Present: Hassell, C.J., Lacy, Koontz, Kinser, Lemons, and
Agee, JJ., and Russell, S.J.
SHERMAN DREHER, ET AL.
v. Record No. 052508 OPINION BY JUSTICE CYNTHIA D. KINSER
September 15, 2006
BUDGET RENT-A-CAR SYSTEM, INC., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF VIRGINIA BEACH
Stephen C. Mahan, Judge
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 PROCEEDINGS1
1
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.2
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.”3 The Drehers based their claim against the
Owners on a New York statute that states:
2
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.
3
Originally, Cendant Corporation was named as a
defendant in each action. The correct corporate entity is
Cendant Car Rental Group, Inc. The circuit court entered
an order in each action allowing the substitution of
parties.
2
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.
3
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.4
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.”
4
The Drehers’ cases were consolidated on appeal
pursuant to Rule 5:17(d).
4
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
5
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
6
same with the permission, express or implied, of such
owner.” The statute imposes vicarious liability upon an
owner of a vehicle. Nelson v. Garcia, 548 N.Y.S.2d 963,
964 (N.Y. App. Div. 1989); see also ELRAC, Inc. v. Ward,
748 N.E.2d 1, 6 (N.Y. 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, 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 extra-
territorial 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
7
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.5
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
5
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).
8
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
9
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
10
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
11
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
12
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
13
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
14
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, 367 N.Y.S.2d 87, 89
(N.Y. App. Div. 1975); see also Plath v. Justus, 268 N.E.2d
117, 118-19 (N.Y. 1971) (N.Y. Law § 388 is a financial
responsibility statute). The New York legislature intended
this responsibility to extend extra-territorially. Farber
v. Smolack, 229 N.E.2d 36, 39 (N.Y. 1967). The provisions
15
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, 249 N.E.2d 394, 399 (N.Y. 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
16
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.
17