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Lessor Liability: Adventures in Motor Vehicle Leasing

Over 4,200 people were killed and over 3,400,000 injured in approximately 6,750 motor vehicle accidents in 1997, as estimated by the National Highway Transportation Safety Administration. It is small wonder, therefore, that motor vehicle leasing poses potential third party liability issues over and above those common in the leasing industry. This article will examine a few of such issues.

Several states have enacted statutes holding lessors responsible for damage caused by their lessee's negligence. Many of these statutes extend vicarious liability theories familiar to most law students. For example, Conn. Gen. Stat. § 14-154a (1987) provides "any person renting or leasing to another any motor vehicle owned by him shall be liable for any damage to any person or property caused by the operation of such motor vehicle while so rented or leased, to the same extent as the operator would have been liable if he had also been the owner."

In other states, liability is limited where the lessor requires or carries insurance, Ariz. Rev. St. Section 28-3204 (1989), 47 Okl. Stat. §§ 8-101 (1990). In Florida, the limitation only applies to lessors of motor vehicle leases for terms in excess of one year and requires the insurance contain limitations of "not less than $100,000/$300,000 bodily injury liability and $50,000 property damage liability or not less than $500,000 combined property damage liability and bodily injury liability." Fla. Stat. Ann. § 324.021(9)(b).

Adding a measure of complexity to analysis of potential lessor liability is the distinction between true leases and conditional sales recognized by some state. Perhaps due to a confusion between finance leases and short term rental agreements, case law in some states hold owner/lessors responsible while lenders and "lessors" under conditional sales agreements are not. For example, in Barksdale v. National Bank of Detroit, 186 Mich. App. 286, 463 N.W. 2d 258 and Matthews v. CTI Container Transport International, Inc. 871 F.2d 270 (2nd Cir. 1989) (A New York Case), the Court examined the substance of the "leases" in question and found that the "lessor" was merely providing financing through a conditional sale arrangement. For similar cases, see 60 ALR 4th 784 (1991).

On the other hand, some courts are willing to adopt a form-over-substance analysis. The Iowa Supreme Court in Peterson v. The Ford Motor Credit Company, 448 N.W. 2nd 316 (1989) ignored the purchase option contained in the "lease" and language in the Iowa statute stating that the debtor under a "security agreement" will be treated as the owner for liability purposes.

Other cases dealing with "dangerous instrumentality" doctrines and other means of placing liability for accidents in motor vehicles owners focus on whether the lessor has control, Dominquez Mojica v. Citibank, N.A. 853 F.Supp. 51 (D.P.R. 1984); Ford Motor Company 595 F.2d 1114 (D.D.C. 1984). Precedent in Pennsylvania and Nebraska indicate that statutes will be construed narrowly and vicarious liability will not be imputed under common law principles. Jahn v. O'Neil, 327 Pa. Sup. 357, 475 A. 2d. 837 (1984); Bridgeford The U-Haul Company 195 Neb. 308, 238 N.W. 2nd
443 (1976).

A final cautionary note involves conflicts of law. Vicarious liability statutes and tort law principles are variously applied according to the state law which governs the lease or the place where the accident occurs. Compare Kline v. McCorkle 330 F.2d 1089 (D.E. VA. 1971) with Drinkall v. Used Car Rentals, Inc. 32 F.3d 329 (8th Cir. 1984).

Given this uncertainty, lessors who do not regularly lease motor vehicles might want to check relevant statutory authority and case law before entering into a vehicle lease and consider restricting the use of motor vehicles to "friendly" states, or at least requiring that vehicles be based and used out of a favorable location. In addition, insurance provisions should be carefully scrutinized and enforced, particularly where state law places the burden of carrying or requiring the lessee to carry insurance on the lessor. The Florida case of Kramer v. General Motor Acceptance Corporation, 572 So. 2nd 1363 (1990) may be instructive. In that case, the lessee allowed its insurance coverage to lapse and the lessor would most likely have been held responsible for injuries caused by the lessee's use of the leased vehicle but for a finding that the lease was a conditional sale.

Finally, lessors should seriously consider whether it makes sense to list themselves as lenders on motor vehicles certificates of title. As federal and state law generally applies a substance-over form analysis to income tax issues, see Frank Lyon Co. v. U.S. 435 U.S. 561 (1978), the risk of losing depreciation and other tax benefits due to this practice would seem minimal. Bankruptcy case law appears to be in accord. See In Re. Circus Time, Inc., 641 F.2d 39 (1st Cir. 1981); In Re. Load-It, Inc. 774 F.2d 1077 (11th Cir 1985).