Does New York's Collateral Source Law Allow Defendants to Bankroll Torts with Crowdsourced Cash?
In recent years, crowdfunding has become a mainstream method of organizing charitable donations. Crowdfunding campaigns on websites like Indiegogo, GoFundMe, and Kickstarter frequently raise millions of dollars for people looking to start business ventures, finance art projects, or assist people who have encountered an unexpected financial crisis. You have likely seen numerous campaign on these platforms to help families pay for funeral expenses, or medical bills. Sometimes the stories behind the campaigns are so tragic that they go viral, and attract donations from all across the globe.
One of the earliest viral campaigns was back in 2012. A bus monitor named Karen was seen in a viral video being bullied by some of the children on her bus. The cruel comments lobbed at her elicited sympathy from a large number of people, who then raised $703,168.00 for her on Indiegogo. Yes, I know it’s hard to believe that there was once a time when people sympathized with someone named Karen. But that was over 40 years ago. In the years since, crowdfunding platforms have only become more popular, and the sums distributed have only become larger. One recent and very prominent example of such a viral campaign is the GoFundMe for the family of George Floyd, whose killing at the hands of Minneapolis police officers has generated global condemnation, protests, and riots. The GoFundMe for Floyd’s family ended with over $14 million collected from over five hundred thousand donors.
Meanwhile, Floyd’s family has filed a federal civil rights lawsuit under 42 USC. § 1983, with 42 USC. § 1988 serving to supplement state law causes of action, such as, ostensibly, wrongful death. It seems plausible, if not highly likely, that this lawsuit could result in a multi-million dollar judgment or settlement, given the nature of Floyd’s death and attention it has received. However, few seem to be aware that if a similar wrongful death case was brought in New York, there would be a possibility that, even if they went to trial and won, the family might have their wrongful death recovery reduced. Possibly even to zero. When each of those 500 thousand individuals donated money to the GoFundMe campaign for Floyd’s family, they likely did not intend or foresee that their money might subsidize the defense of Derek Chauvin or the City of Minneapolis – that each dollar they donated would proportionately diminish how much Floyd’s family can recover. Fortunately, such an outcome is not likely for the Floyd family, but it could be for future families in New York and other states like it. The reason for the possible reduction is due to state statutes that have either eliminated or restricted the application of the common law “collateral source” rule; the law that prohibits courts from reducing awards if plaintiffs have already received compensation for their loss from some other source. In some states, the common law rule has been so curtailed that defendants can point toward charitable donations to reduce judgments against them. Couple these state laws with the uncertainty surrounding how courts will treat crowdsourced donations, like GoFundMe, and predicting the outcome for plaintiffs requires, at minimum, some inspection. In states like New York, where the courts have not directly addressed the question of how crowdfunding fits into collateral source laws, the predictions might be more accurately labeled “guesswork.”
The Collateral Source Rule
To understand the issue, first, let’s take a look at the history of the common law collateral source rule. It is important to keep in mind that the rule is something of a chimera, having both an evidentiary component and a damages component. Under the rule, a plaintiff is permitted to sue and recover damages, regardless of whether or not that plaintiff has already been compensated for his injuries by some source other than (i.e. collateral to) the defendant. A common example of one of these collateral recoveries would be if a plaintiff had his medical bills paid for him by his insurance carrier. That plaintiff could still turn around and sue a defendant for the cost of those medical bills. The rationale behind this rule was that a negligent defendant should not be able to offset a verdict based on a plaintiff’s contracted insurance benefits (Clanton v United States, 943 F3d 319, 326 [7th Cir 2019]), which would allow a tortfeasor to benefit from a plaintiff’s insurance premiums. Another reason for the rule was that torts were traditionally seen as not only a way to compensate injured parties, but also as a way to deter tortfeasors (Robert A. Katz, Too Much of a Good Thing: When Charitable Gifts Augment Victim Compensation, 53 DePaul L. Rev., at 550; Gypsum Carrier, Inc. v Handelsman, 307 F2d 525, 534 [9th Cir 1962])
But what if a defendant, nonetheless, attempted to sway the jury by offering evidence showing that the plaintiff had already had his medical bills paid for through insurance? Well, that’s where the evidentiary portion of the rule comes into play. The collateral source rule also prohibited the introduction of any evidence of collateral source payments that a plaintiff may have received. This evidentiary aspect of the rule was likely a way to ensure that juries would not be provoked by defendants into illicitly reducing an award.
However, the common law rule was not without its critics. Critics argued that plaintiffs who were already compensated for their losses, and were then permitted to recover from defendants for the losses a second time, were obtaining a double recovery for the same loss, resulting in a windfall. In cases where the medical bills were paid for by no-fault insurance, for instance, a plaintiff could potentially recover twice without ever having paid insurance premiums. “Compensation does not mean overcompensation,” they argued (Katz, supra, at 568 quoting Tony Weir, Tort Law, at 188 [2002]). At this same time, there was an ideological shift among some policy makers regarding what the purpose of tort law should be. A view of torts as a way of punishing and deterring undesirable behavior began to lose favor and, instead, torts began to be seen as simply a way to obtain “just compensation” for plaintiffs (Andino v. Mills, 31 N.Y.3d 553, 561, 106 N.E.3d 714, 720 [2018]). Additionally, the cause of reforming the rule was championed by medical professionals as a way to reduce the cost of liability insurance. id. The common law rule was thus being attacked on principles of justice as well as economics (and special interests).
Some states began to take steps to scale back the common law rule. Of course, as one might expect, the approach to reforming the rule differed from state to state. This can have significant implications for federal civil rights cases, particularly those seeking damages for wrongful death. Because, whether or not the common law rule or a state law rule will apply will turn on the source of law giving rise to the right to recover. In other words, the outcome is dependent on the federal statute that you are suing under. Under the Federal Tort Claim Act, 28 USC 1346, federal courts will look to the state collateral source law as a “starting point” (Amlotte v United States, 292 F Supp 2d 922, 928 [ED Mich 2003]). A civil rights lawsuit under 42 USC 1983, on the other hand, will normally apply the federal common law rule (Gill v Maciejewski, 546 F3d 557, 565 [8th Cir 2008]). A notable exception for civil rights actions is when federal law “proves deficient or unable to provide a suitable remedy.” id. at 565. In such a situation, USC 1988 kicks in, and directs federal courts to apply state law. id. An example of an area in which federal law is considered deficient, in a USC 1988 context, is wrongful death. As it stands, then, a wrongful death case, pursuant to USC 1983, brought in federal court in New York, would apply New York’s collateral source law.
New York’s statute on the issue went through several permutations before it took its current form, as CPLR 4545. In a recent case, New York’s highest appellate court, the Court of Appeals, stated that “the ultimate goal of CPLR 4545 is to eliminate duplicative recovery by a plaintiff” id. at 561. The statute allows defendants to submit evidence showing that one of the plaintiff’s categories of claimed loss “was or will, with reasonable certainty, be replaced or indemnified, in whole or in part, from any collateral source . . .” See, CPLR 4545 (emphasis added). To determine if the claimed loss “was or will” be replaced by a collateral source, the New York Court of Appeals has determined there must be a “direct correspondence between the item of loss and the type of collateral reimbursement.” See, Oden v Chemung County Indus. Dev. Agency, 87 NY2d 81, 87 (1995). However, the Court of Appeals later clarified that a “direct correspondence” is found by looking to “the nature, not the label, of compensatory funds” See, Andino v. Mills, 31 N.Y.3d 553, 562, 106 N.E.3d 714, 721 (2018). If the court determines that the loss “was or will” be replaced or indemnified by any collateral source, the court “shall” reduce the plaintiff’s recovery by the amount of the collateral payments, minus the cost of any premiums that the plaintiff may have paid.
What about charitable donations?
While it may be equitable to reduce a plaintiff’s recovery because an insurance policy covered her lost wages, suppose the lost wages were paid for by a charity, or charitable members of the community? How then should such collateral source payments be treated? Is it fair for charities to subsidize tortious behavior? After all, if a plaintiff receiving a double recovery is a windfall, wouldn’t a defendant having his tab paid for by a charitable organization also be a windfall – and one that would benefit the negligent party?
States who have answered these questions have done so in (surprise, surprise) completely different ways. Some states, such as Illinois and Florida, will apply the common law collateral source rule, but only for payments that a plaintiff has earned, meaning that they will not permit a plaintiff to recover for losses which were replaced by charitable organizations. See, Katz, supra, at 565, citing Fla. Physician’s Ins. Reciprocal v. Stanley, 452 So.2d 514, 515 (Fla. 1984); Peterson v. Lou Bachrodt Chevrolet Co., 392 N.E.2d 1 (Il. 1979); Evans v. Pa. R.R. Co., 255 F.2d 205, 210 (3d Cir. 1958).
In New York, there is a statutory carve out, excluding collateral source deductions for money paid to the plaintiff through life insurance, statutory rights of recovery, or “[v]oluntary charitable contributions.” Upon reading that, you might think, “Okay, great, so crowdfunded donations are excluded.” In a wrongful death case like the Floyd family’s, then, any GoFundMe donations would be excluded. That sounds reasonable. But are crowdfunded donations “voluntary charitable contributions?” There may be one problem with such a conclusion: many GoFundMe campaigns aren’t considered “charitable contributions,” within the meaning of U.S. tax law, but, rather, “gifts.”
In an article for Accounting Today, Joyce Beebe, a fellow at Rice University’s Center for Public Finance, states that “only donations to qualified charitable organizations are tax-deductible,” and, “therefore, no matter how charitable the intent or outcome, donors who make payment on GoFundMe cannot claim these funds as charitable contribution deductions on their tax returns.” She further states that “it’s generally agreed that the [GoFundMe] funds are nontaxable gifts to the recipients. . . .”
That crowdsourced payments are closer to gifts than charity becomes even clearer when we look at U.S. charity law, particularly in contrast to tort law. In a DePaul Law Review article, Robert Katz explains that, in order to qualify as a charity, “[t]he recipients of [the charity’s] cash, goods, or services (a.k.a., “outputs”) must constitute a ‘charitable class.’” Katz, supra, at 553. Furthermore, “[o]ne cannot use a charity to earmark gifts for a particular person, and a closed class of pre-selected individuals does not constitute a charitable class” id. It would seem, then, that GoFundMe donations, which are usually directed at specific individuals, fall squarely into the category of “gifts,” and not “charitable contributions.”
But even if crowdfunded donations are not “charitable contributions” within the meaning of federal tax law, and CPLR 4545 directly adopts the tax law definition of a charitable contribution, that would still only indicate that the funds do not fall within the exclusion; it would not establish that the funds qualify for a collateral source reduction. To qualify, the funds would still need to meet the direct correspondence test. That test, as mentioned before, turns on the nature of the payments themselves. How, though, do we even determine the nature of crowdfunded charity to establish direct correspondence? Do we look to the intent of the donors? Do we look to the intent of the person who set up the campaign, or the purpose stated on the campaigns donations page? Or is it enough that some portion of the crowdsourced funds went toward compensating a claimed loss?
One point that bears emphasizing, though, is that the court’s “direct correspondence” test refers to the nature of the “compensatory funds,” not the nature of the “source.” This portion of the analysis emphasizes the nature of the payment itself, rather than the entity paying the money. It would not even matter that GoFundMe is not a charity within the meaning of the tax law, if the donations do not “directly correspond” to some category of loss being sought. It would only be after determining direct correspondence of the payment to the loss that you would look to see if the source meets the charitable contributions exclusion. It may, then, be instructive to examine some categories of loss that one would be most likely to find in a GoFundMe campaign.
Returning to the example of a wrongful death suit, the controlling New York statute is EPTL section 5-4. It provides for the following categories of loss:
In every such [wrongful death] action, in addition to any other lawful element of recoverable damages, the reasonable expenses of medical aid, nursing and attention incident to the injury causing death and the reasonable funeral expenses of the decedent paid by the distributees, or for the payment of which any distributee is responsible, shall also be proper elements of damage.
EPTL 5-4.3. You could certainly find some evidence to support the direct correspondence for recoverable damages, such as “funeral expenses,” on many GoFundMe campaigns. The George Floyd GoFundMe, for instance, seeks donations for “funeral and burial expenses,” among other things.
While no case law in New York has directly addressed the issue of how crowdfunding donations fit into the collateral source landscape, a New York family facing a situation similar to Floyd’s family might still be at risk of having a favorable verdict reduced, at least until the law is made clear. It might make sense for a family in that situation to negotiate a settlement that explicitly precludes that possibility. Wrongful death plaintiffs might also be wise to include as little information in their GoFundMe campaign as possible, so as not to provide ammunition for defendants. Still, there would be no guarantee that such steps would be enough to shield them from the reach of the collateral source reduction.
Was all of this really the intent of the legislature when they drafted CPLR 4545 and its “charitable contribution” exclusion? The exclusion was passed in the wake of terrorist attacks on September 11, 2001, to ensure that people could confidently donate their money, without fear that it would be used to offset a judgment against a terrorist (See, Vincent C. Alexander, Westlaw Practice Commentaries, C4545:1 Background of Collateral Source Deductions and Statutory Overview; citing miscellaneous materials in Governor’s Bill Jacket, Laws of 2002, ch.672 [N.Y. Legis.Serv., Inc.]). At that time, charitable donations flowed primarily to charitable organizations, so of course the easiest way to protect those donations was to simply refer to tax law. Still, a state like Massachusetts, by contrast, has no such provision in their collateral source statute excluding charitable contributions, opting, instead, for a provision which excludes “gratuitous payments or gifts.” This is a much broader exclusion than New York’s “charitable contribution” exclusion. Minnesota, the state whose collateral source law will be controlling the Floyd case, has a much narrower definition of what kinds of collateral source payments can be used to reduce verdicts, one that does not include either charity or gifts. The fact remains that New York could have adopted broader language, or explicitly included “gifts” as part of an exclusion, but they chose to use the same “charitable contribution” language as the tax law, which draws a distinction between those two. The exclusion was drafted long before crowdfunding became widely available on sites like Indigogo and GoFundMe. They likely did not even consider that such large sums of money might be paid by individuals, with little involvement from third parties, directly to those who were harmed.
How should crowdfunding be treated?
As critics of the common law rule have stated in the past, allowing plaintiffs to recovery for the same loss twice creates an undesirable windfall. But allowing defendants to use crowdfunding donations to reduce their judgments not only creates a windfall for defendants, it also undermines a valuable new method of providing assistance to people in need. How then should these crowdsourced donations be handled? Robert A. Katz suggests that, perhaps, collateral sources in torts should be treated the in a similar fashion to how they would be under charity law. He argues that, applying the cy pres doctrine, courts “should attempt to recover [from the defendant] the value of [the] gifts and reapply it to charitable purposes related to the gifts’ original purposes.” Katz, supra, at 573. While Katz did not specifically address crowdfunding, the concerns he raises about reducing the amount that a defendant must pay are relevant. This is a novel approach that could strike a balance by denying both the plaintiff and the defendant a windfall, while also ensuring that jury verdict goes to benefit a charitable cause – an outcome that would be more palatable to crowdfunding donors. He notes that “[r]educing awards by amount of donations from private individual donors would make donors feel that their donations were ‘hijacked by the tortfeasor,’” which would make donors less likely to donate in the future. See, Katz, supra, at 570, quoting Arambula, 85 Cal. Rptr. 2d at 589. This suggestion raises the question of whether his solution, which might funnel a jury verdict to a charity rather than an injured party, would not also leave donors feeling as though their wishes were subverted. Granted, the result would surely be better than allowing the tortfeasor to use charitable gifts to pay his verdict. To that point, Katz quotes a case from the U.K., which states that view elegantly: “[i]t would be revolting to the ordinary man’s sense of justice, and therefore contrary to public policy, that the sufferer should have his damages reduced so that he would gain nothing from the benevolence of his friends or relations or of the public at large, and that the only gainer would be the wrongdoer.” See, Parry v. Cleaver, 1 ALL E.R. 555, 558 (H.L. 1969).
Perhaps instead of applying cy pres to crowdsourced funds, there might be a simpler solution: let the jury decide. Why not have a statutory carve out allowing defendants to show evidence of crowdsourced gifts received by the plaintiff? Perhaps members of the community are in the best position to determine if their fellow community members donated too little or too much. And if we are concerned about how donors feel when they find out that their gift subsidized a plaintiff, shouldn’t we also care how jurors might feel after spending, potentially, weeks or months on a trial only to find out that the plaintiff has already recovered millions from third party donors? How would that make them feel about the justice system?
It seems fair to ask, then, whether the expectations of crowdfunding donors should have any influence on tort policy. If the tort claim is seeking to make a plaintiff whole, what do you do with a plaintiff who has already been made whole and then some? If, instead, the plaintiff is looking to punish the defendant in some way, that plaintiff could still potentially seek punitive damages. This might serve as a way of weeding out some claims before they get to litigation. It could reduce the number of cases in courts, allowing for the remaining cases to proceed expeditiously. That could be good for overworked courts, plaintiffs and defendants alike. In a sense, the crowdfunding would indirectly function as a sort of alternative dispute resolution (crowd-mediation?). That sounds like bad news for litigators, but perhaps good news for justice.
Maybe there aren’t any easy answers. No matter how crowdsourced funds are handled, some party is likely to feel cheated. Regardless, if collateral source laws are not modernized to reflect the changing nature of charity in the 21st century, the results will be unpredictable, often inequitable, and sometimes “revolting.”