Supreme Court of Virginia.
Sherman DREHER, et al.
v.
BUDGET RENT-A-CAR SYSTEM, INC., et al.
Present: HASSELL, C.J., LACY, KOONTZ, KINSER, LEMONS, and AGEE, JJ.,
and RUSSELL, S.J.
OPINION BY Justice CYNTHIA D. KINSER.
This appeal presents a choice of law question in the context of two
personal injury actions. We must decide whether a New York statute,
which imposes vicarious liability on the owner of a vehicle for death
or injuries caused by the negligence of a person operating the vehicle
with the owner's permission, is a matter of tort, meaning Virginia's
substantive law applies, or a matter of contract, meaning the New York
statute applies. Because we conclude the latter, we will reverse the
circuit court's judgment applying Virginia substantive law and holding
that two vehicle rental companies would have no vicarious liability
based on their ownership of a vehicle involved in an automobile
accident in Virginia.
FACTS AND PROCEEDINGS FN1
FN1. Since the circuit court decided the cases on demurrers, we recite
the facts as alleged in the pleadings. Fuste v. Riverside Healthcare
Ass'n., 265 Va. 127, 129, 575 S.E.2d 858, 860 (2003).
Sherman Dreher, while operating an automobile in which his wife,
Chrisceia Dreher, was a passenger (collectively the Drehers), was
involved in an accident with Leonard Saunderson. The accident occurred
in Virginia Beach, and the Drehers are both Virginia residents.
Saunderson was operating a rental vehicle owned by Budget Rent-A-Car
System, Inc., a New Jersey company, and Cendant Car Rental Group, Inc.,
a New York company (collectively, the Owners). The automobile was
rented pursuant to a written contractual agreement entered into in New
York.FN2
FN2. The pleadings do not disclose whether the rental vehicle was
registered in New York. Therefore, we express no opinion whether the
result in this case would be different if in fact the rental vehicle
was not registered in New York.
The Drehers allegedly sustained personal injuries as a result of the
automobile accident. They each filed a separate motion for judgment
against the Owners, alleging that, “pursuant to the law of New York,
[the Owners are] responsible for the negligence of ... Saunderson, as
the owner, operator, and rentor of the vehicle ... operated by
Saunderson.” The Drehers based their claim against the Owners on
a New York statute that states:
Every owner of a vehicle used or operated in [New York] shall be liable
and responsible for death or injuries to person or property resulting
from negligence in the use or operation of such vehicle, in the
business of such owner or otherwise, by any person using or operating
the same with the permission, express or implied, of such owner. N.Y.
Veh. & Traf. Law § 388(1) (McKinney 1996 & Supp.2004)
(hereinafter, N.Y. Veh. & Traf. Law will be referred to as N.Y.
Law).
The Owners demurred to each action, arguing that, since the automobile
accident occurred in Virginia, the choice of law rules of Virginia
applied. Continuing, the Owners asserted that, under those rules,
Virginia's substantive law governed issues of tort liability in the
actions, including any claim of vicarious liability. Therefore,
according to the Owners, the Drehers, as residents of Virginia who were
injured in an accident occurring in Virginia, could not recover against
the Owners for the negligence of Saunderson unless some type of agency
relationship existed between the Owners and Saunderson. Since the
Drehers did not allege any such agency relationship in their respective
motions for judgment, the Owners asked the circuit court to grant the
demurrers and dismiss the actions. The circuit court agreed, sustaining
the demurrers and dismissing the actions with prejudice. In a letter
opinion, the circuit court recognized that it had to apply Virginia's
choice of law rules since the Drehers filed their respective actions in
the Commonwealth. The circuit court further recognized that Virginia
adheres to the doctrine of lex loci delicti, meaning tort liability
depends on the law of the place of injury. Thus, the circuit court
concluded that, under Virginia's choice of law rules, “the substantive
law of Virginia would apply and the [Owners] would have no vicarious
liability to the [Drehers] based upon the ownership or the permissive
use of the vehicle involved in the accident.” The Drehers appeal from
the circuit court's judgment.
ANALYSIS
On appeal, the Drehers assert that the circuit court erred by
sustaining the Owners' demurrers and concluding that Virginia law, as
opposed to New York law, determines whether the Owners are vicariously
liable to the Drehers for Saunderson's negligence in operating the
Owners' vehicle. “A demurrer tests the legal sufficiency of facts
alleged in pleadings, not the strength of proof. We accept as true all
facts properly pleaded ... and all reasonable and fair inferences that
may be drawn from those facts.” Glazebrook v. Board of Supervisors, 266
Va. 550, 554, 587 S.E.2d 589, 591 (2003). Because the decision whether
to grant a demurrer involves issues of law, we review the circuit
court's judgment de novo. Id.
Resolution of this appeal turns on Virginia's choice of law rules. The
parties agree that, since the Drehers filed their actions in Virginia,
we apply Virginia choice of law provisions in deciding whether the
liability imposed by virtue of N.Y. Law § 388(1) is a matter of
tort or contract. See Buchanan v. Doe, 246 Va. 67, 71, 431 S.E.2d 289,
291 (1993) (“The forum state applies its own law to ascertain whether
the issue is one of tort or contract.”). The parties also agree that,
if the Owners' alleged liability under N.Y. Law § 388(1) is a
matter of tort, Virginia applies the doctrine of lex loci delicti,
meaning the law of the place of the wrong governs all matters related
to the basis of the right of action. Jones v. R.S. Jones & Assocs.,
246 Va. 3, 5, 431 S.E.2d 33, 34 (1993); see also McMillan v. McMillan,
219 Va. 1127, 1128, 253 S.E.2d 662, 663 (1979) (explicitly rejecting
other choice of law doctrines). If, however, the Owners' alleged
liability is a matter of contract, the law of the place where the
contract was formed applies when interpreting the contract and
determining its nature and validity. Woodson v. Celina Mut. Ins. Co.,
211 Va. 423, 426, 177 S.E.2d 610, 613 (1970); accord Buchanan, 246 Va.
at 70, 431 S.E.2d at 291. Thus, the question before us is whether the
Owners' alleged liability under N.Y. Law § 388(1) is a matter of
tort or a matter of contract.
Under Virginia's substantive law regarding tort liability, an
automobile owner is not vicariously liable for the negligence of
another person simply because the negligent party was operating the
vehicle with the owner's permission. See Lumbermens Mut. Cas. Co. v.
Indemnity Ins. Co., 186 Va. 204, 208, 42 S.E.2d 298, 300 (1947).
Instead, an owner of a vehicle is liable for an operator's negligence
only in certain circumstances. See, e.g., Hack v. Nester, 241 Va. 499,
503, 404 S.E.2d 42, 43 (1990) (owner is liable if he negligently
entrusts his vehicle to another individual); Abernathy v. Romaczyk, 202
Va. 328, 332, 117 S.E.2d 88, 91 (1960) (vicarious liability imposed
when master-servant relationship exits if the servant was acting within
the scope of employment).
In contrast, the provisions of N.Y. Law § 388(1) make “[e]very
owner of a vehicle used or operated in [New York] liable and
responsible for death or injuries to person or property resulting from
negligence in the use or operation of such vehicle, ... by any person
using or operating the same with the permission, express or implied, of
such owner.” The statute imposes vicarious liability upon an owner of a
vehicle. Nelson v. Garcia, 152 A.D.2d 22, 548 N.Y.S.2d 963, 964
(N.Y.App.Div.1989); see also ELRAC, Inc. v. Ward, 96 N.Y.2d 58, 724
N.Y.S.2d 692, 748 N.E.2d 1, 6 (2001) (N.Y. Law § 388(1) “altered
the common-law rule that an owner of a vehicle was liable for injuries
caused by its operation only if it was driven personally by the owner
or his agent”). The liability imposed under N.Y. Law § 388(1)
applies to companies, such as the Owners, who are in the business of
leasing rental vehicles. ELRAC, 724 N.Y.S.2d 692, 748 N.E.2d at 6.
Furthermore, the provisions of N.Y. Law § 388(4) state “[a]ll
bonds executed by or policies of insurance issued to the owner of any
vehicle subject to the provisions of this section shall contain a
provision for indemnity or security against the liability and
responsibility provided in this section.”
The Drehers argue that N.Y. Law § 388 is an extraterritorial
financial responsibility statute akin to Virginia's uninsured motorist
statute. See Code § 38.2-2206. Thus, they assert that the
liability imposed upon vehicle owners by virtue of N.Y. Law §
388(1), and the requirement in subsection 4 that policies of insurance
provide coverage against the liability created in the statute, follow a
vehicle wherever it goes. Relying on this Court's decision in Buchanan,
the Drehers also assert that New York's imposition of liability upon
owners of vehicles is a contractual provision imposed by statute like
the physical contact requirement at issue in Buchanan, and that the New
York statute creates a substantive right of action. Therefore,
according to the Drehers, the circuit court erred by failing to apply
the substantive law of New York.FN5
FN5. While the Drehers point to other courts that have applied N.Y. Law
§ 388(1), those courts did so under choice of law doctrines
different than Virginia's. See, e.g., Garcia v. Plaza Oldsmobile Ltd.,
421 F.3d 216, 221 (3d Cir.2005) (under Pennsylvania's governmental
interest test, New York was the interested jurisdiction and therefore
the Pennsylvania court would apply N.Y. Law § 388); McKinney v. S
& S Trucking, Inc., 885 F.Supp. 105, 109 (D.N.J.1995) (New Jersey
follows the governmental interest test, and under that test, New York's
contacts were greater and more significant, so N.Y. Law § 388
could be applied).
The Owners, however, contend that the decision in Buchanan is
inapposite because that case involved a coverage dispute between an
insured and his insurer arising out of their contractual relationship;
whereas, the Drehers and the Owners have no contractual relationship.
Because Virginia steadfastly adheres to the doctrine of lex loci
delicti, the Owners contend that the Drehers are attempting to recast
their Virginia tort claims into New York contract claims. The Owners
also urge the Court to follow the decision in Kline v. Wheels by
Kinney, Inc., 464 F.2d 184 (4th Cir.1972), to resolve the issue before
us.
Unlike the Owners, we are not persuaded by the decision in Kline.
There, the plaintiff, Paul E. Kline, was involved in an automobile
accident in North Carolina with “Miss McCorkle,” (McCorkle) who was
operating a vehicle she had rented in New York from Wheels by Kinney,
Inc. (Kinney). Id. at 185. Kline was a resident of Virginia, and
McCorkle was a resident of New York. Id. The vehicle McCorkle operated
was “licensed and registered in New York,” and Kinney admitted
ownership of the vehicle and McCorkle's permissive use of it. Id.
McCorkle was not, however, an agent or employee of Kinney. Id.
Kline filed an action in federal district court against Kinney and
McCorkle and obtained a jury verdict against both. Id. In a motion to
set aside the verdict, Kinney asserted that, since the accident
occurred in North Carolina, the law of North Carolina applied, meaning
that Kinney, as a non-present owner, could not be vicariously liable
for McCorkle's negligence solely on her status as a permissive user of
Kinney's vehicle. Id. at 185-86. The trial court disagreed with Kinney
and concluded that N.Y. Law § 388(1) controlled. Id. at 186. The
trial court reasoned that, since the lease agreement between Kinney and
McCorkle was entered into in New York, “the statute imposing absolute
vicarious liability became a part of the contract.” Id. The trial court
thus concluded that “Kline's action against Kinney was contractual in
nature and that under the law of North Carolina the law of the place of
the contract should control,” thereby making Kinney liable for
McCorkle's negligence under N.Y. Law § 388(1). Id.
The United States Court of Appeals for the Fourth Circuit disagreed.
Stating that N.Y. Law § 388(1) “is not focused on ... leasing
arrangements” but, instead, “is designed to impose liability upon the
owner of any vehicle for injuries resulting from the negligent conduct
of a permissive user,” the appellate court concluded N.Y. Law §
388(1) is “an integral part of the New York law of torts independent of
any contractual relationship.” Id. Recognizing that North Carolina
adhered to the doctrine of lex loci delicti, the appellate court held
that, under North Carolina law, Kinney was not liable for McCorkle's
negligence as a permissive user of Kinney's vehicle. Id. at 187.
We do not agree with the Fourth Circuit's view that N.Y. Law §
388(1) is purely a matter of New York tort law. Instead, we believe the
New York statute resembles a contractual provision imposed by statute
designed to regulate the relationship between a vehicle owner and an
individual operating the vehicle with permission. Thus, we find the
rationale in Buchanan persuasive.
Buchanan, a resident of Virginia, was injured in an automobile accident
that occurred in West Virginia when an unidentified truck driver forced
Buchanan's vehicle off the road. Buchanan, 246 Va. at 69, 431 S.E.2d at
290. There was no contact between the two vehicles. Id. Pursuant to the
provisions of his automobile liability insurance policy, which was
issued in Virginia, and Code § 38.2-2206, Buchanan filed a
personal injury action in Virginia against the truck driver as “John
Doe.” Id. at 69-70, 431 S.E.2d at 290. To pursue a John Doe tort action
under West Virginia law, proof of physical contact with the John Doe
vehicle was required. Id. at 70, 431 S.E.2d at 291. Neither Buchanan's
uninsured motorist insurance coverage nor Virginia's uninsured motorist
statute, however, required such contact between the two vehicles in
order to maintain the John Doe action. Id. at 69, 431 S.E.2d at 290.
Thus, a conflict of laws issue was raised, and “[t]he disagreement
[was] whether the West Virginia proof-of-contact requirement [was] a
matter of tort law controlled by West Virginia law, or one of contract
controlled by Virginia law.” Id. at 70, 431 S.E.2d at 291.
Because Buchanan filed his action in Virginia, we applied the law of
the Commonwealth as the forum state to resolve the disagreement. Id. at
71, 431 S.E.2d at 291. After explaining the difference between a tort
and a contract, the Court noted that, while the substantive tort law of
both states required a plaintiff to prove his injuries were caused by a
defendant's negligence, the tort law of neither state required a
plaintiff to prove physical contact in order to impose liability on a
defendant. Id. at 71-72, 431 S.E.2d at 291-92. Further noting that the
West Virginia proof-of-contact requirement neither imposed a duty upon
a John Doe driver nor benefited a tortfeasor, we concluded the West
Virginia “proof of contact requirement [was] a contractual provision
imposed by statute.” Id. at 72, 431 S.E.2d at 292. Since the uninsured
motorist statutes in both Virginia and West Virginia “expressly
condition[ed] recovery in John Doe cases upon compliance with their
respective protective provisions,” the Court did “not think what would
otherwise be a contractual condition in the proof-of-contact
requirement of the West Virginia [uninsured motorist] statute [was]
converted into an element of John Doe's breach of duty merely by
providing that the contractual condition be fulfilled in the John Doe
tort action.” Id. at 73, 431 S.E.2d at 292; see also Willard v. Aetna
Cas. & Sur. Co., 213 Va. 481, 483, 193 S.E.2d 776, 778 (1973)
(applying North Carolina substantive law to an action involving an
automobile accident that occurred in Virginia).
In the present case, the provisions of N.Y. Law § 388(1) impose
liability upon an owner of a vehicle used or operated in New York for
the death or injuries caused by the negligence of any person using or
operating the vehicle with the owner's express or implied permission.
The New York statute also requires every insurance policy issued to the
owner of a vehicle subject to the liability created in N.Y. Law §
388(1) to “contain a provision for indemnity or security against” that
liability. N.Y. Law § 388(4). Thus, the alleged liability of the
Owners, and the mandated insurance coverage to protect them against
that liability, are a direct function of the New York statute. The
provisions of N.Y. Law § 388 are a matter of substantive law and
go to the very right of action at issue in this appeal. See Willard,
213 Va. at 483, 193 S.E.2d at 778 (North Carolina statute allowing
direct action against an insurance company went to the right of action
and was a matter of substantive law).
As in Buchanan, the New York statute itself imposes no duty on a
tortfeasor, nor does it benefit any tortfeasor. Instead, N.Y. Law
§ 388 “ ‘is part of the legislatively prescribed system for
protecting innocent victims of automobile accidents by assuring that
there will be a financially responsible party who is available to
answer in damages.’ ” Motor Club of America Ins. Co. v. Hanifi, 145
F.3d 170, 178 (4th Cir.1998) (citation omitted). Like the court in
Klippel v. U-Haul Co. of Ne. Mich., 759 F.2d 1176, 1183 (4th Cir.1985),
we believe that, by enacting N.Y. Law § 388, the “New York
legislature intended to regulate the relationships between motor
vehicle owners and their ... permittees. Clearly[,] New York's
legislature has the power to prescribe the terms and coverages of the
liability insurance required of the owners of all motor vehicles
registered in New York.” The provisions of N.Y. Law § 388 are
protective and impose “a contractual duty upon the [owner of a vehicle]
having no relation to [the underlying] tort action.” Buchanan, 246 Va.
at 73, 431 S.E.2d at 292. We therefore conclude that the circuit court
erred by applying Virginia's substantive law and holding that the
Owners have no vicarious liability to the Drehers for the alleged
negligence of Saunderson in operating the Owners' vehicle.
The principle of comity supports this result.
There is no doubt that, in a general sense, a statute can have no
operation beyond the state in which it is enacted. But where a right to
sue is given by statute in one state, we can see no good reason why an
action to enforce that right should not be entertained in the courts of
another state, on the ground of comity, just as if it were a common-law
right ....
Maryland v. Coard, 175 Va. 571, 578, 9 S.E.2d 454, 457 (1940). “Comity
does not[, however,] require the application of another state's
substantive law if it is contrary to the public policy of the forum
state. Willard, 213 Va. at 483, 193 S.E.2d at 778.”
“The statutes of New York imposing a showing of financial
responsibility as a condition to the registration and operation of
motor vehicles express a strong public policy that a person injured by
the negligence of a driver should have recourse to a defendant able to
respond in damages.” Allstate Ins. Co. v. Dailey, 47 A.D.2d 375, 367
N.Y.S.2d 87, 89 (N.Y.App.Div.1975); see also Plath v. Justus, 28 N.Y.2d
16, 319 N.Y.S.2d 433, 268 N.E.2d 117, 118-19 (1971) (N.Y. Law §
388 is a financial responsibility statute). The New York legislature
intended this responsibility to extend extra-territorially. Farber v.
Smolack, 20 N.Y.2d 198, 282 N.Y.S.2d 248, 229 N.E.2d 36, 39 (1967). The
provisions of N.Y. Law § 388 have been viewed as showing a
“commendable concern not only for residents of [New York], but
residents of other States who may be injured as a result of the
activities of New York residents.” Tooker v. Lopez, 24 N.Y.2d 569, 301
N.Y.S.2d 519, 249 N.E.2d 394, 399 (1969).
While Virginia traditionally does not recognize the type of liability
imposed by N.Y. Law § 388(1), the statute's application in this
case does not offend our public policy, which, like New York's, favors
compensation of innocent victims in automobile accidents. USAA Cas.
Ins. Co. v. Hertz Corp., 265 Va. 450, 457, 578 S.E.2d 775, 778-79
(2003). Additionally, in this instance, our public policy as reflected
in the common law regarding the scope of a vehicle owner's liability is
not diminished because New York has statutorily imposed greater
liability on its vehicle owners. See Garcia v. Plaza Oldsmobile Ltd.,
421 F.3d 216, 223 (3d Cir.2005). Even if the application of the New
York statute was offensive, “[t]he public policy of [the Commonwealth]
in this regard is not so compelling as to override the application of
[N.Y. Law § 388].” Willard, 213 Va. at 484, 193 S.E.2d at 779.
Finally, the Owners were aware of their liability under N.Y. Law §
388(1). As Judge Butzner argued in his dissent in Kline, we do not
believe the Owners should receive “a windfall at [the Drehers'] expense
because of the fortuitous site of the accident.” Kline, 464 F.2d at 190
(Butzner, J., dissenting).
CONCLUSION
For these reasons, we conclude that the circuit court erred in
sustaining the Owners' demurrers. Both Virginia's choice of law rules
and the principles of comity require the application of New York's
substantive law set forth in N.Y. Law § 388(1). Therefore, we will
reverse the judgment of the circuit court and remand the case for
further proceedings.
Reversed and remanded.