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«Automobile Leasing and the Vicarious Liability of Lessors Daniel J. Koevary∗ ∗ Fordham University School of Law Copyright c 2004 by the authors. ...»

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Fordham Urban Law Journal

Volume 32, Issue 3 2004 Article 8

Automobile Leasing and the Vicarious

Liability of Lessors

Daniel J. Koevary∗

Fordham University School of Law

Copyright c 2004 by the authors. Fordham Urban Law Journal is produced by The Berkeley

Electronic Press (bepress). http://ir.lawnet.fordham.edu/ulj

Automobile Leasing and the Vicarious

Liability of Lessors∗

Daniel J. Koevary

Abstract

The Comment begins by discussing the New York Vehicle and Traffic Law Section 388, which makes lessors vicariously liable for their cars even when they are begin leased by others, and how this led many car companies in New York to stop offering leases in the 1920’s, the Comment will recommends that Section 388 be amended to exclude lessors from vicarious liability. The Comment then goes through the history of Section 388, explains what leasing is and why it is popular, looks at the recent impact of Section 388 which includes several companies have stopped leasing in New York, looks at current legislation for and against Section 388, examines the various theories of vicarious liability, such as enterprise liability, the control test, and externalities. The Comment concludes by saying that Section 388 should be repealed and lessors should not be vicariously liable for lessees because finance companies acting as insurers is inefficient and expensive, and actual insurance companies would be better and cheaper alternatives.

KEYWORDS: automobile, vicarious liability, lessors ∗ The author wishes to thank Professor Gail Hollister for her suggestions and assistance in writing this Comment and his brother, Jonathan Koevary, for his inspiration. This Comment is dedicated to the author’s, Gail Koevary, who just wanted to lease a car.

KOEVARYCHRISTENSEN 2/3/2011 10:03 PM

AUTOMOBILE LEASING AND THE VICARIOUS

LIABILITY OF LESSORS

Daniel J. Koevary∗

INTRODUCTION

In 2003, some of the largest automobile financing companies determined that they would no longer offer leasing in New York State. 1 These companies ceased leasing because of a 1920s New York law that creates vicarious liability for car owners.2 The statute, New York Vehicle and Traffic Law section 388, 3 has been interpreted to include long-term lessors as automobile owners 4 because they hold title to the leased vehicles, even though the lessors do not possess the vehicles during the lease period.5 ∗ J.D. candidate, Fordham University School of Law, 2005; B.A. Political Science, University of Rochester, 2001. Theauthor wishes to thank Professor Gail Hollister for her suggestions and assistance in writing this Comment and his brother, Jonathan Koevary, for his inspiration. This Comment is dedicated to the author’s, Gail Koevary, who just wanted to lease a car.

1. Ed Garsten, Firms Halt N.Y. Vehicle Leases, DETROIT NEWS, July 6, 2003, at B (noting that the finance arms of General Motors, Ford, and Honda had stopped or planned to stop leasing in New York State in 2003).

2. Adam Rombel, Auto Dealers Adjust to Life With Lighter Leasing Load, CENT. N.Y.

BUS. J., Dec. 19, 2003, at 3 (explaining that General Motors, Ford, and Honda “stopped leasing in New York because of mounting legal costs under the so-called ‘vicariousliability’ that allows accident victims to sue leasing companies for unlimited amounts”).

3. (McKinney 2004). Section 388 states in pertinent part:

1. Every owner of a vehicle used or operated in this state 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.... 3. As used in this section, “owner” shall be as defined in section one hundred twenty-eight of this chapter and their liability under this section shall be joint and several.

4. See N.Y. VEH. & TRAF. LAW § 128 (McKinney 2004) (defining a lessee possessing an automobile for more than thirty days as an owner). This Comment does not address short-term leases—defined as leases that are for less than thirty days, for example, renting a car—and whether it is rational to hold car rental companies or other short-term lessors vicariously liable for their short-term lessees.

5. See, e.g., Sullivan v. Spandau, 186 A.D.2d 641, 642-43 (N.Y. App. Div. 1992) (holding lessor company liable for lessee’s accident because lessor held title to the vehicle, KOEVARYCHRISTENSEN 2/3/2011 10:03 PM

102 FORDHAM URBAN LAW JOURNAL [Vol. XXXII

This Comment addresses whether holding such automobile lessors vicariously liable is justified. Part I discusses the relevant background of the statute, case law interpreting the language of the statute, and the effect of the interpretation. It also gives an overview of the different financing options available to automobile consumers and describes how New York auto purchases have been affected by section 388 in recent years. Part II analyzes how vicarious liability is justified in general, focusing specifically on employer and employee relationships. It further explores how vicarious liability can generally help to minimize the costs that a tortious actor can impose on society. It concludes with an overview of the ways that insurance companies structure their product to operate efficiently. Finally, Part III applies the justifications for vicarious liability in general to vicarious liability in automobile leasing specifically and addresses how vicarious liability forces lessors to perform the functions of insurers. The Comment concludes that applying section 388 to lessors is bad policy for three reasons: first, because it holds lessors liable for the actions of a party whom they neither benefit from nor control; second, vicarious lessor liability does not appropriately apportion the cost of an accident to the party that caused the accident; and third, vicarious liability is inefficient in this context because it requires financing companies to assume the role of insurers. Consequently, this Comment recommends that section 388 be amended to exclude lessors from vicarious liability.





I. THE HISTORY OF SECTION 388 AND ITS MODERN IMPLICATIONS

A. The Statutes New York Vehicle and Traffic Law section 388 was enacted in 1924 to “ensure access by injured persons to a ‘financially responsible insured person against whom to recover for injuries.”’ 6 The major policy goal of section 388 was to compensate automobile accident victims. 7 Section 388 makes all owners of a vehicle jointly and severally liable for the negligence of any driver to whom an owner gives permission to drive the vehicle. 8 Section 388 refers to another section of the New York collected “rent” from the lessee, and did not offer lessee an option to purchase the vehicle at any point).

6. See Morris v. Snappy Car Rental Inc., 637 N.E.2d 253, 255 (N.Y. 1994) (quoting Plath v. Justus, 268 N.E.2d 117, 119 (N.Y. 1971).

7. See John Caher, Car Makers Step Up Lobbying Against Vicarious Liability Law, N.Y. L.J., Apr. 11, 2003, at 1 [hereinafter Caher, Car Makers Step Up Lobbying].

8. See supra note 3.

KOEVARYCHRISTENSEN 2/3/2011 10:03 PM 2005] AUTOMOBILE LEASING AND LIABILITY 103 Vehicle and Traffic Law, section 128, in its definition of “owner.” 9 In section 128, an owner is defined as a person, other than a lien holder, who holds title to a vehicle. 10 There can be multiple owners of a single car under this definition, including vehicle lessors.11 Even though lessors that argue they should be considered lien holders, and thus excluded from the statutory definition of owner, New York courts have concluded that lessors are owners because they are titleholders.12 New York is one of fewer than a dozen states that hold an owner of a vehicle vicariously liable for a permissive user’s negligence.13 Further, it has become the only state to impose unlimited liability for lessee negligence on lessors. 14 The other two states which had unlimited lessor liability, Connecticut and Rhode Island, have passed statutes capping lessor liability within the last few years because vehicle financing companies threatened to stop leasing in those states unless their liability was removed or limited. 15 B. What is Leasing and Why is it Popular?

Automobile leasing is a financing arrangement whereby a lessee, in exchange for monthly payments, obtains possession of an automobile for an agreed term. 16 When a lease commences, a financing company17 (or

9. N.Y. VEH. & TRAF. LAW § 388(3) (McKinney 2004).

10. § 128; see also Harry Steinberg, Vicarious Liability of Motor Vehicle Owners Under V&TL § 388 is Extensively Litigated, 70 N.Y. ST. B.J. 36, 37 (1998).

11. E.g., Sullivan v. Spandau, 186 A.D.2d. 641, 642-43 (N.Y. App. Div. 1992).

12. E.g., id.

13. Steinberg, supra note 10, at 36.

14. Rombel, supra note 2.

15. CONN. GEN. STAT. § 14-154a (2005) (amended by 2003 Conn. Legis. Serv. 250 (West)); R.I. GEN. LAWS § 31-34-4 (2005) (amended by 2003 R.I. Pub. Laws 117 § 2);

Diane Levick, Leasing Firms May Get Incentive, HARTFORD COURANT, June 6, 2003, at E2 (stating that Connecticut reversed its vicarious liability law); Kathleen Yanity, Lease Decrease—Incentive, Liability, Drive Down Popularity, PROVIDENCE J., Aug. 22, 2003, at G1 (stating that Rhode Island reversed its vicarious liability law). Lessor liability has been capped for death or injury at $100,000 for one person and $300,000 for multiple persons in Connecticut. Levick, supra. Rhode Island’s new statute has the same terms. Yanity, supra.

As a result of placing a cap on lessor liability, the financing companies that threatened to leave the Connecticut and Rhode Island market decided to continue leasing in both states.

Liz Moyer, JPM Unit to Resume Auto Leasing in R.I., AM. BANKER, July 9, 2003, at 2;

Yanity, supra.

16. Ralph J. Rohner, Leasing Consumer Goods: The Spotlight Shifts to the Uniform Consumer Leases Act, 35 CONN. L. REV. 647, 651 (2003). A “lease” is defined in the U.C.C. as “the right to possession and use of goods for a term in return for consideration.” U.C.C. § 2A-103(1)(p) (2004).

17. Most lessors are financing companies whose traditional businesses consist of financing auto purchases between consumers and auto dealers. See Stuart M. Litwin, The KOEVARYCHRISTENSEN 2/3/2011 10:03 PM

104 FORDHAM URBAN LAW JOURNAL [Vol. XXXII

“lessor”) purchases a vehicle from a dealer and then the financing company leases the vehicle to the consumer (or “lessee”). 18 The lessor retains the vehicle’s title and resells the vehicle at the end of the lease term when the vehicle is returned. Vehicles depreciate in value over time and, although there will probably be a significant residual value—the value of the vehicle after the lease ends—by the end of the lease term, most vehicles are worth far less than when they were new. 19 To recoup this value, the lessor will set the lease price by determining how much the car will depreciate over the course of the lease term. 20 As the titleholder, the lessor can treat the leased cars as depreciable assets and take tax deductions for the depreciation. 21 Consumers like leasing because less money is required upfront and monthly payments are lower in a lease than for the purchase of a vehicle on credit. 22 Lease payments cover the value of the car over a set period of time, after which possession of the car reverts to the lessor, while a consumer under a credit purchase eventually has unencumbered ownership of the car. 23 Thus, monthly payments on the lease will be based on the lower total cost of owning the vehicle for the lease term instead of on the total purchase price of the vehicle.24 Lower monthly payments give consumers a chance to drive a vehicle that they might find too expensive if they were purchasing the car on credit 25 and are also advantageous to businesses that would prefer to rent. 26 A key difference between loans and credit purchases under New York Vehicle and Traffic Law section 388 27 is that under a lease, but not under a Future of Auto Lease Securitization, 797 PRAC. L. INST. 581, 586 (1999).

18. Id. at 587-88. In a typical vehicle lease, the original lessor is a car dealer who assigns the lease to a financing company. Rohner, supra note 16, at 652 n.21.

19. See Litwin, supra note 17, at 588-89; Rohner, supra note 16, at 650 n.11.

20. Rohner, supra note 18, at 650 n.11.

21. Telephone Interview with Charles Territo, Spokesperson, Alliance of Automobile Manufacturers (May 13, 2004).

22. Rohner, supra note 16, at 650.

23. Id. at 650 n.11.

24. See id.

25. Id. One article cited a consumer who wanted to lease a Chevrolet Cavalier because she was “short on cash but long on desire.” Marc Santora, Carmakers Limit New York Leases, N.Y. TIMES, Apr. 24, 2004, at A1.

26. Telephone Interview with Charles Territo, supra note 21. The total cost of leasing may be more expensive than purchasing a vehicle on credit because, even though the monthly payments are lower, at the end of the term, a lessee does not possess an asset whereas in a credit purchase the owner does. Even if individual consumers are cognizant of this fact, some may prefer to have lower monthly payments throughout the term, instead of higher payments and an asset. See supra note 26 and accompnaying text.

27. (McKinney 2004).

KOEVARYCHRISTENSEN 2/3/2011 10:03 PM 2005] AUTOMOBILE LEASING AND LIABILITY 105 credit purchase, the financing company, not the lessee, has title to the vehicle. 28 In a sale, the consumer is the titleholder and the lender’s rights and liabilities are limited to that of a creditor. 29 Section 388 holds lessors liable, but not lenders, because lessors are title-holders.

Leasing has become a very popular form of auto ownership in New York, particularly in the New York City Metropolitan Area. 30 Consumers benefit because the lower payments allow them to drive new cars every two to four years if they desire. 31 Having the option to lease or to purchase also gives consumers more flexibility in deciding how they want to own an automobile.



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