Case Title: Dreher v. Budget Rent-A-Car System, Inc.

Citation: 

Docket Number: 052508

State: virginia

Court: Virginia Supreme Court

Date: 2006-09-15T00:00:00Z

Document:
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). 
 
2
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. 
 
3
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.  
 
4
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). 
 
5
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 
 
6
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 
 
7
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 
 
8
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). 
 
9
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 
 
10
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 
 
11
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 
 
12
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 
 
13
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 
 
14
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 
 
15
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 
 
16
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 
 
17
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.