Hauer v. Union State Bank of Wautoma

Wisconsin Court of Appeals · 1995 · Contracts

ContractsMental capacityVoidable contractsGood faithmental incompetencecapacity to contractvoidable contractrescission

Facts

Hauer had suffered a brain injury in 1987 and had previously been under guardianship, though that guardianship was terminated in 1988. Eilbes, who was in default on an earlier Bank loan, arranged for Hauer to borrow $30,000 from the Bank using her mutual fund as collateral so she could invest in his business, and he told the Bank he would use her funds to cure or pay off his defaulted debt. Before making the loan, the Bank's officer spoke with Hauer's stockbroker, who said Hauer needed the fund income to live on and wished the Bank would not use it as collateral; the officer also conceded it was possible the broker told him Hauer had brain damage. Hauer signed the loan documents, gave all $30,000 to Eilbes, and by the time she sued to void the transaction the money was gone.

Issue

Whether Hauer could state and prove a claim to void the loan contract on the ground of mental incompetence, and if so, whether she could recover her collateral without repaying the loan proceeds after those proceeds had been dissipated. The case also asked whether the evidence supported the jury's finding that the Bank failed to act in good faith.

Rule

An adult is presumed competent, and the party seeking to void a contract for mental incompetence must prove that at the time of contracting the person lacked sufficient mental ability to know what he or she was doing and to understand the nature and consequences of the transaction. A cause of action exists in Wisconsin to rescind or void a contract on that basis. The infancy doctrine does not apply to mentally incompetent adults; instead, where an executed contract cannot be unwound by restoring the parties to their prior positions, the incompetent may avoid the contract without restoring dissipated consideration if the other party knew or had reason to know of the incompetence or took unfair advantage, while UCC § 401.203 does not create an independent cause of action for lack of good faith in contract formation because it applies only to performance or enforcement.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Madison, Nora Keane signed a promissory note and pledge agreement with Badger Prairie Lending to borrow $18,000 against her certificate account so she could invest in a friend's delivery business. At trial, Nora presented evidence that, on the day she signed, a cognitive disorder left her unable to understand what obligation she was assuming, although the lender offered witnesses who said she appeared normal.

If Nora seeks to void the loan on the ground of mental incompetence, which standard should the court apply to determine capacity?

Explanation. The governing test is whether the adult had sufficient mental ability, at the time the instrument was executed, to know what she was doing and to understand the nature and consequences of the transaction. Prior guardianship, later regret, or the lender's view of the investment may be evidence or irrelevant, but they do not replace the legal test. (Derived from Hauer v. Union State Bank of Wautoma (1995).)