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Indiana Court of Appeals: Competence To Enter Contract Not Same As Competence To Stand Trial
Posted in Litigation

In Nichols v. Estate of Tyler, the Indiana Court of Appeals affirmed the trial court’s determination that deceased Ernest Tyler was incompetent to enter contracts and thus, the trust he formed in 2002 to hold his real estate with his neighbor to serve as trustee, and the subsequent conditional sales contract he executed in February 2005 to convey to the same neighbor, in exchange for $200 per month, Tyler’s $1.5 million farmland, were void. 

Tyler had an extensive mental health history, including multiple hospitalizations.  Following the February 2005 execution of the conditional sales contract, Tyler was diagnosed with Alzheimer’s Disease, and there was expert testimony that Tyler would have been incapacitated at the time the contract was signed.

The Indiana Court of Appeals found that the “mental capacity required to enter into a contract ‘is whether the person was able to understand in a reasonable manner the nature and effect of his act’ on the date of the agreement.”  Contrary to the neighbor’s arguments, standards used by trial court’s to determine whether a criminal defendant is competent at trial to assist his own defense were inapposite.  The Court stated that “the standard to be used here is more closely akin to that in making a will, and therefore evidence as to one’s mental condition prior and subsequent to the date of signing is both admissible and relevant.”  Thus, the Court concluded that the trial court’s finding that Tyler was incompetent to enter contracts was not clearly erroneous.

In addition, the Indiana Court of Appeals observed that when “transactions occur between a dominant and a subordinate party which benefit the dominant party, ‘the law imposes a presumption that the transaction was the result of undue influence exerted by the dominant party, constructively fraudulent, and, thus void.’”  To rebut the presumption, the dominant party must demonstrate by clear proof that the transaction was at arms length.  The circumstantial evidence showed that the neighbor, who held Tyler’s durable power of attorney, prevented Tyler from seeing his family without the neighbor’s supervision, did not disclose to Tyler’s family any of Tyler’s legal dealings, introduced Tyler to the attorney the neighbor used previously and enlisted the attorney’s assistance in preparing a sales agreement that transferred property to the neighbor in “a wholly unfair and one-sided transaction.”  Thus, the neighbor did not rebut the presumption of undue influence.

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