal proceedings instituted and carried on to fruition by the attorney.

[Montefusco, supra, 82 N.J. at 527-28.]

In our review of a trial court's grant or denial of summary judgment, we owe no deference to the court's legal interpretation. Manalapan Realty, L.P. v. Twp. Comm., 140 N.J. 366, 378 (1995). Here, the second motion judge failed to consider equitable subrogation, an element of damages plaintiffs were entitled to seek from Pawtucket as their subrogee. We therefore reverse the order denying plaintiffs' motion to recover some of its legal fees and litigation costs from Pawtucket.

Because the court did not consider equitable subrogation, it made no findings with respect to the value of plaintiffs' counsel's services to Pawtucket. Consequently, we remand for a hearing and findings of fact to determine the value, if any, of plaintiffs' litigation efforts, represented by counsel fees and expenses, which contributed to the ultimate settlement enjoyed by Pawtucket.

Reversed and remanded for further proceedings. We do not retain jurisdiction.


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