Montefusco Excavating & Contracting Co., Inc. v. Middlesex County

• Decision Date: 14 May 1980
• Citation: 414 A.2d 961,82 N.J. 519
• Parties: MONTEFUSCO EXCAVATING & CONTRACTING CO., INC., Plaintiff-Respondent, v. COUNTY OF MIDDLESEX, Defendant. Appeal of UNITED STATES FIDELITY AND GUARANTY COMPANY.
• Court: New Jersey Supreme Court

Page 519

82 N.J. 519

414 A.2d 961

MONTEFUSCO EXCAVATING & CONTRACTING CO., INC., Plaintiff-Respondent, v. COUNTY OF MIDDLESEX, Defendant Appeal of UNITED STATES FIDELITY AND GUARANTY COMPANY.

Supreme Court of New Jersey.

Argued Jan. 22, 1980.

Decided May 14, 1980.

Richard R. Width, Westfield, for appellant (Lindabury, McCormick and Estabrook, Westfield, attorneys; Richard R. Width and John H. Schmidt, Jr., Westfield, on brief).

Robert B. Silverman, Lakewood, for plaintiff-respondent (Braun & Braun, Lakewood, attorneys; Bartholomew G. Babiak, Lakewood, on brief).

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 ¹ 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, 388 A.2d 603 (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. ² See Stevlee Factors, Inc. v. State, 136 N.J.Super. 461, 466, 346 A.2d 624 (Ch.1975), aff'd o. b. 144 N.J.Super. 346, 365 A.2d 713 (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 pays the debt or satisfies the obligation. (Id. at 439)

Unlike bonding requirements provided for in private construction transactions, the Legislature has seen fit to establish certain standards and protection for workers and suppliers on public construction projects. When public improvements are to be constructed under contract at the expense of the State or any county, the public bond act requires that the contractor furnish "the usual bond, as provided for by law, with good and sufficient sureties" obligating payment for all labor performed or materials used in the construction. N.J.S.A. 2A:44-143. The bond must provide for payments equal to at least 100 per cent of the contract price. N.J.S.A. 2A:44-144. Any person to whom any money is due on account of having performed any labor or furnished any materials must at any time furnish the surety on the bond a statement of the amount due, either before the work has been accepted, or within 80 days thereafter. N.J.S.A. 2A:44-145. If the indebtedness is not paid at the expiration of 80 days after acceptance of the work, the laborer or materialman may bring an action on the bond. N.J.S.A. 2A:44-146.

The statute provides that the form of the bond must accord substantially with the statutory language. N.J.S.A. 2A:44-147. That language may be summarized as follows: The contractor and surety bind themselves to the obligee in a dollar amount which is at least equal to the contract price (N.J.S.A. 2A:44-144); the contract is incorporated by reference; it is stipulated that if the contractor pays all materialmen and laborers the amounts due, then the obligation of the bond is ended. The bond must also state that the "undertaking shall be for the benefit of any subcontractor, materialman, laborer, person, firm or corporation having a just claim" as well as for the benefit of the principal.

Moreover, the Legislature has provided that monies paid by the State or by any county to any person pursuant to the provisions of a contract for any public improvement made between such person and the State or county "shall constitute a trust fund in the hands of such person as such contractor, until all claims for labor, materials and other charges incurred in connection with the performance of such contract shall have been fully paid." N.J.S.A. 2A:44-148. This act, commonly known as the Trust Fund Act, protects those who have claims for labor, material and other charges incurred in fulfilling the contract between the governmental body and its contractor. Thus, money paid by the government to a public contractor constitutes a trust fund for its laborers and materialmen. When a contractor's surety has paid the contractor's indebtedness to the laborer or materialman, the surety may pursue the remedies of the laborer or materialman by proceeding against the funds paid to the contractor. See Graybar Elec. Co. v. Manufacturers Casualty Co., 37 N.J.Super. 284, 117 A.2d 196, aff'd 21 N.J. 517, 122 A.2d 624 (1957) (dictum).

The contention is made that the benefits of the Trust Fund Act are restricted to laborers and materialmen and are not available to a surety. Nothing in the legislative history of the Trust Fund Act indicates that this fund should not be considered an asset or credit subject to the equitable subrogation rights of a surety. We reviewed in Key Agency v. Continental Casualty Co., 31 N.J. 98, 107-108, 155 A.2d 547 (1959), the circumstances which led to the adoption of the statute. There we noted that the impetus for the act was the decision in Grover v. Board of Ed. of Franklin Tp., 102 N.J.Eq. 415, 141 A. 81 (Ch.1928), aff'd 104 N.J.Eq. 197, 144 A. 918 (E. & A. 1929). In Grover a contractor had paid a materialman a sum more than sufficient to satisfy the materialman's claim. However, the materialman chose to apply the payment to a prior debt owed to him by the contractor, and filed a lien claim on the money in the hands of the school board. Although the surety asserted the claim had been satisfied, the Court held otherwise and allowed the materialman's lien. This decision made it clear that to protect the payment bond surety, some method was required to assure that money paid to public contractors be used to reduce debts for labor and materials guaranteed by the payment bond. See also Stulz-Sickles co. v. Fredburn Constr. Corp., 114 N.J.Eq. 475, 478, 169 A. 27, 29 (Ch.1933). ("While the (Trust Fund Act) designates claimants for 'labor, materials and other charges incurred in connection with the performance of said contract' as the beneficiaries of the trust thereby created, and surety companies are not specifically named, it requires no keen discernment to see behind this remedial . . . legislation, the subtle hand of those corporations most likely to be affected by the Grover decision.")

Since laborers and materialmen had the protection of a surety bond, N.J.S.A. 2A:44-143, they would appear to have little, if any, need for additional security. The same could not be said for the surety. Applying the rule of construction that statutes are to be interpreted in light of the occasion, the mischief perceived and the remedy in view when enacted, we concluded in Key Agency that "(i)t appears that the Trust Fund Act was intended primarily to benefit the surety." 31 N.J. at 108, 155 A.2d at 553. We continue to adhere to that view.

Montefusco's counsel also contends that, since the Trust Fund Act only applies to "money paid" by the County and the...