The Setoff Problem

By Mike Dorf

An article in Saturday's NY Times called attention to a seeming perversity in the legal system, especially in New York State: Indigent persons confined in mental hospitals who are the victims of serious torts committed by the State may win a damages judgment but end up having their award substantially reduced or collecting nothing because the State offsets the judgment award by the value of the care which the State has provided gratis.  The Times story recounts some truly horrific stories--including the rape of a patient in a Staten Island facility, who ended up losing more than 40% of her $250,000 judgment this way (and that's before accounting for attorney fees).  Here I want to unpack what exactly is objectionable in this phenomenon.

In principle, there is nothing wrong with counterclaims and setoffs.  Suppose A owes B $10,000 to compensate him for work that B performed to improve A's property.  A acknowledges the debt but doesn't have the liquidity to pay it off.  Then B accidentally crashes his car into A's car, causing $10,000 in damage.  Clearly the right result now is to call it even (ignoring insurance).  That principle applies in court as well.  If B sued A (or A sued B) for the debt (or for the tort), then B (and A) would be entitled to a net recovery of zero.

So what is the problem in the cases described in the NY Times story?  One might think that the problem is the clawback.  We could have a system in which long-term mental health care, along with medical care more broadly, were simply an entitlement of the poor.  If we did then anyone who was unable to afford to pay for medical care would receive it, and if at some point in the future, one or more such people came into money, that could affect their eligibility for free State care in the future but would not entitle the state to claw back the value of services already provided.  I could see the merit in such an approach but it hardly strikes me as fundamental principle of justice.  As between X, who has substantial financial resources at the time he needs mental health or other medical care, and Y, who lacks them at that time but later acquires them, is it obvious that justice requires that Y but not X be required to pay for the care out of his own lifetime resources?

The real problem, to my mind, is that when the State sets off prior costs of medical care against a new tort judgment, it robs the tort system of its ability to deter unlawful conduct.  Interestingly, in these cases the State is acting a bit like indigents might act (or at least in the way that economists worry that indigents might act) in most other contexts: People with no money are not subject to the deterrent effect of the prospect of having to pay tort damages.

How might the legal system respond to that broader problem of the undeterrability of the indigent?  We could adopt draconian measures like debtors' prison, but we have (mercifully) abandoned that sort of project.  Instead, the legal system has concluded that people who are judgment-proof will nonetheless accrue debt for their torts and unpaid contractual obligations so that if they some day come into money, they will then have to pay their old debts out of their new money.  But this is mostly unrealistic and often perverse.

It's unrealistic to suppose that someone who is living on the street or in a mental hospital (and thus perhaps not even competent to be held responsible for debts and torts) is going to be deterred by the prospect of having to pay out of money he may some day acquire.  Meanwhile, to the extent that this logic does actually operate, it disincentivizes the very poor from taking steps to get out of poverty.  Personal bankruptcy is supposed to be a means for people to get a fresh start free of past debts, but the population under consideration will typically lack the wherewithal to file a successful bankruptcy petition, and in any event, using restrictions in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, courts have recently been increasingly skeptical of personal bankruptcy claims (even as the Great Recession has led to an overall uptick in personal bankruptcies.)  In any event, the notion that keeping a "tab" for institutionalized indigent mental patients will deter their excessive spending or tortious conduct is far-fetched, bordering on preposterous.

But the keeping of a tab does have one very predictable effect, as memorialized in the NY Times story: It turns the State itself into an undeterrable indigent, or at least substantially reduces the deterrent effect of tort law on the state.  Vis-a-vis an indigent who owes the State hundreds of thousands or millions of dollars for past care, the State itself is a kind of indigent--in the sense that it will never see that money, and so can commit torts up to the value of that care without worrying about any real out-of-pocket cost.  Unlike the logic that seems to justify allowing setoffs against the indigent institutionalized mentally ill, this effect is more than hypothetical.