By Greg Johnson. In Stratton v. Wallace, 11-CV-74-A HKS, 2014 WL 3809479 (W.D.N.Y. Aug. 1, 2014), the court came to an odd result under the Graves Amendment (Transportation Equity Act of 2005 (49 USC § 30106)), a statute intended to preempt state law imposing liability on vehicle owners engaged in the business of renting or leasing motor vehicles absent a showing of negligence or criminal wrongdoing on the part of the owner. I recently posted an overview of the law entitled “Leasing, Renting & Vicarious Liability: An Overview of the Graves Amendment.”

In Stratton v. Wallace, the court interpreted the Graves Amendment to require that both the vehicle owner/lessor and its affiliate/lessee must be free of negligence in order for the statute to apply. This ruling is likely wrong.

The preemption clause of the Graves Amendment provides, in part, as follows:

(a) In general.-An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if-

(1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and

(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).

In the typical Graves Amendment case — where the vehicle’s owner and operator are related only by an arm’s length contract – the outcome is generally simple. Under the Graves Amendment, the owner is not liable to the injured claimant so long as (1) the owner’s business is leasing or renting vehicles; and (2) the owner was not negligent.

However, the Graves Amendment becomes more difficult to apply where the owner/lessor and the lessee are related by more than just a lease agreement; such as where the owner/lessor and the lessee are owned by the same parent company. The Graves Amendment contemplates this situation by providing that the statute may also apply to a vehicle owner’s “affiliate.” (49 U.S.C. § 30106(d) (1)).

One issue is whether the statute will apply to insulate the vehicle owner from liability when its affiliate is allegedly liable or whether both the owner and affiliate must be free of negligence.

This issue was recently addressed in Stratton v. Wallace, a decision released on August 1, 2014. In that case, Julie Stratton’s car hit a deer while she was driving on an interstate in New York. While she was sitting in her disabled vehicle on the side of the road, Thomas Wallace, who was driving a tractor-trailer owned by Great River Leasing, struck Ms. Stratton’s car and killed her.

Great River had leased the tractor-trailer to Wallace’s employer, Millis Transfer, Inc. (Millis). Midwest Holding Group, Inc. (Midwest) was the parent company of Great River and Mathis.

Stratton’s estate brought an action against Great River, the vehicle owner, Millis, Wallace’s employer, Wallace and Midwest. Under New York’s vicarious liability statute “[e]very owner of a vehicle” is liable for injuries caused by the use of the vehicle “by every person using or operating the same with the permission, express or implied, of such owner.” (N.Y. Vehicle & Traffic Law § 388). Thus, if the driver to whom the vehicle is entrusted was negligent, the owner is vicariously liable regardless of whether the owner was negligent.

Great River moved for summary judgment on the basis it was insulated from vicarious liability by the Graves Amendment, 49 U.S.C. § 30106. Great River and Millis were clearly “affiliates” under the statute. The issue was whether the Graves Amendment would apply to insulate Great River, the vehicle owner, from vicarious liability under the New York owner’s statute when its affiliate, Millis, was allegedly liable.

The estate argued the Graves Amendment did not apply to shield Great River from liability because: (1) the estate claimed Millis was negligent; (2) Millis was an “affiliate” of Great River within the definition of the Graves Amendment; (3) that, therefore, subsection (a) (2) of the Graves Amendment was not satisfied; and (4) accordingly, the Graves Amendment did not shield Great River from vicarious liability. Making the appropriate substitutions urged by the estate, the Graves Amendment would provide as follows: “[Great River] shall not be liable under the law of any State … by reason of being the owner of the vehicle … for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if- (1) [Great River or Millis] is engaged in the trade or business of renting or leasing motor vehicles; and (2) there is no negligence or criminal wrongdoing on the part of [Great River or Millis].” Great River, on the other hand, argues that because it was the owner of the truck at issue-and thus, the party seeking to benefit from the Graves Amendment’s protection — subsections (a) (1) and (a)(2) of the Graves Amendment should be read to include only Great River, and not Great River’s affiliate, Millis. Because Great River was not alleged to have any negligence, it would be dismissed from the suit under this reading.

The Magistrate Judge recommended granting Great River’s motion for summary judgment. The Magistrate noted the Graves Amendment “was plainly intended to eliminate vicarious liability for owners engaged in the business of renting or leasing motor vehicles who are free from negligence and, likewise, affiliates of owners who are engaged in the business of renting or leasing motor vehicles and are likewise free from negligence.”

However, the district court concluded otherwise, holding that “both the lessee and lessor [must] be free of negligence” in order for the Graves Amendment to shield a vehicle’s owner from vicarious liability. This interpretation, while plausible, is likely wrong.

The Graves Amendment was intended to extinguish liability for owners engaged in the business of renting or leasing motor vehicles who are free from negligence and affiliates of owners who are engaged in the business of renting or leasing motor vehicles and are likewise free from negligence.” While generally, a non-owner of a vehicle does not need the protection of the Graves Amendment because it ordinarily cannot have vicarious liability under owner statutes, liability claims were presented against non-owner affiliates engaged in the business of renting vehicles on the basis that the affiliate was the alter ego of the vehicle owner and/or should otherwise be treated as if they were the vehicle “owner” for purposes of the statute as they were often in exclusive possession and control of the vehicle under lease agreements with the owner.

When applying the statute, one should do so from the point of view of the party seeking its protection. It is much like interpreting the term “insured” under a commercial liability policy. One has to read the statute (policy) separately from the perspective of the company (insured) seeking its protection. Thus, if the vicarious liability claim is presented against the vehicle owner, the Graves Amendment should be read as follows:

(a) In general. An owner of a motor vehicle that rents or leases the vehicle to a person … or an affiliate … shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle … for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if-

(1) the owner … is engaged in the trade or business of renting or leasing motor vehicles; and

(2) there is no negligence or criminal wrongdoing on the part of the owner …

If the vicarious liability claim is presented against an affiliate of the vehicle owner, the statute should be read as follows:

(a) In general … [A]n affiliate of the owner … shall not be liable under the law of any State or political subdivision thereof, by reason of being … an affiliate of the owner … for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if-

(1) the … affiliate of the owner … is engaged in the trade or business of renting or leasing motor vehicles; and

(2) there is no negligence or criminal wrongdoing on the part of the … affiliate of the owner).

As noted, the district court in Stratton interpreted the statute in a contrary fashion, requiring that both the vehicle owner and the owner’s affiliate be free of negligence. In the district court’s view, if one read the phrase “(or an affiliate of the owner)” as a substitute for the word “owner,” the statute “would then accomplish nothing, because vicarious liability statutes hold owners liable solely because they are owners-not because they are affiliates.” Because the court was unwilling to read the phrase “(or an affiliate of the owner)” as a substitute for the word “owner,” it was compelled to read the balance of the statute in a similar fashion, such that 49 U.S.C. § 30106 (a) (2) required both the owner and affiliate to be free of negligence.

However, as noted above, when the Graves Amendment was passed affiliates needed protection from liability as well because they were often joined in lawsuits involving the vehicle owner on the basis of their exclusive possession and control of the vehicle under lease agreements with the owner.

The Graves Amendment should be interpreted from the perspective of the party seeking its protection. If that party was “engaged in the trade or business of renting or leasing motor vehicles” and was free of negligence, the statute should apply. Hopefully, the Stratton case will be appealed and the appellate court will bring more clarity to the issue.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.