Automobile leasing and the vicarious liability of lessors.

• Author: Koevary, Daniel J.
• Position: New York

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)

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.

1. THE HISTORY OF SECTION 388 AND ITS MODERN IMPLICATIONS

   1. 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 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)

   2. 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 company (17) (or "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 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.

   3. Recent Impact of Section 388

      The mounting costs associated with section 388 are attributable to rising amounts in jury awards and to, what seems to some, outrageous determinations of lessor liability. (32) Lessors claim that vicarious liability under section 388 has cost them over $1 billion since 1997 in New York, (33) and that between August 2001 to August 2002 there were over 215 vicarious liability suits against them, seeking a total of $1.6 billion. (34) Even if the lessors were to prevail in many of these suits, litigation costs would still be substantial.

      Last year, the finance arms of General Motors, Ford, and Honda stopped leasing in New York because of the increasing costs associated with liability under section 388. (35) These lenders account for seventy-five percent of car leases in New York. (36) Chase Manhattan Automotive Financing Corp., the auto leasing arm of J.P. Morgan Chase and Co., and several smaller lenders have also discontinued offering leases in New York. (37) Some of the companies that continue to lease cars have altered their lease terms by raising their fees several hundred dollars to account for their liability under section 388. (38) Some that stopped leasing altogether began offering balloon payment options instead. (39)

      Balloon payment options are similar to leases in that a consumer takes possession of a vehicle for a set term while making monthly payments. Under this approach, however, at the end of the term the consumer has the option of either making a "balloon" payment and obtaining unencumbered ownership of the vehicle, or returning the vehicle (and title). (40) The key difference is that during the term of the agreement, the consumer, not the finance company, is the titleholder, and thus the finance companies are not vicariously liable under section 388. (41) The consumer makes payments as though he were owning the vehicle only for a set term and then, in consideration for not having to pay the cost of buying the car outright, returns it to the dealer. (42)

      Balloon payment plans, however, are more expensive than leases for two reasons. First, the monthly balloon payments are higher because consumers pay interest as though they had purchased the vehicle on credit. (43) In a lease, the consumer only pays interest based on the total cost of the lease, not the entire purchase price of the car. Second, the consumer must pay sales tax as though he were purchasing the car in its entirety rather than for a set lease term. (44) This is because the sales tax will be based on the entire retail cost of the car for a balloon payment, (45) whereas for a lease, sales tax is only based on the total cost of the lease. (46) Because of these increased costs, financing companies do not consider balloon payments to be competitively priced and they claim that they will not use balloon payments for much longer because consumers will choose to buy on credit instead. (47)

   4. Current Legislation and Lobbyists For and Against Section 388

      Several trade organizations have spoken out against section 388, (48) including, not surprisingly, the Alliance of Automobile Manufacturers, the National Vehicle Leasing Association, and the New York State Automobile Dealers Association. (49) The New York State Bar Association has also criticized section 388. (50) These critics allege that vicarious liability under section 388 is unfair because it holds them liable for the acts of people over whom they have no control. (51) Opponents further claim that section 388 limits consumer choices, hurts auto sales, and is not needed to help injured parties. (52)...