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

• Decision Date: 15 September 2006
• Docket Number: Record No. 052508.
• Parties: Sherman DREHER, et al. v. BUDGET RENT-A-CAR SYSTEM, INC., et al.
• Court: Virginia Supreme Court

634 S.E.2d 324

Sherman DREHER, et al. v. BUDGET RENT-A-CAR SYSTEM, INC., et al.

Record No. 052508.

Supreme Court of Virginia.

September 15, 2006.

William D. Breit (Joynes & Gaides Law Group, on briefs), for appellants.

Robert B. Delano, Jr., Richmond; Kimberly A. Chadwick, Fairfax (William N. Watkins; Sands Anderson Marks & Miller, Richmond; Doherty, Sheridan & Persian, Fairfax, on briefs), for appellees.

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 PROCEEDINGS¹

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:

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.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." 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 exists 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.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 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...