Budget Rent Car Sys v. Chappell

Opinions of the United
2005 Decisions States Court of Appeals
for the Third Circuit

5-5-2005

Budget Rent Car Sys v. Chappell
Precedential or Non-Precedential: Precedential

Docket No. 04-1931

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 04-1931

BUDGET RENT-A-CAR SYSTEM, INC.

v.

NICOLE CHAPPELL;
JOSEPH POWELL, III

Nicole Chappell,

Appellant

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action No. 02-cv-08975)
District Judge: Honorable Stewart Dalzell

Argued February 15, 2005

Before: SLOVITER, AMBRO
and ALDISERT, Circuit Judges
 (Filed May 5, 2005)

Roger L. Simon, Esquire (Argued)
Friedman & Simon
333 Jericho Turnpike, Suite 318
Jericho, NY 11753

Counsel for Appellant

Stephen A. Scheuerle, Esquire (Argued)
Hohn & Scheuerle
1835 Market Street
Eleven Penn Center, Suite 2901
Philadelphia, PA 19103

Counsel for Appellee

OPINION OF THE COURT

AMBRO, Circuit Judge

We apply Pennsylvania’s choice-of-law rules to
determine which state’s substantive law (New York’s,
Michican’s or Pennsylvania’s) governs the extent of vicarious
liability of Budget Rent-a-Car System, Inc. (“Budget”), the
owner of a vehicle involved in an accident that rendered Nicole
Chappell (“Chappell”), a New York resident, permanently

2
paralyzed. The accident occurred in Pennsylvania as Chappell
and her boyfriend, Joseph Powell, III (“Powell”), a Michigan
resident, were driving from New York to Michigan in a car
Powell had rented from Budget in Michigan (and previously
driven to New York).

Because the State of New York has the greatest interest
in the application of its law to this dispute, we conclude that its
law should apply. The contrary judgment of the District Court
is reversed.

I. Pertinent Facts and Procedural History

On the morning of February 12, 2002, Powell rented a
Nissan Xterra from Budget in Michigan. Later that day, he
drove eight hours to New York to visit Chappell. Powell stayed
with Chappell in New York for the rest of that week. On the
evening of February 15, after Chappell completed her work
week, she and Powell left New York in the Xterra, planning to
drive to Michigan to spend the weekend together there.

While driving through Pennsylvania early the next
morning, Powell fell asleep at the wheel. The car drifted from
the left lane of Interstate 80 across the right lane and into the
right guardrail, causing it to flip over. Powell escaped the crash
without substantial physical injury. However, the force of the
impact ejected Chappell from the Xterra, causing severe
injuries. Shortly after the accident, a helicopter transported her

3
to Mercy Hospital in Pittsburgh, where doctors diagnosed,
among other injuries, spinal trauma that has rendered Chappell
permanently paraplegic.

Budget initiated this action in the United States District
Court for the Eastern District of Pennsylvania, seeking a
declaratory judgment against Powell and Chappell and asking
the Court to determine which state’s substantive law governed
its vicarious liability as the owner of the vehicle.1 Budget
argued that Michigan law should apply, capping its liability at
$20,000. Chappell brought two counterclaims against Budget
(vicarious liability and negligent entrustment) and a cross-claim
against Powell. She argued that Budget faced unlimited
vicarious liability under New York law.

The parties cross-moved for summary judgment on the
choice-of-law issue, and the District Court granted summary
judgment to Budget, holding that Pennsylvania law applied.
Chappell moved for a certification of the issue and entry of a
final judgment under Fed. R. Civ. P. 54(b). After the District

1
The District Court exercised diversity jurisdiction pursuant
to 28 U.S.C. § 1332. As noted, Chappell is a New York resident
and Powell is a Michigan resident. Budget Systems, Inc. was a
Delaware corporation that maintained its principal place of
business in Illinois. Subsequent to the accident, it was acquired
by Budget, which was and remains a Delaware corporation with
its principal place of business in New Jersey.

4
Court granted that motion and entered a final judgment,
Chappell timely appealed. We exercise appellate jurisdiction to
review the District Court’s final judgment under 28 U.S.C. §
1291.

II. Legal Framework

A. Pennsylvania Choice-of-Law

To determine which state’s substantive law governs, we
must refer to the choice-of-law rules of the jurisdiction in which
the District Court sits, here Pennsylvania. Klaxon Co. v. Stentor
Electric Mfg. Co., 313 U.S. 487, 496 (1941); Melville v.
American Home Assur. Co., 584 F.2d 1306, 1308 (3d Cir.
1978). Under Pennsylvania law, we begin with an “interest
analysis” of the policies of all interested states and then—based
on the result of that analysis—characterize the case as a true
conflict, false conflict, or unprovided-for case. LeJeune v.
Bliss-Salem, Inc., 85 F.3d 1069, 1071 (3d Cir. 1996); Lacey v.
Cessna Aircraft Co., 932 F.2d 170, 187 & n.15 (3d Cir. 1991).

A true conflict exists “when the governmental interests
of [multiple] jurisdictions would be impaired if their law were
not applied.” Lacey, 932 F.2d at 187 n.15. If a case presents a
true conflict, Pennsylvania choice-of-law rules “call for the
application of the law of the state having the most significant
contacts or relationships with the particular issue.” In re Estate

5
of Agostini, 457 A.2d 861, 871 (Pa. Super. Ct. 1983). As
explained in the Second Restatement of Conflict of Laws,

the factors relevant to the choice of the applicable
rule of law include (a) the needs of the interstate
and international systems, (b) the relevant policies
of the forum, (c) the relevant policies of other
interested states and the relative interests of those
states in the determination of the particular issue,
(d) the protection of justified expectations, (e) the
basic policies underlying the particular field of
law, (f) certainty, predictability and uniformity of
result, and (g) ease in the determination and
application of the law to be applied.

Restatement (Second) of Conflict of Laws § 6 (1971).

“A false conflict exists if only one jurisdiction's
governmental interests would be impaired by the application of
the other jurisdiction’s law.” Lacey, 932 F.2d at 187. If there
is a false conflict, we must apply the law of the only interested
jurisdiction. See, e.g., Kuchinic v. McCrory, 222 A.2d 897,
899–900 (Pa. 1966); Griffith v. United Air Lines, Inc., 203 A.2d
796, 807 (Pa. 1964).

Finally, an unprovided-for case arises when no
jurisdiction's interests would be impaired if its laws were not
applied. Lex loci delicti (the law of the place of the

6
wrong—here Pennsylvania) continues to govern unprovided-for
cases. See, e.g., Miller v. Gay, 470 A.2d 1353, 1355–56 (Pa.
Super. Ct. 1983).

With this background, we turn to the competing state
laws we consider applying.

B. Relevant State Law Provisions on Vicarious
Liability

1. New York

New York law imposes unlimited vicarious liability on
the owners of vehicles. It provides that “[e]very owner of a
vehicle used or operated in [that] state shall be liable and
responsible for . . . injuries to person[s] . . . resulting from
negligence in the use or operation of such vehicle . . . .” N.Y.
Veh. & Traf. Law § 388(1) (McKinney 2002). By passing
§ 388(1), the New York “[l]egislature intended that the injured
party be afforded a financially responsible insured person
against whom to recover for injuries.” Plath v. Justus, 268
N.E.2d 117, 119 (N.Y. 1971).

It is beyond dispute that § 388(1) has extraterritorial
scope, that is, it can apply to accidents occurring beyond New
York’s borders. Farber v. Smolack, 229 N.E.2d 36, 40 (N.Y.
1967) (holding that “[t]o the extent . . . earlier decisions declined
to give extraterritorial effect to [§ 388], they are overruled”).

7
This dispute requires us to assess the extent of the extraterritorial
scope of § 388(1). The New York Court of Appeals has held
that “vicarious liability imposed by section 388(1) does not
extend to owners of vehicles that have never been registered,
used, operated or intended for use within [New York].” Fried
v. Seippel, 599 N.E.2d 651, 654 (N.Y. 1992) (emphasis added).
We later address whether (under New York law) the Xterra in
our case falls within that exclusion.

2. Michigan

Michigan also imposes vicarious liability on the owners
of vehicles. Its law provides that “[t]he owner of a motor
vehicle is liable for an injury caused by the negligent operation
of the motor vehicle . . . [if] the motor vehicle is being driven
with his or her express or implied consent or knowledge.”
Mich. Comp. Laws § 257.401(1) (2003) (“Subsection 1”).
Liability is capped, however, in certain circumstances: “[The
liability of] a person engaged in the business of leasing motor
vehicles who is the lessor of a motor vehicle under a lease
providing for the use of the motor vehicle by the lessee for a
period of 30 days or less . . . is limited to $20,000.00 because of
bodily injury to or death of 1 person in any 1 accident . . . .”
Mich. Comp. Laws § 257.401(3) (2003) (“Subsection 3”). In
effect, vicarious liability is imposed on an owner when the
driver's negligence causes an accident in another state so long as
the owner-driver relationship was entered into in Michigan.
Sexton v. Ryder Truck Rental, Inc., 320 N.W.2d 843, 856

8
(Mich. 1982).

At the time of Chappell’s accident, Michigan law
provided that it was a misdemeanor for “an owner knowingly
[to] permit to be operated, upon any highway, a vehicle required
to be registered . . . unless there is attached to and displayed on
the vehicle . . . a valid registration plate issued for the
vehicle . . . .” Mich. Comp. Laws §§ 257.255(1), (2) (2001).2

2
The parties presented (and the District Court relied on)
several legal arguments implicating the significance of this
provision, all involving events that took place before Powell
rented the vehicle. For reasons explained below, we need not
reach these arguments. For the sake of completeness, however,
we set out the pertinent pre-rental facts.
Assuming that Budget followed its regular procedures,
after the Xterra arrived in Romulus, Michigan (on or about
January 30, 2002), a Budget fleet clerk obtained Michigan
license plate NVQ532 and placed that plate on one of the
Xterra's seats. A “lot person” later removed the plate from the
Xterra's seat and affixed it to the vehicle.
After placing the plate in the Xterra, the fleet clerk wrote
license plate number “NVQ532” at the top of the vehicle's
certificate of origin and took the certificate to the office of
Michigan's Secretary of State. Someone unknown crossed out
the fleet clerk's initial reference to “NVQ532” and wrote
“PHS756” next to it.
Michigan license plate NVQ532 was registered for use
with a 2001 Ford with Vehicle Identification Number

9
 3. Pennsylvania

Pennsylvania follows the common law rule that, absent
an employer-employee relationship, an automobile’s owner is
not vicariously liable for the negligence of its driver. Solomon
v. Commonwealth Trust Co., 100 A. 534, 535 (Pa. 1917);
Shuman Estate v. Weber, 419 A.2d 169, 172 (Pa. Super. 1980).

III. Analysis

A. District Court Opinion

The District Court’s opinion is a plot-twister. The case
starts simply enough: “the parties [sought] a declaratory
judgment . . . whether the law of New York or Michigan governs
the extent of Budget’s vicarious liability to Chappell . . . .”
Budget Rent-A-Car System, Inc. v. Chappell, 304 F. Supp. 2d

1FAFP55201G235610 that Team Fleet Financial Corporation
(“Team Fleet”) owned. Team Fleet leased its vehicles to
Budget. Budget's fleet clerk had access to a plate registered to
a vehicle that Team Fleet owned.
An employee at the Secretary of State's office used the
certificate of origin, including the handwritten annotation for the
license plate, to register the Xterra and to create an Application
for Michigan Vehicle Title for it. The Michigan Secretary of
State's office registered the Xterra with Michigan license plate
PHS756 and prepared a title application for the transfer of
Michigan license plate PHS756 to the Xterra.

10
639, 644 (E.D. Pa. 2004) (emphases added). “[M]indful” of
what it described as “[a] delicious irony in how the parties
briefed this case,” id. at 650 n.17, the District Court “concluded
that Pennsylvania law controls the resolution of the issues,” id.
at 651 (emphasis added).

This conclusion unfolds as follows. The Court assessed
New York and Michigan’s respective vicarious liability
provisions, reaching the following two intermediate
determinations. First, it “predict[ed] that the New York Court
of Appeals” would “avoid the serious [federal] constitutional
questions” it perceived in § 388(1) by concluding that the
statute’s “reference to ‘vehicle[s] used or operated’ in New
York [does not] cover vehicles that are registered outside of
New York and that were not being used or operated in New
York at the time of an accident,” id. at 647–48. Second, it
decided that Budget could not invoke Michigan's limitation of
liability for short-term lessors of cars in Subsection 3 because
“the lease between Budget Systems and Powell was ‘founded
on’ a misdemeanor—Budget Systems's grant of permission to
operate the Xterra without a valid license plate—” and is
therefore a “nullity” under Michigan law, id. at 650.

Having determined that neither New York’s nor
Michigan’s substantive legal provisions would apply in this
case, the District Court reasoned that neither state had an interest
in applying its law. Id. at 650–51. That is, the Court
characterized this dispute as an unprovided-for case. Id. at 651.

11
As a result, it held that the rule of lex loci delicti governed,
Pennsylvania’s substantive law applied, and thus Budget did not
face vicarious liability. Id.

In sum, the District Court’s choice-of-law ruling rested
on its limiting interpretations of New York and Michigan
substantive law. Before turning to the choice-of-law inquiry, we
address the propriety of those legal interpretations.

B. Does New York’s § 388(1) Apply to This
Dispute?

The District Court predicted that the State of New York
would not construe § 388(1) to apply to this case. Our review
of this prediction is plenary. Nationwide Mut. Ins. Co. v.
Buffetta, 230 F.3d 634, 637 (3d Cir. 2000). We disagree with
the District Court’s analysis and conclude that this case falls
within the scope of § 388(1) as that statute has been construed
by New York’s courts.

Our core query is what does the phrase “used or operated
in [New York]” in § 388(1) mean? Fortunately, New York’s
Court of Appeals has addressed this question on several
occasions.

In Farber v. Smolack, the Court of Appeals implied that
§ 388(1) has as broad a scope of substantive application as

12
would be consistent with New York’s choice-of-law principles.3
When “New York is . . . the jurisdiction having ‘the most
significant relationship’ with the issue presented,” § 388(1)
applies. Farber, 229 N.E.2d at 40 (citations omitted). While
this formulation is unfortunate inasmuch as it conflates—or at
least equates—the substantive law question (the scope of the
statute) with the choice-of-law issue (the extent of New York’s
interest in applying the statute),4 this early precedent nonetheless

3
Farber involved the following facts and disposition. Robert
Smolack loaned his automobile to his brother, Arthur, so that
Arthur could drive his family to Florida and back. While in
North Carolina, Arthur's negligence caused an accident in which
his wife was killed and his two sons were seriously injured.
Representatives of the wife's estate and of the children sued
Robert under § 388(1), but the trial court dismissed the claim,
holding that the provision did not apply. The Court of Appeals
reversed, stressing that “[all parties] were citizens and
domiciliaries of New York; the car was registered in New York;
arrangements for its use had been made in New York; and it was
on its way back to New York when the accident occurred.” Id.
at 38.
4
The District Court in our case recognized the important
distinction between these questions, explaining that when it
“focus[ed] first on the issue of whether Section 388 covers these
facts,” it “[would] not address the myriad cases that have
considered the applicability of that statute based on
choice-of-law principles.” Budget, 304 F. Supp. 2d at 646 n.12.

13
sets the principle that New York will broadly apply § 388(1),
perhaps as broadly as is permissible under constitutional choice-
of-law principles.

Eight years later, in Sentry Ins. Co. v. Amsel, 327 N.E.2d
635 (N.Y. 1975), the New York Court of Appeals again stressed
the broad scope of the statute, explaining that “[t]he legislative
history of [§ 388(1)] indicates that the Legislature intended to
enlarge the vehicle owner’s vicarious liability and not to draw
the line at the border.” Id. at 637.

Most recently, in Fried v. Seippel, the Court of Appeals
directly addressed the scope of the statute and held that the
“vicarious liability imposed by section 388(1) does not extend
to owners of vehicles that have never been registered, used,
operated or intended for use within [New York].” 599 N.E.2d at
654 (emphasis added). In Fried, Avis (which operated in New
York) owned a Jamaican car rental company that rented a
vehicle of Jamaican registry to Seippel, a New York resident.
Seippel and Fried (also a New York resident) were in the car in
Jamaica when one of them 5 negligently caused a head-on
collision. Fried died in the accident. His representatives sued
Avis under § 388(1), and the trial court denied Avis’s motion for
summary judgment based on the Jamaican company's ownership
of the vehicle. Putting aside the issue whether Avis should be

5
The Court concluded that it was unclear whether Fried or
Seippel was driving. Fried, 599 N.E.2d at 652.

14
deemed the vehicle’s owner, the Court of Appeals held that
§ 388(1) did not apply because the car “ha[d] never been
registered, used, operated or intended for use within [New
York].” Fried, 599 N.E.2d at 654.

1. Scope of the Statute

Noting that “[t]he facts here fall in the middle ground
between Farber and Fried because the Xterra was not registered
in New York but Powell did drive it there,” the District Court
interpreted these cases to mean that “New York courts would
conclude that the New York legislature did not intend . . . to
cover vehicles that are registered outside of New York and that
were not being used or operated in New York at the time of an
accident.” Budget, 304 F. Supp. 2d at 647–48. We disagree
with this creative legal interpretation.

The Fried Court stated that “the holding in Farber ha[d]
little bearing on the statutory construction problem presented [in
Fried], since, by virtue of its prior ‘use . . . or operat[ion] in
[New York],’ the accident vehicle in Farber was indisputably
within section 388's substantive coverage . . . .” Fried, 599
N.E.2d at 654 (emphasis added). This statement by New York’s
highest Court is irreconcilable with the District Court’s view and
is arguably sufficient of itself to settle the statutory construction
issue before us. As in Farber, by virtue of its prior use and
operation in New York, the accident vehicle here is indisputably
within § 388’s substantive coverage.

15
 Yet we need not labor, as the District Court did, to
discern the scope of New York’s law from the disposition of its
precedents, for the Fried Court explicitly drew a line for us:
“vicarious liability imposed by section 388(1) does not extend
to owners of vehicles that have never been registered, used,
operated or intended for use within this State.” Fried, 599
N.E.2d at 654 (emphasis added). The vehicle in this case was
used, operated and intended for use within New York.

Lest we be left with doubt as to the meaning of the
seemingly clear rule announced in Fried, we refer to New
York’s intermediate courts for further guidance. “Where an
intermediate appellate state court rests its considered judgment
upon the rule of law which it announces, that is a datum for
ascertaining state law which is not to be disregarded by a federal
court unless it is convinced by other persuasive data that the
highest court of the state would decide otherwise.” West v. Am.
Tel. & Tel. Co., 311 U.S. 223, 237 (1940). In Vasquez v.
Christian Herald Ass’n, 588 N.Y.S.2d 291, 292 (N.Y. App. Div.
1992), only five months after Fried, the First Department of the
Appellate Division of New York’s Supreme Court cited Fried as
authority for the applicability of § 388(1) to facts similar to this
case. 6 Leave to appeal the intermediate appellate court’s

6
In Vasquez one plaintiff was a New York resident (the other
an Ohio resident), the owner of the vehicle was a Pennsylvania
resident (a co-defendant was a New York resident), and the
accident took place in Pennsylvania. The Court explained that

16
decision in Vasquez was denied by the Court of Appeals.7

In short, the District Court’s conclusion that § 388(1)
does not “cover vehicles that are registered outside of New York
and that were not being used or operated in New York at the
time of an accident,” Budget, 304 F. Supp. 2d at 648, runs afoul
of New York’s precedent. To the contrary, the provision applies
unless the accident vehicle “ha[s] never been registered, used,
operated or intended for use within [New York].” Fried, 599

the “[d]efendant . . . erroneously relie[d] upon . . . Fried . . .
[because] [an agent of the New York defendant (not the owner)]
had operated the subject van to and from New York with [the
New York defendant]'s permission.” Id. The use of the car in
New York was enough to extend liability under New York law
to the Pennsylvania owner of the vehicle notwithstanding that
the accident took place in Pennsylvania.
We also note that the United States District Court for the
Eastern District of New York has decided, albeit in a not
precedential opinion we cite solely as persuasive authority, that
§ 388(1) applied to an out-of-state accident involving a car not
registered in New York on the basis of prior use and operation
of the vehicle in the State. Roberts v. Xtra Lease, Inc., No. 98
CV 7559, 2001 WL 984872, at *7 (E.D.N.Y. June 25, 2001).
7
When a state’s highest court denies review, the policy
reasons for following an intermediate court decision (absent
compelling evidence to the contrary) are strengthened. See, e.g.,
Comer v. Texaco, Inc., 514 F.2d 1243, 1244 (5th Cir. 1975).

17
N.E.2d at 654 (emphasis added). Thus, the provision applies to
our case.

2. Constitutional Concerns

The District Court’s construction of § 388(1) was
premised on its perception that applying the statute in this case
would implicate federal constitutional problems. It predicted
that the New York courts would adopt its specific limiting
construction of the statute in order “[t]o avoid the serious
constitutional questions that interpreting Section 388 to cover
the facts of this case would raise . . . .” Budget, 304 F. Supp. 2d
at 648. That is, the District Court interpreted New York law to
require that a court invoke the doctrine of constitutional
avoidance in order to sidestep potential constitutional problems
raised by the application of the statute in this case. It further
predicted that the New York courts would adopt a limiting
construction imposing its bright-line registration requirement.
We have already disagreed with the District Court’s construction
of the statute. We now address the constitutional concerns it
perceived.

To be technical, the Court did not actually hold that
application of § 388(1) would be unconstitutional. It simply
predicted that the courts of New York “would recognize that the
United States Supreme Court has held that due process forbids
states from regulating extraterritorial activities with which they
have ‘slight’ or ‘casual’ connection” and avoid the issue

18
altogether by narrowing the statutory scope. Id. at 647–48
(citing Hartford Accident & Indem. Co. v. Delta & Pine Land
Co., 292 U.S. 143 (1934); Home Ins. Co. v. Dick, 281 U.S. 397
(1930)). Having parted from the District Court’s statutory
interpretation, we ask simply whether application of the statute
in this case under the Fried rule would violate the Constitution
(as opposed to asking whether New York courts would perceive
the application of the statute in this case as a potential
constitutional problem they should avoid by adopting the
District Court’s construction).

The Supreme Court has spoken on this issue since 1934,
when the most recent case cited by the District Court was
decided. In fact, the precedent that gave rise to the District
Court’s constitutional apprehensions is widely recognized to be
irrelevant under modern law. As Chappell points out, Delta and
Dick were decided before the modern states’ interest framework
for choice-of-law analysis began to dominate. The plurality
opinion in Allstate Ins. Co. v. Hague, 449 U.S. 302 (1981), for
example, noted that Delta has “scant relevance for today”
because “[i]t implied a choice–of–law analysis which, for all
intents and purposes, gave an isolated event . . . controlling
constitutional significance, even though there might have been
contacts with another State . . . which would make application
of its law neither unfair nor unexpected.” Id. at 309 n.11
(emphasis added). See also Clay v. Sun Ins. Office, Ltd., 377
U.S. 179 (1964); Watson v. Employers Liab. Assurance Corp.,
348 U.S. 66 (1954).

19
 In Hague the Supreme Court stated that in order for the
substantive law of a state “to be selected in a constitutionally
permissible manner, the state must have a significant contact or
significant aggregation of contacts, creating state interests, such
that choice of its law is neither arbitrary nor fundamentally
unfair.” 449 U.S. at 312–13. In that case, a Wisconsin resident
who had three automobile insurance policies was killed in an
accident in Wisconsin by an uninsured motorist. Suit was filed
in Minnesota by the decedent’s personal representative to
recover under the uninsured motorist endorsements of the three
policies. Minnesota permitted the stacking of policies, while
Wisconsin did not. The Supreme Court affirmed the application
of Minnesota law on the basis of three contacts that it found, in
aggregate, constitutionally sufficient:

First, . . . Mr. Hague was a member of
Minnesota's work force, having been employed by
a Red Wing, Minn., enterprise for the 15 years
preceding his death. . . . Mr. Hague's residence in
Wisconsin does not . . . constitutionally mandate
application of Wisconsin law to the exclusion of
forum law. . . . Second, Allstate was at all times
present and doing business in Minnesota. By
virtue of its presence, Allstate can hardly claim
unfamiliarity with the laws of the host jurisdiction
and surprise that the state courts might apply
forum law to litigation in which the company is
involved. . . . Third, respondent became a

20
 Minnesota resident prior to institution of this
litigation.

Id. at 313–18. We have no doubt that this case passes the Hague
standard for a constitutionally permissible choice of law. All
three of the factors the Court relied on in Hague are present
here, plus many more. As a result, we see no constitutional
problem with the choice of New York’s substantive law to
govern this dispute.

We note an additional problem we perceive with the
District Court’s analysis. The Court viewed Hague’s forebears
as a limitation on the permissible interpretation of the scope of
New York’s substantive law. Yet, as best illustrated by Hague,
the relevant issue is the constitutionality of a choice of
substantive law (not constitutional limitations on the permissible
scope of a state’s substantive law). In our case we must ask
whether New York’s substantive law would constitutionally
apply to the facts we review, not whether New York could
permissibly choose to apply its law (the choice of which
substantive law to apply being an issue reserved to Pennsylvania
law). Put colloquially, applying choice-of-law principles to the
analysis of the constitutional scope of New York’s substantive
law mixes apples and oranges. For our purposes, it is sufficient
to conclude that there is no constitutional bar to the application
of New York law to this dispute.

21
 C. Does Michigan’s Subsection 3 Apply to this
Dispute?

As noted, the District Court concluded that Budget could
not invoke Michigan’s limitation of liability for short-term
lessors of cars in subsection 3 because “the lease between
Budget Systems and Powell was ‘founded on’ a
misdemeanor—Budget Systems’s grant of permission to operate
the Xterra without a valid license plate—” and was therefore a
“nullity” under Michigan law. Budget, 304 F. Supp. 2d at 650.
The parties vigorously dispute the propriety of this holding.
Because we conclude below that New York’s interest in
applying its law far outweighs any interest Michigan might have
in applying subsection 3 (that is, assuming subsection 3 would
apply), we find it unnecessary to address the competing,
complex statutory interpretation arguments presented by the
parties.8 Instead, we leave the construction question to the State
of Michigan and assume without holding that Michigan’s

8
If Michigan’s subsection 3 does not apply to this case, then
only New York has an interest in applying its law and this case
would be a “false conflict.” New York law would clearly apply.
If subsection 3 does apply, Michigan has an interest in applying
its law and we must weigh the “true conflict” between its
interest and that of New York. Because we conclude that New
York’s interest trumps in any event, we need not settle the
construction of Michigan law because we reach the same result
under either construction.

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subsection 3 would apply and limit Budget’s liability in this
case. Under this assumption, we turn to New York and
Michigan’s competing interests.

D. Identification and Weighing of State Interests

In choosing between Michigan and New York law,9 we
consider, inter alia, “the relevant policies of [the] interested
states and the relative interests of those states in the
determination of the particular issue.” Restatement (Second) of
Conflict of Laws § 6 (1971). New York’s § 388(1) “was
enacted to ensure access by injured persons to a financially
responsible [party] against whom to recover for injuries and to
change th[e] common-law rule and to impose liability upon the
owner of a vehicle for the negligence of a person legally
operating the car with the permission, express or implied, of the
owner.” Hassan v. Montuori, 786 N.E.2d 25, 27 (N.Y. 2003)

9
It is clear that Pennsylvania does not have an interest in
applying its law to this dispute. But for the chance occurrence
of the accident in Pennsylvania, there is no connection between
the Commonwealth and the parties. Pennsylvania has no
interest in securing a recovery for Chappell nor in limiting
Budget’s liability. The District Court held that Pennsylvania
law applied by default under the rule of lex loci delicti because
neither New York nor Michigan had an interest in applying its
law. We have already stated our disagreement with those
predicate determinations.

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(internal quotations omitted); Morris v. Snappy Car Rental, 637
N.E.2d 253, 255 (N.Y. 1994). “Another . . . interest is in
assuring that New York vendors who furnish medical and
hospital care to injured parties are compensated . . . . Finally,
New York has a public fiscal interest in assuring that . . . New
York State can recoup its welfare expense[s] from [victims’]
recover[ies].” Bray v. Cox, 333 N.Y.S.2d 783, 785–86 (N.Y.
App. Div. 1972).

Describing Michigan’s subsection 3, the District Court
explained that “[i]n response to car rental companies’
complaints that Subsection 1[—which provides for unlimited
vicarious liability—]was ‘inhibiting the growth of the [rental
car] industry and threatening to drive some companies out of the
state,’ the Michigan legislature amended the law in June of 1995
[to add subsection 3].” Budget, 304 F. Supp. 2d at 648 (quoting
DeHart v. Joe Lunghamer Chevrolet, Inc., 607 N.W.2d 417, 420
(Mich. Ct. App. 1999)). That is, subsection 3 was codified to
advance Michigan’s interest in preventing rental car companies
from deciding not to do business (or to do less business) in the
State of Michigan for fear of unlimited vicarious liability.

Having identified the competing state policies implicated
by this dispute, we turn to the states’ relative interests in those
policies. New York’s interest is clear, direct and compelling.
Chappell is a New York resident receiving treatment and care
from medical providers in New York with the aid of New York-
administered welfare programs. Each of New York’s policy

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justifications for enacting § 388(1) is directly implicated by this
case, and New York’s interest runs to the full extent of
Chappell’s recovery, dollar for dollar. It has an interest in (1)
Chappell’s full recovery from a financially responsible party, (2)
the compensation of New York vendors who furnish medical
and hospital care to Chappell, and (3) recouping the State’s
welfare expenses.

Michigan, unlike New York, does not have an interest in
securing a recovery for an injured citizen in this case (or
associated state medical expenses). Its only interest lies in the
extent of Budget’s liability (or, put another way, in the potential
application of subsection 3’s liability cap). We doubt that
Michigan’s interest in the application of subsection 3 is
implicated at all in this case. Is it plausible that Budget will
decide not to do business in the State of Michigan if it is held
liable under New York law for an accident that occurred in
Pennsylvania involving a car rented in Michigan? In fact, the
application of New York’s more stringent law in this case likely
advances Michigan’s interest in making it a relatively attractive
place for rental car companies to do business by highlighting the
value of Michigan’s liability cap. And if potential liability in
other fora would undermine Budget’s decision to do business in
Michigan, there are steps it can take to preserve the value of
Michigan’s liability cap short of pulling out of the State. For
example, Budget is free to limit to intrastate travel the
permissible use of vehicles it rents in Michigan. It is similarly
free contractually to bar its customers from operating its

25
vehicles in the State of New York. (We note that, far from
restricting the use of vehicles in New York, Budget actually
rents vehicles in that State, calling into question the necessity of
a liability cap to induce rental car companies to do business in
a state.) In short, Michigan’s interest in this particular dispute
is uncertain and tenuous at best.

We thus conclude that New York’s interest in the
application of its law to this dispute clearly trumps that of
Michigan. Thus, under Pennsylvania’s choice-of-law rules,
New York law is to be applied.

IV. Conclusion

The District Court erred in its conclusion that the facts of
this case do not fall within the scope of New York’s § 388(1).
Because § 388(1) does apply to this case, and because New
York’s interest in applying that provision clearly outweighs any
interest Michigan might (or might not) have in applying its
liability cap, under Pennsylvania’s choice-of-law rules New
York law governs this dispute and Budget faces unlimited
vicarious liability. The District Court’s judgment is accordingly
reversed.

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