September 18, 2014

140-Year-Old Precedent Overturned in D.C. Court Due to Evolution of American Understanding of Mental Illness

LettyMaxfieldBy Letitia Maxfield

The District of Columbia Court of Appeals overturned a 140-year-old precedent earlier this month and joined the majority of jurisdictions in ruling that the contracts of mentally incapacitated persons are merely voidable and not inherently void.[1]

A voidable contract is binding and enforceable unless and until the incapacitated party, or his or her agent, elects to void the contract.[2]

Alternatively, the “void rule” automatically voids a contract if, after the contract is formed, one of the parties is found to have lacked capacity to contract.[3]

This somewhat nuanced legal distinction is best illustrated by an example:

Buyer, who has an undiagnosed mental illness, plans to buy a condominium. On the day the closing documents are to be executed, Buyer is experiencing symptoms related to her mental illness. Before the closing documents are signed, Sellers ask Buyer if she will consent to some additional terms that Buyer had on previous occasions adamantly rejected. Buyer agrees to the additional terms without hesitation. Buyer and Sellers then execute the closing documents. Later that day, Buyer seeks mental health treatment. A few days later, Neighbor, who was out of the country when Sellers listed the condominium for sale, offers to buy the condominium from Buyer for double the price Buyer paid. Buyer receives inpatient treatment for her symptoms and is released several days later. Buyer then sells the condominium.

The “void rule” dictates that if Buyer is found to have lacked the mental capacity to enter into the sales contract, the contract has no legal effect. Neither Buyer nor Sellers can rehabilitate the transaction. Further, the third-party who purchased the property from Buyer in good-faith does not have valid legal title to the property.[4] Sellers would be free to sell the condominium to Neighbor.

However, if the “voidable rule” applies, Buyer has three options: (1) Buyer (upon regaining capacity) or her legal representative can choose to ratify the contract; (2) if Sellers knew Buyer lacked capacity to contract, Buyer can choose to unilaterally void the contract; or (3) if the terms of the contract are unfair, or the contract is otherwise inequitable, Buyer can choose to void the contract.[5] Finally, Buyer’s right to void the contract may be equitably limited by the interests of any third-party, good-faith purchaser.[6]

The “voidable rule” is a well-settled rule[7] followed by the majority of States, including Colorado.[8] Consequently, the D.C. Court’s decision to overturn 140 years of its own precedent is less than groundbreaking for jurisdictions like Colorado, which has applied the “voidable rule” to the contracts of the mentally incapacitated for almost 100 years.

What is noteworthy about the D.C. Court’s opinion is its ardent position that the “void rule” is “based upon an outdated understanding of mental illness and of what it means to ‘protect’ mentally incapacitated persons.”[9]

The Court opines that the historical attitude that incapacity by reason of mental illness is a permanent and unwavering state is no longer tenable.[10] Further, it notes that advances in modern medicine and an evolving understanding of mental illness have led to policies and laws that “focus on protecting the civil and legal rights of people with mental illnesses.”[11]

Ultimately, the Court concludes that the “voidable rule” aligns more closely with modern society and law because it “better balances the competing interests of ensuring the security of transactions and enabling mentally incapacitated persons meaningful participation in society, while still protecting them from unfair imposition.”[12]

By contrast, Colorado courts have routinely taken the position that the primary judicial motivation behind the “voidable rule” as opposed to the “void rule” is its protection of innocent parties and bona fide subsequent purchasers.

Specifically, the Colorado Supreme Court in Davis v. Colorado Kenwoth Corp. relied on the following policy justifications when determining the proper application of the “voidable rule”:

The courts have made reasonably clear the judicial concept which motivates the enforcement of the contracts of an insane person in such situations. They are enforced against the insane person, not because such agreements possess all the legal characteristics of a binding contract, but primarily because the insane party has secured a benefit in the transaction which it would be inequitable to allow him to retain, without first restoring to their original position those who conferred such benefit, or with whom he entered into the agreement. Stated differently, it is grossly unfair to allow a person to repudiate a contract without returning, or offering to return, the benefits which he received thereunder. The rule which conditions a rescission of a contract upon the restoration of the status quo by the person seeking to avoid the obligation on the ground of his insanity in based upon principles of equity, as well as upon public policy and good faith.[13]

Colorado again emphasized the importance of the “voidable rule’s” protection of individuals other than the mentally incapacitated party in its 2008 decision in Delsas ex rel. Delsas v. Centex Equity Co., LLC:

The interest of a good faith purchaser who asserts ownership under a voidable deed will be protected. “[T]he distinction between void and voidable deeds becomes highly important in its consequences to third persons, ‘because nothing can be founded upon a deed that is absolutely void, whereas from those which are only voidable, fair titles may flow.’”[14]

The Restatement (Second) of Contracts recognizes that the “voidable rule” has two conflicting policy justifications: the protection of justifiable expectation and the protection of persons unable to protect themselves against impositions. The Restatement also notes that each policy may prevail to a greater or lesser extent which, consequently, will affect the rule’s judicial application.[15]

In adopting the “voidable rule” as a part of a modern legal trend aimed at better protecting the civil and legal rights of people with mental illness, the D.C. Court has chosen to shift the rule’s equitable focus away from the rights of innocent parties and bona fide purchasers and toward the rights of mentally incapacitated persons.

What, if any, potential affect the D.C. Court’s re-tooling of the “voidable rule” may have on Colorado’s common law applications of the “voidable rule” is at best speculative, but in the author’s opinion, nonetheless worth asking.

Letitia M. Maxfield is an associate at Poskus, Caton & Klein, P.C. Her practice includes elder law, litigation, protective proceedings, estate planning, and probate administration. She is a member of the Women’s Estate Planning Counsel and the Elder Law and Trust and Estate Sections of the Colorado Bar Association.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 


[1] Hernandez v. Banks, 2013 WL 1831713, *9 (D.C. May 2, 2013).

[2] CORBIN ON CONTRACTS § 1.6 (1993). See Hernandez, 2013 WL 1831713, *4 (citing Richard A. Lord, 5 WILLISTON ON CONTRACTS § 10:5, at 313 (4th ed. 2009).

[3] CORBIN ON CONTRACTS § 1.7 (1993). See Hernandez, 2013 WL 1831713, *4 (citing, 5 WILLISTON ON CONTRACTS § 10:2, at 278-79.

[4] See Delsas ex rel. Delsas v. Centex Home Equity Co., LLC, 186 P.3d 141, 144 (Colo. App. 2008).

[5] Restatement (Second) of Contracts § 15 (1981).

[6] Davis v. Colorado Kenworth Corp., 156 Colo. 98, 105 (Colo. 1964).

[7] The Colorado Supreme Court, held as early as 1914 in Green v. Hulse, that a deed executed by an incapacitated individual was not inherently void but merely voidable. Green v. Hulse, 142 P. 416 (Colo. 1914).

[8] In 2008, the Colorado Court of Appeals expressly ruled that Colorado follows the majority rule that contracts executed by incapacitated people are voidable. See Delsas, 186 P.3d at 146-47.

[9] Hernandez v. Banks, 2013 WL 1831713, *7 (D.C. May 2, 2013).

[10] Id. at *7.

[11] Id. at *8.

[12] Id. at *9.

[13] Davis v. Colorado Kenworth Corp., 156 Colo. 98, 104-05 (Colo. 1964) (citing 29 Am. Jur. Insane Persons 215).

[14] Delsas, 186 P.3d 141, 144 (citing Medlin v. Buford, 115 N.C. 260, 20 S.E. 463, 463 (1894) (quoting Somes v. Brewer, 19 Mass. (2 Pick.) 184, 203 (1824)).

[15] Restatement (Second) of Contracts § 15 cmt. a (1981).

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