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Dreher v. Budget Rent-A-Car System, Inc.

Court: Supreme Court of Virginia
Date filed: 2006-09-15
Citations: 634 S.E.2d 324
Copy Citations
14 Citing Cases

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