(1) Does it make sense to peg ownership of movable property at the time and place of its conveyance? If the Luries had traveled to Russia to purchase the sketch, would their respective interests in the sketch be determined by Russian law? Assuming the soundness of a situs rule focused on the point of transfer, would it make more sense to peg the transfer of ownership of the sketch to Russian law but peg the specific nature of the spouses’ interests to the law of Missouri, where they were domiciled at the time?
(2) If spouses choose a new domicile, as the Luries did, should the nature of the property owned be redefined according to the law of their new domicile? What reasons might justify defining the nature of their joint ownership by reference to the law of the current marital domicile?
(3) Why should situs matter so much? The Restatement provisions quoted above point chiefly to the locus of the tangible item to determine questions about transfers. Exceptions are made with respect to testamentary dispositions and transfers between spouses. Are the reasons discussed previously for applying the law of the situs to questions involving real property as compelling for questions of personal property?
(4) What law should determine ownership in shares of stock? Did it make sense for the Morson court (and the Restatement) to distinguish between certificates and shares? Suppose that Herbert had given the signed, notarized, and witnessed certificates to Mildred while sitting at the kitchen table in their home. If the couple was domiciled in Massachusetts and the stock at issue represented shares in a Panamanian corporation, whose law should apply then to determine whether the gift was effective?
(5) A particularly troublesome aspect of chattels is that they can be moved. When that fact is added to the fact that valuable chattels are often the collateral for security interests, the opportunity for a great deal of mischief arises. The Uniform Commercial Code has spelled out a set of fairly specific rules for dealing with the perfection of security interests in movable goods and in intangibles. Provisions are made for accounts, “ordinary goods,” “mobile goods,” goods subject to certificate-of-title legislation, and several other categories of collateral. In general, ordinary goods are governed by the law of their location. Accounts and mobile goods, having no handily identifiable location, are governed by the law of the debtor’s location—usually its place of business. Goods subject to a certificate of title are generally subject to the law of the state that issues the certificate of title. For each category, there are rules concerning the relocation of the collateral or debtor.
For the most part, the single most important choice-of-law question concerning goods under Article Nine is where to file a financing statement in order to perfect a security interest, and in the 1972 version of the UCC, the rules of §9-103 are limited to rules on where to file. Note that this is an area in which certainty is not only the most important consideration but nearly the only consideration. UCC 1-105 governs other conflicts issues. (See Chapter 3 infra.)
(6) Consider also the problem of choice of law as applied to movable property held in trust. What law should apply when the creator (“settlor”) of a trust is domiciled in State A, the property held in trust is located in State B, the trustee designated to administer the estate is located in State C, and the beneficiaries of the trust are domiciled in State D? The First Restatement, §§294-298, provided that the validity of a trust of chattels created via inter vivos transaction is determined by the law of the state where the chattel is located when the trust is created. The validity of a trust of choses in action created inter vivos is determined by the law of the place where the transaction takes place. And the validity of a trust created by will is determined by the law of the testator’s domicile at the time of her death. The trust instrument is interpreted according to usage at the domicile of the settlor at the time the trust was created. And the law applied to the administration of the trust is that of the place where the trust instrument locates its administration. Does it make sense to have so many different laws applied to trusts?
Is this a situation where the settlor should be permitted to choose the law governing the trust, either by express choice-of-law clause or by choosing the location where the trust is established? Consider the following:
In all the affairs of life there has been a vast increase of mobility. Residence is growing less and less the focal point of existence, and its practical effect is steadily diminishing. Men living in one jurisdiction often conduct their affairs in other jurisdictions, and keep their securities there. Trusts are created in business and financial centers by settlors residing elsewhere. A settlor, regardless of residence, cannot establish a trust to be administered here which offends our public policy. If we hold that a nonresident settlor may also not establish a trust of personal property here which offends the public policy of his domicile, we shackle both the nonresident settlor and the resident trustee.
Our courts have sought whenever possible to sustain the validity even of testamentary trusts to be administered in a jurisdiction other than the domicile of the testator.… In regard to other conveyances or alienations of personal property situated here, they have steadfastly applied the law of the jurisdiction where the personal property is situated. The maxim that movable personal property follows its owner is restricted to the field within which the state, where that property is found, chooses to apply other laws than its own, and modern conditions have caused a limitation of the field to narrow bounds. That is true in other jurisdictions as well as here. Where a nonresident settlor establishes here a trust of personal property intending that the trust should be governed by the law of this jurisdiction, there is little reason why the courts should defeat his intention by applying the law of another jurisdiction.…
Hutchison v. Ross, 262 N.Y. 381 (1933) (upholding inter vivos trust created by a husband in Montreal intended to benefit his wife, also of Montreal, even though the trust was invalid under the laws of Quebec). Consider also the following statements made in Wilmington Trust Co. v. Wilmington Trust Co., 26 Del. Ch. 397 (1942), a case in which a trust was upheld under the law of the state to which the seat of the trust was relocated even though the testator’s appointment violated the Rule Against Perpetuities of the state of the testator’s domicile:
The diversity of judicial opinion with respect to the discovery of the jurisdiction under whose law the validity of a trust inter vivos of intangible personal property is to be determined is such that no useful purpose will be served by an attempted analysis of the decisions. Courts have variously looked to the domicile of the donor, the place of execution of the trust instrument, the situs of the trust property, the place of administration of the trust, the domicile of the trustee, the domicile of the beneficiaries, and to the intent or desire of the donor, or to a combination of some of these denominators, in deciding the troublesome question of conflict of law. In the case of a testamentary trust of personalty it is very generally held that the law of the testator’s domicile is the governing law. In some jurisdictions the same rule is applied in the case of a living trust of personal property. Modern methods of transportation with a resulting change of business economy have tended, however, to obliterate state lines and to depreciate the importance of particular localities. The place of one’s residence no longer is a sure indication of one’s place of business; nor is ownership of property closely tied to residence. The domicile of the donor is, of course, a circumstance to be considered in the ascertainment of the seat of the trust; but courts, today, are not so much inclined to the uncompromising pursuit of abstract doctrine. They are disposed to take a more realistic and practical view of the problem; and the donor’s domicile is no longer regarded as the decisive factor. The place of execution of the trust instrument and the domicile of the trustee and the place of administration of the trust—quite generally the same place—are important factors; and the intent of the donor, if that can be ascertained, has been increasingly emphasized.…
Contracting parties, within definite limits, have some right of choice in the selection of the jurisdiction under whose law their contract is to be governed. And where the donor in a trust agreement has expressed his desire, or if it pleases, his intent to have his trust controlled by the law of a certain state, there seems to be no good reason why his intent should not be respected by the courts, if the selected jurisdiction has a material connection with the transaction. More frequently, perhaps, the trust instrument contains no expression of choice of jurisdiction; but, again, there is no sufficient reason why the donor’s choice should be disregarded if his intention in this respect can be ascertained from an examination of attendant facts and circumstances, provided that the same substantial connection between the transaction and the intended jurisdiction shall be found to exist.…
Are there any potential problems with allowing settlors to place their assets in trust in states where those trusts are valid even though the same trust would be invalid in the state of the settlor’s domicile? What if the settlor is seeking to shield his assets from potential creditors by placing his assets in offshore trusts? See LoPucki, The Essential Structure of Judgment Proofing, 51 Stan. L. Rev. 147 (1998); Sterk, Asset Protection Trusts: Trust Law’s Race to the Bottom? 85 Cornell L. Rev. 1035 (2000); Hirsch, Fear Not the Asset Protection Trust, 27 Cardozo L. Rev. 2685 (2006). Does the substantial connection requirement indicated by the Wilmington Trust court solve this potential problem?
Selections from the First Restatement of Conflicts, on Corporations
§§154, 155, 165, 166, 182, 183, 187, 188, 190-192, 205 (1934)
§154. Recognition of Foreign Corporation
The fact of incorporation by one state will be recognized in every other state.
§155. Questions of Incorporation
(1) Whether an association has been incorporated is determined by the law of the state in which an attempt to incorporate has been made.
(2) The effects of an unsuccessful attempt to incorporate are governed by the law of the state in which the attempt was made.
(3) Defects in the process of incorporation which may give the incorporating state a power to dissolve the corporation are governed by the law of such state.
§165. Powers of Foreign Corporation
A foreign corporation can legally perform any act within its corporate powers under the law of the state of incorporation unless the act is prohibited by the law of the state where it is to be performed.
§166. Law Governing Act of Foreign Corporation
The effect of an act directed to be done by a foreign corporation is governed by the law of the state where it is done.
§182. Law Governing Title to Share
Whether a person is a shareholder or other member of a corporation is determined by the law of the state of incorporation.
§183. Participation in Management and Profits
The right of a shareholder to participate in the administration of the affairs of the corporation, in the division of profits and in the distribution of assets on dissolution and his rights on the issuance of new shares are determined by the law of the state of incorporation.
Except as stated in §188, the existence and extent of the liability of shareholders, officers or directors of a corporation to a creditor of the corporation for a violation of law by them, is determined by the law of the state of incorporation.
§188. Liability Imposed by State Where Corporation Acts
So far as the directors or agents are participants in acts done within the state, a state can impose liability upon the directors or agents of a foreign corporation doing business in the state for acts done within the state or for failure to do acts required by the law of the state as a condition of doing business within the state.
§190. Direct Liability of Shareholder Imposed by State of Incorporation
The state of incorporation can impose liability on a shareholder running directly to creditors, for debts of the corporation incurred in another state and this liability will be enforced in any state which has judicial jurisdiction over the shareholder.
§191. Direct Liability of Shareholder Imposed by Foreign State
Liability for an act caused by a foreign corporation to be done by its agent can be imposed on a shareholder by the law of the state where the act is done only if the shareholder
(a) is domiciled in the state, or
(b) has personally taken part in doing the act or causing it to be done, or
(c) has notice that the corporation was formed to do business there. This liability will be enforced in any state having judicial jurisdiction over the shareholder.
§192. Action Concerning Shares
Except as stated in §193 and subject to the considerations stated in the Scope Note to this Topic, a court will usually not entertain a suit brought against a foreign corporation to obtain a decree against it requiring or enjoining the issuance, transfer, or cancellation of shares.
When an association already incorporated by one state is incorporated by another, the creation of shares is governed by the law of the state which first incorporates the association.
McDermott Inc. v. Lewis
531 A.2d 206 (Del. 1987)
Before CHRISTIE, C.J., HORSEY and MOORE, JJ.
We confront an important issue of first impression—whether a Delaware subsidiary of a Panamanian corporation may vote the share it holds in its parent company under circumstances which are prohibited by Delaware law, but not the law of Panama. Necessarily, this involves questions of foreign law, and applicability of the internal affairs doctrine under Delaware law.
Plaintiffs, Harry Lewis and Nina Altman, filed these consolidated suits in the Court of Chancery in December, 1982 seeking to enjoin or rescind the 1982 Reorganization under which McDermott Incorporated, a Delaware corporation (“McDermott Delaware”), became a 92%-owned subsidiary of McDermott International, Inc., a Panamanian corporation (“International”). Lewis and Altman are stockholders of McDermott Delaware, which emerged from the Reorganization owning approximately 10% of International’s common stock. Plaintiffs challenged this aspect of the Reorganization, and the Court of Chancery granted partial summary judgment in their favor, holding that McDermott Delaware could not vote its stock in International.
We conclude that the trial court erred in refusing to apply the law of Panama to the internal affairs of International. There was no nexus between International and the State of Delaware. Moreover, plaintiffs concede that the issues here do not involve the internal affairs of McDermott Delaware. Thus, we decline to follow Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (2d Cir. 1984), which prohibited a similar device involving a Panamanian subsidiary seeking to vote the share it held in its Panamanian parent. Accordingly, we reverse. In so doing, we reaffirm the principle that the internal affairs doctrine is a major tenet of Delaware corporation law having important federal constitutional underpinnings.
International was incorporated in Panama on August 11, 1959, and is principally engaged in providing worldwide marine construction services to the oil and gas industry. Its executive offices are in New Orleans, Louisiana, and there are no operations in Delaware. International does not maintain offices in Delaware, hold meetings or conduct business here, have agents or employees in Delaware, or have any assets here.
McDermott Delaware and its subsidiaries operate throughout the United States in three principal industry segments: marine construction services, power generation systems and equipment, and engineered materials. McDermott Delaware’s principal offices are in New Orleans.
Following the 1982 Reorganization, McDermott Delaware became a 92%-owned subsidiary of International. The public stockholders of International hold approximately 90% of the voting power of International, while McDermott Delaware holds about 10%.
The stated “principal purpose” of the reorganization, according to International’s prospectus, was to enable the McDermott Group to retain, re-invest and redeploy earnings from operations outside the United States without subjecting such earnings to United States income tax. The prospectus also admitted that the 10% voting interest given to McDermott Delaware would be voted by International, “and such voting power could be used to oppose an attempt by a third party to acquire control of International if the management of International believes such use of the voting power would be in the best interests of the stockholders of International.” An exchange offer, and thus the Reorganization, was supported by 89.59% of McDermott Delaware stockholders.
The applicable Panamanian law is set forth in the record by affidavits and opinion letters of Ricardo A. Durling, Esquire, and the deans of two Panamanian law schools, to support the claim that McDermott Delaware’s retention of a 10% interest in International, and its right to vote those shares, is permitted by the laws of Panama. Significantly, the plaintiffs have not offered any contrary evidence.…
We note at the outset that if International were incorporated either in Delaware or Louisiana, its stock could not be voted by a majority-owned subsidiary. No United States jurisdiction of which we are aware permits that practice.
Relying on Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (2d Cir. 1984), the Court of Chancery concluded that Panama in effect would refrain from applying its laws under the facts of this case. On that basis, the trial court then concluded that since both Delaware and Louisiana law prohibit a majority-owned subsidiary from voting its parent’s stock, the device was improper. We consider this an erroneous application of both Delaware and Panamanian law.
Our analysis requires a two-step inquiry. First, we must determine if Panamanian law, in the factual context addressed by the Court of Chancery, permits International to vote its own shares through the device of McDermott Delaware’s ownership. If it does not, then the inquiry ends. However, if Panamanian law permits the practice, we must consider the multifaceted issues inherent in the application of the internal affairs doctrine.
It is apparent that under limited circumstances the laws of Panama permit a subsidiary to vote the shares of its parent. Article 35 of Panamanian Cabinet Decree No. 247 of July 16, 1970, which is part of the General Corporation Law of Panama, restricts the exercise of voting rights on shares of certain Panamanian corporations, but Article 37 limits the scope of Article 35 to “corporations registered in the National Securities Commission [of Panama] and those whose shares are sold on the market.…” Opinion of Ricardo A. Durling, supra p. 5. Based on the facts before the Court of Chancery, it is undisputed that International was not required to register, nor had it registered, with the National Securities Commission. Further, International’s shares were not “sold on the market,” as that term is defined by the Attorney General of Panama. Reading Articles 35 and 37 together, it is apparent that Article 35’s prohibition did not apply to International.
Given the uncontroverted evidence of Panamanian law, establishing that a Panamanian corporation may place voting shares in a majority-owned subsidiary under the limited circumstances provided by Article 37, we turn to the fundamental issues presented by application of the internal affairs doctrine.
Internal corporate affairs involve those matters which are peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders. It is essential to distinguish between acts which can be performed by both corporations and individuals, and those activities which are peculiar to the corporate entity.
Corporations and individuals alike enter into contracts, commit torts, and deal in personal and real property. Choice of law decisions relating to such corporate activities are usually determined after consideration of the facts of each transaction. See Reese & Kaufman, The Law Governing Corporate Affairs: Choice of Law and the Impact of Full Faith and Credit, 58 Colum. L. Rev. 1118, 1121 (1958) (hereinafter “Reese and Kaufman”). In such cases, the choice of law determination often turns on whether the corporation had sufficient contacts with the forum state, in relation to the act or transaction in question, to satisfy the constitutional requirements of due process. The internal affairs doctrine has no applicability in these situations. Rather, this doctrine governs the choice of law determinations involving matters peculiar to corporations, that is, those activities concerning the relationships inter se of the corporation, its directors, officers and shareholders.
The internal affairs doctrine requires that the law of the state of incorporation should determine issues relating to internal corporate affairs. Under Delaware conflict of laws principles and the United States Constitution, there are appropriate circumstances which mandate application of this doctrine.
Delaware’s well established conflict of laws principles require that the laws of the jurisdiction of incorporation—here the Republic of Panama—govern this dispute involving McDermott International’s voting rights.
The traditional conflicts rule developed by courts has been that internal corporate relationships are governed by the laws of the forum of incorporation. See Macey & Miller, Toward an Interest-Group Theory of Delaware Corporate Law, 65 Tex. L. Rev. 469, 495 (1987). As early as 1933, the Supreme Court of the United States noted:
It has long been settled doctrine that a court—state or federal—sitting in one state will, as a general rule, decline to interfere with, or control by injunction or otherwise, the management of the internal affairs of a corporation organized under the laws of another state but will leave controversies as to such matters to the courts of the state of the domicile.…
Rogers v. Guaranty Trust Co. of New York, 288 U.S. 123, 130 (1933) (citations omitted).
However, in Western Air Lines, Inc. v. Sobieski, Cal. App., 191 Cal. App. 2d 399 (1961), a California court upheld an order of the California Commissioner of Corporations directing a Delaware corporation having major contacts with California to follow the cumulative voting requirements imposed by California law. After the Western Air decision, commentators noted that the case signaled the alleged start of a “conflicts revolution.” See Kozyris, Corporate Wars and Choice of Law, 1985 Duke L.J. 1; Kaplan, Foreign Corporations and Local Corporate Policy, 21 Vand. L. Rev. 433 (1968).…
A review of cases over the last twenty-six years, however, finds that in all but a few, the law of the state of incorporation was applied without any discussion. Kozyris, supra, at 17-18. In fact, twenty-six years after Western Air the following statement remains apt:
The umbilical tie of the foreign corporation to the state of its charter is usually still religiously regarded as conclusive in determining the law to be applied in intracorporate disputes. The fundamental reexamination of the nature of conflict of laws over the past few years has virtually left foreign corporation matters remaining as a pocket of the past in a subject area which has otherwise been characterized by free inquiry, change and flux.
Kaplan, supra at 464.
The policy underlying the internal affairs doctrine is an important one, and we decline to erode the principle:
Under the prevailing conflicts practice, neither courts nor legislatures have maximized the imposition of local corporate policy on foreign corporations but have consistently applied the law of the state of incorporation to the entire gamut of internal corporate affairs. In many cases, this is a wise, practical, and equitable choice. It serves the vital need for a single, constant and equal law to avoid the fragmentation of continuing, interdependent internal relationships. The lex incorporationis, unlike the lex loci delicti, is not a rule based merely on the priori concept of territoriality and on the desirability of avoiding forum-shopping. It validates the autonomy of the parties in a subject where the underlying policy of the law is enabling. It facilitates planning and enhances predictability. In fields like torts, where the typical dispute involves two persons and a single or simple one-shot issue and where the common substantive policy is to spread the loss through compensation and insurance, the preference for forum law and the emphasis on the state interest in forum residents which are the common denominators of the new conflicts methodologies do not necessarily lead to unacceptable choices. By contrast, applying local internal affairs law to a foreign corporation just because it is amenable to process in the forum or because it has some local shareholders or some other local contact is apt to produce inequalities, intolerable confusion, and uncertainty, and intrude into the domain of other states that have a superior claim to regulate the same subject matter.…
Kozyris, supra at 98.… In conclusion, the trial court erred as a matter of law in ignoring the uncontroverted Panamanian law, and in applying Delaware and/or Louisiana law to the internal affairs of International contrary to established Delaware law and important constitutional principles. Accordingly the judgment of the Court of Chancery is reversed.
Irving Trust Co. v. Maryland Casualty Co.
83 F.2d 168 (2d Cir. 1936)
L. HAND, J.
This is an appeal from a decree, dismissing a bill in equity for lack of equity, filed by a trustee in bankruptcy against grantees and transferees of the bankrupt. The bankrupt is a Delaware company, doing business in New York under license of the Secretary of State; an involuntary petition was filed against it on the 13th of October, 1932; it was adjudicated, and the plaintiff was appointed its trustee in the following December. On January 6, 1932, it was indebted to four surety companies, with which on that day it entered into two contracts on separate dates by which it promised to transfer to the companies or their nominees in payment of its debts to them certain personal property, and to procure the transfer by three of its subsidiaries of certain other real and personal property. Most of the real property was within the state of New York, but one parcel with chattels upon it was in Missouri, one was in Florida, and two were in New Jersey. The chattels consisted of the supplies, furniture, and the like; the other personalty was made up of mortgages, mortgage bonds secured by real property, insurance policies, assignments of rent, accounts receivable, and cash. The bill alleged that at the time of the contracts the bankrupt was insolvent, or in imminent danger of insolvency; that the transfers were intended to prefer the surety companies, as they well knew or had cause to know; and that in performance of the contracts the subsidiaries conveyed the real property and chattels thereon to nominees of the surety companies, and the bankrupt transferred the bonds, mortgages, accounts, etc., to the companies themselves. The suit was against the companies and the nominees, and was based upon section 114 of the Stock Corporation Law (Consol. Laws N.Y. c.59) quoted in the margin.* … The judge decided that section 114 applied only to the liability of officers, directors, and stockholders of foreign companies and did not make unlawful the transfers themselves; for this reason he dismissed the bill. The plaintiff appealed.
Section 114 was confessedly passed to fill the gap left in section 15 [which provided that no corporation shall make transfers or assignments in contemplation of its insolvency, and all such assignments shall be declared void,] when Vanderpoel v. Gorman construed that section as limited to domestic companies.** The result was to put domestic companies at a disadvantage as compared with foreign companies licensed by the state to do business within its borders; and in 1897 the Legislature made up its mind to end the handicap. The report of the committee then appointed particularly mentioned among other things the desirability of subjecting foreign companies to the same limitations in favor of their creditors which applied to domestic; section 114, then section 60, was the result of their efforts.…
A more troublesome question concerns the property outside New York. Although the bill does not say where the transfers were made, the contracts required them to be delivered in that state, and we are to assume that the parties performed as stipulated. The receipt of the deeds by the defendants was therefore a wrong, and any liabilities imposed as a remedy would be recognized and enforced elsewhere, for the law of the place where acts occur normally fixes their jural character. Restatement of Conflict of Laws, §384. The question here is whether it makes a difference that the wrong consisted in the conveyance of property in another state, under whose laws the conveyance might perhaps have been valid.… The doctrine is of course well settled, certainly as to real property, and, as we shall assume arguendo, equally at the present time as to personal, that the law of the situs absolutely determines the validity of conveyances wherever made. No title will pass and no interest will arise, save as that law prescribes. We have no doubt therefore that title passed by the deeds delivered in New York to property situated in those of the three states whose laws did not forbid such transfers; yet the law of New York might still make receipt of the deed a wrong and impose a liability upon the grantee though he got a good title. That would not trench upon the sovereignty of the state of the situs whose power over the res would remain wholly unimpaired. Nobody would question this so far as concerned the grantee’s liability in damages; it would be but reasonable that he should become liable to the grantor’s creditors just because his title was unimpeachable. In the case of contracts for the sale of land the lex loci contractus certainly controls.
… Some of the relief asked by the bill cannot therefore be granted; the court cannot adjudge the transfers void as to land and chattels outside the state, except as the lex rei sitae is the same as section 114. But under his general prayer the plaintiff, if he proves his case, may have a decree as to any of the property transferred directing the defendants to reconvey it, and this he can enforce in personam. Of course he may also recover damages as a substitute if he so elects.
Decree reversed; defendants to answer over.
Questions and Comments
(1) The McDermott court also decided, in an omitted portion of its opinion, that its ruling was constitutionally compelled. For a discussion of the constitutional issues raised by the “internal affairs” doctrine requiring application of the law of the state of incorporation, see pages 392–393 infra. More recently, the Supreme Court of Delaware reaffirmed its claim that the internal affairs doctrine has constitutional status. VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005).
(2) In Vanderpoel v. Gorman, 35 N.E. 932 (N.Y. 1894), a case mentioned in Irving Trust, the New York Court of Appeals provided the following justification for a strict application of the internal affairs doctrine:
As to domestic corporations, we assume certain responsibilities arising out of the very liberty given by the state for their creation or formation. We provide for their birth, for their regulation and government during life, and for their death. Upon their dissolution, which no other power than the state itself, acting through its legislature or its courts, can pronounce, the whole power of the corporation ceases, and the property which the corporation leaves passes under the dominion of the sovereignty which created it. Responsible for its creation, for its government, and for its death, the state has assumed, in such cases, complete and full jurisdiction over the corporation and its property; and accordingly the state has, in a series of statutory provisions, made certain that the corporate property shall be distributed in accordance with its own ideas of justice. On the other hand, in the case of a foreign corporation, the same kind of responsibility does not obtain. Our courts cannot dissolve it, nor can we, by virtue of our laws, in any way affect its property situated outside of the state, nor call it to any account therefore.…
Does this rationale provide a compelling argument for applicable rules regarding asset transfers in contemplation of bankruptcy?
(3) Although most states continue to follow the internal affairs doctrine, some states have departed from the doctrine through statutory provision. California has been the most aggressive in subjecting the internal affairs of foreign-incorporated firms to portions of its corporate code. For example, if a foreign corporation does half its business in California and if half of its voting securities are held by California residents, California law governs issues such as director elections, inspection of books and records, distribution policy, and cumulative voting. See Cal. Corp. Code §2115 (2001). California courts have upheld this provision against numerous legal challenges. See Valtz v. Penta Inv. Corp., 139 Cal. App. 3d 803 (Cal. Ct. App. 1983) (upholding California’s shareholders’ right to inspect laws against a Delaware corporation); Wilson v. Louisiana-Pacific Resources, Inc., 138 Cal. App. 3d 216 (Cal. Ct. App. 1982) (upholding California’s cumulative voting requirements as applied to a Utah corporation). New York also applies provisions of its corporate code to foreign corporations that do business in the state. See N.Y. Bus. Corp. §§1317, 1318, 1319 (2001); Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (2d Cir. 1984) (applying New York law forbidding subsidiaries from voting shares of the parent’s stock to Panamanian corporation, and observing that “principles compelling a forum state to apply foreign law come into play only when a legitimate and substantial interest of another state would thereby be served”).
(4) States have also applied local law on occasion to “pseudo-foreign” or “tramp” corporations that do all their business in one state while being formally incorporated in another. See, e.g., Mansfield Hardwood Lumber Co. v. Johnson, 268 F.2d 317 (5th Cir. 1959). In Weede v. Iowa Southern Utilities Co. of Delaware, 231 Iowa 784, 2 N.W.2d 372, opinion modified, 4 N.W.2d 869 (1942), the Supreme Court of Iowa applied forum law designed to prevent “stock watering” to a foreign corporation operating a local utility plant. The corporation had argued that Iowa was without power to interfere with the corporation’s internal affairs.
In passing upon these propositions, it must be kept in mind that while the appellee is a corporation organized under the laws of Delaware, it is what the authorities or decisions speak of as a “tramp” or “migratory” corporation. “While this practice of taking out a charter in one state to do business solely in another is probably too general and too long recognized to be questioned, the courts of a state in which such business is to be done are ordinarily reluctant to adopt a construction of the local laws which would enable corporators, by resorting to such practice, to receive, by reason of foreign incorporation, more favorable treatment than similar domestic corporations.” 23 Am. Jur. Section 123, p.127. Its promotors went from Iowa to Maine and first organized under the laws of the latter state. Later they reorganized under the laws of Delaware. They had no apparent intention of operating their utility plant, or of doing any other business in Maine or Delaware. Its officers, its plant and operating property, its assets, except a bank account or two, its business, almost all of its officers, its books and records, in fact, all of its physical manifestations, have always been, and are now in Iowa, within the jurisdiction of the courts of Iowa.… Its creation in Delaware was purely one of convenience, or other hoped for advantage. It was not for the purpose of becoming an actual, as well as a legal, resident of Delaware. While it was, and is, in law a legal resident of Delaware, and has its technical domicile there, its “commercial” or “economic” domicile is in Iowa. It was conceived in Iowa, born in Delaware, and has lived its entire life in Iowa. The foreignness of such a corporation has been spoken of as but a “meta-physical concept.” Its existence in Delaware is an illusory mirage, more atmospheric, than real. Under the circumstances it is, in actuality, more domestic than foreign. The courts of this state have full jurisdiction of the parties and the subject matter with authority to grant all of the relief prayed for, and the power at hand to fully enforce such decree.
Is forum-shopping in this context good or bad? Does the answer turn on whether the rights of third parties (i.e., persons who were in no way involved in the choice of where to incorporate) are at stake? Aren’t shareholders and managers in a different position than tort victims?
(5) Problems arise in defining the contours of “internal affairs.” Is piercing the corporate veil a matter of internal affairs? See, e.g., Jefferson Pilot Broadcasting Co. v. Hilary & Hogan, Inc., 617 F. 2d 133 (5th Cir. 1980) (law of place of incorporation governs decision whether to disregard corporate entity). What about enforcement requests to view the corporate books? See, e.g., Jefferson Industrial Bank v. First Golden Bancorporation, 762 P.2d 768 (Colo. Ct. App. 1988) (Colorado law giving shareholders access to corporate records applies to Delaware corporation conducting substantial business within the state); Sadler v. NCR Corp., 928 F.2d 48 (4th Cir. 1991) (access to stockholder list is recognized exception to internal affairs doctrine). What about officer and director duties owed to the corporation not to engage in insider trading? Friese v. Superior Court, 134 Cal. App. 4th 693 (Cal. Ct. App. 2006) (securities laws not governed by internal affairs doctrine). Note that, unlike choice of law for other subject matter, courts do not usually apply a public policy exception to the internal affairs doctrine. Does that suggest a narrower scope for the applicability of the doctrine? See Ribstein & O’Hara, Corporations and the Market for Law, 2008 U. Ill. L. Rev. 661.
(6) As Irving Trust suggests, there is a substantial possibility of collision between the rules of corporate capacity and those tort, property, or contract rules specifying the law of some place other than the place of incorporation. If the ABC Corp. injures someone in State X, is this a tort case governed by X law even if the plaintiff seeks to pierce the corporate veil and reach the assets of individual shareholders? In Pinney v. Nelson, 183 U.S. 144 (1901), the Supreme Court upheld application of forum law imposing personal liability on shareholders by citing a contract rationale. By forming a corporation to do business in the forum, the shareholders had formed their “contract” of corporation with reference to forum law. Is this convincing?
It has been suggested that the doctrine of limited liability for corporate shareholders be abandoned. Hansmann & Kraakman, Toward Unlimited Shareholder Liability for Corporate Torts, 100 Yale L.J. 1879 (1991); Leebron, Limited Liability, Tort Victims, and Creditors, 91 Colum. L. Rev. 1565 (1991). But as has been pointed out, the feasibility of any one state abolishing the doctrine depends on whether it has a right to impose its laws on foreign corporations and shareholders, who may have little connection with the state. Alexander, Unlimited Shareholder Liability Through a Procedural Lens, 106 Harv. L. Rev. 387 (1992). Alexander argues that the issue would be treated as a question of “internal affairs” and would therefore be governed by the law of the state of incorporation; Hansmann and Kraakman, in a response, disagree. Hansmann & Kraakman, A Procedural Focus on Unlimited Shareholder Liability, 106 Harv. L. Rev. 446 (1992). Which side does Pinney support?
(7) Note that federal law sometimes preempts state laws that might otherwise apply. For example, federal bankruptcy laws can affect the relationship between the insolvent corporation and its shareholders and creditors. And the Sarbanes-Oxley Act, officially known as Public Company Accounting Reform and Investor Protection Act, Pub. L. No. 107-204 (2002), influences corporate board composition and internal corporate decision processes. The Dodd-Frank Act also regulates board decision making as well as director elections. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (2010). These federal laws preempt state corporate law and raise their own choice-of-law questions regarding their applicability to companies incorporated outside the United States.
(8) The European Union is moving toward an internal affairs doctrine in that corporations chartered in one member country are permitted to conduct their affairs throughout the European Union, and other member nations are limited in their ability to impose local regulations on firms incorporated elsewhere. See Case C-212/97, Centros Ltd. v. Erhvervs-og Selskabsstyrelsen, 1999 E.C.R. I-1459, I-1490; Case C-208/00, Überseering BV v. Nordic Constr. Co. Baumanagement GmbH (NCC), 2002 E.C.R. I-9919, paras. 1-2; Case C-167/01, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd., 2003 E.C.R. 1-10,155, I-10, 223 to 38. Prior to these decisions by the European Court of Justice, corporate affairs in Europe were governed by the law of the “real seat” of the corporation, which often meant the location of its administrative affairs offices.
G. Wrinkles in the Theory
In the Carroll case, supra page 15, the plaintiff attempted to avoid the application of Mississippi’s fellow-servant doctrine by arguing that the issue in the case was contractual (and governed by the law of Alabama where the contract was formed), rather than tortious (and governed by the law of the place where the tort occurred). The plaintiff was unsuccessful in that attempt, but the plaintiff in Levy v. Daniel’s U-Drive Auto Renting Co., note (6), supra pages 23–24, succeeded with a similar argument. Likewise, in Burr v. Beckler, supra page 85, the court had to choose between characterizing the case as one involving real property, to be governed by the law of the situs of the property, or involving the validity of a note, to be governed by the law of the place where the note was made. These cases and several others illustrate the general problem of characterization: Before the rules of the First Restatement may be applied, one must know whether the case is a tort case, a contract case, etc. The First Restatement says remarkably little about characterization. It does comment about determining whether a contract issue is one of obligation or performance (see comment b to §358, supra pages 37–38) and has a few words on the difference between the capacity to make a contract to transfer property and the capacity to transfer property (see comment a to §333, supra pages 35–36), but in general it offers little help.
Haumschild v. Continental Casualty Co.
7 Wis. 2d 130, 95 N.W.2d 814 (Wis. 1959)
[Mrs. Haumschild sued her husband for personal injuries she suffered in an automobile accident in California as a result of his negligence. Both parties were Wisconsin domiciliaries. The Wisconsin trial court dismissed the case under California’s law prohibiting a wife from suing her husband in tort.]
This appeal presents a conflict of laws problem with respect to inter-spousal liability for tort growing out of an automobile accident. Which law controls, that of the state of the forum, the state of the place of wrong, or the state of domicile? Wisconsin is both the state of the forum and of the domicile while California is the state where the alleged wrong was committed. Under Wisconsin law a wife may sue her husband in tort. Under California law she cannot.
This court was first faced with this question in Buckeye v. Buckeye, 1931, 203 Wis. 248. In that case Wisconsin was the state of the forum and domicile, while Illinois was the state of the place of wrong. It was there held that the law governing the creation and extent of tort liability is that of the place where the tort was committed. From this premise it was further held that interspousal immunity from tort liability necessarily is governed by the law of the place of injury.
The principle enunciated in the Buckeye case and followed in subsequent Wisconsin cases, that the law of the place of wrong controls as to whether one spouse is immune from suit in tort by the other, is the prevailing view in the majority of jurisdictions in this country. It is also the rule adopted in Restatement, Conflict of Laws, §§378 and 384(2). However, criticism of the rule of the Buckeye case…, and recent decisions by the courts of California, New Jersey, and Pennsylvania, have caused us to re-examine the question afresh.
The first case to break the ice and flatly hold that the law of domicile should be applied in determining whether there existed an immunity from suit for tort based upon family relationship is Emery v. Emery, 1955, 45 Cal. 2d 421. In that case two unemancipated minor sisters sued their unemancipated minor brother and their father to recover for injuries sustained in an automobile accident that occurred in the state of Idaho, the complaint alleging wilful misconduct in order to come within the provisions of the Idaho “guest” statute. All parties were domiciled in California. The opinion by Mr. Justice Traynor recognized that the California court, in passing on the question of whether an unemancipated minor child may sue the parent or an unemancipated brother, had a choice to apply the law of the place of wrong, of the forum, or of the domicile. It was held that the immunity issue was not a question of tort but one of capacity to sue and be sued, and rejected the law of the place of injury as “both fortuitous and irrelevant.” In deciding whether to apply the law of the forum, or the law of the domicile, the opinion stated this conclusion:
Although tort actions between members of the same family will ordinarily be brought in the state of the family domicile, the courts of another state will in some cases be a more convenient forum, and thus the question arises whether the choice of law rule should be expressed in terms of the law of the forum or that of the domicile. We think that disabilities to sue and immunities from suit because of a family relationship are more properly determined by reference to the law of the state of the family domicile. That state has the primary responsibility for establishing and regulating the incidents of the family relationship and it is the only state in which the parties can, by participation in the legislative processes, effect a change in those incidents. Moreover, it is undesirable that the rights, duties, disabilities, and immunities conferred or imposed by the family relationship should constantly change as members of the family cross state boundaries during temporary absences from their home.
The two reasons most often advanced for the common law rule, that one spouse may not sue the other, are the ancient concept that husband and wife constitute in law but one person, and that to permit such suits will be to foment family discord and strife. The Married Women’s Acts of the various states have effectively destroyed the “one person” concept thereby leaving as the other remaining reason for the immunity the objective of preventing family discord. This is also the justification usually advanced for denying an unemancipated child the capacity to sue a parent, brother or sister. Clearly this policy reason for denying the capacity to sue more properly lies within the sphere of family law, where domicile usually controls the law to be applied, than it does tort law, where the place of injury generally determines the substantive law which will govern.
We are convinced that, from both the standpoint of public policy and logic, the proper solution of the conflict of laws problem, in cases similar to the instant action, is to hold that the law of the domicile is the one that ought to be applied in determining any issue of incapacity to sue based upon family relationship.
After most careful deliberation, it is our considered judgment that this court should adopt the rule that, whenever the courts of this state are confronted with a conflict of laws problem as to which law governs the capacity of one spouse to sue the other in tort, the law to be applied is that of the state of domicile. We, therefore, expressly overrule [Buckeye].
Perhaps a word of caution should be sounded to the effect that the instant decision should not be interpreted as a rejection by this court of the general rule that ordinarily the substantive rights of parties to an action in tort are to be determined in the light of the law of the place of wrong. This decision merely holds that incapacity to sue because of marital status presents a question of family law rather than tort law.
The concurring opinion by Mr. Justice Fairchild protests that we should not adopt the conflict of laws rule, that interspousal immunity to suit in tort should be determined by the law of the domicile, because this was not urged in the briefs or arguments of counsel.… While the appellant’s counsel did not request that we overrule Buckeye and the subsequent Wisconsin case dealing with this particular conflict of laws problem, he did specifically seek to have this court apply California’s conflict of laws principle, that the law of the domicile is determinative of interspousal capacity to sue, to this particular case. However, to do so would violate the well recognized principle of conflict of laws that, where the substantive law of another state is applied, there necessarily must be excluded such foreign state’s law of conflict of laws.
The reason why the authorities on conflict of laws almost universally reject the renvoi doctrine (permitting a court of the forum state to apply the conflict of laws principle of a foreign state) is that it is likely to result in the court pursuing a course equivalent to a never ending circle. For example, in the instant case, if the Buckeye line of Wisconsin cases is to be followed, the Wisconsin court first looks to the law of California to see whether a wife can sue her husband in tort. California substantive law holds that she cannot. However, California has adopted a conflict of laws principle that holds that the law of the domicile determines such question. Applying such principle the court is referred back to Wisconsin law because Wisconsin is the state of domicile. Again the court applies Wisconsin law and, under the prior holdings of the Buckeye line of authorities, would have to again refer to California law because such line of cases does not recognize that the law of domicile has anything to do with interspousal immunity, but holds that the law of the state of injury controls.
Wisconsin certainly should not adopt the much criticized renvoi principle in order not to overrule the Buckeye line of cases, and still permit the plaintiff to recover. Such a result we believe would contribute far more to produce chaos in the field of conflict of laws than to overrule the Buckeye line of cases and adopt a principle the soundness of which has been commended by so many reputable authorities.
Judgment reversed and cause remanded for further proceedings not inconsistent with this opinion.
FAIRCHILD, J. (concurring):
I concur in the reversal of the judgment, but do not find it necessary to re-examine settled Wisconsin law in order to do so. A fundamental change in the law of Wisconsin such as the one announced by the majority in this case, which will importantly affect many people, should be made, if at all, in a case where the question is necessarily presented. Both parties assumed that their case would be decided under the principle which is being overturned by the majority, and accordingly, we have not had the benefit of brief or argument upon the validity of the principle.
1. Solution of this case without overruling previous decisions.… It has been the rule in Wisconsin that the existence or non-existence of immunity because of family relationship is substantive and not merely procedural, and is to be determined by the law of the locus state. The law of California is that the existence or non-existence of immunity is a substantive matter, but that it is an element of the law of status, not of tort. The tort law of California is no more concerned with immunity than is Wisconsin’s. Thus it makes no difference under the facts of this case whether we look directly to the law of Wisconsin to determine that immunity is not available as a defense or look to the law of Wisconsin only because California, having no general tort principle as to immunity, classifies immunity as a matter of status.
2. Policy questions requiring full consideration. Under the principle announced by the majority that the existence or nonexistence of immunity is a matter of status our courts must henceforth recognize immunity as a defense where the alleged tort occurred in Wisconsin, but the parties are married and are domiciled in an immunity state. This would mean that such an act is or is not a remedial wrong depending upon the state where the parties happen to be domiciled.
The determination of domicil is not always easy, yet the courts will henceforth be required to determine it in many cases where it has heretofore been considered immaterial. A good many married couples who may have domicil in other states are in Wisconsin for extended periods. Some for example, are students at colleges and universities, some stationed here for military duty, some temporarily assigned here by employers, and some vacationing. Under the rule abandoned by the majority, a tortious act done in Wisconsin by a nonresident and injuring his spouse gave rise to the same civil liability as if done by a permanent resident.
The problem involved apparently has its principal impact because of injuries sustained in automobile accidents where members of a family travel together across state lines. Under the new rule Wisconsin courts will not countenance the defense of immunity for a Wisconsin husband when sued by his wife for an injury occurring in an immunity state. I concede there is some merit to the logic relied upon and that there may be some practical benefit to Wisconsin people. It is to be remembered, however, that under the law of many states a wife will have no cause of action for simple negligence of her husband because she will be a gratuitous guest. The fact that she and her husband are domiciled in Wisconsin and that they are on a family trip which began in Wisconsin will not exempt her from that principle of tort law. Thus the purely practical benefit to Wisconsin people which might appear at first blush to arise from the new rule will be limited.
Questions and Comments
(1) The rigidity of the First Restatement’s rules, combined with its silence on the characterization issue, provides an opportunity for manipulation of characterization to achieve results that courts think are fair or desirable. For this reason, characterization is sometimes known as an “escape device.” But is this characterization fair? After all, if there are no rules for characterization, how can characterization be used to “escape” an otherwise mandated result?
(2) Are you convinced by Haumschild’s reasons for concluding that “incapacity to sue because of marital status presents a question of family law rather than tort law”? How should a court resolve the characterization problem? What law should it apply in making this decision? Is Haumschild’s inquiry into the purposes of the interspousal immunity rule a fruitful approach? How did the Carroll court decide that the case involved a tort rather than a contract?
(3) Doesn’t the characterization problem make it harder for the First Restatement to achieve its desired choice-of-law uniformity? Unless courts in different states would characterize the same case in the same way, uniformity will likely be defeated.
(4) Note that in Haumschild, the court appeared to commit itself to applying California law on tort issues such as negligence even though it applied Wisconsin’s law rejecting interspousal immunity. The process of dividing a case up into various issues governed by potentially different laws is known as dépecage. Is such characterization at the level of issue rather than case appropriate? Is it consistent with the provisions of the First Restatement that you have read? Whether it is or not, does it make sense?
In Simon v. United States, 805 N.E.2d 798 (Ind. 2004), the Supreme Court of Indiana rejected the plaintiff’s argument that Indiana should engage in dépecage when determining what tort rules should apply in the aftermath of a plane crash. In response to a question certified by the United States Court of Appeals for the Third Circuit, the Indiana court rejected dépecage, both because dépecage is inconsistent with the First Restatement principles, and because dépecage seemed conceptually objectionable:
On the simple merits of depecage as a judicial technique, we find ourselves unimpressed. By making separate determinations for each issue within a claim, the process amalgamates the laws of different states, producing a hybrid that may not exist in any state. This is a problem for several reasons. First, legislatures “may enact a given law only because of its expected interaction with a complementary law.” Erin A. O’Hara & Larry E. Ribstein, From Politics To Efficiency in Choice of Law, 67 U. Chi. L. Rev. 1151, 1193 (2000). For example, a legislature may allow recovery for certain injuries or impose a low standard of proof for liability but place a cap on the damages that might be recovered or adopt immunities for certain potential defendants. Id. Consequently, applying the law outside the context of the other laws in the jurisdiction may contravene legislative intent. In addition, applying a law in isolation increases the likelihood that its purposes and importance will be misconstrued, thereby thwarting state policy. William H. Allen & Erin A. O’Hara, Second Generation Law and Economics of Conflict of Laws: Baxter’s Comparative Impairment and Beyond, 51 Stan. L. Rev. 1011, 1033 (1999). Ultimately, by applying depecage a court may hinder the policy of one or more states without furthering the considered policy of any state.
Depecage may also produce unfair results because the hybrid law may be more favorable to one party than to another, allowing a result that could not be reached if the laws of any one state were applied. As Branierd Currie said, a party “should not be allowed to put ‘together half a donkey and half a camel, and then ride to victory on the synthetic hybrid.’” Christopher G. Stevenson, Depecage: Embracing Complexity to Solve Choice-of-Law Issues, Note, 37 Ind. L. Rev. 303, 320 (2003) (quoting Frederick K. Juenger, How Do You Rate a Century? 37 Willamette L. Rev. 89, 106 (2001) (quoting Branierd Currie)). Moreover, depecage compounds the advantage of parties with greater access to legal resources because it requires a separate analysis of each issue for each state involved.
Simon, 805 N.E.2d at 802-803. Do you agree? Surely it makes sense to separate components of a legal claim sometimes. Is there a principled way to know where to draw the line?
(5) What happens when a court characterizes a claim and looks to foreign law, only to find that the foreign state characterizes the claim differently? In Colonial Life & Accident Insurance Co. v. Hartford Fire Insurance Co., 358 F.3d 1306 (11th Cir. 2004), an insurance company defending an action against its policyholder brought cross-claims and third-party claims against its liability insurers asserting, among other things, that the insurers breached their duty of good faith owed to it. The U.S. District Court for the Middle District of Alabama, applying Alabama’s First Restatement choice-of-law principles, noted that Alabama characterizes a breach of the duty of good faith claim as a contract claim and looked to South Carolina, the place of contracting, to determine its substantive contract law on the issue. As it turns out, however, South Carolina contract law did not include recognition of claims for this breach, and the District Court therefore dismissed the claim. The Eleventh Circuit reversed. South Carolina did recognize a cause of action for breach of the duty of good faith (i.e. bad faith), but under South Carolina law this claim sounded in tort rather than contract. According to the Eleventh Circuit, South Carolina law on the breach of good faith obligations would apply to this case, regardless of how South Carolina characterized the claim.
First Restatement choice-of-law rules pick out the law of the place of the wrong, the contract, the property, etc. But when the chosen law is the law of another state, does the chosen “law” include the foreign state’s choice-of-law rules? This is the sticky problem of renvoi. As the majority opinion in Haumschild suggests, the inclusion of choice-of-law rules within the law chosen by a choice-of-law rule can lead to intractable problems, and for that reason is usually—but not always—avoided. The First Restatement generally rejected the renvoi doctrine except in cases involving title to land or the validity of a decree of divorce. See First Restatement, §§7-8. Consider whether these exceptions make sense as you read the cases below.
In re Estate of Damato
86 N.J. Super. 107, 206 A.2d 171 (1965)
This is an appeal from a judgment of the Probate Division awarding the balance in two out-of-state bank accounts to decedent’s son Philip Damato.
The facts are not in dispute. Decedent died on November 6, 1960, a resident of Paterson, New Jersey. Although he had been engaged in the waste-paper business in the Paterson area for many years, he also had business interests in Florida, including the operation of a small stable of race horses. His will was admitted to probate by the Surrogate of Passaic County, his son James Damato qualifying as the executor thereof. On July 26, 1962, the executor filed a verified complaint praying, inter alia, for instructions as to the disposition of the balances remaining in two savings accounts in the Bank of Hollywood, Hollywood, Florida, which are the subject of the present controversy.…
Both Philip and James Damato were sons of the decedent. Philip worked for his father in the Paterson business and never knew of the accounts until after the death of his father. The passbooks for both accounts remained in decedent’s possession and were found among his papers in Florida.
In awarding the balance in each account to Philip, the trial judge held that the transactions were governed by the law of Florida, their situs, and since Florida had adopted the rule of In re Totten, they were effective to pass the balance in each account to Philip upon the death of the decedent.…
The law is well settled that the creation of an inter vivos trust in money or securities, as distinguished from a testamentary trust, is governed by the law of the situs of the money or securities. The validity of an inter vivos trust of choses in action is determined by the law of the place where the transaction takes place.
The savings bank trust doctrine which the trial judge found to be dispositive of the issue before him was set forth in its present form in In re Totten, supra, to the effect that:
A deposit by one person of his own money in his own name and as trustee for another, standing alone, does not establish an irrevocable trust during the lifetime of the depositor. It is a tentative trust merely, revocable at will, until the depositor dies or completes the gift in his lifetime by some unequivocal act or declaration, such as delivery of the passbook or notice to the beneficiary. In case the depositor dies before the beneficiary without revocation, or some decisive act or declaration of disaffirmance, the presumption arises that an absolute trust is created as to the balance on hand at the death of the depositor.
In Cutts v. Najdrowski the court held that where a New Jersey resident opened an account in a New York savings bank in his name in trust for another, since the transaction was effective there, it was effective here to pass title to the balance in the account at the depositor’s death, to the other person named, under the Totten trust doctrine. It was so held notwithstanding that such a transaction, had it been consummated here by a New Jersey resident, would have been invalid to pass title as violative of our statute of wills or as an ineffective gift inter vivos. Since then, however, N.J.S.A. 17:9A-216 has been held effective to pass valid title to the balance, at death, in such an account, to the beneficiary named.… Cutts was followed in Conry v. Maloney, where a New York savings account was again involved and, through application of the law of situs, it was held that the cestui, a niece, took the balance in an account opened by the decedent “in trust for” her, to the exclusion of the decedent’s widow.
The trial judge, following Cutts and Conry, held that the law of Florida applied. Concluding that the Totten trust doctrine had been adopted in Florida, he found that title to the bank balances passed to respondent. In so doing, he applied the substantive law of Florida as found in Seymour v. Seymour.…
Appellant urges that in thus applying Florida substantive law, instead of Florida conflict of laws, the trial judge fell into error. Specifically, it is argued that in Seymour the court was passing upon the validity, as a trust, of an account established by a domiciliary of Florida in a Florida bank, whereas we are here concerned with an account opened in Florida by a domiciliary of New Jersey. Under Florida conflicts law, the argument continues, the doctrine of mobilia sequuntur personam would be applied. Hanson v. Denckla, 100 So. 2d 378 (Fla. Sup. Ct. 1956), reversed on grounds of lack of jurisdiction in Hanson v. Denckla, 357 U.S. 235 (1958). Turning, then, to the law of decedent’s domicile, New Jersey, appellant invokes Swetland v. Swetland as holding the transaction to be ineffective as a trust of the accounts in question. Appellant thus seeks to invoke the doctrine of renvoi to defeat respondent’s claim.…
However, we find it unnecessary to determine the Florida conflicts rule which would be applicable in view of the conclusions which follow.
We are satisfied that the trial judge correctly ruled that the substantive law of Florida should be applied to the transaction in question. In neither Cutts nor Conry did our courts proceed any further than to apply the internal law of the place where the transaction took place. The transaction rule was also followed in Hooton v. Needl, supra. In the Restatement, Conflict of Laws, §7, p.11 (1934), the rule as to conflicts is set forth as follows:
Except as stated in §8 [concerning matters involving title to land and the validity of divorce decrees], when there is a difference in the Conflict of Laws of two states whose laws are involved in a problem, the rule of Conflict of Laws of the forum is applied: (a) in all cases where as a preliminary to determining the choice of law it is necessary to determine the quality and character of legal ideas, these are determined by the forum according to its law; (b) where in making the choice of law to govern a certain situation the law of another state is to be applied, since the only Conflict of Laws used in the determination of the case is the Conflict of Laws of the forum, the foreign law to be applied is the law applicable to the matter in hand and not the Conflict of Laws of the foreign state.
In comment (d) to subsection (b) the learned authors note that, under the rule stated, the court of the forum, in a matter involving a contract, applies only the contract law of the other state, and this “may result in a decision contrary to that which would be reached by a court in that state, the law of which is being applied, by reason of the fact that a different Conflict of Laws rule prevails in the latter state.”
The rule set forth in the Restatement seems grounded in reason for, if appellant’s views were to be upheld, the courts would be faced with a possible unending circuity. Thus, if the Florida conflicts rule would refer the matter back to New Jersey, New Jersey, applying its full body of law, including its conflict rules, would again refer to the law of Florida because of the holdings in Cutts, Conry and Hooton. The circular process would then begin anew and continue ad infinitum. Such was the problem posed In re Tallmadge, 181 N.Y.S. 336 (Surr. Ct. 1919), where application of the renvoi doctrine was denied on account of its inconsistency with common law theory of the conflict of laws, its fundamental unsoundness and the chaos which would result from its application to conflicts arising between the laws of the several states.
Accordingly, we hold that where, in a proceeding in this State, the validity of a transaction in a foreign state—except one involving title to land or the validity of a divorce, as to which we make no determination—is, by virtue of our conflict of laws principles, made to depend upon the laws of such state, the foreign law to be applied is the law applicable to the matter in hand not the conflict of laws of the foreign state.…
277 Mich. 653, 270 N.W. 175 (1936)
[The facts are taken from the dissenting opinion of Justice Sharpe.] In November, 1928, negotiations were commenced to secure a loan in the sum of $75,000 on a piece of property in Chicago. The property was owned by George R. Dater and John R. Price of Benton Harbor, Mich., and they appointed H. S. Gray, an attorney of Benton Harbor, as their agent in the matter. Plaintiff agreed to make the loan if it could be assured that the title was good. A trust deed and certain promissory notes were drawn up with George R. Dater and Nellie E. Dater, his wife, and John R. Price and Clara A. Price, his wife, as parties of the first part, and the Chicago Title & Trust Company, as trustee, and as party of the second part. The notes were payable in the city of Chicago and at such place as the legal holder might appoint. The trust mortgage and notes were sent by mail to the Benton Harbor State Bank for the signature of the parties involved. The papers were signed in Benton Harbor, Mich., about December 8, 1928, and mailed to plaintiff’s agent in the city of Chicago where the trust deed was placed on record, then it was found that there were some objections to certain delinquent taxes of 1927. Further negotiations followed, and finally on January 3, 1929, and after the tax objections were cleared in the title, the loan was actually made and the money paid over by check made payable to Mr. and Mrs. Dater and Mr. and Mrs. Price and cashed in Chicago, Ill.
January 29, 1929, John R. Price died, and it is conceded that Mrs. Price became the actual and record owner of at least one-half of the property after the death of her husband. Subsequent to December 1, 1933, foreclosure proceedings were commenced on the property and the property purchased at chancery sale. Suit was filed in Michigan before the foreclosure suit was completed in Chicago. The cause was heard November 7, 1934, and on June 18, 1935, judgment was rendered in favor of plaintiff against George R. Dater in the amount of $15,536.32 and from which no appeal has been taken. On the same date judgment was entered in favor of Clara Price of no cause for action, from which judgment plaintiff appeals.
The obligation in suit was executed in this state by defendant Clara A. Price, a married woman, and bore no relation to her separate estate, and, without more, carried no personal liability when sued upon in this jurisdiction. But, it is claimed, that the obligation was accepted in the state of Illinois, and was there payable and, by the law of the state, Mrs. Price is not saved from liability by reason of want of capacity under the Michigan law of coverture.
As pointed out later in this opinion, personal liability of Mrs. Price could not be enforced in Illinois under the theory of an Illinois contract.
In the case at bar negotiations for the loan, to be secured by mortgage, had reached the state where the lender prepared the note and mortgage in Illinois and sent the same to an agent in Michigan, with direction as to execution by defendants in this state, and, when executed, to be returned by such agent to the mortgagee in Illinois. Mrs. Price, at the request of the agent, executed the instruments and the agent mailed the same to the mortgagee.
The instant case does not involve conflict of laws relative to the construction, force, and effect of the instruments, signed or executed in one state to be performed in another, but that of capacity of Mrs. Price to enter into such an obligation in this state.
It is well said in a note, 26 L.R.A. (N.S.) 773:
While there are almost numberless cases which state, with slight variations, Story’s general proposition that, where the contract is either expressly or tacitly to be performed in some place other than that where it is made, the general rule is, in conformity to the presumed intention of the parties, that the contract, as to its validity, nature, obligation, and interpretation, is to be governed by the law of the place of performance, none of them can be regarded as express authority for the application of that rule to the question of the capacity of a married woman to contract. Few of them can be relied upon for the application of that rule to any question relating to the existence of a contract as distinguished from its interpretation or obligation or essential validity.
It must be agreed that this case is governed by the law of Michigan or of Illinois. If by the law of Michigan, it is clear, and is not disputed, that defendant has no personal liability on the note, recoverable from her separate estate.
Assuming, however, that by the Michigan law of the forum that case is governed by the law of Illinois, it presents the unique situation in the realm of conflict of laws that by the law of Illinois, Burr v. Beckler [page 85 supra] the case is governed by the law of Michigan.
In Burr v. Beckler, the wife, a resident of Illinois, was sojourning temporarily in Florida. Her husband owed a concern in Illinois, of which he was treasurer, on an overdraft. He informed his wife that he could borrow the necessary money to pay the overdraft from an estate of which he was trustee. The wife executed a note and trust deed in Florida and mailed them to her husband, as trustee, at Chicago, Ill., as he had directed her to do. The husband also signed the trust deed, but the opinion does not state when. The court held that delivery of the note and trust deed by the wife was complete in Florida, the law of that state governed her capacity to contract, and, because she was not competent to enter into a contract under the law of Florida, her note and trust deed were void.
The question is not whether the decision is in harmony with the law of Michigan, but whether it governs this case. Here, manual delivery was as complete as in the Burr Case because it was made to a bank which had been designated by the mortgagee for that purpose.
In neither case had there been a binding engagement by the mortgagee to make the loan prior to delivery. In neither case had the money been paid in advance of the delivery or contemporaneously therewith. There is nothing in the Burr Case to indicate that the mortgagee could not have refused to make the loan or that the mortgagors could not have refused to take the money or could not have abandoned the matter after the wife deposited the papers in the mail. The Burr opinion indicated no circumstance fixing the effect of the manual delivery which is not present here. The Burr Case is directly applicable, and, consequently, under the law of Illinois, it must be held that the capacity of defendant Clara A. Price is governed by the law of Michigan. Under the law of Michigan, a married woman cannot bind her separate estate through personal engagement for the benefit of others. Defendant Price is not liable.
Affirmed, with costs to defendant Price.
NORTH, C.J., and FEAD and TOY, JJ., concurred with WIEST, J.
SHARPE, J. (dissenting).
It is conceded that under the law of Illinois a married woman is as free to contract as a man, while in Michigan a married woman has not the legal capacity to bind herself or her separate estate by signing these notes.…
The plaintiff contends that the contract was an Illinois contract; that the signing of the notes in Michigan was not the final act in the making of the contract, but rather a preliminary step, the delivery of the note being conditional upon defendant’s producing a satisfactory title, the approval of the title in Illinois was the last act necessary to make a legal delivery.
The general rule is well stated in John A. Tolman Co. v. Reed, where the court said:
The law is well settled that contracts must be construed and their validity determined by the law of the country where they were made, unless the contracting parties clearly appear to have had some other law in view.
The general rule is that the law of the place where the instrument was executed and delivered so as to become binding as a contract … governs the rights and liabilities of the parties thereto, except in so far as they are controlled by the law of the place where the instrument is payable.…
8 C.J. 87, §145.
There is good authority for the broad proposition, however, that when a note is executed by a married woman in the state of her domicile but made payable in another state, if under the law of the former state she could not have entered into the contract but could have done so under the law of the latter state, it will be presumed that it was the intention of the parties that the note should be governed by the law of the latter state and being valid under such law should be enforced against her even in the state of her domicile.…
It is a general rule that every contract as to its validity, nature, interpretation and effect, or, as they may be called, the right, in contradistinction to the remedy, is governed by the law of the place where it is made, unless it is to be performed in another place; and then it is governed by the law of the place where it is to be performed.
Poole v. Perkins [supra page 38].
The next question that presents itself in the case at bar is the place where the contract was made.
A contract is deemed to have been made in the state where the last act necessary to make it a binding agreement takes place.
When the contract is made in one jurisdiction to be performed in another the case presents a more complicated question, the rule being that if the parties to a contract are in different jurisdictions, the place where the last act is done which is necessary to the validity of the contract is the place where the contract is entered into.
5 R.C.L. 935.
In the case at bar all of the negotiations for the loan occurred in Chicago, the property upon which the mortgage was placed was located in Chicago, and no money was to be paid by plaintiff until such time as the defendants could show good title to the property. We think the mailing of the papers to Chicago was for the purpose of enabling the plaintiff to ascertain if the title to the real estate was satisfactory and was but a preliminary step in the whole transaction. The final act in the making of the loan was the payment of the money in Chicago. This concluded the negotiations and made it an Illinois contract.
BUSHNELL, J., concurred with SHARPE, J.
BUTZEL, J. (dissenting).
I concur in the result reached by Justice Sharpe. The place of contracting controls the question of capacity of the parties to contract. Palmer National Bank v. Van Doren, 260 Mich. 310, 244 N.W. 485; American Law Institute Restatement of the Conflict of Laws, §333. The notes were dated and payable at Chicago and secured by Chicago real estate. The loan was made in Chicago 25 days after the notes had been signed and not until an actual cloud on the title to the realty had been removed. These circumstances leave no doubt that the notes in question constituted Illinois contracts.… The facts are entirely different from those in Re Estate of Lucas … in which the loan was solicited by residents of Michigan, the moneys were first received in Michigan by the borrowers, and subsequently the note was dated and signed in Michigan and was payable in Michigan. The place of contracting is where the note is first delivered for value. In Beale on Conflict of Laws, page 1047, it is said:
Delivery, however, is not the only requisite to the creation of a contract on a negotiable instrument. Value must be given, and until, therefore, there has been a delivery for value, the instrument cannot be said to have had any inception.…
It follows that the place of contracting of a contract on a negotiable instrument, be it the obligation of the maker, the drawer or the endorser, is the place where, after the signature of the party in question, the instrument is first delivered for value.
It is true that the physical act of signing the note in the instant case took place in Michigan and the notes were mailed to plaintiff in Chicago, but there was no absolute delivery until the plaintiff had satisfied itself of the status of the title to the mortgaged property and until an actual cloud had been removed. Until that time the transaction was conditional and the notes of no binding force and effect.
The rule is stated in Beale on Conflicts of Laws, p. 1045, as follows: “The phrase ‘place of contracting’ and its equivalents, the place of making or the place where the contract is made, properly mean the place in which the final act was done which made the promise or promises binding.”…
We do not believe that the case of Burr v. Beckler … should in any way be controlling on this court in determining the lex loci contractus. The problem in the instant case is termed by the authorities as one of “qualifications.” The prevailing view in answer to the problem is that the law of the forum should control on the question of lex loci contractus. An excellent treatment of the entire subject may be found in an article entitled, “The Theory of Qualifications and Conflict of Laws,” by Professor Lorenzen in 20 Columbia Law Review, p. 247.
Were we not to be controlled by our own law and obliged each time to ascertain what a foreign state would have held under similar circumstances, our decisions would be in hopeless confusion, and it would be necessary each time to examine the decisions of other states in determining the lex loci contractus. The question, however, is foreclosed in this state, as we held in the case of Ohio v. Purse, supra, that the law of the place of contracting is to be determined in accordance with the law of the forum.
The judgment should be reversed, with costs to plaintiff.
BUSHNELL, J., concurred with BUTZEL, J.
Questions and Comments
(1) Terminology: whole law= conflicts rules + internal law.
(2) In the Damato case, why does New Jersey’s conflicts rule refer to the law of the situs of the trust money? If the answer is that the situs state has the right to control the disposition of trust funds, doesn’t the decision in the case deny that right by reaching a result that the courts of the situs would not have reached? On the other hand, of course, one could ask the same question about why Florida conflicts law defers to the state of the settlor’s domicile. If it is because that state has the right to control the disposition of the money (in Florida’s view), then we are in trouble, with neither state claiming the right.
(3) Wouldn’t the simple answer to such a non-conflict be to say that where neither state is particularly interested, the intent of the parties ought to control, or lacking any obvious intent, the forum ought to apply its own law by default? Isn’t it a bit strange that under the court’s approach, New Jersey ends up applying the law of Florida, which it presumably thinks is inferior (since it has not adopted the Totten trust doctrine—a matter that has traditionally been a function for the courts rather than for the legislatures), while Florida would end up applying the law of New Jersey, which it thinks is inferior? Isn’t this the least satisfactory solution?
(4) Why is the doctrine of renvoi accepted in American law for real property and marriage questions but not generally for other matters? With respect to the real property half of the question, some of the traditional justifications are thin. For example, the courts of State A will not (for jurisdictional reasons) determine matters directly affecting title to land in State B. Thus, our traditional concern for the poor title searcher need not concern us in a renvoi case. If the reason for renvoi with respect to real property is deference to the situs state’s political control over its own land, isn’t that reason weakened by the fact that in a renvoi case, by hypothesis, the situs state has already relinquished political control over its own land by applying the law of another state, rather than its own, to that land?
(5) A renvoi situation can come about in several different ways. First, the two states may have choice-of-law rules that agree but may characterize the case differently (e.g., one calling it a tort case, the other a contract case). Second, the two states may simply have two different choice-of-law rules (e.g., place of execution vs. place of performance). Third, the two states may use the same concept but define it differently (e.g., domicile). Should it make any difference to the renvoi analysis which of these situations is responsible for the problem?
(6) The court in the Dater case seems at one point (though it is not clear) to be saying either (a) the law of Michigan applies or (b) the law of Illinois applies and it makes the law of Michigan apply. But if one mixes one’s as and bs, one could say either (a) the law of Illinois applies or (b) the law of Michigan applies and it makes the law of Illinois apply.
Isn’t the basic flaw of the court’s reasoning the fact that it fails to note the shift in meaning of “law” between the two halves of its dichotomy? That is, when it says that the law of Michigan may apply, it means the internal law, while it means the whole law of Illinois when it says that the law of Illinois may apply. Granted these different meanings of “law,” the court’s reasoning is correct, but its assumptions contain its conclusion—that is, the decision to refer to Illinois whole law rather than Illinois internal law is the central issue of the case, isn’t it?
3. Substance vs. Procedure
There are certain rules and principles of conflicts that cut across various substantive areas like torts or contracts. For example, the question whether a particular issue is substantive or procedural can arise in a tort, contract, or any other kind of case.
That procedure should be governed by the law of the forum is, at least in the most basic cases, obvious. It would be strange to conclude that the size of paper required in the courts of the state whose substantive law controls would be the size required in another state adjudicating the case. But as soon as we leave the precinct of such safely “procedural” topics, the question becomes more obscure. As you read the following Restatement selections and cases, keep in mind the question why the law of the forum should apply to procedural issues as a yardstick for determining whether a particular issue should be called “procedural.”
Selections from the First Restatement of Conflicts, on Procedure
§§584-585, 588, 591, 594-597, 599-601, 606 (1934)
§584. Determination of Whether Question Is One of Procedure
The court at the forum determines according to its own Conflict of Laws rule whether a given question is one of substance or procedure.
All matters of procedure are governed by the law of the forum.
The law of the forum determines who may and who must sue and be sued.
§591. Commencement of Action
The law of the forum determines at what moment action is begun.
§594. Mode of Trial
The law of the forum determines whether an issue of fact shall be tried by the court or by a jury.
§595. Proof of Facts
(1) The law of the forum governs the proof in court of a fact alleged.
(2) The law of the forum governs presumptions and inferences to be drawn from evidence.
The law of the forum determines the competency and the credibility of witnesses.
The law of the forum determines the admissibility of a particular piece of evidence.
§599. Integrated Contracts
When a contract is integrated in a writing by the law of the place of contracting, no variation of the writing can be shown in another state which could not be shown in a court in the place of contracting under the law of that state, whatever the law of the other state as to integrated contracts.
The law of the forum determines matters pertaining to the execution of a judgment, and what property of a judgment defendant within the state is exempt from execution and on what property within the state execution can be levied, and the priorities among competing execution creditors.
§601. Freedom from Fault
If the law of the forum makes it a condition of maintaining an action that the party bringing the action show himself free from fault, the condition must be fulfilled though there is no such requirement in the state where the cause of action arose.
§606. Limitation of Amount Recoverable
If a statute of the forum limits the amount which in any action of a certain class may be recovered in its courts, no greater amount can be recovered though under the law of the state which created the cause of action, a greater recovery would be justified or required.
Sampson v. Channell
110 F.2d 754 (1st Cir.), cert. denied, 310 U.S. 650 (1940)
On this appeal the question presented may be stated simply, but the answer is not free from difficulty. A car driven by defendant’s testator collided in Maine with a car driven by the plaintiff, injuring both the plaintiff and his wife, who was a passenger. The wife sued and recovered judgment. We affirm that judgment.… In this, the husband’s action, the jury found specially that the plaintiff’s injury was caused by the negligence of defendant’s testator, but brought in a general verdict for the defendant on the issue of contributory negligence. Judgment was entered for the defendant.
The action was brought in the federal district court for Massachusetts, there being the requisite diversity of citizenship. On the issue of contributory negligence the plaintiff requested the court to charge the jury, in accordance with the local Massachusetts rule, that “the burden of proving lack of care on the part of the plaintiff is on the defendant.” This the court declined to do, but upon the contrary charged, in accordance with the Maine law, that the burden was upon the plaintiff to show affirmatively that no want of ordinary care on his part contributed to cause his injuries. The sole question raised is as to the correctness of this charge, and refusal to charge as requested.
Inquiry must first be directed to whether a federal court, in a diversity of citizenship case, must follow the applicable state rule as to incidence of burden of proof. If the answer is in the affirmative, the further point to be considered is whether the applicable state rule here is that of Massachusetts, where the action was brought, or Maine, where the accident occurred.
It would be an over-simplification to say that the case turns on whether burden of proof is a matter of substance or procedure. These are not clean-cut categories. During the reign of Swift v. Tyson the federal courts in diversity of citizenship cases consistently held that the defendant had the burden of proving the plaintiff’s contributory negligence, even though the suit arose in a state whose local rule was the contrary. They avoided having to apply the local rule under the Conformity Act by saying that burden of proof was not a mere matter of procedure but concerned substantive rights, as to which the federal courts on a matter of “general law” were free to take their own view.… The question of classification also arose where suit was brought in one state on an alleged tort committed in another state. But here it was generally held, in the state courts at least, that burden of proof as to contributory negligence was a matter of procedure; hence the rule of the forum would be applied despite a contrary rule of the locus delicti. In these two groups of cases the courts were talking about the same thing and labelling it differently, but in each instance the result was the same; the court was choosing the appropriate classification to enable it to apply its own familiar rule.
In another and quite different setting the question of classification has frequently arisen, namely, in cases involving the constitutionality of statutes shifting from the plaintiff to the defendant the burden of proof on the issue of contributory negligence, as applied retroactively to alleged torts committed before the date of the enactment. Here the courts, federal as well as state, have upheld the statutes as so applied.… The courts say that such statutes introduce no change of the substantive law rule that contributory negligence is a complete bar to liability, but pertain only to the procedure by which the fact as to contributory negligence is to be established. In Easterling Lumber Co. v. Pierce, a state statute, applicable to railroads, provided that from the proof of the happening of an accident there should arise a prima facie presumption of negligence. Referring to this statute, the U.S. Supreme Court said,
The objection to the … statute is that it was wanting in due process because retroactively applied to the case since the statute was enacted after the accident occurred. But the court below held that the statute cut off no substantive defense but simply provided a rule of evidence controlling the burden of proof. That as thus construed it does not violate the Fourteenth Amendment to the Constitution of the United States is also so conclusively settled as to again require nothing but a reference to the decided cases.
It is apparent, then, that burden of proof does not fall within either category of “substance” or “procedure” by virtue of any intrinsic compulsion, but the matter has been made to turn upon the purpose at hand to be served by the classification. Therefore, inasmuch as the older decisions in the federal courts, applying in diversity cases the federal rule as to burden of proof as a matter of “general law,” are founded upon an assumption no longer valid since Erie Railroad Co. v. Tompkins, their classification of burden of proof as a matter of substance should be re-examined in the light of the objective and policy disclosed in the Tompkins case.
The opinion in that case sets forth as a moving consideration of policy that it is unfair and unseemly to have the outcome of litigation substantially affected by the fortuitous existence of diversity of citizenship. Hence, the greater likelihood there is that litigation would come out one way in the federal court and another way in the state court if the federal court failed to apply a particular local rule, the stronger the urge would be to classify the rule as not a mere matter of procedure but one of substantive law falling within the mandate of the Tompkins case. There will be, inescapably, a twilight zone between the two categories where a rational classification could be made either way, and where Congress directly, or the Supreme Court under authority of the Act of June 19, 1934 …, would have power to prescribe a so-called rule of procedure for the federal courts. Thus, if Rule 8(c) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, could be construed as imposing upon the defendant the burden of proof of contributory negligence, it seems that this would be valid and conclusive of the case at bar, despite the contrary intimation in Francis v. Humphrey. Rule 8(c) speaks of contributory negligence as an “affirmative defense,” a phrase implying that the burden of proof is on the defendant. Yet the only rule laid down is one of pleading; the defendant must affirmatively plead contributory negligence. It is not inconsistent to require the defendant to plead contributory negligence if he wants to raise the issue, and yet to put the burden of proof on the plaintiff if the issue is raised. Since Rule 8(c) contains no prescription as to burden of proof, we must look elsewhere for the answer.
It seems to be said in Francis v. Humphrey and was suggested by counsel in the case at bar, that the question whether in diversity of citizenship cases burden of proof is to be classified as a matter of procedure or substantive law is to be determined by following the classification made by the courts of the state. No doubt we should look to those courts to tell us what their rule is and how it operates in local litigation. But once that is determined, the rule is the same whether it is labeled substantive law or procedure. Furthermore, as already pointed out, such a classification by the state court for one purpose does not mean that the classification is valid for another purpose. Surely the question whether a particular subject-matter falls within the power of the Supreme Court to prescribe rules of procedure under the Act of 1934, or is a matter of substantive law governed by the doctrine of the Tompkins case, cannot be foreclosed by the label given to the subject-matter by the state courts.
The inquiry then must be: considering the policy underlying Erie Railroad Co. v. Tompkins, supra, would that policy best be served by classifying burden of proof as to contributory negligence as a matter of procedure or substantive law? The incidence of burden of proof may determine the outcome of the case. This is true where the evidence is conflicting and the jury is not convinced either way. It is more pointedly true where, as sometimes happens, the injured person dies and no evidence is available on the issue of contributory negligence. If, in such a case, the burden of proof is on the defendant, the plaintiff wins, assuming the other elements of the cause of action are established.… If the burden is on the plaintiff, however, the defendant wins.… Assuming the state rule to be one way and the federal rule the other, then the accident of citizenship becomes decisive of the litigation. The situation seems to call for the application of the rule in the Tompkins case. There is no important counterconsideration here, for the state rule can be easily ascertained and applied by the federal court without any administrative inconvenience. In thus concluding that for this purpose the incidence of the burden of proof as to contributory negligence is to be classified as a matter of substantive law, we are in harmony with the spirit of the Tompkins case, and at the same time are adhering to the classification maintained in an unbroken line of federal court decisions under Swift v. Tyson, supra. Federal courts in other circuits have held, since the Tompkins decision, that the state rule as to burden of proof must now be applied in diversity of citizenship cases.…
Thus far, the case has been discussed as though suit had been brought in the federal court sitting in the state where the alleged tort occurred. But there is the complicating factor that the accident occurred in Maine and suit was brought in Massachusetts. This makes it necessary to consider three further points:
First, if the plaintiff had sued in a Massachusetts state court, would the Massachusetts Supreme Judicial Court have allowed the application of the Maine rule as to burden of proof? The answer is, no. The court would have said that burden of proof is a matter of procedure only, and would have applied the Massachusetts rule that the burden is on the defendant to establish the plaintiff’s contributory negligence. Such was the holding in Levy v. Steiger and Smith v. Brown.
Second, would such a decision by the Supreme Judicial Court of Massachusetts be subject to reversal by the Supreme Court of the United States? Presumably we are permitted under the Tompkins case thus to attack the decision of a state court collaterally, so to speak, for the Supreme Court would hardly require the federal courts to follow a local decision which, had it been appealed, would have been reversed by the Supreme Court on constitutional grounds.…
Whatever the eventual development of this line of cases may be, we know of no decision indicating that the Supreme Court at the present time would reverse a decision of a state court in a case like Levy, applying the lex fori rather than the lex loci delicti in the matter of burden of proof. Numerous decisions to this effect have been rendered by state courts, and it has never seemed to occur to anyone that a federal question was involved. Furthermore, in Levy, the Massachusetts court was applying not its common law (which put the burden of proof on the plaintiff), but a statute providing that “In all actions, civil or criminal, to recover damages for injuries to the person or property or for causing the death of a person, the person injured or killed shall be presumed to have been in the exercise of due care, and contributory negligence on his part shall be an affirmative defense to be set up in the answer and proved by the defendant.”
… To hold that this statute is unconstitutional, as applied in Levy, to a foreign tort, one would have to find somewhere in the Constitution an implied prohibition to the effect that no state shall pass any law altering an assumed nationally applicable body of doctrine concerning the conflict of laws, the final interpreter of which is the Supreme Court of the United States.
It follows, therefore, that the unimpeachable law of Massachusetts in the case at bar is that in a suit brought in Massachusetts the burden of proof as to contributory negligence is on the defendant, despite the contrary rule applicable in Maine where the accident occurred.
Third, this being Massachusetts law, there remains the inquiry, what law must be applied in the federal court in Massachusetts when jurisdiction is invoked on the ground of diversity of citizenship? Under Tompkins, is it the Massachusetts or the Maine rule? We know of no considered decision by the Supreme Court on this point. In the Tompkins case, suit was brought in the federal court in New York on a tort alleged to have been committed in Pennsylvania. The question was whether the railroad owed a duty of care to an undiscovered pedestrian walking on a much-used path along the right of way near the tracks. The Supreme Court held that the lower court was in error in treating this question as a matter of “general law,” and sent the case back for determination in accordance with the common law of Pennsylvania as declared by its highest court. There is no doubt that in this situation the state courts of New York would have applied the same rule of conflict of laws, and would have looked to the lex loci delicti. The decision in the Tompkins case manifestly tended to produce a uniformity in result in that particular situation, whether action on the Pennsylvania tort were brought in a New York state court or New York federal court.…
Until the point is finally ruled upon by the Supreme Court, lower courts must piece out as best they can the implications of the Tompkins case. The theory is that the federal court in Massachusetts sits as a court coordinate with the Massachusetts state courts to apply the Massachusetts law in diversity of citizenship cases.… The powerful argument by Holmes, J., dissenting, in Black & White Taxi Co. v. Brown & Yellow Taxi Co., cited with approval by the majority opinion in the Tompkins case, seems to be applicable to that portion of the Massachusetts common law relating to conflict of laws quite as much as to the common law of contracts or torts. Except in the limited range of cases, already alluded to above, where state court decisions on points of conflict of law are subject to reversal by the United States Supreme Court under the federal constitution, the rules applicable to conflict of laws are not “a transcendental body of law outside of any particular state but obligatory within it.” If the federal court in Massachusetts on points of conflict of laws may disregard the law of Massachusetts as formulated by the Supreme Judicial Court and take its own view as a matter of “general law,” then the ghost of Swift v. Tyson, supra, still walks abroad, somewhat shrunken in size, yet capable of much mischief. In the case at bar, it is difficult to see that any gain in the direction of uniformity would be achieved by creating a discrepancy between the rules of law applicable in the Massachusetts state and federal courts, respectively, in order to bring the law of the Massachusetts federal court in harmony with the law that would be applied in the state courts of Maine.
Our conclusion is that the court below was bound to apply the law as to burden of proof as it would have been applied by the state courts in Massachusetts.
This result may seem to present a surface incongruity, viz., the deference owing to the substantive law of Massachusetts as pronounced by its court requires the federal court in that state to apply a Massachusetts rule as to burden of proof which the highest state court insists is procedural only. The explanation is that reasons of policy, set forth in the Tompkins case, make it desirable for the federal court in diversity of citizenship cases to apply the state rule, because the incidence of burden of proof is likely to have a decisive influence on the outcome of litigation; and this is true regardless of whether the state court characterizes the rule as one of procedure or substantive law. Certainly the federal court in Massachusetts cannot treat burden of proof as a matter of procedure in order to disregard the Massachusetts rule, and then treat it as substantive law in order to apply the Maine rule. Under the conclusion we have reached, if suit were brought in Massachusetts, the state and federal courts there would be in harmony as to burden of proof; and if suit were brought in Maine, the state and federal courts there would likewise be in harmony on this important matter. It is true that the rule applied in the Maine courts would not be the same as the rule applied in the Massachusetts courts. But this is a disparity that existed prior to Tompkins, and cannot be corrected by the doctrine of that case. It is a disparity that exists because Massachusetts may constitutionally maintain a rule of conflict of laws to the effect that the incidence of burden of proof is a matter of “procedure” to be governed by the law of the forum. Levy.
For error in the instructions given to the jury on the burden of proof, the judgment must be reversed and the cause remanded for further proceedings not inconsistent with this opinion.
O’Leary v. Illinois Terminal Railroad
299 S.W.2d 873 (Mo. 1957)
Plaintiff recovered judgment against defendant in the Circuit Court of the City of St. Louis for the sum of $7,000 for personal injuries sustained when an automobile in which she was a passenger was struck by defendant’s electric railway train in Granite City, Illinois. Upon appeal by defendant to the St. Louis Court of Appeals, the several assignments of error there asserted were decided adversely to defendant and the judgment of the trial court was affirmed.… Among the assignments considered by the Court of Appeals was defendant’s contention that the trial court erred in giving plaintiff’s Instruction No. 10, which casts upon defendant the burden of proving its affirmatively pleaded defense for contributory negligence on the part of plaintiff in bar of any right of recovery she otherwise might have.
In determining that question, the Court of Appeals took judicial notice that the law of Illinois made it incumbent upon plaintiff to allege and prove that she was in the exercise of ordinary care for her own safety at the time of the collision.… It then undertook to determine “whether the Illinois requirement that the plaintiff allege and prove that she was in the exercise of due care was a substantive and essential element of her right to recover or was merely a procedural matter to be determined by the law of Missouri.” At that point, the court was confronted with a situation which it aptly described as “difficult and delicate.”…
… The Court of Appeals of its own motion, transferred the case here to the end “that the law on the subject should be re-examined.” … The parties have briefed the question anew. The importance of the question impels us to give it first consideration before discussion of the other assignments of error asserted by defendant in this court.
Plaintiff insists that the overwhelming weight of authority is that the burden of proof is a rule of evidence and as such is procedural, not substantive [citing] cases from several states, and several Missouri cases which the Redick case had purported to overrule and to which reference will be hereinafter made. Plaintiff has also invoked the rule of stare decisis and insists that “under this time-honored rule this court should refrain from disturbing the existing law until an authoritative court of Illinois should declare that the burden of proof as to contributory negligence is substantive and not procedural, and thereby demonstrate that the present law is ‘clearly erroneous or manifestly wrong.’”…
We have carefully considered the cases and authorities cited by both of the parties in the instant case and the cases and authorities upon which the Redick case was decided. Unquestionably, there is a conflict of authority upon this subject. Oftentimes, however, a careful analysis of the precise question presented in these cases reveals that the conflict is more seeming than real. The rule applied in the more closely reasoned cases is thus stated in 11 Am. Jur., Conflict of Laws, §203, p. 523:
Even in those jurisdictions which recognize that ordinarily matters concerning presumptions of evidence and burden of proof relate to the remedy, where the remedy prescribed by that rule of the lex loci, which attaches the burden of proof to one of the parties, is so inseparably connected with, and incorporated in, the substantive rule creating the right that to ignore that remedy and substitute therefor the rule of the forum would destroy, prejudice, or render ineffective the right to which it is attached, substituting a local cause of action for the one arising in another state, the lex loci in its entirety will be given effect in preference to the contrary rule of the lex fori. It is sometimes stated that the burden of proof is not determinable by the lex fori if it is made a substantial part of the right of action by the laws of the jurisdiction under which it arose.
No purpose will be served by further discussion. We are convinced that the authorities upon which the decision in the Redick case was reached are sound. Hence we affirm that portion of the Redick case … reading:
Is the Illinois requirement that plaintiff prove he was in the exercise of due care substantive or merely procedural? In Barker v. St. Louis County,… we quoted with approval from Jones v. Erie R. Co., … as follows: “The distinction between substantive law and procedural law is that ‘substantive law relates to rights and duties which give rise ‘to a cause of action,’ while procedural law ‘is the machinery for carrying on the suit.’”
We think that the Illinois requirement is substantive, just as much as is the requirement that plaintiff plead and prove the negligence of defendant. No one would argue that the latter was not substantive. Both are essential elements of plaintiff’s right to recover under the law of Illinois. Plaintiff suggests, however, that our courts are not obligated to involuntarily have the laws of another state engrafted into our jurisprudence, … and that it will be Missouri rules of law that determine whether a given question is substance or procedure.… But certainly we should not determine the matter by mere whim or fiat. “In administering the substantive laws of a sister state we administer them, not our own; and we should not administer them either more or less blandly than do our sister’s courts.” …
The Restatement, Conflict of Laws, Sec. 595, ch. 12, states that:
if a requirement concerning proof of freedom from fault exists in the law of the place of injury and if such condition is there interpreted as a condition of the cause of action itself, … the court at the forum will apply the rule of the foreign state.… In such a case, the remedial and substantive portions of the foreign law are so bound together that the application of the usual procedural rule of the forum would seriously alter the effect of the operative facts under the law of the appropriate foreign state.
The illustration following the comment is:
A, in state X, is injured by the alleged negligence of B. A sues B in state Y. By the law of X, a plaintiff has no cause of action until he has shown that his own negligence did not contribute to his injury. By the law of Y, contributory negligence is an affirmative defense to be pleaded and proved by the defendant. A must show his freedom from contributory negligence.
The Redick case continues …:
We are convinced that, to the extent the Menard case holds that the Illinois rule is remedial and not substantive and to the extent it holds that Missouri courts will adhere to their rule of placing the burden of proving contributory negligence upon the defendant in a case arising in another state wherein the law of that state is as it is in Illinois, it should no longer be followed. The distinction is that the Missouri law makes a plaintiff’s contributory negligence a matter of defense only, the proof of which will defeat an existing claim. But in Illinois, the plaintiff’s due care, or his freedom from contributory negligence, is not a matter of defense, defeating a claim, but an essential element which must exist before there is a cause of action in the first instance.
For the reasons stated, the rule announced in the Menard and subsequent cases was clearly erroneous and manifestly wrong. The rule of stare decisis is never applied to prevent the repudiation of decisions that are patently wrong and destructive of substantive rights.…
The judgment is reversed and the cause remanded. All concur.
Questions and Comments
(1) Why does a court apply its own procedural rules even though it may be applying the substantive law of another jurisdiction? Presumably the answer lies in the desire of the forum not to complicate its task unduly. If domestic procedure can be applied without affecting the foreign rights asserted by way of foreign law, there seems little reason to borrow foreign procedure as well. On the other hand, if a matter is one that will clearly affect the outcome of the case, the tendency is to call it substantive and apply the foreign rule. Two considerations muddy the waters, however: First, it isn’t always clear whether a particular rule will affect the outcome of the case (for example, the burden of proof when the question comes up on appeal by way of an attack on jury instructions); second, the forum may wish to apply its own “procedural” rule even though the outcome of a case will be affected in one respect or another because the adoption of the foreign procedure is too burdensome. This second point is particularly strong when the first factor is also operating—the adoption of troublesome foreign procedure when its effect on the outcome is doubtful is not always attractive to the forum.
Outcome determination and ease of application are not always the sole considerations, however. If the issue is the right to a jury trial, for example, the forum may have rejected trial by jury for a particular cause of action because it feels that the judge is a more reliable finder of fact for the particular kind of action in question. Thus, although there might be no difficulty in empaneling a jury in the action in question (since the forum uses juries in other types of actions), the forum might nonetheless refuse to do so on the grounds that the foreign cause of action is better served by forum procedure than by foreign procedure. Similarly, forum rules concerning the scope of cross-examination, competency of witnesses and documents, etc., may appeal to the forum as superior and unrelated to its obligation to apply foreign law, even though they may affect the outcome of the case. Evidentiary privileges may further complicate matters since the privilege asserted (doctor-patient privilege, for example) may have little to do either with the forum or the state whose substantive law is applicable if the communication took place in a third state.
Finally, might there be sound analytical reasons, especially in the traditional choice-of-law framework, for distinguishing between primary rights that attach normative judgments to out-of-court behavior, and adjective rights that regulate how primary rights get adjudicated? On this latter distinction, see Dane, Vested Rights, Vestedness and Choice of Law, 96 Yale L.J. 1191 (1987). And for an intelligent general discussion of the substance/procedure distinction, see Risinger, “Substance” and “Procedure” Revisited, 30 U.C.L.A. L. Rev. 189 (1982).
(2) Some of the common issues that provoke controversy as to proper categorization are:
(a) Statutes of fraud. These statutes have frequently been categorized as substantive or procedural depending on their precise wording, the search being for words that forbid enforcement of the obligation (procedural) as against words that forbid creation of the obligation (substantive). When they analyze the matter, cases taking the former view concentrate on preventing perjury in the forum’s courts, while cases taking the latter view concentrate on the rights of the parties.
(b) Statutes of limitations. These are considered in the following subsection.
(c) Burdens of proof, privilege, and other evidentiary questions, including the parol evidence rule.
(d) Joinder, counterclaim, setoff, impleader, right to jury trial, and other matters usually thought of as “procedural” without regard to the conflicts controversy.
(e) Survival or revival of a cause of action.
(f) The availability of equitable relief, installment judgments, etc., and other “remedy” questions such as measure of damages.
(3) Sampson was cited with apparent approval by the Supreme Court in Klaxon Co. v. Stentor Manufacturing Co., 313 U.S. 487 (1941). Does the Sampson opinion do a convincing job of arguing that the issue there is substantive for Erie purposes and procedural as a matter of state law? What if two states were involved instead of a state and a federal court? That is, assume that State A is the forum and State B is the place of injury. If State A decides that a particular matter is substantive and that the law of State B, the locus delicti, therefore ought to apply to the issue, what should be done if the law of State B characterizes the issue as procedural?
(4) Assuming that a state places the burden of proof with respect to contributory negligence on the plaintiff because of a suspicion of negligence actions, is it likely that this extra bit of help for the defendant is important enough, in a case that actually gets to the jury, that reversal is merited when the wrong conflicts principle is applied and the plaintiff gets the extra help instead? In other words, how often does the burden of proof affect the “normal” case? Should reversals be limited to cases in which evidence is lacking and the burden issue is therefore determinative of the outcome?
Grant v. McAuliffe
41 Cal. 2d 859, 264 P.2d 944 (1953)
On December 17, 1949, plaintiffs W. R. Grant and R. M. Manchester were riding west on U.S. Highway 66 in an automobile owned and driven by plaintiff D. O. Jensen. Defendant’s decedent, W. W. Pullen, was driving his automobile east on the same highway. The two automobiles collided at a point approximately 15 miles east of Flagstaff, Arizona. Jensen’s automobile was badly damaged and Jensen, Grant, and Manchester suffered personal injuries. Nineteen days later, on January 5, 1950, Pullen died as a result of injuries received in the collision. Defendant McAuliffe was appointed administrator of his estate and letters testamentary were issued by the Superior Court of Plumas County. All three plaintiffs, as well as Pullen, were residents of California at the time of the collision.…
The basic question is whether plaintiffs’ causes of action against Pullen survived his death and are maintainable against his estate. The statutes of this state provide that causes of action for negligent torts survive the death of the tortfeasor and can be maintained against the administrator or executor of his estate. Defendant contends, however, that the survival of a cause of action is a matter of substantive law, and that the courts of this state must apply the law of Arizona governing survival of causes of action. There is no provision for survival of causes of action in the statutes of Arizona, although there is a provision that in the event of the death of a party to a pending proceeding his personal representative can be substituted as a party to the action … if the cause of action survives. The Supreme Court of Arizona has held that if a tort action has not been commenced before the death of the tortfeasor a plea in abatement must be sustained.
Thus, the answer to the question whether the causes of action against Pullen survived and are maintainable against his estate depends on whether Arizona or California law applies. In actions on torts occurring abroad, the courts of this state determine the substantive matters inherent in the cause of action by adopting as their own the law of the place where the tortious acts occurred, unless it is contrary to the public policy of this state. “[N]o court can enforce any law but that of its own sovereign, and, when a suitor comes to a jurisdiction foreign to the place of the tort, he can only invoke an obligation of its own as nearly homologous as possible to that arising in the place where the tort occurs.” Learned Hand, J., in Guinness v. Miller. But the forum does not adopt as its own the procedural law of the place where the tortious acts occur. It must, therefore, be determined whether survival of causes of action is procedural or substantive for conflict of laws purposes.
This question is one of first impression in this state. The precedents in other jurisdictions are conflicting. In many cases it has been held that the survival of a cause of action is a matter of substance and that the law of the place where the tortious acts occurred must be applied to determine the question. The Restatement of the Conflict of Laws, section 390, is in accord. It should be noted, however, that the majority of the foregoing cases were decided after drafts of the Restatement were first circulated in 1929. Before that time, it appears that the weight of authority was that survival of causes of action is procedural and governed by the domestic law of the forum. Many of the cases, decided both before and after the Restatement, holding that survival is substantive and must be determined by the law of the place where the tortious acts occurred, confused the problems involved in survival of causes of action with those in causes of action for wrongful death. The problems are not analogous. See Schumacher, Rights of Action Under Death and Survival Statutes, 23 Mich. L. Rev. 114, 116-117, 124-125. A cause of action for wrongful death is statutory. It is a new cause of action vested in the widow or next of kin, and arises on the death of the injured person. Before his death, the injured person himself has a separate and distinct cause of action and, if it survives, the same cause of action can be enforced by the personal representative of the deceased against the tortfeasor. The survival statutes do not create a new cause of action, as do the wrongful death statutes. The English courts have reached the same result in construing similar statutes. They merely prevent the abatement of the cause of action of the injured person, and provide for its enforcement by or against the personal representative of the deceased. They are analogous to statutes of limitation, which are procedural for conflict of laws purposes and are governed by the domestic law of the forum. Thus, a cause of action arising in another state, by the laws of which an action cannot be maintained thereon because of lapse of time, can be enforced in California by a citizen of this state, if he has held the cause of action from the time it accrued.
Defendant contends, however, that the characterization of survival of causes of action as substantive or procedural is foreclosed by Cort v. Steen, where it was held that the California survival statutes were substantive and therefore did not apply retroactively. The problem in the present proceeding, however, is not whether the survival statutes apply retroactively, but whether they are substantive or procedural for purposes of conflict of laws. “‘Substance’ and ‘procedure,’ … are not legal concepts of invariant content.”[A] statute or other rule of law will be characterized as substantive or procedural according to the nature of the problem for which a characterization must be made.
Defendant also contends that a distinction must be drawn between survival of causes of action and revival of actions, and that the former are substantive but the latter procedural. On the basis of this distinction, defendant concludes that many of the cases cited above as holding that survival is procedural and is governed by the domestic law of the forum do not support this position, since they involved problems of “revival” rather than “survival.” The distinction urged by defendant is not a valid one. Most of the statutes involved in the cases cited provided for the “revival” of a pending proceeding by or against the personal representative of a party thereto should he die while the action is still pending. But in most “revival” statutes, substitution of a personal representative in place of a deceased party is expressly conditioned on the survival of the cause of action itself. If the cause of action dies with the tortfeasor, a pending proceeding must be abated. A personal representative cannot be substituted in the place of a deceased party unless the cause of action is still subsisting. In cases where this substitution has occurred, the courts have looked to the domestic law of the forum to determine whether the cause of action survives as well as to determine whether the personal representative can be substituted as a party to the action. Defendant’s contention would require the courts to look to their local statutes to determine “revival” and to the law of the place where the tort occurred to determine “survival,” but we have found no case in which this procedure was followed.
Since we find no compelling weight of authority for either alternative, we are free to make a choice on the merits. We have concluded that survival of causes of action should be governed by the law of the forum. Survival is not an essential part of the cause of action itself but relates to the procedures available for the enforcement of the legal claim for damages. Basically the question is one of administration of decedent’s estates, which is a purely local proceeding. The problem here is whether the causes of action that these plaintiffs had against Pullen before his death survive as liabilities of his estate.… Decedent’s estate is located in this state, and letters of administration were issued to defendant by the courts of this state. The responsibilities of defendant, as administrator of Pullen’s estate, for injuries inflicted by Pullen before his death are governed by the laws of this state. This approach has been followed in a number of well-reasoned cases. It retains control of the administration of estates by the local legislature, and avoids the problems involved in determining the administrator’s amenability to suit under the laws of other states. The common law doctrine actio personalis moritur cum persona had its origin in a penal concept of tort liability. See Prosser, Law of Torts 950-951. Today, tort liabilities of the sort involved in these actions are regarded as compensatory. When, as in the present case, all of the parties were residents of this state, and the estate of the deceased tortfeasor is being administered in this state, plaintiff’s right to prosecute their causes of action is governed by the laws of this state relating to administration of estates.
[A dissenting opinion is omitted.]
Questions and Comments
(1) Can calling the survival issue of this case “procedural” be justified on the basis of ease of administrability of the forum? Wouldn’t dismissal on the basis of the Arizona nonsurvival rule be much easier?
(2) Why did Arizona allow abatement of the action against a dead tortfeasor? The Grant court cites the ancient origin of the tort law and its original penal purpose: Presumably the decedent is not significantly punished by a judgment against his estate. Professor Brainerd Currie, in writing about this case, concluded that the most probable reason for the Arizona rule was inertia in moving away from its common-law origins, but he also proposed another possible rationale for the rule: “that the living should not be mulcted for the wrongs of the dead: that the interests represented in the estate of the tort-feasor—his heirs, next of kin, devisees, legatees, creditors—should not suffer because of what he did.” Currie, Selected Essays on the Conflict of Laws 143, 144 (1963).
Do these considerations make the rule look procedural?
(3) In the same article Professor Currie speculated as to what “really” went on in the decision of the Grant case:
The judges fed the data into the machine in the usual way, but, when the machine’s answer came out, they couldn’t swallow it. They rebelled against the machine. They adjudicated the case.… Doubtless they felt a bit uncomfortable.… So they went back to the machine and fed the same data into it again, this time using a somewhat different procedure. After pressing the button marked “Procedure is governed by the law of the forum, substance by the law of the place of the wrong,” they pressed the button marked “Procedural” instead of the one marked “Substantive.” This time the machine came up with the answer that the court had arrived at independently.
Id. at 138-139.
(4) “We have concluded that survival of the causes of action should be governed by the law of the forum.” “Decedent’s estate is located in this state, and letters of administration were issued to the defendant by the courts of this state. The responsibilities of defendant, as administrator of Pullen’s estate, for injuries inflicted by Pullen before his death are governed by the laws of this state.”
Question: What happens when the forum is other than the state of administration of the decedent’s estate—because, for example, the decedent had property elsewhere that serves as the basis for jurisdiction? Which rule governs—that of the forum, or that of the state of administration?
(5) Justice Traynor later commented on the decision in this case: “I do not regard it as ideally articulated, developed as it had to be against the brooding background of a petrified forest. Yet I would make no more apology for it than that in reaching a rational result it was less deft than it might have been to quit itself of the familiar speech of choice of law.” Traynor, Is This Conflict Really Necessary? 37 Tex. L. Rev. 657, 670 n.35 (1959).
What are the reasons that led Justice Traynor to believe that he had reached a “rational” result?
4. Statutes of Limitations
Selections from the First Restatement of Conflicts, on Statutes of Limitations
§603. Statute of Limitations of Forum
If action is barred by the statute of limitations of the forum, no action can be maintained though action is not barred in the state where the cause of action arose.
If action is not barred by the statute of limitations of the forum, an action can be maintained, though action is barred in the state where the cause of action arose.
§605. Time Limitations on Cause of Action
If by the law of the state which has created a right of action, it is made a condition of the right that it shall expire after a certain period of limitation has elapsed, no action begun after the period has elapsed can be maintained in any state.
Duke v. Housen
589 P.2d 334 (Wyo.), cert. denied, 444 U.S. 863 (1979)
In the appeal now before the court, appellant-defendant challenges the jury verdict and district court judgment entered against him awarding the appellee-plaintiff, based upon defendant’s alleged grossly negligent infection of plaintiff with venereal disease, compensatory and punitive damages in the sum of $1,300,000. Through this appellate challenge, defendant raises the following questions:
1. Is the action barred by the statute of limitations? … For the reasons stated in detail herein, we shall reverse on the ground that the action is barred by the statute of limitations and not consider the other issues.
In early April, 1970, plaintiff was living, working, and going to college part-time in the Washington, D.C. area. On April 4 of that year she was introduced by her brother to defendant; and on the same night and early morning of April 5, following dinner and dancing plus moderate drinking, engaged in sexual intercourse with defendant in the front seat of his pickup truck. On April 8th, at least partially in response to defendant’s sudden and convincing professions of love and desire to marry, plaintiff met defendant at the La-Guardia airport in New York and subsequently traveled by truck with him from New York to Denver, Colorado, engaging on and off in acts of sexual intercourse with defendant along the way. Upon reaching Denver, defendant, having lost interest in plaintiff, lodged her in a local hotel and left for his home in Meeteetse, Wyoming. Plaintiff, after contacting her brother and waiting for him to arrive, subsequently traveled to Meeteetse and confronted defendant concerning his behavior. As a result, it was agreed that defendant would accompany plaintiff and her brother back to Washington, D.C. and apologize to the family; yet after arriving in Washington and discussing the situation with her family, plaintiff for some reason which is neither totally clear nor probably capable of elucidation, accompanied the defendant to New York, there occupying a hotel room together and engaged once more in sexual intercourse with him. Finally, on the next morning of April 21, 1970, defendant broke off his relationship with the plaintiff and informed her for the first time that he had venereal disease, gonorrhea, and that now she probably had it too.
At trial, through the presentation of voluminous testimony by both parties, it was established that at some time prior to March 22, 1970, defendant had become aware that he was probably infected with venereal disease for on that day he visited a doctor in Dallas, Texas, complaining of pain and a urethral discharge. In response, the examining physician took a sample of the discharge for testing and administered a large dosage of fast-acting penicillin, telling defendant to return the next day for the test results. When defendant returned on March 23, 1970, the test results for gonorrhea having been found positive, a larger dose of a longer-acting penicillin was administered and defendant was advised to see his own doctor for further treatment. Defendant then left by plane for New York, arriving the same day, March 23, where immediately upon arrival he contacted his own physician, who after an external examination, stated that he could find no “clinical evidence of gonorrhea”—defendant had no current urethral discharge. On the basis of the previous treatment and this current information, defendant asserted at trial that it was his belief that as of his first sexual contact with the plaintiff on the night of April 4-5, 1970, his infection with gonorrhea had been cured.
Plaintiff, after being told by defendant on April 21, 1970, that she had probably contracted gonorrhea from him and should see a doctor, left New York for Washington, D.C. and the following day, April 22, 1970, visited her personal physician who through a smear test confirmed that gonorrhea was present. In response to medication, plaintiff’s infection with what her physician described as a “classic case of asymptomatic gonorrhea” was arrested by May 14, 1970, but more serious problems were to develop. Beginning in January, 1973, plaintiff noticed a pain in her lower right side which by March, 1973, had become so severe and constant as to require medical attention. After various external medical tests provided negative results and antibiotic medication proved ineffective, major exploratory surgery was performed in July, 1973. As a result, plaintiff’s physician found that because of the gonorrhea infection, and possibly other related secondary infections as well, scar tissue adhesions had formed within a number of areas of appellee’s lower abdomen. He testified that although he had lysed (loosed or detached by surgical procedures) the adhesions, thus somewhat relieving temporarily the severe pain, because of the nature of the scar tissue involved, new adhesions would eventually form and the pain would very probably return again and continue in this cyclical manner for the remainder of plaintiff’s life. He further advised that because of the scarring involved, plaintiff’s ability to bear children had been greatly reduced.…
Plaintiff filed this new action on April 19, 1974, seeking hospital expenses, doctor’s expenses, wage loss, future medical expense, as well as damages for pain and suffering, present and future. In addition, based on an allegation that defendant was guilty of gross negligence when he infected her with gonorrhea, plaintiff requested $1 million in exemplary damages. By interrogatory, the jury found that defendant had been infected with gonorrhea at the time of his relations with plaintiff between April 4 and April 21, 1970; and by verdict awarded plaintiff $300,000.00 in compensatory damages, and $1,000,000.00 in exemplary or punitive damages. Following denial of various posttrial motions, the appeal herein was filed.
By way of both the answer filed in response to plaintiff’s complaint as well as by motions prior, during and after trial, defendant alleged and strongly argued that based upon applicable statutes and case law, plaintiff’s cause of action had been barred by the passage of time and her complaint should therefore be dismissed. Rule 8(c), W.R.C.P. requires that the statute of limitations be specifically set forth as an affirmative defense. In response, the trial judge ruled that inasmuch as plaintiff’s scar adhesions had not been discovered until a date much later than when the infection itself had occurred, the applicable time period for limitation of action purposes was to be computed only from discovery of the adhesions; and defendant’s assertion was thus denied.
Statutes of limitation have long been a part of the jurisprudence of the United States, all its states and the State of Wyoming. They are pragmatic devices to save courts from stale claim litigation and spare citizens from having to defend when memories have faded, witnesses are unavailable by death or disappearance and evidence is lost. Statutes of limitation are arbitrary by their very nature and do not discriminate between the just and unjust claim. They are not judicially made but represent legislative and public policy controlling the right to litigate. The statutes operate against even the most meritorious of claims and courts have no right to deny their application. When considering the statute of limitations, the nature of injury, its extent, the amount of money damages involved, social considerations, and the emotional appeal the facts may have must pass to the background. The circumstances are only significant in the bearing they may have on where the cause of action arose, when it arose and when the time expired for pursuing the applicable judicial remedy.
[W]hile the basic claim raised by plaintiff, albeit an unusual one, sounds in tort, the circumstance of its pursuance in Wyoming is somewhat unique. Since, as the evidence points up, there was no sexual contact between plaintiff and defendant in Wyoming, nor any tortious injury in this state, simple logic reveals that there could be no tortious conduct, no negligent exposure of plaintiff’s body to disease by defendant in this, the forum state. There can be no question that plaintiff’s cause of action could only be found as having arisen elsewhere.
… The heavy weight of authority in interstate tort cases such as here with elements in different jurisdictions, is that the law of the place where the plaintiff sustains injury to her person controls. Restatement of Conflict of Laws, §377; 2 Harper and James, §30.4, p.1961.
At common law, the limitation period of the forum jurisdiction, the lex fori, generally controlled the time within which causes of action had to be pursued, regardless of the fact that the cause itself in all its elements may have accrued outside the forum jurisdiction. Only when the limitation of action statute of the foreign jurisdiction in which the cause arose could be deemed substantive law rather than procedural would the foreign statute be applied by the forum court. Ehrenzweig, Conflict of Laws §161 (1962); Vernon, Statutes of Limitation in the Conflict of Laws; Borrowing Statutes, 32 Rocky Mtn. L. Rev. 287 (1960). In order to avoid the confusion and problems associated with attempting to determine when a foreign limitation of action statute was substantive or procedural, a majority of states, including Wyoming, enacted what are referred to as “borrowing” statutes. Section 1-3-117, W.S. 1977, which we find to be controlling in this regard, is simple and clear:
If by the laws of the state or country where the cause of action arose the action is barred, it is also barred in this state.
The plaintiff takes an unusual position that since the case is tried in Wyoming, it must be tried under Wyoming law as a whole, including §1-3-105, W.S. 1977, prescribing a period of limitation of four years “after the cause of action accrues,” pertaining to causes of action arising in Wyoming. She then asserts that under the statutory section, since she discovered she was infected with gonorrhea “around April 22, 1970,” her action was timely brought within the Wyoming four year period by filing her complaint on April 19, 1974. She elects to ignore the borrowing statute, §1-3-117, supra. She then relies upon [two cases] to support a 51 Am. Jur. 2d, Limitation of Actions, §66, p.645 statement as follows:
… the statutes of limitation of the place where the action is brought and the remedy is sought to be enforced, and not those of the place where the contract was made, the right in tort arose, or the plaintiff resides, or of the domicil of one or the other of the persons affected by the litigation, control in the event of a conflict of laws.…
We have no argument with that rule in the case before us but we have no conflict of laws to make it applicable. Any conflict has been erased by the legislature by enactment of the “borrowing” statute fixing the statute of limitations of this state to be the same as that of the jurisdiction in which the cause of the action arose. That is explained in the next section (67) of the Am. Jur. 2d, supra, quote. The limitations law of the jurisdiction in which a cause of action arises is the law of this state and has been ever since territorial days, even though a defendant is properly before a Wyoming court, the place where he may be personally served with process and a remedy found.…
… Cope v. Anderson, 331 U.S. 461 (1947), points out that the bottom line purpose of a state’s borrowing statute is to require its courts to bar suits if the right to sue had already expired in another jurisdiction where the crucial combination of circumstances giving the right to sue had taken place, the existence of which affords a party a right to judicial interference in his behalf.
Plaintiff also argues, and the trial judge so held, that the statute of limitations did not commence to run until October, 1973, when adhesions resulting from the infection were discovered because it is the injury therefrom for which the damages are sought. That position is not the accepted rule.…
The jury found as a fact that the defendant was the bearer of gonorrhea during the period April 4, 1970 to April 21, 1970. The plaintiff’s testimony, admitted by the defendant, is that sexual intercourse between the plaintiff and defendant took place on the dates and in other state jurisdictions in accordance with an itinerary as follows:
April 4-5, 1970. State of Virginia.
April 7-8, 1970. Tuxedo, New York.
April 8-9, 1970. Erie, Pennsylvania.
April 9-10, 1970. State of Iowa.
April 10-11, 1970. Ogallala, Nebraska.
April 20-21, 1970. New York City, New York.
There is no evidence of sexual intercourse taking place in the State of Wyoming. We must therefore look elsewhere for a jurisdiction in which the cause arose. While it is perhaps unusual that the defendant perpetrated his negligent acts and caused injury to plaintiff’s body in several different states and which may give an appearance of complexity, an application of settled rules of tort law in the jurisdictions involved clears away any suggestion of obscurity.
The limitation of action statute of the foreign jurisdiction in which the cause in question arose is applied by the forum court irregardless [sic] of whether or not the foreign limitation could be characterized as substantive or procedural. Thus, in almost all instances, if a plaintiff’s cause of action is time-barred in the jurisdiction in which the cause of action arose, it would be barred by the passage of time in the forum court as well. Such a rule not only clears up any substantive procedural conflict problem, but eliminates as well the possibility of the plaintiff shopping for a favorable forum in which to revive a dead claim. It thus becomes of acute importance in the situation at bar to specifically determine, for limitation of action purposes, where and when plaintiff’s cause of action arose. In making such a determination based upon a borrowed limitational period, in all jurisdictions having a borrowing statute, with the exception of Ohio, not only is the specific prescriptive period utilized, but all of its accouterments as well whether in the form of additional statutory provisions or interpretive judicial decisions. As the court in Devine v. Rook has very aptly stated:
But when such [limitational] statute is so borrowed, it is not wrenched bodily out of its own setting, but taken along with it are the court decisions of its own state which interpret and apply it, and the comparison statutes which limit and restrict its operation. This we think is the general law.
Thus, in applying a “borrowed” statute, we must consider not only the borrowed limitation of action statute itself, but also any applicable tolling or other statutes as well as pertinent court cases. In effect, plaintiff’s cause must be viewed as if filed in the state where under the laws of that state a cause of action accrued.7
We find and hold that a cause of action arose in the state of New York on April 8, 1970 and April 21, 1970. New York City, New York was the place where the defendant committed his second and last acts of negligence in communicating disease to the plaintiff. In New York it has long been the rule that in classic actions of negligence, damage is the gist and essence of a plaintiff’s cause, Schwartz v. Heyden Newport Chemical Corporation, and the statute of limitations commences to run at the time of injury is produced (in personal injury cases) and there is damage to the structure of the body. Schwartz holds that the cause of action is complete when the invasion of the body by injury takes place “independently of any actual pecuniary damage.” The injury is considered a trespass upon the person of the injured plaintiff.…
The Schmidt doctrine as applied to this case means that a cause of action arose in New York when the defendant had sexual intercourse with the plaintiff at the Motel in the Mountains in Tuxedo, New York on the morning of April 8, 1970. At that time he introduced into the body of the plaintiff infectious pus producing bacteria known as gonococci, which causes the disease of gonorrhea. There is no question but that under the law of New York the defendant was guilty of a tortious act of negligence and the plaintiff was injured by the placement in her body of deleterious matter. Then on the morning of April 21, 1970, the defendant once again at a hotel in New York City, New York repeated the tortious act and once again in the same fashion introduced into the body of plaintiff the bacteria of gonococci.…
Having concluded a cause of action accrued in the State of New York, the “borrowing” statute of Wyoming controls the determination of whether or not plaintiff’s action has been barred. Under New York law, an action to recover damages for personal injury, unless involving certain specific causes of action not relevant here, must be commenced within three years.
Plaintiff’s cause of action accrued in New York at the latest on April 21, 1970, the date of last sexual contact between the parties. Disregarding for the moment any other possibly applicable statute, plaintiff’s action not having been filed until April 19, 1974, it appears to be barred, and defendant has so asserted. In response, plaintiff has urged that because of defendant’s absence from New York following his tortious conduct, the applicable limitation period has by statute been tolled. N.Y. CPLR §207. We, as did the New York Supreme Court in a recent case, must disagree with the plaintiff. Burwell v. Whitmoyer, 1977, 392 N.Y.S.2d 512, 513:
We now pass to plaintiff’s contention that the statute of limitations was tolled pursuant to CPLR 207. While that section does provide for the tolling of the statute where a defendant is out of the state for more than four months after the action has accrued, subdivision 3 provides for an exception where the jurisdiction over the person can be obtained without personal delivery of the summons to him within the state.…
Under the provisions of N.Y. CPLR §302, the defendant, although a nondomiciliary of the state of New York, was still subject to the personal jurisdiction of the courts of that state based upon his commission of a tortious act within the confines of the state itself.
Once found subject to the court’s jurisdiction, service of process could have been made upon defendant notwithstanding his absence from the state.… It would thus seem clear that had plaintiff brought this action against defendant in New York, the situs of its accrual, by the statutes and authorities of that state, her cause of action would be barred. The limitational period having run in New York, it has run in this, the forum state, as well. §1-3-117, W.S. 1977, supra.
In other jurisdictions in which defendant committed his acts of negligence, the cause of action is likewise either barred by a statute of limitations or no cause of action there arose. The defendant’s first installment of negligence, April 4-5, 1970, was in the State of Virginia. Arguably, under the law of that state, the cause of action could have arisen there; if indeed it did, it is likewise barred by the state’s limitations. In Virginia, the appropriate limitational period for personal injuries of the kind sustained herein is two years, and even though the defendant did not then and does not now reside in Virginia, he was still subject to the personal jurisdiction of its courts through its long arm statutes because of his allegedly tortious conduct within the state.
… On the other hand, if we follow the holding of the Virginia court’s Street case, that the statute begins to run upon the date of last exposure, then the cause of action arose in New York City, New York, on April 22, 1970 where the last act of sexual intercourse took place. In the first instance, the plaintiff is barred in Virginia by its two year statute of limitations. In the other no cause of action arose in Virginia.
Even if it could be considered that a cause of action arose in Pennsylvania, its statute of limitations bars any action there. The Pennsylvania statute of limitations, 12 P.S. §34, provides that a personal injury action “must be brought within two years from the time when the injury was done and not afterwards.” The tolling statute of Pennsylvania, 12 P.S. §40, applies only to residents.… The presence of plaintiff and defendant in Pennsylvania was only transient.
We must also conclude that no cause of action arose in Iowa. Iowa follows the Restatement, Conflict of Laws, §377 rule that: “The place of wrong is in the state where the last event necessary to make an actor liable for an alleged tort takes place.” Since Iowa follows the discovery rule, as noted, it would appear that it was in Washington, D.C. that the cause of action accrued as far as that state is concerned because it was in the District of Columbia that plaintiff discovered that she had in fact suffered injury by virtue of the negligent conduct of the defendant.
[The court rejected application of the Nebraska statute for reasons discussed in connection with the statutes of other states.]
We foreclose Washington, D.C. as the place where a cause of action arose because no tortious act was committed there, nor was that a place where the plaintiff was injured by the implanting of infection by the defendant. It is true that Washington, D.C. was the place where plaintiff incurred medical expense for diagnosis and treatment of the injury inflicted upon her but has no controlling force as to where the cause arose. While she had money damages in the District of Columbia, her physical injury of contracting gonorrhea took place elsewhere.…
We therefore must conclude after extensive research that by virtue of Wyoming’s borrowing statute, the filing of plaintiff’s complaint on April 19, 1974 was untimely.
Reversed with directions to vacate the judgment for plaintiff and enter judgment for the defendant.
I concur in the result in this case that was reached by the majority of the Court. I would, however, reach that result in a different manner. In my view this action was barred by the three-year statute of limitations of the District of Columbia, which is the place where the cause of action arose and to which we are directed by §1-3-117, W.S. 1977. The District of Columbia, like our state, follows a discovery rule with respect to the accrual of an action in tort.…
I am impressed with the reference in the majority opinion and the dissenting opinion to A.L.I. Restatement, Conflict of Laws, §377 (1934), which sets forth the rule as follows:
§377. The Place of Wrong. The place of wrong is in the state where the last event necessary to make an actor liable for an alleged tort takes place.
As I understand the thrust of the majority opinion that place is determined to be the state of New York. Included within §377 is a section entitled “Summary of Rules in Important Situations Determining Where a Tort is Committed,” and included within that section is a rule set forth as follows:
2. When a person causes another voluntarily to take a deleterious substance which takes effect within the body, the place of wrong is where the deleterious substance takes effect and not where it is administered.
2. A, in state X, mails to B in state Y a package containing poisoned candy. B eats the candy in state Y and gets on a train to go to state W. After the train has passed into state Z, he becomes ill as a result of the poison and eventually dies from the poison in state W. The place of wrong is state Z.
This illustration seems peculiarly applicable to the factual situation herein in which the infection could have been transmitted in any one of a number of states. The plaintiff did not manifest any symptoms of the disease, and the illness was identified in Washington, D.C., upon physical examination. I have no quarrel with the general discussion of the law relative to statutes of limitations set forth in the majority opinion, but those concepts are designed to reach a degree of certainty in the law, albeit arbitrarily. Their application in this instance identifies the District of Columbia as the place of wrong.…
MCCLINTOCK, J., dissenting.
In brief outline of the basis of my dissent, I agree with the majority that under the common law, limitations of actions are governed by the law of the forum. Section 1-3-117, W.S. 1977, the so-called borrowing statute, changes that rule only to the extent that we are required to apply the limitation of another state if it is determined that the “cause of action arose” in that other state. The majority recognize that both a wrongful act and a resulting injury are necessary to effect an actionable tort, and that the “law of the place where the plaintiff sustains injury to her person controls.” The record does not disclose and neither the jury nor this court could find the specific state where either the wrongful act took place or the plaintiff sustained injury to her person. An essential prerequisite to application of our borrowing statute, namely, that there be a state from which to borrow, is then lacking. However, it might be logically consistent with §1-3-117 to hold the action barred if, by the law of all the states where the action might possibly have arisen, the action is barred. That is not the situation here, since Nebraska and Wyoming, both of which are states where the injury could have taken place, have four-year statutes and both are discovery states. My essential disagreement with both the majority and concurring opinions is with their concept that discovery of the wrongful act and resulting injury is an essential condition to the existence of an actionable tort. I would hold that discovery is of importance only in determining when a statute of limitations begins to run. I would then hold that defendant, who bears the burden of proving facts bringing the case within an applicable statute of limitations, has failed in that burden. I would therefore not dismiss the action.…
[Justice McClintock stated his opinion that the wrong was committed only when the disease was “communicated” to the plaintiff, and discussed incubation periods.]
… Consistently with the proper holding of the majority that it is the law of the state of injury and not of the wrongful act that determines whether a tort has been committed, it is possible that the tort could have become complete in any one of 11 states in which the plaintiff, in the company of the defendant, or separately, found herself during the 18-day sojourn between the first contact and confirmation of the existence of the disease in plaintiff in Washington on April 22.…
Although it is the law of the place of injury that governs, the majority briefly and I think arbitrarily dismiss Wyoming as a possible place of wrong because no sexual act took place therein. If transmission of the disease through sexual intercourse is not certain and if there is an incubation period, then it is possible that transmission and planting of the infection occurred in one state and took effect in another.…
Defendant does not plead the statute of limitations of any particular state, and claims only that the action is barred by the provisions of our borrowing statutes, §1-3-117, W.S. 1977. In this court he relies on the District of Columbia three-year statute. I would hold that statute inapplicable on the basis already discussed, and since he has shown no other statute which governs and has not shown that the statutes of all possible places of wrong have run, he has failed in his burden. From this, it follows that the action should not be dismissed.…
Questions and Comments
(1) A well-known exception to the usual principle that forum statutes of limitations automatically apply in the absence of a borrowing statute is Bournias v. Atlantic Maritime Co., 220 F.2d 152 (2d Cir. 1955) (Harlan, J.—later Justice Harlan). There the question was whether the one-year limitations period of the Panamanian code or the longer period under American maritime law would apply in a case arising under the Panamanian Labor Code. The forum was the United States District Court, not an individual state, because federal maritime jurisdiction had been invoked. The United States has no borrowing statute. The court said that the Panamanian limitation would be applied if it were substantive but not if it were procedural. It then discussed the various tests for distinguishing substantive from procedural statutes of limitations, expressed a lack of satisfaction with all of them, and settled on what appeared to be the most acceptable: Statutes of limitations will be presumed to be procedural unless they are contained in the same statute that creates the substantive right. Under that test, the court said, the Panamanian statute was procedural (since it did not deem the broad Panamanian Labor Code to be a single statute). Did such a test ever make sense? Why should a United States court wish to entertain an action that arose under Panamanian law but that could not be brought in Panama?
(2) Consider also so-called “statutes of repose,” which have the effect of extinguishing a cause of action after a specified period of time has elapsed from the happening of an event, such as the death of the debtor. Statutes of repose can trump the applicable statute of limitations and can even eliminate a right of action before it ever accrues. For example, a statute of repose might bar tort actions against a product manufacture for injuries that occur more than twenty years after the product was first purchased. In contrast to statutes of limitations, statutes of repose are likely to be treated as substantive, at least if they are deemed substantive by the states adopting them. See, e.g., Bonti v. Ford Motor Co., 898 F. Supp. 391, 397 (S.D. Miss. 1995), aff’d, 85 F.3d 625 (5th Cir. 1996) (North Carolina’s products liability statute of repose is substantive rather than procedural). Does consultation of the other state’s characterization violate the principle embodied in section 584, reprinted at page 125 supra?
(3) As in Duke, most states have adopted some kind of borrowing statute to determine when the forum will apply its own statute of limitations to a case and when it will apply the limitations statute of another state. The Wyoming statute at issue in Duke is typical in borrowing the statute of limitations of the state where the cause of action “arose.” Will this criterion always be appropriate, even in simple cases? What if the claim “arose” in State A but is to be governed by the law of State B?
(4) The Duke opinion at one point refers to the “Schmidt doctrine” to determine that the cause of action arose in New York, thus triggering the Wyoming borrowing statute (which applies when the cause of action “arose” in another state or country.) But Schmidt was a New York case. Shouldn’t the court have applied Wyoming law to determine where, for purposes of a Wyoming statute, the cause of action arose?
After the court decides that the cause of action arose in another jurisdiction, what law governs issues such as tolling and accrual? See Uniform Conflict of Laws Limitations §3 (1982) (“If the statute of limitations of another state applies to the assertion of a claim in this State, the other state’s relevant statutes and other rules of law governing tolling and accrual apply in computing the limitations period, but its statutes and other rules governing conflict of laws do not apply.”).
(5) In several other places the court, in discussing the law of various states, concluded that under the law of the state being discussed, the claim accrued only when it was discovered. The court therefore ignored the laws of those states since the claim was discovered in the District of Columbia. Isn’t the dissent right in saying that the majority was confusing the issue of when a claim arose and where it accrued? Specifically, could Wyoming do the following:
(a) determine that the claim had “arisen,” say, in Virginia, and
(b) therefore apply the law of Virginia, under which the statute would begin to run when the claim was discovered, no matter where it was discovered?
(6) What would the Duke majority have done if it determined that wrongs had been committed in several states against the plaintiff and that actions were barred under the laws of some of those states but not others?
5. Public Policy
Selection from the First Restatement of Conflicts, on Public Policy
§612. Action Contrary to Public Policy
No action can be maintained upon a cause of action created in another state the enforcement of which is contrary to the strong public policy of the forum. (1948 Supp.) Likewise, a distinction has to be noted between the situation dealt with in this Section and the situation where a party sets up a defense which is contrary to the strong public policy of the forum. The latter situation involves more than a matter of denial of access to the court. The plaintiff is asking for a judgment even though there is a defense otherwise valid. It is, therefore, not within the scope of the rule of this Section.
Laboratory Corp. of America v. Hood
395 Md. 608, 911 A.2d 841 (2006)
[Parents brought suit against Laboratory Corporation, alleging that its erroneous report stating that their fetus did not have cystic fibrosis (a genetic disease that is highly likely to be fatal) contributed to their decision to have the child. The United States District Court for the District of Maryland certified questions to the Court of Appeals.]
We have before us three questions of law certified by the United States District Court for the District of Maryland pursuant to the Maryland Uniform Certification of Questions of Law Act (Maryland Code, §§12–601 through 12–613 of the Cts. & Jud. Proc. Article). The questions arise from an action by Karen and Scott Hood, Maryland residents, against two North Carolina corporations—Laboratory Corporation of America and Laboratory Corporation of America Holdings, which we shall refer to collectively as LabCorp.
The action is one that is often, but misleadingly, denominated as “wrongful birth.” The Hoods complain that the defendants were negligent in misreading a chromatograph of the DNA from an amniotic fluid specimen extracted from Ms. Hood and erroneously reporting that the fetus was not likely to be affected by cystic fibrosis (CF). Relying on the erroneous report, Ms. Hood elected to continue with the pregnancy, and that resulted in the birth of their son, Luke, who does have CF. The Hoods now seek to recover damages for the cost of raising and caring for Luke.
1. In a case where a medical laboratory receives a specimen from a Maryland physician and erroneously interprets the specimen in another State, causing injury in Maryland to Maryland residents, should this court follow the “standard of care” exception in the Restatement (First) of Conflicts of Law §380(2) and apply the substantive law of the State where the erroneous interpretation took place?
2. Does denying Maryland residents the right to bring a wrongful birth action by applying North Carolina law violate the public policy of the State of Maryland?
The problem underlying the first two certified questions … is that, while Maryland recognizes an action of this kind by the parents, North Carolina apparently does not, and the District Court, which must apply Maryland law, including the Maryland law on conflicts of law, desires to know whether, in the situation at hand and if the action were filed in a Maryland court, we would apply the substantive law of Maryland, where the injury occurred, or of North Carolina, where the negligent acts or omissions took place.
The Hoods are Maryland residents. Their first child, Zachary, was born in 1997 and was diagnosed with CF when he was two. In the present state of medical science, persons with CF are doomed to suffer from lung, gastrointestinal, pancreatic, heart, and other organ diseases, and rarely live beyond their mid-30s. In order to develop CF, a child must receive a particular gene mutation from both parents. After Zachary was diagnosed, the Hoods learned that they both carry the recessive delta F508 gene mutation that causes one of the most severe forms of CF. Because they are both carriers of that mutation, each of Karen’s pregnancies carries a 25% risk of the child having CF.
In 1999, Ms. Hood became pregnant again, and she and her husband were referred by Ms. Hood’s obstetrician to a genetic counselor. Genetic testing performed on the fetus revealed that it had CF, whereupon Ms. Hood terminated the pregnancy. In August, 2001, she became pregnant the third time and again decided to have the fetus tested. The Hoods had already made the decision to terminate the pregnancy if the fetus tested positive for CF. On November 27, 2001, Ms. Hood had an amniocentesis performed, in Maryland, by her obstetrician, Thomas Pinkert.
LabCorp operates a nationwide network of 35 primary testing locations and more than 1,100 patient service centers, eight of which are located in Maryland. Although it receives specimens from physicians and from its various patient service centers throughout the country, LabCorp performs all of its genetic testing on amniotic fluid at its Center for Molecular Biology and Pathology in North Carolina. The company markets genetic testing services to couples such as the Hoods. Before the specimen taken from Ms. Hood was sent to LabCorp for testing, the Hoods’ genetic counselor, Amy Kimball, who worked in Dr. Pinkert’s office in Maryland, informed LabCorp that both Karen and Scott Hood carried the CF gene. The sample was sent to the LabCorp facility in North Carolina, where the DNA in it was subjected to a chromatograph that was analyzed by two LabCorp employees, Marcia Eisenberg and Nicholas Brown.
In conformance with the analysis done by Eisenberg and Brown, LabCorp reported to Dr. Pinkert that, although both parents were carriers of the delta F508 mutation, the amniotic fluid was negative for 31 common CF genetic mutations, and “[t]his fetus is not expected to be a carrier of cystic fibrosis or be affected by cystic fibrosis.” Pinkert sent the report to the Hoods. Based on the LabCorp report, the Hoods elected to continue the pregnancy, resulting in the birth of Luke on May 3, 2002. Three months later, the child was found to be positive for CF. In September, 2002, LabCorp issued a corrected report which noted that the original chromatograph did, indeed, demonstrate that the fetus was positive for the delta F508 mutation that causes CF—the box containing the word “del F508” was marked with an asterisk, indicating that the fetus had CF—and stated that Eisenberg and Brown had misread the chromatograph.
The District Court issued a partial ruling on the cross-motions for summary judgment. In that ruling, the court held that, under Maryland law, the Hoods’ action was for negligence, not breach of contract, and that the Maryland law of negligence therefore applied. The court observed that, in diversity cases, such as the one at hand, it was obliged to apply Maryland’s choice of law rules and determined that Maryland adheres to lex loci delicti principles for all tort claims, i.e., we apply the law of the place where the tort or wrong was committed. It concluded that, under our application of those principles, the place where the last event required to give rise to the tort occurred determines the law that should apply, that in personal injury claims the last event required to give rise to the tort is the injury, and that the injury in this action occurred in Maryland, where Luke was born.
Whether Maryland or North Carolina law applies is critical to the Hoods’ case. In Azzolino v. Dingfelder, 315 N.C. 103 (1985), the North Carolina Supreme Court held that the parents of a child born with even severe birth defects did not suffer any legally cognizable injury, and thus the Hoods’ action could not succeed under North Carolina law. In Reed v. Campagnolo, 332 Md. 226 (1993), responding to a certified question from the U.S. District Court, we adopted a completely opposite point of view, noting that “[t]he Azzolino analysis does not recognize even the economic impact on the parents and, in that respect, is contrary to Maryland law.” Id. at 238. That divergence forms the basis of the second certified question. If application of Restatement §380(2) would ordinarily cause North Carolina law to be applicable in this case, would Maryland nonetheless refuse to apply that law on the ground that it would be contrary to Maryland public policy to deny a Maryland resident, suing in a Maryland court for a wrong committed in Maryland, a remedy recognized in this State.
Maryland Public Policy
We have not previously applied a public policy exception to the lex loci delicti doctrine, although our case law strongly indicates that we would do so in a proper case. We have long recognized, and have on occasion applied, such an exception under analogous lex loci principles and have implicitly recognized the exception in a tort action subject to lex loci delicti.
In breach of contract actions, this Court has traditionally applied the doctrine of lex loci contractus, under which, in deciding upon the validity and construction of a contract, we generally apply the law of the place where the contract was made. We have just as consistently held, however, that the lex loci contractus principle is not inflexible and that it “does not apply to a contract provision which is against Maryland public policy.” Bethlehem Steel v. G.C. Zarnas & Co., 304 Md. 183, 188 (1985) and cases cited there. We cautioned in Bethlehem Steel that “merely because Maryland law is dissimilar to the law of another jurisdiction does not render the latter contrary to Maryland public policy” and that “for another state’s law to be unenforceable, there must be a ‘strong public policy against its enforcement in Maryland.’ ” Id. at 189, quoting in part from Texaco v. Vanden Bosche, 242 Md. 334, 340-41 (1966). See also National Glass v. J.C. Penney, 336 Md. 606 (1994).
In Hutzell v. Boyer, 252 Md. 227 (1969) and Hauch v. Connor, 295 Md. 120 (1983), we applied a public policy exception in the context of workers’ compensation statutes, which we recognized had some affinity to contract and tort principles but were sufficiently different from both to be considered separately. The issue in those cases was whether Maryland would allow a fellow-employee action—an action implicitly permitted under the Maryland workers’ compensation law but not permitted under the law where the parties were employed (Hutzell) or where the accident occurred (Hauch).
In Hutzell, although the parties were temporarily employed in Virginia, the employment-related accident occurred in Maryland and the parties were both residents of Maryland. In rejecting application of the Virginia law, which otherwise would have been required, the Court observed that Maryland had “a genuine interest in the welfare of a person injured within its borders, who may conceivably become a public charge due to a disabling injury” and that “[t]he social and economic problems following in the wake of a serious injury as they may affect the dependents of the person injured are properly matters of public concern.” Hutzell, 252 Md. at 233. The Hauch court regarded that as a public policy exception and applied that exception to the situation in which the co-employees were residents of and employed in Maryland but where the accident occurred in Delaware.
In Harford Mutual v. Bruchey, 248 Md. 669 (1968), a Maryland couple sued a Maryland company in a Maryland court for damages arising from an automobile accident that occurred in Virginia. In addition to any direct personal injuries, the husband sued for loss of consortium, an action that, by statute, was not allowed in Virginia. We concluded that, under lex loci delicti principles, Virginia law would generally apply, but acknowledged “the question of whether there is extant in Maryland such a strong public policy in favor of recovery by a husband for loss of consortium as to require its courts to refuse to apply the law of a sister State which does not recognize such a right.” Id. at 674. We concluded that there was “no such strong public policy.” Id. We observed that a husband’s right to recover for loss of consortium had been characterized as an “anachronism,” a “fossil from an earlier era,” an “anachronistic common law rule,” and a “vestigial right,” which, we said, “hardly indicates recognition of a strong public policy in Maryland in favor of recovery for deprivation of consortium.” Id. at 675.
Although we did not find in Harford Mutual a sufficiently clear and strong public policy to disregard the lex loci delicti in favor of allowing a loss of consortium claim, the case cannot be read other than as recognizing that there is a public policy exception to the lex loci delicti rule and that we would apply it in an appropriate case. See also Linton v. Linton, 46 Md. App. 660 (1980); Rhee v. Combined Enterprises, Inc., 74 Md. App. 214, cert. dismissed, 314 Md. 123 (1988); Black v. Leatherwood, 92 Md. App. 27 (1992). We can find no principled basis upon which to recognize such an exception in contract and workers’ compensation cases but to deny it in tort cases.
The question certified is thus presented: does denying Maryland residents the right to bring a wrongful birth action by applying North Carolina law violate the public policy of the State of Maryland? Should the District Court, in light of our response to the first certified question, still find this question relevant, our answer is “Yes.”
This is not a case like Harford Mutual, which needs to be examined in context. Under long-established Maryland common law, only a husband could sue for loss of consortium in Maryland—for “the loss of society, affection, assistance, and conjugal fellowship” of his wife. The wife had no comparable right. See Coastal Tank Lines v. Canoles, 207 Md. 37 (1955). That anomaly was founded on the ancient common law premise that the husband was entitled to his wife’s services and was obliged to support her but that the wife was not entitled to her husband’s services and was not obliged to support him. Id. at 50–51. As the clearest basis for maintaining that unequal right in the middle of the 20th Century, the Coastal Tank Lines Court quoted the pronouncement from the House of Lords decision in Best v. Samuel Fox & Co., Ltd., A.C. 716 (1952), affirming 2. K.B. 639 (1951) that “[t]he common law is a historical development rather than a logical whole, and the fact that a particular doctrine does not logically accord with another or others is no ground for its rejection.” Coastal Tank Lines, at 48.
In Deems v. Western Maryland Ry., 247 Md. 95, 100-101 (1967), decided a mere seven months before Harford Mutual, the Court, in considering a Constitutional equal protection challenge to such an unfair rule, decided, in lieu of either abolishing the action or extending it to the wife, to regard it, prospectively, as a joint action for injury to the marital relationship. Although preserving the action in its converted form, there is nothing in the Deems Opinion to suggest that the Court had any great attachment to the action; rather, it transformed the action into a joint one only to avoid having to resolve the Federal Constitutional attack on it, Deems, 247 Md. at 113, and, indeed, the Court expressly cautioned that it was not deciding the effect that any Federal statute might have in “foreclosing any claim for consortium under the Maryland law.” Id. at 115. As noted, the Harford Mutual Court still considered the action, even in its new emanation, as vestigial, anachronistic, and a “fossil from an earlier era,” and, consistently with the caution expressed in Deems, did not regard the existence of the action in Maryland as a reason not to apply Virginia law.
The right of parents to bring an action for wrongful birth is quite different. It is not a vestige of ancient common law illogic but, as we noted in Kassama v. Magat, 368 Md. 113, 134 (2002), is of a type that, as a practical matter, could not have been brought before the last half of the 20th Century. At its core, we said, it rests “to a large extent on the more recent advances in medical and scientific knowledge that made contraception more practical and reliable and made potential fetal injuries and defects detectable prior to birth, and even prior to conception, coupled with the loosening of the fetters on abortions triggered in 1973 by Roe v. Wade.” Id.
In Reed v. Campagnolo, supra, 332 Md. 226, we pointed out that “[t]he clear majority of courts that has considered the type of medical malpractice case alleged by the Reeds has concluded that there is legally cognizable injury, proximately caused by a breach of duty,” id. at 235-36, and that “there is at least some economic harm to the parents in these cases—a harm that can be quantified under the general rules relating to tort damages.” Id. at 236. We expressly rejected the approach of Azzolino as contrary to both Maryland law and the law of most States, and adopted instead the view of the Massachusetts court in Viccaro v. Milunsky, 406 Mass. 777 (1990) that the harm is not the birth itself but “the effect of the defendant’s negligence on the [parents] resulting from the denial to the parents of their right, as the case may be, to decide whether to bear a child or whether to bear a child with a genetic or other defect.” Reed, supra, 332 Md. at 237, quoting from Viccaro.
Reed was a carefully considered and deliberate recognition that, when prospective parents, relying on the negligent act or omission of a health care professional, elect to continue a pregnancy that they otherwise would have lawfully terminated and, as a result, are burdened with the cost and expense of raising a child with a serious genetic or other physical or mental defect, they have been injured and have a right to seek damages for that injury from the person whose negligence led to the injury. That right is a matter of important public policy in this State, flowing not only from this Court’s considered view but as well from statute. See Maryland Code, §20–209(b), of the Health General Article, precluding the State from interfering with the decision of a woman to terminate her pregnancy at any time during the pregnancy if the fetus is affected by genetic defect or serious deformity or abnormality. We thus conclude that, if application of North Carolina law would preclude this cause of action on the ground stated in Azzolino that no injury has occurred, we would hold that aspect of North Carolina law to be contrary to clear, strong, and important Maryland public policy and would not apply it.
[The court commented on the difficulty of determining whether Laboratory Corporation has a duty to Scott Hood, the father of Luke Hood.]
Certified questions of law answered as set forth above; costs to be equally divided by the parties.
Holzer v. Deutsche Reichsbahn-Gesellschaft
277 N.Y. 474, 14 N.E. 2d 798 (1938)
The complaint alleges two causes of action arising out of a contract between plaintiff, a German national, and Schenker & Co. G.m.b.H., a German corporation, for services to be performed by plaintiff for three years from January 1, 1932, in Germany and in other locations outside this state. Defendants, German corporations, controlled either through stock ownership or otherwise, the transportation system known as Schenker & Co.
Both causes of action allege that the contract provides that “in the event the plaintiff should die or become unable, without fault on his part, to serve during the period of the contract the defendants would pay to him or his heirs the sum of 120,000 marks, in discharge of their obligations under the hiring aforesaid.”
The first cause of action alleges that on June 21, 1933, defendants discharged plaintiff as of October 31, 1933, upon the sole ground that he is a Jew and that as the result of such discharge he was damaged in a sum upwards of $50,000.
The second cause of action alleges that in April, 1933, the German government incarcerated plaintiff in prison and in a concentration camp for about six months, that his imprisonment was not brought about by any act or fault of plaintiff but solely by reason of the policy of the government which required the elimination of all persons of Jewish blood from leading commercial, industrial, and transportation enterprises, that as a result “plaintiff became unable, without any fault on his part, to continue his services from the month of April, 1933,” and has been damaged in the sum of $50,000.
The second separate defense of defendant Deutsche Reichsbahn-Gesellschaft alleges that the contract of hiring was made and was to be performed in Germany, was terminated in Germany and is governed by the laws of Germany, that subsequent to April 7, 1933, the government of Germany adopted and promulgated certain laws, decrees, and orders which required persons of non-Aryan descent, of whom plaintiff is one, to be retired.
The Special Term granted plaintiff’s motion to strike out this defense, the Appellate Division affirmed and certified these questions: “(1) Is the second separate defense contained in the answer of the defendant, Deutsche Reichsbahn-Gesellschaft, sufficient in law upon the face thereof? (2) Does the complaint herein state facts sufficient to constitute a cause of action?”
The courts of this state are empowered to entertain jurisdiction of actions between citizens of foreign countries or other states of this Union based upon contracts between nonresidents to be performed outside this state.… Under the decisions of this court and of the Supreme Court of the United States, the law of the country or state where the contract was made and was to be performed by citizens of that country or state governs.… Within its own territory every government is supreme … and our courts are not competent to review its actions.… We have so held, “however objectionable” we may consider the conduct of a foreign government. Dougherty v. Equitable Life Assur. Soc. of United States.…“Every sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory.” Oetjen v. Central Leather Co.… In the Dougherty Case … we have held: “It cannot be against the public policy of this State to hold nationals to the contracts which they have made in their own country to be performed there according to the laws of the country.”
Therefore, in respect to the first cause of action, we are bound to decide, as a matter of pleading, that the complaint does not state facts sufficient to constitute a cause of action and that the second separate defense of the answer is sufficient in law upon its face. Defendants did not breach their contract with plaintiff. They were forced by operation of law to discharge him.
In respect to the second cause of action, the result is necessarily different. We are dealing merely with pleadings. Assuming, as alleged, that plaintiff became unable without any fault on his part to continue his services subsequent to April, 1933, that part of the agreement which is alleged to provide “that in the event the plaintiff should die or become unable, without fault on his part, to serve during the period of the contract the defendants would pay to him or his heirs the sum of 120,000 marks, in discharge of their obligations, under the hiring aforesaid,” must be interpreted according to German law and the meaning of German words. What that law is depends upon the solution of questions of fact which must be determined on the trial. If the English words “become unable” are a correct translation of the German words employed in the contract, then they would not appear to be limited to inability caused by physical illness but might be intended to apply to any factor which might prevent his service.…
Questions and Comments
(1) The classic definition of “public policy” is found in Loucks v. Standard Oil Co. of New York, 120 N.E. 198, 202 (N.Y. 1918) (Cardozo, J.):
The courts are not free to refuse to enforce a foreign right at the pleasure of the judges, to suit the individual notion of expediency or fairness. They do not close their doors unless help [to the other state] would violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.
With the due process clause to strike down the most serious abuses, and with a fairly uniform sense of fairness throughout the country, should there be many instances in which laws meet the criteria of the Loucks case?
(2) Laboratory Corporation rules that Maryland law should apply in that case because, at least in part, “[t]he right of parents to bring an action for wrongful birth … is not a vestige of ancient common law illogic [like the one upheld in Harford Mutual] but … of a type that … could not have been brought before the last half of the 20th Century.” 395 Md. at 624. Is this distinction between Harford Mutual and Laboratory Corporation persuasive? If the common law tradition that Harford upheld is so “illogical” as the court suggests, why didn’t the court simply reverse Harford? Was the court trying to reserve its power to refuse to apply Maryland law under the rule of lex loci delicti in the future? Or is there really a compelling value to upholding a longstanding legal tradition despite practical flaws?
(3) In Mertz v. Mertz, 3 N.E.2d 597 (N.Y. 1936), Emmy sued Fred for damages resulting from his negligent use of an automobile in the state of Connecticut. Both were residents of New York, which forbade such suits between spouses. The law of Connecticut contained no such bar. The New York Court of Appeals apparently concluded that Connecticut provided the applicable law to the interspousal immunity issue but went on to refuse application of the Connecticut rule because it was against the public policy of New York. (In the alternative, the court found that questions of capacity—such as interspousal immunity—are matters for the forum.)
In light of the Mertz and Holzer cases, is it fair to say that interspousal suits are against the public policy of New York but that racial persecution is not?
(4) Was the Holzer court somehow condoning racial discrimination in its opinion, or is it significant that the defendant was required by law to fire Holzer? If someone held a gun against A’s head and required her to commit a tort against B, would it be condoning the tort not to hold A liable?
(5) Assume that Germany had a prewar statute providing (a) that Jewish people were not allowed to hold positions in industry, (b) that it was the duty of every German citizen to report every Jewish person remaining in an industrial position after January 1, 1937, and (c) that the first person making such a report was entitled to a bounty of one tenth of the victim’s wealth. If the victim owned property in New York, would the Holzer court have applied the principles applied in Holzer—that “[w]ithin its own territory every government is supreme … and our courts are not competent to review its actions”? Note that under the hypothetical statute, as in Holzer, the offending party was required to behave as it did.
(6) Should it make a difference whether public policy is invoked to defeat a foreign cause of action or invoked to defeat a defense to a foreign cause of action?
In Bradford Electric Light Co. v. Clapper, 286 U.S. 145, 160 (1932), Justice Brandeis said:
A State may, on occasion, decline to enforce a foreign cause of action. In so doing, it merely denies a remedy, leaving unimpaired the plaintiff’s substantive right, so that he is free to enforce it elsewhere. But to refuse to give effect to a substantive defense under the applicable law of another State … subjects the defendant to irremediable liability. This may not be done.
Is sending the parties away adequate vindication of a state’s public policy, or should it try to make its judgment res judicata? In other words, is public policy merely a kind of clean-hands doctrine for the state, or does it represent the desire to see a particular result in the case no matter where it is finally decided?
(7) Brainerd Currie didn’t think much of the argument made by Justice Brandeis (and termed it the “Brandeis fallacy” even though it had been voiced by others). The chief difficulty he found was that it assumes that parties can go elsewhere when the public policy doctrine is used to bar a cause of action. Often plaintiffs cannot get jurisdiction elsewhere, he said, and consequently the effect of dismissal on public policy grounds is often the equivalent of denying a defense on public policy grounds. Currie, Selected Essays on the Conflicts of Laws 211-212 (1963).
(8) Paulsen and Sovern, in a careful study of the public policy principle (“Public Policy” in the Conflict of Laws, 56 Colum. L. Rev. 969 (1956)), found that “[t]he overwhelming number of cases which have rejected foreign law on public policy grounds are cases with which the forum had some important connection.” They concluded that the evil of public policy overuse was not provincialism, to which it had often been equated, but its use as a “substitute for analysis” in cases where the forum was in fact justified in applying its own law on other grounds.
How much connection with a state is sufficient to justify a state’s invocation of the public policy exception? Should it depend on the purpose served by the laws at issue? And what function is that connection serving in the analysis? In Roach v. State Farm Mutual Automobile Ins. Co., 892 So. 2d 1107 (Fla. Dist. Ct. App. 2004), plaintiffs, year-round residents of Florida, were injured when the car in which they were riding as passengers collided with another car in Florida. Plaintiffs sued both drivers and the insurance company of the driver of the car in which they were passengers. Plaintiffs argued that State Farm was liable for additional sums to be paid under the underinsured motor vehicle coverage, which enabled those insured to recover additional amounts over the policy limits if the accident was caused by another driver who is underinsured. State Farm had denied payment of these additional amounts because a provision in the insurance contract limited the underinsured motorist coverage by providing for setoffs against other coverage. This limitation provision was enforceable under the laws of Indiana, where State Farm issued the policy to the driver, but was unenforceable and considered repugnant to public policy in Florida. The driver in this case was a “snowbird” who spent winters in Florida and summers in Indiana. Previous Florida case law indicated that the public policy exception was available to permanent but not temporary residents of the state, and the Florida District Court of Appeal concluded that the public policy exception could reasonably apply in the case of annual snowbirds because their insurance company is placed on notice of the regular presence of the car in the state of Florida. A majority of the Florida Supreme Court thought otherwise, however, and limited the public policy exception to cases of policies taken out by year-round, permanent residents of Florida. State Farm Mutual Auto. Ins. Co. v. Roach, 945 So. 2d 1160 (2006). According to the majority, the need to provide certainty of obligation in the case of contracts necessitates allowance of only a very narrow exception to the lex loci contractus rule. Which Florida court’s solution seems most sensible?
(9) Compare Laboratory Corp. to Marchlik v. Coronet Insurance Co., 40 Ill. 2d 327 (1968), a case in which a court refused to apply foreign law, citing the public policy exception. There, a Wisconsin resident suffered an accident in Wisconsin, but the insurance policies of both drivers were issued in Illinois. The plaintiff sued the insurance companies in Illinois claiming that the court should apply Wisconsin law, which allows direct action against a tortfeasor’s insurance company. In refusing to apply Wisconsin law, the Marchlik court stated “Our courts and juries would be hard put to cope with the complex problems posed by other aspects of the Wisconsin law if these direct actions are permitted.”
What did the court have in mind when it made this statement? Are people from Wisconsin smarter than people from Illinois? Isn’t the court engaging in a great deal of speculation about the possible mischief to be posed by the Wisconsin statute? As long as Illinois would permit an action based on a Wisconsin accident against the tortfeasor and would permit an action by the tortfeasor against his insurer, why should a suit directly against the tortfeasor’s insurer introduce significant complications?
On the other hand, even if the Marchlik court is not adept at identifying the source of its unease over the direct-action statute of Wisconsin, isn’t there room for legitimate concern that juries who know that the defendant is an insurer will be more willing to find in favor of the plaintiff, even in the absence of negligence? Or do juries assume that everyone is insured? (And, of course, do they assume that the amount of coverage will be sufficient to cover whatever verdict they return?) Note the court’s statement that disclosure of the fact of insurance in Illinois constitutes reversible error.
(10) Can a court still exercise the public policy exception to deny enforcement of a foreign right when the dispute involving that foreign right has been reduced to judgment? See Widenhouse v. Colson, 405 S.C. 55 (2013). There, the South Carolina court ruled that, even though a legal cause of action called alienation of affections (which is available in North Carolina) is contrary to South Carolina’s public policy, full faith and credit cannot be denied when that cause of action has been tried and reduced to a monetary judgment. Compare Fauntleroy v. Lum, 210 U.S. 230 (1908).
6. Penal Laws
Selections from the First Restatement of Conflicts, on Penal Laws and Tax Claims
§610. Action on Foreign Public Right
No action can be maintained on a right created by the law of a foreign state as a method of furthering its own governmental interests.
(1948 Supp.) Caveat: The Institute expresses no opinion whether an action can be maintained by a foreign state on a claim for taxes.
§611. Action for a Penalty
No action can be maintained to recover a penalty the right to which is given by the law of another state.
Paper Products Co. v. Doggrell
195 Tenn. 581, 261 S.W.2d 127 (1953)
Appellees, Doggrell, and Konz, together with one Van E. Whitaker, Jr., were the sole stockholders in an Arkansas corporation formed by them under the name of Forrest City Wood Products, Inc. with principal office to be located in St. Francis County, Arkansas.
The Arkansas statute requires the articles of incorporation to be filed (1) with the Secretary of State and (2) thereafter in the office of the County Clerk of the County in which the corporations’ principal place of business is to be located.
Doggrell and Konz, Tennessee residents, left the management of the corporation entirely to the third stockholder, Whitaker, a resident of Arkansas. The lawyer in Memphis who prepared the charter directed Whitaker to file it with the Secretary of State and then with the Clerk of the County Court of St. Francis County, Arkansas. Whitaker inadvertently failed to file it with the Clerk of the County Court of St. Francis County. It was not filed with this clerk until after the account which gave rise to this suit had been made. Neither Doggrell or Konz were [sic] aware of the fact that the charter had not been filed in St. Francis County as required by the Arkansas statute. Neither has received any dividends or profits or remuneration from the corporation.
Under the decisions of the Arkansas Court of last resort the stockholders of a corporation are liable as partners when the charter is not filed as required by the Arkansas statute in the county where the principal office of the corporation is to be maintained. Based on those decisions of the Arkansas Supreme Court, Whitaker, the third stockholder in the aforementioned corporation, has been adjudged by the Arkansas Court liable for a debt made by this corporation before this charter was filed in St. Francis County.… The Arkansas Court rendered no judgment in that case against Doggrell and Konz because no service had been had on these Tennessee residents.
Whitaker who operated and managed the business of the corporation purchased goods in the name of the corporation from Paper Products Company and issued the company’s note payable in thirty days. Paper Products Company in this transaction dealt with the Forrest City Wood Products, Inc. as such and not through the personal credit of Doggrell and Konz. These two stockholders knew nothing whatever about the account in question.
Forrest City Wood Products, Inc. became bankrupt. A substantial balance of its note issued to Paper Products Company remains unpaid. Accordingly, Paper Products Company instituted this suit in Shelby County, Tennessee Circuit Court against Doggrell and Konz. It seeks a recovery against them individually because of the Arkansas law holding stockholders personally liable as partners for the accounts made by a corporation whose charter has not been filed in the County where its principal office is located.
It was the judgment of the Shelby County Circuit Court that Doggrell and Konz are not liable individually, or as partners, for this obligation of Forrest City Wood Products, because this Arkansas rule “is penal in its nature, and will not be enforced in the State Courts of Tennessee.” Paper Products Company has appealed and insists that (1) the Arkansas rule is not penal in nature and (2) under the law of comity the Arkansas rule should be applied in this case.
Under Tennessee decisions, the liability of a stockholder for the debts of his corporation is determined by the law of the State in which that corporation is domiciled unless such law is contrary to the legislation or public policy of Tennessee, or is penal in nature. Under these circumstances such law of a sister State will not be enforced in Tennessee.
When a Tennessee Court is called upon to enforce the civil law of a sister jurisdiction it will determine whether such law is penal in nature or contrary to the public policy of the law of Tennessee in which it is sought to be enforced.… Whether the aforementioned law of Arkansas, therefore, is contrary to our public policy or penal in nature is a matter to be determined in this case by the Tennessee Court since it is in that Court that it is sought to enforce this Arkansas rule.
The Arkansas statute heretofore referred to provides that “upon the filing with the Secretary of State of articles of incorporation, the corporate existence shall begin.” Ark. Stats. §64-103. (Emphasis supplied.) It follows that the corporate existence of Forrest City Wood Products, Inc. had begun prior to the inadvertent failure of Whitaker to file the corporation’s charter in the office of the County Court of St. Francis County, Arkansas. The Arkansas rule, therefore, is that an inadvertent failure to comply with some detail in a bona fide effort to comply with the law chartering corporations is a failure which makes the stockholders liable in Arkansas for those debts of the corporation made prior to the compliance with such required detail.
This Arkansas rule is contrary to the public policy of Tennessee, wherein the rule is that the stockholders are not liable for the debts of their corporation in a case where there has been “made a bona fide effort to comply with the provisions of law,” but “have inadvertently failed in some particular, and in good faith have exercised the franchises of such corporation.”
… It is a commonly known fact that one of the purposes of organizing a corporation for the carrying on of a business is to relieve stockholders of individual liability for the debts of the corporation. That fact is well known to those dealing with corporations. The Tennessee rule forwards the accomplishment of that purpose.
In ascertaining whether the Arkansas statute is penal in nature it is well to observe again that under the Arkansas rule the stockholders of the corporation are liable as partners for the mere failure, after the commencement of corporate existence, to file its charter in the Arkansas County of its principal office. This liability is imposed without regard to the fact that a creditor is not prejudiced by the failure to comply with this detail and was not misled thereby. There is no escape from the conclusion, therefore, that this rule prescribes a penalty in order to enforce compliance with the law of Arkansas as to the registering of a charter in the county where the principal office of the corporation is maintained. “Penalties prescribed by one state to enforce a compliance with its law will not be enforced by the courts of another state.”…
A case directly in point is Woods v. Wicks, cited in appellees’ brief. A statute of Kentucky was involved in that suit. That statute required the directors of a corporation to file and record within a specified time in a certain office a certificate stating the amount of the capital stock fixed and paid in. Stockholders were arbitrarily made liable in double the amount of their stock for failure to file such certificate. The Tennessee Court refused to hold such stockholders liable for the failure to file such certificate. In rejecting such a suit our Court said that “no court of another sovereignty can be expected to enforce such a penalty.”…
The judgment must be affirmed with costs taxed to Paper Products Company and its surety.
On Petition to Rehear
The case of Doggrell v. Great Southern Box Company, Inc., was decided by the United States Court of Appeals for the 6th Circuit on July 9, 1953. 206 F.2d 671.* It came to that Court by appeal from the Federal District Court for the Western District of Tennessee. That case involved the identical Arkansas law and question decided by this Court in the instant case on July 17, 1953.
Preceded by well considered remarks unnecessary here to detail, the conclusion of the United States Court of Appeals in that case is that the Arkansas law in question is not penal within the meaning of the full faith and credit clause of our Federal Constitution, Article 4, §1; hence, that “the courts of Tennessee, including a United States District Court sitting in that state, are bound” to give effect to this Arkansas law in proceedings brought by a creditor of the Arkansas corporation to recover a personal money judgment against some of the stockholders of that Arkansas corporation. In the instant case this Court reached the opposite conclusion. Judge McAllister, in a dissenting opinion in the Federal case, reached the same conclusion as that reached by this Court with reference to the penal nature of this Arkansas law.
Because of the majority opinion of the United States Court of Appeals in its case, supra, Paper Products Company, appellant in the instant case, has filed in the instant case its petition to rehear.…
The expression Arkansas “law,” rather than Arkansas “statute,” is used by this Court because it is a decision of the Arkansas Supreme Court as to the effect which must be given a failure to comply with the Arkansas statute requiring a copy of the corporation’s charter to be filed in the office of the County Clerk of the county in which the corporation’s principal place of business is located. Its decision is that such failure, ipso facto, renders each stockholder of such Arkansas corporation liable for every debt incurred by that corporation prior to such filing in such county, notwithstanding the fact that such charter had been filed with the Arkansas Secretary of State, whereby, under the express language of the statute, its “corporate existence shall begin.”
This Court was of the opinion that the instant case fell within the ruling of Woods v. Wicks … wherein this Court refused to give effect to a very similar Kentucky statute because of its penal nature. The United States Court of Appeals thought its case to be distinguishable from Woods v. Wicks because the incorporation of the Tennessee organization had been completed whereas such incorporation of the Arkansas organization lacked completion, so it is said, to the extent that a copy of its charter had not been filed in the Arkansas county of its principal office.
Apparently, in considering material such above stated distinction between the Kentucky and Arkansas organizations, the United States Court of Appeals inadvertently failed to give effect to the fact that in Tennessee the stockholders of a de facto corporation are not liable for its debts, and that corporations de facto are “those which have made a bona fide effort to comply with the provisions of law and have inadvertently failed in some particular, and in good faith have exercised the franchises of such corporation.”
… Judge McAllister calls attention to the fact that the Arkansas organization was also a de facto corporation in Arkansas.…
The United States Court of Appeals felt that its case fell within Huntington v. Attrill, 146 U.S. 657. In that case it was held that the full faith and credit clause of our Federal Constitution required the Maryland Court to give effect to a New York statute said to be penal in character. Compliance with that statute, however, was clearly intended for the protection of creditors of corporations created pursuant to its provisions. The court can find no purpose of the Arkansas law other than that of better procuring compliance with a technical requirement of the Arkansas statute by inflicting a penalty merely because of a failure to so comply.
The above stated distinction between the instant case and Huntington v. Attrill, supra, makes it unnecessary to consider the further fact that the proceedings in the Maryland Court were to enforce a New York judgment based on a statute said to be penal in nature. In the case at bar the effort is to procure a judgment in a Tennessee Court based on an Arkansas law which the Tennessee Court regards as penal in nature and contrary to the public policy of its State.
Whether the full faith and credit clause requires the Courts of one state to enforce the law of another state penal in some respects “depends upon the question whether its purpose is to punish an offense against the public justice of the state, or to afford a private remedy to a person injured by the wrongful act.” Huntington v. Attrill, supra.…
As heretofore stated, this Court thinks that there is no escape from the conclusion that the sole purpose of the Arkansas law in question is to procure a compliance with its statute as to a formal or technical requirement. But, pursuing further the immediately above stated test furnished by Huntington v. Attrill, there is particularly applicable the statement in Judge McAllister’s dissenting opinion in Doggrell v. Great Southern Box Company, supra [206 F.2d 682], that:
There was no wrong committed against any individual in not filing the articles with the County Clerk. To subject an innocent party, who happens to be an incorporator or original stockholder, to what may prove great financial losses or ruin, in being obliged to pay personally all the debts of the corporation merely because someone who should have complied with this technical requirement failed to do so, seems to me to subject appellant to a liability that is clearly penal in its nature.
On principle, as well as under the test pronounced by the United States Supreme Court, this Court is of the opinion that the penal nature of the Arkansas law in question is such that the Tennessee Court is not required by the full faith and credit clause of our Federal Constitution to give it effect.
The rule of comity does not apply because the Arkansas law is contrary to the law and public policy of this State.…
Questions and Comments
(1) Why shouldn’t confessedly penal laws be enforced by other jurisdictions? If the basis for enforcing the law of other jurisdictions is some kind of comity, or respect for the sovereignty of another state, shouldn’t penal laws, which obviously express some particularly strong state interest, be the first to be enforced?
(2) The oft-cited case defining a “penal” law is Huntington v. Attrill, 146 U.S. 657 (1892), which involved an attempt in Maryland to enforce a New York judgment based on a New York statute that imposed personal liability on directors and stockholders of a corporation for its debts when papers falsely stating the capital position of the corporation were filed. The Court determined that the law in question was not penal and that Maryland was required to enforce the judgment. The mark of a penal statute, the Court said, was that it appeared to the forum “to be, in its essential character and effect, a punishment of an offense against the public.” Section 611, comment a, of the Restatement defines a penalty as a “sum of money exacted as punishment for a civil wrong as distinguished from compensation for the loss suffered by the injured party.”
Was the Arkansas statute penal by this standard?
Note that the Huntington case allows a state to ignore not only the law of another jurisdiction but its judgments as well.
See generally Kutner, Judicial Identification of “Penal Laws” in the Conflict of Laws, 31 Okla. L. Rev. 590 (1978).
(3) Finding that filing with the secretary of state was enough to cause de facto corporate existence made it easy for the court to determine that the penalty for failure to file with the local clerk was penal. But would the Tennessee courts come to a different conclusion in a case with similar facts if the Arkansas legislature, in reaction to the Paper Products opinion, amended its statutes to provide that de facto corporate existence was not possible in Arkansas? Note that the effect would be to impose liability on each of the partners in a partnership—not exactly a result that appears “penal.”
(4) Is it fair to make the Arkansas partner (against whom an Arkansas judgment was rendered) bear the entire burden? Isn’t that the effect of the Paper Products decision, since judgment was rendered against the third partner in Arkansas? If the Arkansas partner, after paying the Arkansas judgment, brought an action against the Tennessee partners for contribution, would the attractiveness of using the penal-law exception be as great?
(5) What would have been the result in the Paper Products case if Tennessee had had a law identical to that of Arkansas? Surely under those circumstances Tennessee would not have been able to find that the Arkansas law violated Tennessee public policy. But would the fact that Tennessee had an identical law make the Arkansas law any less “penal”? Do you really think that the Tennessee court would have come out the same way (refusing enforcement of the Arkansas law) if Tennessee law had been identical?
(6) In Campbell v. Mitsubishi Aircraft International, 452 F. Supp. 930 (W.D. Pa. 1978), the court, applying Pennsylvania law, found a Texas usury statute to be penal and refused to apply it. The Texas statute provided for penalties of twice the amount of interest provided for by the contract, plus attorneys’ fees, when the interest rate charged exceeded that allowed in Texas. The federal district court said that under Pennsylvania law it was bound by Texas’s characterization of its own statute as penal and cited several Texas cases that referred to the amount the plaintiff could recover as a “penalty.”
Since Texas would obviously never refuse enforcement to its own statute on the grounds that it was penal, doesn’t it follow that Texas’s characterization of the statute must have been for purposes other than conflicts purposes? And doesn’t it follow from that that the Texas characterization of the statute should be, at most, persuasive and not binding?
(7) Closely related to the traditional prohibition on enforcing foreign penal laws was a prohibition on enforcing foreign revenue laws. See First Restatement §610 comment c (1934) (“No action can be maintained by a foreign state to enforce its license of revenue laws, or claims for taxes.”). Judge Learned Hand justified this prohibition (as well as the penal law prohibition) on the following grounds:
While the origin of the exception in the case of penal liabilities does not appear in the books, a sound basis for it exists, in my judgment, which includes liabilities for taxes as well. Even in the case of ordinary municipal liabilities, a court will not recognize those arising in a foreign state, if they run counter to the “settled public policy” of its own. Thus a scrutiny of the liability is necessarily always in reserve, and the possibility that it will be found not to accord with the policy of the domestic state. This is not a troublesome or delicate inquiry when the question arises between private persons, but it takes on quite another face when it concerns the relations between the foreign state and its own citizens or even those who may be temporarily within its borders. To pass upon the provisions for the public order of another state is, or at any rate should be, beyond the powers of a court; it involves the relations between the states themselves, with which courts are incompetent to deal, and which are entrusted to other authorities. It may commit the domestic state to a position which would seriously embarrass its neighbor. Revenue laws fall within the same reasoning; they affect a state in matters as vital to its existence as its criminal laws. No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper.
Moore v. Mitchell, 30 F.2d 600, 604 (2d Cir. 1929). Is this reasoning an artifact of the vested rights theory? Why is it more offensive to refuse to apply a state’s tort law than to refuse to apply a state’s tax law? For criticism of the tax rule, see Oklahoma ex rel. Oklahoma Tax Commission v. Neely, 225 Ark. 230, 282 S.W. 2d 150 (1955); Leflar, Extrastate Enforcement of Penal and Governmental Claims, 46 Harv. L. Rev. 193 (1932). However, the Supreme Court has held that the revenue rule did not preclude an interpretation of the federal criminal wire fraud statute to apply to a scheme to evade Canadian liquor taxes. See Pasquantino v. United States, 544 U.S. 349 (2005).
(8) For a critique of the prohibition on enforcing foreign penal and revenue rules, see Dodge, Breaking the Public Law Taboo, 43 Harv. Int’l L.J. 161 (2002).
H. Proof of Foreign Law
Tidewater Oil Co. v. Waller
302 F.2d 638 (10th Cir. 1962)
This is an appeal from a judgment of a district court in Oklahoma in a diversity suit for damages for personal injuries allegedly caused by the appellant—Tidewater Oil Company’s negligence in the country of Turkey. The basic facts are that the appellee, Waller, an employee of Spartan Aircraft Company, an Oklahoma manufacturer of mobile homes, was sent to Turkey to perform repair work on behalf of his Oklahoma employer on mobile homes belonging to a pipeline company. While in Turkey, Waller undertook on behalf of his Oklahoma employer, to perform similar work on the mobile homes of Tidewater Oil Company at a remote and isolated oil well drilling site. Waller was injured when Tidewater’s plane in which he was being transported crashed while attempting to land at the drilling site where the repair work was to be done.
It seems agreed that Waller was injured in the course of his employment with Spartan, his Oklahoma employer, and that he was paid $35.00 per week in lieu of Oklahoma’s workmen’s compensation, and all hospital and medical care. After the commencement of this suit against Tidewater, Waller filed a workmen’s compensation claim with the Oklahoma Workmen’s Compensation Commission, and at the same time sought and obtained an order of the Commission holding the claim in abeyance pending the outcome of this litigation.
After alleging his Oklahoma employment and his undertaking to perform work in Turkey for Tidewater on behalf of his Oklahoma employer, Waller alleged that his injuries were caused by the unsafe condition of the airstrip where Tidewater’s plane was required to land and the negligent operation of it. It was specifically alleged that his right to recover was to be determined by the laws of Turkey, under which Tidewater owed Waller the duty to use ordinary care in the operation of the aircraft, and to furnish a reasonably safe place on which to land it; and that res ipsa loquitur was recognized in Turkey and applicable here.
Tidewater admitted Waller’s employment in Oklahoma and his undertaking to do certain work for it in Turkey as a loaned servant of Spartan, and that the rights and liabilities of the parties were governed by the laws of the country of Turkey. It denied the allegations of negligence or that res ipsa loquitur was applicable. As a separate and primary defense, Tidewater asserted that any claim or right of action is exclusively cognizable under either the workmen’s compensation law of the country of Turkey, or of the State of Oklahoma, and in either event, Tidewater was secondarily and hence exclusively liable for workmen’s compensation benefits; and that the Oklahoma court was therefore without jurisdiction to entertain this suit.
In the trial of the case, neither party offered any evidence of controlling and applicable Turkish law, and the court manifestly proceeded upon the factual premise that the tort laws of Turkey permitted recovery for the asserted wrong as if in Oklahoma.…
[The Oklahoma statute, as interpreted by the majority, allowed Waller either to proceed under Oklahoma’s worker’s compensation system or, in the case of accidents occurring elsewhere, to proceed under the law of the locus.]
… The decisive issue, as indeed the parties ultimately seem to agree, is whether Waller, having elected to pursue his remedy under the law of Turkey, where the injury occurred, may maintain this suit under and by virtue of such laws.
It is agreed that the law of Turkey is controlling and is a matter of fact of which the Oklahoma Court cannot take judicial notice; and, having pleaded Turkish law to sustain his right of recovery, Waller is under the burden of going forward with proof of it at the risk of nonpersuasion. See Vol. 3 Beale, Conflict of Laws, p. 1663, §621.…
Tidewater takes the position that since there was no evidence of controlling Turkish law, Oklahoma law, including its workmen’s compensation statutes, is applicable; and that under Section II thereof, as construed in the Mid-Continent case, it is secondarily and exclusively liable under the provisions of the Workmen’s Compensation Act, as if the accident had occurred in Oklahoma.…
In the absence of proof of applicable foreign law, courts of the forum have rather unevenly followed three alternative courses: (1) dismissed the claim for failure to make out a prima facie case; (2) conveniently applied the law of the forum; and (3) indulged in certain presumptions as to the foreign law and applied it accordingly.… Courts which arbitrarily apply the law of the forum do so as a rule of convenience in disregard of the evidentiary rule of burden of proof, or going forward with the evidence at the risk of nonpersuasion. Courts which indulge in the presumption of foreign law do so by first taking judicial notice of the fundamental system of jurisprudence in the foreign country, and having noticed that its system is fundamentally the same, will indulge in the presumption that applicable law is similar and apply it accordingly. If, however, having judicially noticed that the systems of the two are fundamentally different, it will not indulge in any presumption of similarity, except the juridical principles which may be assumed to inhere in the laws of all civilized countries.… Oklahoma, whose conflicts rule we apply, has recognized the factual quality of applicable general law, and along with most other states has statutorily provided for the admissibility of such laws.… It has embraced the theory that in the absence of pleading and proof of applicable law of sister state, it will apply its own law, both general and statutory, on the convenient assumption that the law of the sister state is the same as its own.…
We have found no cases in which the Oklahoma courts have been confronted with application of the law of a foreign country in the absence of any proof of it, except some early cases in which they declined to take judicial notice of the laws of the Five Civilized Tribes.… Since the legal system prevailing in Turkey is judicially known not to be the same as Oklahoma, but is wholly different, it does not seem reasonable to presume under any circumstances that the general law of Turkey is the same or similar to Oklahoma, much less the workmen’s compensation law.… There is a rational and, we think, admissible basis, however, for presuming that as a civilized country with a juridical system based upon civil law, Turkey recognizes the universal fundamental principle which embraces the legal duty of one to exercise due care not to injure another, and that its courts of justice will grant compensable redress for the unexcused violation of that duty.…
Of course if Oklahoma law is to be transplanted to Turkey and applied to a Turkish employment contract, it cannot be doubted that Waller was injured in the course of his employment under the Turkish contract; and, making application of the Oklahoma Workmen’s Compensation Act as Turkish law, Tidewater would doubtlessly be primarily exclusively liable under its Turkish employment contract; for, in these circumstances, we should have no difficulty saying as a matter of law, that the maintenance of the mobile homes at the remote drilling site, was a necessary and integral part of Tidewater’s hazardous business of drilling oil wells.… In that respect, it is important to note that Tidewater’s liability is in no wise governed by Waller’s Oklahoma employment contract with Spartan to which it was not a party, but rather, under the Turkey employment contract to which it was a party, and which must condition the rights of the parties.
Obviously, this suit was not tried and submitted to the jury on the theory that applicable Turkish law embraced a workmen’s compensation act identical to or even similar to that of Oklahoma. Nor does the record before us indicate that either party had any such farfetched factual theory in mind at the time of trial. Rather, as we have seen, it is clear that the case was tried on the factual premise that Turkish law recognized the acts complained of as redressable wrongs. There is no suggestion that the asserted remedy is contrary to the public policy of the State of Oklahoma. Moreover, Section 4 of the Oklahoma Workmen’s Compensation Act, supra, which grants the election to claim extra-territorial benefits, specifically provides that such right of election shall not preclude an injured employee from pursuing his remedy under the laws of the state where the injury occurred. Having accorded this right of election, we should not presume that Oklahoma would close the doors of its courts to the assertion of the remedy, even though it would have been unavailable if the injury had occurred in the State. … There being nothing in the public policy of the State of Oklahoma to forbid a remedy, the Oklahoma courts will enforce the right in accordance with the prevailing forms of practice and procedure. It was on this factual basis that the court formulated the law of the case and submitted it to the jury in accordance with the rules of evidence, standard of care and measure of damages prevailing in Oklahoma.… Inasmuch as the instructions of the court are not in issue, we will of course assume that they correctly stated the law of the case, and the judgment of the court based upon the jury verdict is sustained.
Federal Rule of Civil Procedure 44.1 provides:
A party who intends to raise an issue concerning the law of a foreign country shall give notice by pleadings or other reasonable written notice. The court, in determining foreign law, may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence. The court’s determination shall be treated as a ruling on a question of law.
The present form of the Rule dates from July 1, 1966. It was given exhaustive treatment (136 pages) in Miller, Federal Rule 44.1 and the “Fact” Approach to Determining Foreign Law: Death-Knell for a Die-Hard Doctrine, 65 Mich. L. Rev. 615 (1967).
Questions and Comments
(1) Similar facts yielded the opposite result in Walton v. Arabian American Oil Co., 233 F.2d 541 (2d Cir. 1956), a case in which the injury occurred in Saudi Arabia, the action was tried in New York, and the plaintiff refused to offer proof concerning Arabian law. The trial judge directed a verdict in favor of the defendant for failure of the plaintiff to prove his case. The Court of Appeals affirmed, rejecting plaintiff’s invocation of the rule that the forum may apply its own law when the injury occurs in an uncivilized place that has no law or legal system. (Note the date of the case and the fact that knowledge about Saudi Arabia in the outside world was substantially more limited than today.)
The trial judge in the Walton case gave plaintiff’s counsel an opportunity to prove Arabian law and indicated that he would rule against plaintiffs without such proof. Plaintiff’s counsel declined. What would lead the lawyer to behave in such a way? If the lawyer had accepted the opportunity where should he or she have turned to find out about Arabian law? Should it have made a difference that the defendant was a rich corporation with more knowledge of Arabian law and more resources, financial and otherwise, for finding out more about it?
(2) How would Waller and Walton have been handled under Fed. R. Civ. P. 44.1, set out above?
(3) See generally Currie, On the Displacement of the Law of the Forum, in Selected Essays on the Conflict of Laws 3-4 (1963). Currie favored a presumption in favor of the application of forum law. Other commentators, even those generally sympathetic to his assumptions, disagree. See Kramer, Interest Analysis and the Presumption of Forum Law, 56 U. Chi. L. Rev. 1301 (1989).
(4) Tidewater Oil Co. v. Waller considered using a presumption of forum law because there was insufficient evidence of what foreign law said. But there are other ways that presumptions might come in handy. Recall Linn v. Employers Reinsurance Corp., page 42 supra, in which the court did not know which state the phone call of acceptance originated from. A similar situation arose in Doe v. Roe, 841 F. Supp. 444 (D.D.C. 1994), where the plaintiff alleged the defendant had infected her with the herpes simplex virus after misrepresenting his health status; recovery would have been allowed under District of Columbia law, but not under Virginia law. There had been equal opportunities for infection in both states, and it was scientifically impossible for the court to determine in which state the disease had actually been transmitted.
The court followed, in effect, the strategy advocated by Professor Kramer in the article cited in note (3), supra. Kramer argued that the plaintiff always has the burden of demonstrating a cause of action, so that in the absence of reason to apply the plaintiff-favoring rule, the defendant must win. The Doe court reasoned, analogously, that “recovery would be possible only if plaintiff could trace her injury to the District encounter. Because we conclude that no reasonable trier of fact could determine which encounter resulted in infection, we are forced to grant defendant’s motion for summary judgment. We regret this unfortunate result which, if plaintiff’s allegations are true, shields from liability conduct which is not only despicable, but at the least is highly irresponsible. We hope plaintiff will appeal our determination that we are unable to grant the relief she seeks.” 841 F. Supp. at 449.
(5) Rule 44.1 of the Federal Rules of Civil Procedure was applied in Vishipco Line v. Chase Manhattan Bank, 660 F.2d 854 (2d Cir. 1981). Until April 24, 1975, Chase had operated a branch office in Saigon; plaintiffs had maintained demand deposit accounts in piastres at that branch. On the eve of the fall of Saigon, Chase closed the branch without permitting an opportunity to withdraw deposits. The communist regime confiscated all accounts upon taking the city, and plaintiffs sued in New York to recover the dollar value of their accounts. The district and appellate courts agreed that Vietnamese law governed; but the parties were unable to muster much evidence about the content of Vietnamese law:
Chase here first contends that plaintiffs’ claims were dismissible for failure to prove that under Vietnamese law they were entitled to recover. We disagree. The district court largely agreed with Chase’s contention, stating:
When foreign law is an issue in a case, that law must be proved as a fact. Plaintiffs, however, presented no evidence concerning the law of Vietnam. Such failure has resulted in dismissal of a plaintiff’s claims. However, since defendant has shouldered plaintiffs’ burden and offered proof of Vietnamese law, there is no need to dismiss for lack of evidence on which to determine Vietnamese law.
Although this statement reflects the law as it existed prior to the adoption of Rule 44.1 F.R. Civ. P. in 1966, it no longer governs the manner in which questions of foreign law are to be dealt with in the federal courts. Prior to 1966 foreign law questions were regarded as questions of fact, 9 C. Wright & A. Miller, Federal Practice and Procedure §2441 (1971), and, as the district court’s citations indicate, a number of courts took the position that a failure to prove foreign law was fatal to a claim, even if the parties had not raised the issue of the applicability of foreign law on their own. Even in this state of the law, however, federal courts frequently refused to dismiss where they were sitting in a state which provided for judicial notice of foreign law.
Rule 44.1 of the Federal Rules of Civil Procedure, which became effective in 1966, put to rest the idea that foreign law is a question of fact which has to be proven by the claimant in order to recover. It declared that “[t]he court’s determination shall be treated as a ruling on a question of law.”
Chase nevertheless contends that even under the more liberal standards of Rule 44.1, plaintiffs’ claims should have been dismissed for failure to provide evidence of foreign law after it became clear that under New York’s choice-of-law rules the entire case would normally be governed by Vietnamese law.
This assumes that the forum’s choice-of-law rules are mandatory rather than permissive. However, with the decline of the vested rights theory, see Currie, On the Displacement of the Law of the Forum, 58 Colum. L. Rev. 964, 1001 (1958), the movement has been away from a mandatory application of the forum’s choice of law rules and toward the adoption of a discretionary rule. While, as the Advisory Committee’s notes to Rule 44.1 make clear, a court is still permitted to apply foreign law even if not requested by a party, we believe that the law of the forum may be applied here, where the parties did not at trial take the position that plaintiffs were required to prove their claims under Vietnamese law, even though the forum’s choice of law rules would have called for the application of foreign law. This reflects the view adopted by ourselves and other federal courts since 1966.
While Chase invoked foreign law under Rule 44.1 with respect to its own affirmative defenses only, neither party invoked foreign law with respect to Chase’s basic obligations to its depositors and holders of certificates of deposit. Nor did Chase ever suggest that under Vietnamese law those obligations would not have formed a basis for recovery. Therefore, while Vietnamese law as invoked by Chase will be applied to those affirmative defenses which rest on Vietnamese law, the parties’ failure to invoke foreign law with respect to the underlying obligations themselves would not mandate dismissal of the claims. Under New York law it is clear that, unless relieved of liability under one or more of the affirmative defenses asserted by it, Chase was obligated under its contracts with plaintiffs to pay them the amounts deposited with it.
660 F.2d 859-860. When the court wrote of “Vietnamese law,” did it mean the law of the pro-American Saigon government or of the new revolutionary regime? How much law on international banking do you think the revolutionary regime had promulgated?
(6) Suppose that the parties offer proof of the content of foreign law in the form of expert affidavits and/or testimony. How reliable is an expert paid by a party to spin the law in the direction that the party prefers? Under FRCP 44.1, courts are permitted to engage in their own research on the content of foreign law. See Advisory Committee Notes accompanying 28 U.S.C.A. 44.1. Suppose a judge wishes to rely on an English-language description of foreign law instead of the proffered expert testimony. Are those sources more reliable? Judges Posner, Easterbrook, and Wood participated in a debate over these questions through their written opinions in Bodum U.S.A., Inc. v. La Cafetière, Inc., 621 F.3d 624 (7th Cir. 2010).
(7) The approach that American courts take to the law of another state or American jurisdiction is considerably different from the approach they take to the law of other countries or their subdivisions. The full faith and credit clause of the Constitution requires some deference to the law of other states (a topic to be discussed more fully in Chapter 4). Most states, but not all (see, e.g., Retirement Credit Plan, Inc. v. Melnick, 139 Ga. Ct. App. 570 (1976)), take judicial notice of the laws of other states. But what should a State A court do when faced with a question about the law of State B and with no answer in the case law of State B? One solution is set out below.
(8) Through certification or some related procedure, 45 states, the District of Columbia, and Puerto Rico allow their high courts to answer questions about their law posed by a court in another jurisdiction (including another state). See Kaye & Weissman, Interactive Judicial Federalism: Certified Questions in New York, 69 Fordham L. Rev. 373, 422-423 (2000) (Appendix A). Is this a general solution to the problem of proving foreign law, at least in the interstate context? It certainly helps one court avoid errors in the interpretation of another state’s law. But is this a feasible process in the run-of-the-mill choice-of-law case? Does the court to which certification is directed really want to expend its limited resources to decide a pure question of law in another court? For discussion of these issues, see Robbins, Interstate Certification of Questions of Law: A Valuable Process in Need of Reform, 76 Judicature 125 (1992); Corr & Robbins, Interjurisdictional Certification and Choice of Law, 41 Vand. L. Rev. 411 (1988).
And what should a court do when overseeing complex litigation and presented with uncertainties in many states’ law? This topic is explored further in Chapter 1.
The full faith and credit clause provides weak limitations on one state court’s (mis)interpretation of another state’s law. See Sun Oil v. Wortman, 486 U.S. 717 (1988), reproduced infra page 333.
3. The rules embodied in the Pennsylvania Statute of Frauds are matters of substance, not procedure, and apply only to contracts made in Pennsylvania.
* What is the nature of the presumption the defendant must defeat?—EDS.
1. The age of majority in New York is 18. N.Y. Civ. Prac. L. & R. 105(j) (Supp. 1988).
2. Section 1332(a)(1) provides,
The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $10,000, exclusive of interest and costs, and is between—(1) citizens of different States; …
Section 1332(d) provides,
The word “States” as used in this section includes the Territories, the District of Columbia, and the Commonwealth of Puerto Rico. [eft]
3. We emphasize, however, that the district court did not make a finding that Rodriguez Diaz (assuming he had the legal capacity to obtain a New York domicile) actually met the elements necessary to acquire a domicile there. To the extent there may be a genuine issue of fact as to plaintiff’s “true, fixed home” and actual intention, our present assumption, arguendo, that his presence in New York meets these requirements, should not be taken as a final resolution of that issue. The only issue the district court addressed, and the only issue now before us, is whether, for diversity purposes, Rodriguez Diaz could have a domicile separate from that of his parents. We leave open the factual issue of whether plaintiff actually met the elements necessary to acquire a domicile of choice in New York.
4. We agree that, ordinarily, if a person is under 18, federal courts should follow the common law principle that he is incapable of choosing his own domicile. There is a general understanding that a person under 18 lacks the full capacity to conduct his life as he will. The years between 18 and 21, however, are currently a twilight zone. The majority of the states have adopted 18 as the age of majority.… A person 18 or older has the constitutional right to vote in federal and state elections. U.S. Const. amendment XXVI. Nonetheless, some states, like Puerto Rico, still consider a person under 21, but 18 or older, to be incapable (unless formally emancipated) of conducting his personal life. Although this policy is entitled to respect in federal courts for substantive law purposes, we see no necessary reason to give it special deference for diversity jurisdictional purposes when it conflicts with another state’s policy judgment that an 18 year old living within its borders is of legal age and fully capable of choosing the place he regards as home. Puerto Rico, in fact, recognizes that a child may be emancipated with parental consent and, thereafter, although under age, will be capable of choosing a domicile of his own. It is generally recognized that even persons lacking the capacity to enter into contracts and other legal arrangements may have sufficient capacity to select a domicile of choice. Weintraub, Commentary on the Conflicts of Laws §2.4, at 18 (1980).
5. “[A] person cannot acquire a domicil of choice unless he has legal capacity to do so. Whether such legal capacity exists will be determined by the law of the forum.” Restatement of the Law, Conflicts of Law (Second) §13, comment d.
6. There would, of course, be no diversity jurisdiction as to any claim of the parents, who reside in Puerto Rico. The parents sue here solely as next friends; their domicile is irrelevant in such circumstances.
7. See, e.g., Ziady v. Curley, 396 F.2d 873 (4th Cir. 1968) (in deciding infant plaintiff’s domicile, the court took into account a major purpose of diversity jurisdiction, which is to protect a citizen of one state from parochialism if forced to litigate in another state).
8. Bjornquist v. Boston & A. R. Co., 250 F. 929 (1st Cir.), cert. denied, 248 U.S. 573 (1918). In this case, this circuit refused to follow the common-law rule that a minor could not establish his own domicile for diversity purposes: the minor’s parents were dead, and plaintiff’s domicile was technically that of his deceased father. Nonetheless, we found that he had acquired a Maine domicile when he moved there when 19 for a relatively brief sojourn with an aunt. See also Stifel v. Hopkins, 477 F.2d 1116 (6th Cir. 1973) (a prisoner may show a change of domicile to a state to which he was moved by his jailers notwithstanding old rule that the pre-incarceration domicile of a prisoner must continue during his imprisonment).
1. “No State, territory, or possession of the United States, or Indian tribe, shall be required to give any effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship.” 28 U.S.C.A. §1738C (West 2006).
2. We also note the decision in Littleton v. Prange, 9 S.W.3d 223 (Tex. App. 1999) (plurality op.). In Littleton, the San Antonio Court of Appeals held that a person who was born male, underwent a sex-change operation, and then ceremonially married another man was not validly married for purposes of standing to sue as a spouse under Texas’s wrongful-death and survival statutes. Littleton was decided before the adoption of section 6.204 of the family code and article I, section 32 of the Texas Constitution, but the court still concluded that “Texas statutes do not allow same-sex marriages.” Id. at 231. And in Ross v. Goldstein, the Houston Fourteenth Court of Appeals refused to recognize the “marriage-like relationship” doctrine in the same-sex context, relying on the Texas Constitution and family code for support. 203 S.W.3d 508, 514 (Tex. App. 2006).
* “Liabilities of Officers, Directors and Stockholders. Except as otherwise provided in this chapter, the officers, directors and stockholders of a foreign stock corporation transacting business in this state, except a moneyed or a railroad corporation, shall be liable under the provisions of this chapter, in the same manner and to the same extent as the officers, directors and stockholders of a domestic corporation, for the making of
1. Unauthorized dividends;
2. Unlawful loans to stockholders;
3. False certificates, reports or public notices;
4. Illegal transfers of the stock and property of such corporation, when it is insolvent or its insolvency is threatened.
Such liabilities may be enforced in the courts of this state, in the same manner as similar liabilities imposed by law upon the officers, directors and stockholders of domestic corporations.”
** Vanderpoel v. Gorman, 140 N.Y. 563 (1894), involved an assignment of assets made by an insolvent corporation incorporated in New Jersey but doing business in New York. The assignment was then permitted under New Jersey but not New York law. The New York Court of Appeals interpreted New York’s prohibition to apply to domestic corporations only. The court’s rationale turned on the fact that states have special authority to regulate domestic corporations but comity requires deference to domicile states regarding companies incorporated elsewhere—EDS.
7. During the remaining course of this opinion, we shall be citing and quoting from the statutes of other states. As allowed by the law of the State of Wyoming, we shall take judicial notice of those considered.
Section 1-12-303, W.S. 1977: “Every court of this state shall take judicial notice of the common law and statutes of every state, territory and other jurisdiction of the United States.”
Section 1-12-303, W.S. 1977: “The court may inform itself of foreign laws in such manner as it deems proper, and the court may call upon counsel to aid it in obtaining such information.”
Counsel for defendant informed the trial judge of his reliance on the statutes of limitation of other states. The statutes we set out are those applicable at the time of the occurrence herein and are found in the Wyoming State Law Library, Cheyenne.
* This decision was later set aside. 208 F.2d 310 (6th Cir. 1953)—ED.