Court Opinion

ID: 9755257
Source: CourtListenerOpinion
Date Created: 2023-08-28 20:32:08.623394+00
Date Added: 2024-06-11T09:53:44.655188
License: Public Domain

The opinion of the Court was delivered by
HANDLER, J.
This appeal arises from a dispute between an insurance carrier and its insureds over subrogation rights. The insured suffered a fire loss that exceeded the coverage of the insurance policy. After payment of the policy limits for the fire loss, the insurer brought a subrogation action against third-party tortfeasors. The case settled, effectively ending the participation of the third-party tortfeasors in the litigation. There followed, however, a contested motion between Insurance Company of North America (INA) and the Culvers, the insurer and insureds, respectively, involving the validity and enforceability of the separate subrogation agreement that had been entered into between these parties. The trial court order determined the motion effectively enforcing the agreement by ordering the disbursement of the settlement proceeds in accordance with its terms.
The insureds then brought a separate action to set aside the judgment enforcing the subrogation agreement and to obtain a more favorable distribution of the subrogation proceeds. The critical issue in this appeal is whether the doctrine of res judicata is a bar to that action. The trial court applied the doctrine and dismissed the complaint. The Appellate Division reversed, determining that equitable considerations, not contract principles, were determinative of the subrogation claims and justified the rejection of the doctrine of res judicata. We conclude that the Appellate Division’s analysis of the subrogation interests did not obviate the application of the doctrine of res judicata as a bar to this action, and reverse its judgment.
*453I.
The record reveals that in November 1981, the Culvers, insureds under a homeowners insurance policy issued by defendant, INA, suffered a fire loss estimated at $185,000. The Culvers submitted a claim to INA, which after investigation of the cause of the loss and extent of the damage, paid the policy limit of $83,373.12. Thereafter, INA instituted a subrogation action against the tortfeasors believed to have caused the fire. The Culvers, claiming that they were under-insured, obtained separate counsel. Eventually, the Culvers and INA entered into an agreement whereby they would proceed jointly against the tortfeasors. Based on an analysis of the provable amount of the Culvers’ uninsured loss, the parties agreed to share any recovery 80% for INA and 20% for the Culvers. They also agreed that INA would bear all costs of litigation and be entitled to legal fees.
The parties allegedly responsible for the fire were General Electric Company, the manufacturer of the Culvers’ gas stove, and Better Living Department Stores, Inc., the seller and installer of the stove. INA commenced its subrogation action against both parties in plaintiffs’ name. INA controlled that litigation in all respects, although plaintiffs had their own counsel with whom they and INA consulted from time to time.
The trial court bifurcated the issues of liability and damages in the subrogation suit. During the liability trial, INA reached a settlement with General Electric, releasing it for the sum of $25,000. At the conclusion of the trial, the jury reached a liability verdict assessing 100% negligence against Better Living. On the day the damages trial was to begin, Better Living negotiated a settlement in the amount of $135,000 and INA obtained the consent of Mrs. Culver to its acceptance of that settlement offer.
Some time after the date of the settlement with Better Living, INA proffered plaintiffs their share of the settlement proceeds, which totalled $160,000. Based on the 80/20 division *454the proposed distribution was: $23,583.33 to plaintiffs and $92,000 plus $44,416.67 for legal fees and costs to INA.
Plaintiffs refused to accept this division and INA moved in the pending subrogation action against the Culvers for an order to enforce the agreement. The Culvers, with the assistance of new counsel, opposed the motion and cross-moved for a different allocation. In support of the cross-motion, Mrs. Culver submitted a certification in which she alleged fraud and breach of fiduciary duty by INA and its counsel. The trial court rejected these defenses and granted INA’s motion, entering an order of distribution in accordance with the agreement.1 In doing so, the trial judge ruled against plaintiffs’ motion to set aside the subrogation agreement.
Plaintiffs did not appeal this order nor did they file a motion for relief. Instead, approximately four months later, plaintiffs commenced a new action, filing a complaint against INA, alleging, as they had in their cross-motion for distribution in the previous action, that their consent to the subrogation allocation agreement was illegally obtained, that INA made misrepresentations, and that INA breached its fiduciary obligation to them. They sought compensatory damages, punitive damages, attorney’s fees, interest, costs and a “just and equitable settlement.” INA moved for summary judgment on the grounds that the issues raised in the complaint were res judicata, which the trial court granted. On appeal, the Appellate Division reversed. 221 N.J.Super. 493 (1987). Rejecting the application of res judicata, it determined that the subrogation agreement was not *455enforceable and that the insureds were entitled to be paid the full extent of their loss from the settlement proceeds. INA filed a petition for certification, which this Court granted. 110 N.J. 305 (1988).
II.
In the earlier subrogation action, the trial court decided INA’s motion to disburse the settlement proceeds in terms of whether the subrogation agreement was legally enforceable. It rejected all of plaintiffs’ claims of misrepresentation and breach of fiduciary duty as a basis for invalidating the agreement and ordered a distribution of the settlement proceeds in accordance with its terms.
In the current case, the trial court found that the plaintiffs’ complaint was inclusive of their earlier claims. It therefore determined that the earlier judgment was res judicata, barring the subsequent action. The Appellate Division, however, ruled that the subrogation agreement between the Culvers and INA was not enforceable. It determined that INA, the subrogating insurer, had “a trust obligation to the insured in respect of the difference between the insurance payment and the insured’s actual loss,” and INA was therefore obligated to hold from the settlement an amount equal to the uninsured portion of their loss in trust for the Culvers. 221 N.J.Super. at 502. The appellate court concluded that “the [subrogation] agreement,” calling for a different result, “appears to be unconscionable, violative of public policy and in abrogation of INA’s trust obligation to its insureds.” Id. at 504. This conclusion, according to the Appellate Division, obviated the application of the doctrine of res judicata.
The Appellate Division appropriately recognized the importance and uniqueness of the doctrine of subrogation, stressing its equity underpinnings. It has long been appreciated that “[s]ubrogation is a device of equity to compel the ultimate discharge of an obligation by the one who in good conscience *456ought to pay it [and] * * * to serve the interests of essential justice between the parties.” Standard Accident Ins. Co. v. Pellecchia, 15 N.J. 162, 171 (1954) (citations omitted). The doctrine is highly favored in the law. Ibid.
It is important to understand that subrogation rights do not arise spontaneously nor are they free-floating or open-ended. Subrogation rights are created in one of three ways: “(1) an agreement between the insurer and the insured, 44 Am.Jur.2d Insurance § 1820 at 746, (2) a right created by statute, 16 Couch on Insurance 2d § 61:6 at 240 (1966), or (3) a judicial ‘device of equity to compel the ultimate discharge of an obligation by the one who in good conscience ought to pay it.’ ” Aetna Ins. Co. v. Gilchrist Brothers, Inc., 85 N.J. 550, 560 (1981). While the doctrine has an equitable foundation, the attitude of courts toward subrogation has been described as “one of allowing complete freedom of contract and trying to determine and enforce the expressed intention of contracting parties.” R. Keeton, Insurance Law § 3.10 at 153. Indeed, subrogation “is not applicable where its enforcement would be inconsistent with the terms of a contract or when the contract, either expressly or by implication, forbids its application.” Ganger v. Maffett, 8 N.J. 73, 80 (1951).
The analysis of the Appellate Division appears to place emphasis only on the equitable nature of subrogation, discounting the contract basis for its application. Nevertheless, in this case the subrogation rights of INA were established in the insurance policy itself; further, INA and the Culvers negotiated and entered into a supplementary agreement defining their correlative subrogation interests.
The appellate court appropriately turned for guidance initially to equitable principles under the standard subrogation clause of the insurance policy; nevertheless, it failed then to consider the contractual relevance of the specific subrogation agreement. In Providence Washington Ins. Co. v. Hogges, 67 N.J.Super. 475 (App.Div.1961), the court held that when the *457insurance policy contained only a general subrogation clause that did not specify how subrogation proceeds would be paid, general equitable principles of subrogation governed. Such subrogation principles, however, could be altered by contract:
Subrogation is an offspring of equity, and its equitable principles apply even when the subrogation is’ based on contract, except as modified by specific provisions in the contract. Here we have only the general clause quoted. Under such a clause, in case of doubt the interests of the insured come first. In the absence of express terms in the contract to the contrary, he must be made or kept whole before the insurer may recover anything from him or from a third party under its right of subrogation. Against the insured, as well as against third parties, there may be recovery by the insurer (again, subject to the express terms of the contract) "only if the cause is just and enforcement is consonant with reason and justice.” [Id. at 482 (emphasis added).]
The Appellate Division in this case, while relying on Providence Washington Ins. Co., indicated that the supplementary contract could be disregarded because it appeared to be “unconscionable” and “violative of public policy.” Nevertheless, the court did not suggest that the agreement constitutes a contract of adhesion. See, e.g., Sparks v. St. Paul Ins. Co., 100 N.J. 325, 335 (1985); Allen v. Metropolitan Life Ins. Co., 44 N.J. 294, 305-06 (1965). Nor did it indicate that the terms of the agreement were doubtful or failed to fulfill the reasonable expectations of the insureds. See, e.g., Sparks v. St. Paul Ins. Co., supra, 100 N.J. at 336-38; Bryan Const. Co. Inc. v. Employers’ Surplus Lines Ins. Co., 60 N.J. 375, 377-78 (1972).
The Appellate Division apparently believed that a supervening equitable principle, namely, the right of the insured to be made whole, overcomes rights provided by contract. This conclusion, however, does not necessarily follow from the principal rationale behind insurance subrogation, namely, that “the insurer should be reimbursed for his payment to the insured,” Standard Accident Ins. Co. v. Pellecchia, supra, 15 N.J. at 171, and is subrogated only to those rights of the insured that are sufficient to reimburse it for the amount of the loss paid. See Restatement of Restitution § 162, comment c (1937).
It may be that the Appellate Division sought to invoke and adapt that rationale in this case. The court thus stated, “just *458as the insured has a trust obligation to the insurer for any sum he recovers from the tortfeasor in excess of his actual loss, so does the subrogating insurer have a trust obligation to the insured in respect to the difference between the insurance payment and the insured’s actual loss.” 221 N.J.Super. at 502. It then ruled that the insurer has a duty to pay the insured for its entire loss before it can reimburse itself for any part of the loss that it paid under the policy.2 345Nevertheless, the Appellate Division in reaching this conclusion relied on Providence Washington Ins. Co. v. Hogges, supra, 67 N.J.Super. 475, in which the court allowed the insured to be paid its $50 deductible from the third party award before the insurer could be reimbursed for its insurance payment. But, as earlier noted, Providence *459Washington expressly recognized that this result could be altered by contract. Id. at 482. The other cases relied on by the Appellate Division, Camden Fire Ins. Ass’n v. Prezioso, 93 N.J.Eq. 318, 320 (Ch.Div.1922), and Federal Ins. Co. v. Engelhorn, 141 N.J.Eq. 349, 351 (E. & A.1947), also do not suggest that general subrogation principles calling for similar results cannot be modified by contract.
We are therefore unable to conclude that the Appellate Division correctly decided on the record of this case that a subrogation contract providing for a division of proceeds that favored the insurer was unenforceable, as a matter of law, or that the insured be made whole first from the settlement of a subrogation action, despite a contractual agreement to the contrary. We are, however, satisfied that under either the Appellate Division’s theory of subrogation or that of the trial court and the parties, the current action should be barred by the doctrine of res judicata.
III.
The Appellate Division reversed the trial court because it concluded that the subrogation contract did not overcome equitable principles governing subrogation. The Appellate Division only tangentially addressed the trial court’s dismissal of the Culvers’ claim based on res judicata. It could be inferred from its opinion, however, that the Appellate Division believed either that the issues of breach of fiduciary duty and misrepresentation were never fully addressed in the first lawsuit or, more likely, that under its view of the cause of action these issues were not determinative. Under either approach, we believe that the Appellate Division’s rejection of res judicata was incorrect.
The essential issues were clearly implicated, if not fully addressed, in the original subrogation action. Plaintiffs contended that INA misled Mrs. Culver into consenting to the subrogation arrangement and breached a fiduciary obligation; *460in contrast, defendant denied any misrepresentations or breach of duty.3 These conflicting contentions were also raised in the earlier action in the contested motion seeking enforcement of the subrogation agreement where Mrs. Culver alleged fraud and breach of fiduciary duty by INA and its counsel. Thus, these issues were presented in both actions.
The doctrine of res judicata “contemplates that when a controversy between parties is once fairly litigated and determined it is no longer open to relitigation.” Lubliner v. Board of Alcoholic Beverage Control, 33 N.J. 428, 435 (1960). Where the second action is no more than a repetition of the first, the first lawsuit stands as a barrier to the second. “The rule precludes parties from relitigating substantially the same cause of action.” Kram v. Kram, 94 N.J.Super. 539, 551 (Ch.Div.), rev’d on other grounds, 98 N.J.Super. 274 (App.Div.1967), aff'd, 52 N.J. 545 (1968).
The application of res judicata doctrine requires substantially similar or identical causes of action and issues, parties, and relief sought. Eatough v. Board of Medical Examiners, 191 N.J.Super. 166, 173 (App.Div.1983); Constant v. Pacific Nat’l Ins. Co., 84 N.J.Super. 211, 216 (App.Div.1964). In addition, there must be a “final judgment by a court or tribunal of competent jurisdiction.” Charlie Brown of Chatham v. Board of Adjustment, 202 N.J.Super. 312, 327 (App.Div.1985).
In this case there is identity of parties. The relief sought, i.e., a fair distribution of settlement proceeds from the subroga*461tion action, is essentially the same, even though in the second action the claim for damages is expanded to include other forms of monetary relief. Further, the prior action was concluded by a final judgment. The trial court distinctly decided the issue whether the settlement proceeds from the third-party tortfeasors should be distributed according to the separate subrogation agreement entered into between INA and the Culvers. In view of the detailed factual contentions presented by the parties addressed solely to the validity of their agreement, it is not readily inferable, as suggested by the dissent, that the trial court believed that the dispute involved only the validity of the settlement with the third-party tortfeasors. If the court wrongly decided the proper distribution of the settlement proceeds or failed to address the Culvers’ fraud and breach of fiduciary duty claims, plaintiffs of course could have sought relief from the trial court or appealed from this final judgment. They did neither. Cf. City of Newark v. North Jersey Water Supply Comm’n, 106 N.J.Super. 88, 98-99 (Ch.Div.1968) (plaintiff, which lost action to invalidate contract and afterwards found additional evidence to support its position, did not seek post-judgment trial or appellate relief, but brought second action seeking essentially same relief; applying analogous entire controversy doctrine, court ruled that subsequent action was barred), aff’d per curiam, 54 N.J. 258 (1969). Hence, the doctrine of res judicata applies unless the causes of action and essential issues were not substantially the same.
The test for the identity of a cause of action for claim preclusion purposes is not simple. The term “ ‘cause of action’ cannot be precisely defined, nor can a simple test be cited for use in determining what constitutes a cause of action for res judicata purposes.” Donegal Steel Foundry Co. v. Accurate Prods. Co., 516 F.2d 583, 588 n. 10 (3d Cir.1975). To decide if two causes of action are the same, the court must consider:
(1) whether the acts complained of and the demand for relief are the same (that is, whether the wrong for which redress is sought is the same in both actions) Gissen v. Tackman, 401 F.Supp. 310, 312 (D.N.J.1975); (2) whether the theory *462of recovery is the same; (3) whether the witnesses and documents necessary at trial are the same (that is, whether the same evidence necessary to maintain the second action would have been sufficient to support the first) O’Shea v. Chrysler Corporation, 206 F.Supp. 601, 605 (D.N.J.1962); and (4) whether the material facts alleged are the same. [United States v. Athlone Industries, Inc., 746 F.2d 977, 984 (3d Cir.1984).]
Taking this approach, we can find a high degree of similarity between the two lawsuits. The acts complained of are the same; they involve the conduct of the insurer that constitutes a breach of fiduciary duty, fraud, or misrepresentation sufficient to invalidate the subrogation agreement. Moreover, the material facts encompassing INA’s alleged misconduct are identical; virtually the same evidence would be necessary to establish this misconduct in both actions. In addition, a similar demand for relief is presented in each action, namely, the setting aside of the subrogation agreement to obtain a more favorable distribution of subrogation proceeds. Finally, any verdict for plaintiffs in this case would completely overturn the ruling in the first action.
This conclusion is not altered by the Appellate Division’s view of the cause of action as one resting on equitable rather than contract principles. The Appellate Division variously characterized the cause of action brought by the Culvers as “unconscionability,” or violations of public policy, or breach of a fiduciary duty. Nevertheless, it does not appear that its cause of action would be any different from the earlier action or that the factual issues and evidence would vary materially. For example, in determining the unconscionability of a contract, in addition to inspecting the terms of the contract, the court will “scrutinize ‘the relations of the parties and all the surrounding circumstances.’ ” (citations omitted). Rotwein et al. v. General Accident Group & Casualty Co., 103 N.J.Super. 406, 418 (Law Div.1968). However, this is virtually the same factual inquiry that was presented to the court in the earlier subrogation lawsuit. For purposes of res judicata, we do not believe that the theory of recovery, as viewed by the Appellate Divi*463sion, is sufficiently different to warrant avoidance of res judicata.
Moreover, in the context of this litigation, any putative differences between the causes of action would not overcome the bar of claim preclusion. The principle of res judicata applies not only to “all matters litigated and determined by such judgment but also as to all relevant issues which could have been presented, but were not.” Anselmo v. Hardin, 253 F.2d 165, 168 (3d Cir.1958); see Mazzilli v. Accident and Casualty Ins. Co., 45 N.J.Super. 137, 141 (App.Div.1957); Bowers v. American Bridge Co., 43 N.J.Super. 48, 66 (App.Div.1956); see also Angel v. Bullington, 330 U.S. 183, 192-93, 67 S. Ct. 657, 662, 91 L.Ed. 832 (1947) (“if issues that were or could have been dealt with in an earlier litigation are raised anew between the same parties,” subsequent litigation is “needless” and will not be tolerated under doctrine of res judicata). Thus, if the issues of “unconscionability” or “violations of public policy” are deemed to be different from the issues of fraud, misrepresentation, and breach of fiduciary duty, they were or could have been raised in the previous lawsuit. The dissent suggests that plaintiffs introduced their claim in the previous lawsuit but were not allowed to litigate it due to the trial court’s belief that their claim was solely to invalidate their assent to the settlement of the third-party action. Post at 470. This inference is not likely, however, in view of plaintiffs’ detailed factual contentions, which attacked their agreement with INA, not their settlement with the third-party tortfeasor. Moreover, regardless of the adequacy or soundness of its determination, the trial court effectively and specifically concluded the issues presented by plaintiffs’ claim attacking their agreement through its denial and dismissal of their cross-motion for distribution.
In addition, the entire controversy doctrine requires that all issues of a single dispute between the parties must be completely determined in one action. Rule 4:27-1 provides that “[e]ach party to an action shall assert therein all claims which he may have against any other party thereto insofar as may be re*464quired by application of the entire controversy doctrine.” As the Court stated in Applestein v. United Board & Carton Corp., 35 N.J. 343, 356 (1961), “a defendant must assert all matters which will defeat a claim against him and a plaintiff must seek complete relief for vindication of the wrong he charges.” This doctrine attempts to avoid the delay, waste and expense of fragmented litigation. See R. 4:5-4 (pleadings seeking to present claims sufficient to constitute an avoidance must set forth specific supporting facts; failure to raise such claims constitutes a waiver); Kress v. Kress, 1 N.J. 257 (1949); M. Schnitzer and J. Wildstein, N.J. Rules Services, 4:8-3 § 4 at AIV-154, 156 (1954-1967 edition). To this extent, the entire controversy doctrine is wholly consistent with the doctrine of res judicata. Lubliner v. Board of Alcoholic Beverage Control, supra, 33 N.J. at 435. See City of Newark v. North Jersey Water Supply Comm’n, supra, 106 N.J.Super. 88, aff'd per curiam, 54 N.J. 258. Thus, any new claims involving the subrogation agreement should have been raised in the subrogation lawsuit because that decision determined the entire controversy between the parties.
To characterize the claims brought in the subsequent lawsuit as “equitable,” and those in the earlier action as “legal” in no way displaces the bar of res judicata or the entire controversy doctrine. See Massari v. Einsiedler, 6 N.J. 303, 313 (1951). Thus, whether based on breach of fiduciary duty and misrepresentation, or, as characterized by the Appellate Division, on unconscionability and violations of public policy, the insureds’ claims are controlled by the principles of res judicata, as well as the companion entire controversy doctrine.
IV.
We conclude that the earlier action and final judgment constitute a bar to any relitigation of the matters in dispute, and that bar applies to the current action.
Accordingly, the judgment below is reversed.

AIthough the order contained somewhat different figures, plaintiffs contend that the total recovery was divided as follows:
INA: $92,000.00
INA's attorney: 41,328.33
Culvers’ attorney: 2,671.67
Culvers: 24,000.00
TOTAL: 160,000.00

The rule adopted by the Appellate Division is just one of several rules that can govern what happens if an insurer seeks recovery from a third-party tortfeasor where the insured’s total loss has not been repaid in full. See R. Keeton, Insurance Law § 3.10(c)(2) at 160. The rule followed by the Appellate Division states that "out of the recovery from the third party the insured is to be reimbursed first, for the loss not covered by insurance and the insurer is entitled to any remaining balance, up to a sum sufficient to reimburse the insurer fully, the insured being entitled to anything beyond that.” R. Keeton, Insurance Law § 3.10(2) at 161. See, e.g., Union Ins. Soc’y v. Consolidated Ice Co., 261 Mich. 35, 245 N.W. 563 (1932). Other possible rules are:
(2) The insurer is the sole beneficial owner of the claim against the third party and is entitled to the full amount recovered whether or not it exceeds the amount paid by the insurer to the insured. See, e.g., Travelers’ Ins. Co. v. Brass Goods Mfg. Co., 239 N.Y. 273, 146 N.E. 377 (1925);
(3) The insurer is to be reimbursed first out of the recovery from the third party, and the insured is entitled to any remaining balance. See, e.g., Fort Worth Lloyds v. Haygood, 151 Tex. 149, 246 S.W.2d 865 (1952);
(4) The recovery from the third person is to be prorated between the insurer and the insured in accordance with the percentage of the original loss for which the insurer paid the insured under the policy. See, e.g., Pontiac Mut. County Fire & Lighting [Lightning] Ins. Co. v. Sheibley, 279 Ill. 118, 116 N.E. 644 (1917); General Exch. Ins. Corp. v. Driscoll, 315 Mass. 360, 52 N.E.2d 970 (1944); and
(5) The insured is the sole owner of the claim against the third party and is entitled to the full amount recovered, whether or not the total thus received from the third party and the insurer exceeds his loss. (i.e., this option rejects subrogation). [R. Keeton, Insurance Law § 3.10(a) at 161— 62.]

Mrs. Culver claimed that INA’s attorney assured her and her attorney that INA was entitled, as a matter of law, to reimbursement of the $82,373.12 it had paid her under the insurance policy plus 12% interest before the Culvers would be entitled to any portion of the subrogation proceeds; she also contended that INA's attorney told her and her attorney that the net subrogation recovery would not be in excess of $82,373.12 and that she had no alternative to accepting 20% of any recovery. Defendant, on the other hand, stresses that according to a letter sent to Mrs. Culver, it never represented that it was entitled to $82,373.12 plus 12% interest of any recovery, or that it was unlikely any recovery would not exceed what had been paid out.