Guardianship

Guardianship

Restatement (Second) of Contracts § 13 states the rule in one sentence: a person has no capacity to incur contractual duties if his property is under guardianship by reason of an adjudication of mental illness or defect.¹ Guardianship is the first of the four conditions that § 12(2) lists as exceptions to the presumption of full capacity.² It differs from the other three in the strength of its effect. Section 12(1) sets a floor, because no one can be bound by contract unless he has capacity to incur at least voidable duties.³ Section 13 says a person under guardianship lacks capacity to incur contractual duties at all, so the ward, as the person under guardianship is called, falls below that floor. Infancy and the other categories sit above it.

This category depends on a court's act. A court may declare an adult legally incapacitated because of a range of circumstances, from mental illness and mental deficiency to chronic intoxication and confinement, and any of them can create a need for continuing supervision by a guardian.⁴ The appointment can take several forms. A guardian of the person makes decisions about residence and medical care, a guardian of the estate manages the ward's financial affairs, and one individual may hold both roles.⁵ A guardian of the person who also needs authority over money and property takes the additional title of conservator.⁶ Contract law cares about the property side of these appointments, and § 13 is worded in terms of a person whose property is under guardianship.

The reason for the stricter rule lies in what guardianship does. It moves control of the ward's property from the ward to a fiduciary who answers to the court, and the contract consequences follow from that transfer of authority. If the ward could still bind the estate by his own promise, two people would hold power over the same assets, and the guardian's authority would last only until the ward's next signature. The category also differs from ordinary mental illness in how incapacity gets established. There the question is whether this person, in this transaction, could understand or act reasonably, and it is decided after the fact. Here a court has already made the determination in a proceeding of its own, so no transaction-by-transaction inquiry is needed. The next subsection takes up what that adjudication does to the ward's attempted contracts, and the one after it turns to the position of the people who deal with a ward.

Void Under Guardianship

Restatement (Second) of Contracts § 13 states the rule in one sentence: a person has no capacity to incur contractual duties if his property is under guardianship by reason of an adjudication of mental illness or defect.⁷ An adjudication is a court's formal finding, made after a proceeding, that a person is legally incompetent, and guardianship means the court has placed the person's property under a fiduciary who manages it under the court's supervision. The person in that position, called a ward, falls within the first exception to the presumption of full capacity.⁸ The words no capacity set this category apart. A minor, a person with a mental illness, and an intoxicated person each incur voidable duties, so each holds an option to escape the bargain. A ward incurs no duties to begin with, so an attempted contract is void, and no election to avoid it and no ratification is needed or possible.⁹

The strength of the rule follows from what the court has already done. A court that finds a person unable to manage property and hands control to a guardian has answered the capacity question in advance, and all power over the ward's estate now sits with the guardian.¹⁰ If the ward could still bind the estate by signing a contract, two people would hold authority over the same assets, and the guardian's control would last only until the ward's next signature. A void rule closes that gap. It also tells counterparties where to look: once a person has been adjudicated, a binding transaction runs through the duly appointed guardian, and a counterparty who wants a dependable deal should confirm that the guardian was properly appointed and that the guardianship was in effect when the contract was signed.¹¹

The contrast with ordinary mental incapacity shows how much work the adjudication does. Older authority treated the transactions of the mentally infirm as void, but under the overwhelming weight of modern authority they are voidable, with one exception adopted in many jurisdictions: if the person was adjudicated incompetent and a guardian of property was appointed before the transaction, the transaction is void.¹² For an unadjudicated person, the question is whether this person could understand or act reasonably in this transaction, a transaction-by-transaction inquiry that later sections develop. For a ward, the question is whether the court's order was in force when the contract was made.

The void rule applied in Kenai Chrysler Center, Inc. v. Denison, where a dealership sold a car to David Denison, a developmentally disabled young adult who lived independently and was under a legal guardianship held by his parents; he paid with his debit card.¹³ His mother told the dealership as soon as she learned of the sale that David had no legal authority to contract, and when she tried to return the car, the manager refused to take it back. The parents sued for a declaration that the contract was void and for an injunction against further payments, and they prevailed on summary judgment.¹⁴ The dealership argued on appeal that it deserved at least restitution. The court answered that, under the Restatement, a valid guardianship precludes formation of a valid contract with the ward, and that restitution for a party who dealt with an incompetent was available only when that party lacked actual or constructive knowledge of the incompetence.¹⁵ The dealership relied on Pappert v. Sargent, but the incompetent party there was not under any guardianship and the circumstances gave no reason to suspect incompetence, whereas David's status was fixed by a formal order.¹⁶ Because the order settled his status, the court also rejected the suggestion that factual questions about his state of mind at the time of the sale precluded summary judgment. Why the dealership's ignorance of the guardianship could not rescue it is the subject of the next subsection.

Because the order controls, evidence that a ward had lucid moments does not reopen the question. In Sun Trust Bank v. Harper, a decedent whom a court had placed under guardianship lacked capacity to modify the terms of a retirement account despite alleged lucid moments.¹⁷ The adjudication has already measured the person's capacity, and testing each later transaction against how clearly the ward happened to be thinking would revive the case-by-case inquiry that the adjudication replaced. The general rule is the same for a conservator: a person whose property is under court-decreed conservatorship cannot contract.¹⁸

Each part of § 13 carries weight, and the usual exam error is to treat a severe diagnosis as enough. The section requires guardianship of the person's property, resting on an adjudication, by reason of mental illness or defect.¹⁹ Commitment to an institution does not meet that description, and neither does a voluntary appointment of a conservator, because neither is an adjudication of incompetence that vests control of the person's property in a guardian.²⁰ Timing matters as well. If a person is adjudicated incompetent only after a transaction, the transaction is voidable and not void.²¹

Step four matters because a rigid void rule has a cost: it can strip a ward of a good deal that the guardian would gladly keep, and some authority softens it. In Huntington National Bank v. Toland, a contract made by a person adjudicated incompetent 35 years earlier was held voidable unless ratified by the guardian, even though the person had dealt with the bank without incident for four years before death.²² Statutes show the same drift. The Oregon spendthrift statute at issue in Olshen v. Kaufman first declared a spendthrift ward's contracts null and void, was amended in 1947 to make them voidable, and was amended again in 1961 to make them voidable by the guardian of the estate for the ward.²³ A spendthrift guardianship protects a person against wasteful habits and is not an adjudication of mental illness, so § 13 does not govern it by its terms, but the statute shows how a legislature can adjust the consequence of a guardianship. The court read the 1947 change as recognizing that some contracts a spendthrift makes may benefit him, so the guardian should have discretion to avoid a contract that harms the ward or to affirm one that helps, and the 1961 amendment settled that the guardian holds the power to avoid.²⁴

The same decisions show how firmly the ward's status controls. In the companion decision, Lilienthal v. Kaufman, a California plaintiff advanced money in San Francisco to an Oregon ward for a binocular resale venture and took two promissory notes without knowing of the guardianship; the guardian then declared the notes void.²⁵ In Olshen the guardian likewise elected to declare the contract void, and the court held that the ward's regular business activity, even if known to the plaintiff, could not give the contract validity, since a person incompetent to make a contract is equally incompetent to estop himself from asserting its invalidity.²⁶ On an exam stem, apply § 13 as the default and treat the contract as void, but if the stem supplies a statute making a ward's contracts voidable by the guardian, apply that statute and give the power of avoidance to the guardian alone.

Constructive Notice to Counterparties

A dealer who contracts with a ward will almost always say it never knew of any guardianship, and the rule that the ward's contract is void gives that answer very little weight. The Restatement's comment to § 13, which the Alaska Supreme Court quoted in Kenai Chrysler, treats guardianship proceedings as giving public notice of the ward's incapacity and as fixing the ward's status for transactions during the guardianship. It does so even when the other party to a particular transaction has no knowledge or reason to know of the guardianship, and it adds that the guardian is not required to give personal notice to everyone who may deal with the ward.²⁸ Constructive notice is knowledge that the law attributes to a person because a public record existed that would have supplied it, whether or not the person ever looked. A counterparty who deals with a ward is therefore treated as though it had been told, and the question of what it actually knew drops out of the analysis.

Kenai Chrysler shows the principle working against the argument a dealer is most likely to make. After the guardianship order made the sale void, the dealership asked for restitution. It relied on an earlier Alaska decision, Pappert v. Sargent, which allows restitution to a party who dealt with a ward only when that party had neither actual nor constructive knowledge of the incompetence, and it argued that a factual question remained about whether it had notice of the guardianship.²⁹ The court accepted the rule and rejected the argument. The person in the earlier case was under no guardianship and the transaction gave no reason to suspect incompetence, whereas David Denison was subject to a formal order declaring him incompetent to contract, and that order gave notice to the public.³⁰ Because the dealership was charged with constructive notice, it could not recover restitution, and questions about David's own state of mind at the time of the sale could not defeat summary judgment. The court backed the result with older authority: a territorial decision had treated an adjudication of insanity as notice to all the world, and an Ohio court had deemed the probate record of the judgment to give constructive notice of the ward's disability.³¹

The notice rule has two parts, and each has its own reason. The first concerns the ward's status. A guardianship is worth something only if the ward cannot bind the estate by contract, and a Massachusetts decision quoted in Olshen says so in nearly those words.³² If an enforceable contract depended on the counterparty's ignorance, the protection would fail exactly where the ward deals with strangers, because every stranger who had not heard of the order would hold a binding promise. The second part allocates the risk of not knowing. A guardian cannot be required to find and warn every person who might someday deal with the ward, since no one can list them in advance, while a counterparty about to hand over goods or credit can look at the court record first. Placing the cost on the party who can check most cheaply explains why the adjudication is treated as notice to everyone, and the belief that those who contract with an adjudicated person are on notice, actual or constructive, likely explains why such contracts are void rather than merely voidable.³³

The sharpest test of the rule came in Olshen v. Kaufman, where the ward did not look like a ward. Kaufman, adjudged a spendthrift, kept an office, held commercial accounts at two banks, and borrowed $7,000 from one of them on collateral. His guardian knew of some of this, told him to stop, and complained to the banks, but could not control him.³⁴ The plaintiff, who had no actual knowledge of the guardianship, argued that the ward and the guardian were estopped to deny the validity of the check, since the guardian had tolerated the business activity.³⁵ The Oregon Supreme Court refused, relying on the Iowa statement that every person dealing with one who is in fact under permanent guardianship is bound by constructive notice of the judgment of disability. It added that business activity, if known to the plaintiff, might have misled the plaintiff but could not give a contract validity: "If he was incompetent to make a contract, he was equally incompetent to estop himself to assert its invalidity."³⁶ The ward's ordinary appearance therefore does not matter, because the notice comes from the adjudication and not from how the ward behaves. A California lender in Lilienthal v. Kaufman, a companion case, advanced funds and took promissory notes without knowing of the guardianship, and the guardian's declaration that the notes were void defeated the lender's claim.³⁷

The plaintiff in Olshen also argued by analogy to minors, since some courts estop an infant who misrepresents age or acts as an adult in business. The court gave two answers. Estoppel generally cannot be invoked against an infant sued on a contract, and none of the cases enforcing an infant's contract on estoppel grounds involved an infant under guardianship.³⁸ The second answer is that assuming a spendthrift under guardianship had enough capacity to contract would attack the very basis of the order appointing the guardian. The modern rule protecting a person who reasonably supposes the other party is sane likewise concerns people who were not under guardianship.³⁹ The notice rule has a boundary of its own. The court emphasized that the guardianship before it was active and going, with annual accounts filed and orders taken on the estate's routine business, and it distinguished a dormant guardianship, in which the ward has regained competency and the guardian has surrendered the estate but neglected to get a discharge.⁴⁰ Notice attaches to an adjudication that is actually in force when the contract is made, and an adjudication that comes only afterward leaves the earlier transfer voidable instead of void.⁴¹

The dissenting judges in Olshen attacked the notice rule itself. Justice O'Connell argued that to those unaware of the guardianship, Kaufman was just another person running a business, with nothing in his activities to warn of his status, so that saying guardianship proceedings give constructive notice "is merely to state a conclusion" that could as easily be reversed.⁴² His point is that constructive notice assigns a risk without showing that the counterparty could realistically have discovered the facts. He would have read "voidable" in the spendthrift statute the way courts read it for infants, with equitable limits that deny avoidance where it would be inequitable, and he drew support from cases estopping a minor who appears to be an adult and induces a contract.⁴³ Justice Sloan added a practical worry. Because guardians are appointed through an ex parte process, a person can consent to a guardianship, place property behind its protection, and keep doing business to the detriment of creditors, who would then bear the cost and delay of setting the guardianship aside.⁴⁴ Those objections identify a real cost of the notice rule, but the majority's answer is that the guardianship protects the ward only if the ward's contracts do not depend on what a stranger happened to learn. For exam purposes, the Restatement comment and Kenai Chrysler state the controlling approach, and equitable relief for the counterparty belongs only in a stem that supplies a statute or a jurisdiction adopting that position.

The contrast with ordinary mental incapacity shows how much the adjudication changes. When mental illness has not been adjudicated, the counterparty's knowledge matters: the volitional ground for avoidance requires that the other party have reason to know of the condition, and the power of avoidance can end where a fair contract was made by a party without knowledge of the illness.⁴⁵ The dealer who contracts with a ward gets no comparable protection from ignorance, because the adjudication supplies the notice.