Olshen v. Kaufman , 235 Or. 423 ( 1963 )

LUSK, J.

This is an action to recover the balance owing on a check for $5,750 given to the plaintiff by the defendant Leonard I. Kanfman, Jr. The other defendant, Leon W. Behrman, is the gnardian of the estate of Leonard I. Kanfman, Jr., a spendthrift. When the action was commenced the only defendant was Kaufman; the guardian was not made a defendant until after the case came on for trial.

The question is whether, under the statute of this state providing for the appointment of guardians for spendthrifts, recovery may be had on the contract of a spendthrift when his guardian has repudiated the obligation.

The facts are free from dispute. Briefly stated, the record shows that in December, 1958, Kaufman induced the plaintiff, a druggist in Portland, to advance to him the sum of $1,575 as an investment in a joint venture for the purchase of toys for resale. A few months later Kaufman informed plaintiff that they had doubled their money. He offered to give plaintiff a check in settlement and at the same time proposed another venture in the purchase of binoculars to which the plaintiff agreed. Plaintiff’s share of the toy business, his investment plus the profit, was $2,340. This sum and an additional $2,660, totaling $5,000, were thereupon advanced by plaintiff to Kaufman for use in the binocular business. Later Kaufman told plaintiff that the latter was entitled to $750 as his share of the profits from that venture, and he gave the plaintiff his cheek for $5,750, dated October 1, 1959, drawn on the Bank of California, N.A., in full settlement, of his indebtedness to the plaintiff. There were insufficient funds in Kaufman’s account with the bank to pay the check and no part of the debt has been paid except $1,400. Plaintiff brought this action to recover the balance of $4,350, together with interest and a reasonable attorney’s fee.

There was a trial before the court without a jury, upon the conclusion of which the court entered findings to the effect that the transactions, as a result of which Kaufman delivered the cheek to the plaintiff, were not transactions for necessaries and that the guardian had declared void the transactions and the agreement of Kaufman to pay $5,750 to the plaintiff. Judgment accordingly was entered for the defendant. The plaintiff appeals.

We think that the case was correctly decided.

OES 126.005, in effect at the applicable times, provided :

“As used in this chapter:

“(1) ‘Spendthrift’ includes every person who, by excessive drinking, idleness, gaming or debauchery of any kind, shall spend or lessen his estate so as to expose or likely to expose himself or his family, to want or suffering, or to cause the county to be charged for the expense of the support of himself and his family.”

The order adjudging Kaufman a spendthrift and appointing Mr. Behrman guardian of his estate was entered by the Circuit Court for Multnomah County, Probate Department, February 25, 1953, upon a petition filed by Kaufman’s mother and sister, which showed, among other things, that Kaufman had a beneficial interest in a trust created by his grandmother from which he received an income of approximately $3,000 a year. Kaufman consented to the appointment in writing, as provided for by former OES 126.135. Behrman immediately duly qualified as guardian and has ever since acted in that capacity.

Former ORS 126.335, the statute in effect at the time of the transactions in question, provided:

“After the appointment of a guardian for a spendthrift, all contracts, except for necessaries, and all gifts, sales and transfers of real or personal estate made by such spendthrift thereafter and before the termination of the guardianship are voidable.”

The statute originally provided that the contracts of a spendthrift are “null and void,” OCLA 22-114. This was changed to “voidable” by Oregon Laws 1947, eh 524, § 17, and changed again in 1961 to “voidable by the guardian of the estate for the ward,” Oregon Laws 1961, ch 344, § 37; ORS 126.280.

The statutes of other states regarding spendthrifts usually provide, as ours formerly did, that the contracts of a spendthrift while under guardianship, except those for necessaries, are null and void. We are of the opinion that the change from “null and void” to “voidable” in 1947 was made with the idea in mind that some contracts which a spendthrift might enter into would be for his benefit and that the guardian in such a case should be granted the discretion to determine that question and to avoid the contract if he thought that this would be in the interest of the ward, but if otherwise to affirm it. The 1961 amendment adding the words “by the guardian” after “voidable” was evidently adopted to clarify the meaning of the statute and to remove any doubts that might have arisen as to who was authorized to avoid the spendthrift’s contracts. See Elliott Grocer Co. v. Field’s Pure Food Market, Inc., 286 Mich 112, 281 NW 557, 118 ALR 845. This right to avoid a contract was given for the protection of the spendthrift. A similar: right in the case of insane persons is ordinarily exercised by a guardian. Woerner, Guardianship, § 129; Atwell v. Jenkins, 163 Mass 362, 40 NE 178, 47 Am St Rep 463, 28 LRA 694; Allen v. Berryhill, 27 Iowa 534, 536, 1 Am Rep 309; Carrier v. Sears, 4 Allen (Mass) 336, 81 Am Dec 707. So, also, of infants. Oliver v. Houdlet, 13 Mass 237, 7 Am Dec 134. An Illinois statute provided that every contract with a “spendthrift made after the application for the appointment of a conservator, may he avoided, except in favor of the person fraudulently making the same.” Rev. Statutes of Illinois, 1905, ch 86, § 15. In Sheldon v. Eakle, 160 Ill App 282, this right to avoid a contract was held to he in the conservator.

The purpose of the appointment of a guardian of the estate of a spendthrift is to protect the ward in his property against his wasteful and vicious habits which expose him or are likely to expose him or his family to want or suffering or to cause any public authority to he charged for any expense for his support or that of his family. ORS 126.005, supra. See Norton v. Leonard, 29 Mass 152, 161. It would seem to be fairly obvious that for the fulfillment of that purpose the responsibility of declaring void a contract entered into by the ward naturally devolves upon the guardian, along with his other duties. That this is what the legislature intended when it adopted the amendment in question we think there is no reason to doubt.

The guardian in this case having elected to declare the contract void, the plaintiff cannot recover upon it, unless there is merit in his contentions now to he considered.

By way of reply to the affirmative answer alleging the guardianship of Kaufman and the avoidance by the guardian of the contract sued upon, the plaintiff alleged that since 1957 Kaufman had regularly engaged in business as a wholesaler of toys, sporting goods, radios, and other merchandise; that defendant Behrman knew of Kaufman’s business activities and made no inventory of the property of Kaufman used in them; that the contracts entered into by Kaufman in the pursuit of such business activities were the contracts of the guardian and that the defendants had waived any right to avoid the check which is the basis of plaintiff’s claim, and are estopped to deny its validity.

The evidence is uncontradicted that Kaufman did engage in at least some of the business activities alleged. He maintained an office. He had commercial accounts in the Bank of California, N.A., and The United States National Bank of Portland and borrowed money from both banks. In June 1960 he borrowed $7,000 from the Bank of California, giving as collateral security a warehouse receipt for binoculars and 84 shares of stock of Trans Caribbean Airways, Inc., standing in his name. It is not necessary to go into these matters in further detail.

That Mr. Behrman knew about some of his ward’s doings is not disputed. He testified that he learned of the bank accounts and instructed Kaufman not to maintain them and the banks not to allow them, and that he remonstrated with his ward regarding his engaging in business, but, in effect, that he could not control Kaufman.

Despite all this, it cannot be questioned that Kaufman had been duly adjudged a spendthrift and Behrman duly appointed his guardian and that the guardianship was in existence at the time of the transactions which led to this lawsuit. This is not a case of a “dormant guardianship” referred to in Reeves v. Hunter, 185 Iowa 958, 967, 171 NW 567, where the ward is “restored to mental competency, and * * * the guardian, recognizing such fact, surrenders to him his estate, and thereby becomes entitled to an order of discharge, but neglects to obtain the same,” but a ease “of an active, ‘going’ guardianship.” Annual'reports were regularly filed and their approval secured, and petitions presented and orders thereon taken relating to the routine business of the estate. The value of the estate as shown by the second supplemental inventory and appraisement filed March 11; 1958, was $63,410.17. The eighth annual account filed February 16, 1961, showed total assets valued at $86,381.38.

The question presented, therefore, is whether, if a spendthrift engages in business, to some extent with the knowledge, though not the approval, of his guardian, the ward and the guardian are estopped to question the validity of a contract entered into by the ward with one who has no actual notice or knowledge of the guardianship.

We are unable to see on what principle this can be held. A spendthrift under guardianship who enters into a contract impliedly, at least, represents that he is competent to do so; yet the mere fact that the party dealing with him has no actual knowledge of the guardianship will not prevent the spendthrift from relying on his incompeteney as a defense when sued on the contract, Reeves v. Hunter, supra; Sheldon v. Eakle, supra; Lynch v. Dodge, 130 Mass 458. As stated in the case last cited:

“In order that the guardianship be of any practical value, it is essential that the ward be powerless to make contracts which shall bind him or his estate, and the consequence of the appointment of a guardian of a spendthrift is that, from the time of the appointment, the ward ceases to be sui juris, except so far as contracts for necessaries are concerned, and is unable otherwise to deal with any part of his estate.” 130 Mass at 459.

In re Barker, 83 Or 702, 164 P 382, is relied on by the plaintiff. In this case recovery was allowed for the agreed price and reasonable value of necessaries sold by the plaintiff to the ward for whom a guardian had been appointed as a spendthrift. It appeared that the guardian had placed in the hands of the ward each month ample funds for his sustenance, but that the ward squandered the money and failed to pay in full for the necessaries furnished him by the plaintiff, and the defendant argued that for this reason food furnished the ward by the plaintiff and consumed by the ward were not necessaries. The court said that it was a violation of the guardian’s duty to commit the control of any considerable portion of the ward’s property to the spendthrift himself, but that to declare that such conduct would take from the spendthrift’s food its character as a necessary “would be to say that the payment of his just debts could be prevented by a void act.” 83 Or at 706-7. The only principle established by this decision applicable to the present case is that dereliction of duty on the part of a guardian of a spendthrift cannot be invoked to affect the validity, or otherwise, of contracts entered into by the ward. Whether one contracting with the ward would have a remedy against the guardian in his personal capacity because of such dereliction of duty, is a- question not presented by this record and concerning which we indicate no opinion. The guardian is a proper party to defend the action in the interest of the ward, hut he is not a proper party for the purpose of establishing a personal liability against him. Sturgis v. Sturgis, 51 Or 10, 19, 93 P 696, 131 Am St Rep 724, 15 LRA NS 1034.

Plaintiff quotes from 5 Bancroft’s Probate Practice (2d ed) § 1345 as follows:

“A guardian should not permit the ward to manage his own estate, and in ease he does so, any act of the ward while so managing is in law the act of the guardian.”

The foregoing statement is taken from In re Cuffe’s Estate, 63 Mont 399, 207 P 640, which was a contest between a guardian and his ward, a minor, over the settlement of the guardian’s accounts. The guardian had never taken possession of the property of the ward and the ward continued to operate a farm which he owned as he had before the guardianship. The court held that a complete and fair settlement of the accounts had been agreed upon by the parties after the ward became of age and added, obiter, the language quoted, which may have been appropriate to the facts of that case but can scarcely be accepted as a principle applicable to the dealings of the ward with third parties.

In Reeves v. Hunter, supra, the court said that the property of a spendthrift is “in a sense, in custodié legis” and that every person “dealing with one who is, in fact, under permanent guardianship, is bound by constructive notice of the judgment of disability,” 185 Iowa at 964. Sheldon v. Eakle, Lynch v. Dodge, both supra, Rannells v. Gerner, 80 Mo 474, and Imhoff v. Witmer’s Administrator, 31 Pa 243, 244-245, are to the same effect. The case of Gen. Pulaski B. & L. Assn. v. P. Tr. Co., 338 Pa 198, 12 A2d 336, which is cited as contra to these holdings, is explained and qualified in Pa. Co. for Bank, and Tr. v. Phila. T. Ins. Co., 372 Pa 259, 262-264, 93 A2d 687. We think it is not in point. See, also, Century Credit Co. v. Jones et al., 196 Pa Super 210, 213-214, 173 A2d 768. The fact that the defendant was engaged in business, if known to the plaintiff, might have misled the latter, but could not give validity to the spendthrift’s contract. If he was incompetent to make a contract, he was equally incompetent to estop himself to assert its invalidity.

An analogy is suggested to cases in which some of the courts have held that infants may be estopped to avoid their contracts on the ground of incompetency. At common law an infant’s contract is voidable by him upon his attaining his majority. In this state, where an infant has purchased an article of personal property as, for example, a motorcycle or an automobile, and on attaining his majority disaffirms the contract, returns the property and sues to recover the consideration paid by him, he will not be permitted to recover the amount actually paid without allowing the seller reasonable compensation for the use and depreciation of the article while in his hands. Gaither v. Wallingford, 101 Or 389, 200 P 910; Petit v. Liston, 97 Or 464, 191 P 660, 11 ALR 487. More nearly resembling this ease are those in which an infant fraudulently misrepresents his age so as to induce another to enter into a contract with him. If the infant is sued at law upon such a contract it is held by all but a few courts that he is not estopped by his conduct to avoid the contract, 27 Am Jur 798, Infants § 67. See Annotations, 6 ALR 416, 418; 18 ALR 520; 90 ALR 1442. In other cases, according to the author of the annotation in 6 ALR, “* # * it is not easy to say where [the weight of authority] is.” Some of the courts have relied on the language of Lord Mansfield in Zouch ex dem, Abbot v. Parsons (1765), 3 Burr. 1794, 97 Eng Rep 1103, that the privilege “is given as a shield, and not as a sword” and “[t]here is considerable authority to the effect that one, having while an infant induced a contract by fraudulent representations that he was of full age, may not demand relief from a court of equity.” 27 Am Jur 800, Infants § 70. See, for example, Stallard v. Sutherland, 131 Va 316, 108 SE 568, 18 ALR 516. On the other hand, it was held by the court of appeals of New York in Sternlieb v. Normandie National Securities Corp., 263 NY 245, 188 NE 726, 90 ALR 1437, that in a suit to rescind a purchase of stock based on the ground that the plaintiff was under 21 years of age at the time he made the purchase, the defense that the plaintiff misrepresented his age was not valid. The court cited numerous authorities to support its statement “That the false representation regarding age does not prevent rescission, even when the infant be the plaintiff, is the holding of the courts in the majority of our States.” 263 NY at 249. We need not pursue that matter further because we are not dealing here with that kind of a case.

Even though the analogy of the law regarding the contracts of infants were to be applied to spendthrifts, the plaintiff would not be aided, because, under the decided weight of authority, estoppel cannot be invoked against an infant when he is sued upon his contract and moreover in no case, so far as we are aware, has the infant- been held estopped unless it appeared that at the time of entering into the contract he was of sufficient age to understand his rights and the nature of the business on which he was engaged. See 27 Am Jur 798, Infants § 65. Thus in LaRosa v. Nichols, 92 NJL 375, 105 A 201, 6 ALR 412, the court said:

“It seems anomalous, indeed, that youths of sufficient age and- capacity, although less than twenty-one years old, may be convicted of crime, and be held liable for their torts, and yet not be liable on their contracts when apparently of sufficient capacity to make them, and when they procure their making by fraud.” (Italics added.) 92 NJL at 379.

None of the eases in which the contracts of infants have been held enforceable on the ground of estoppel involve infants under guardianship. It cannot be assumed that a spendthrift under guardianship is of sufficient capacity to make a contract; that would be to attack the very basis of the court’s order appointing a guardian for him. For the “guardianship [is] conclusive of the disability of the ward, whether in consequence of insanity, or habitual drunkenness, old age, sickness, or other cause whatever.” Woerner, Guardianship 425. As the court said in Lynch v. Dodge, supra, 130 Mass at 458:

“The fact being established that he has the characteristics which constitute a spendthrift, he is, in the interest of the public welfare, put in person and property into the same position with those who are incompetent, by reason of mental weakness, to manage their own affairs.”

See, also, Reeves v. Hunter, supra, 185 Iowa at 961; Hughes v. Jones et al, 116 NY 67, 15 Am St Rep 386, 22 NE 446, 5 LRA 632; Wadsworth v. Sharpsteen and Moffat, 8 NY 388, 59 Am Dec 499; L’Amoureux v. Crosby, 2 Paige’s Chancery Reports (NY) 422, 22 Am Dee 655; Wait v. Maxwell, 5 Pickering (Mass) 217, 16 Am Dec 891; Hovey v. Hobson, 53 Maine 451, 89 Am Dec 705.

Onr attention is called to 1 Williston on Contracts (rev ed) § 254, where the author discusses the modern rule that if one dealing with a lunatic may reasonably suppose he is sane and makes a bargain with him on that assumption, mental incapacity is no defense to an action on a contract. The authorities to which Williston refers are all cases in which the lunatic was not under guardianship. This fact is specifically stated by the author in section 257, where it is said:

“In the discussion thus far it has been assumed that the lunatic was not under guardianship. When a guardian is appointed he thereupon becomes vested with the control of the property of his ward, and he alone is capable of transferring it. It may also be assumed that all contracts of a - lunatic made during guardianship are held void. The guardian represents the lunatic for the purpose of all business transactions. * * *”

It is said by plaintiff that the. provision of former ORS 126.320 (3), imposing on the guardian the duty to “pay out of the personal estate, if sufficient, and if not, out of his real estate, all just debts due from his ward,” is controlling. But this statute does not determine what are the “just debts” of the ward, and cannot be reasonably interpreted to apply to a debt incurred by the ward which the guardian elects to avoid. If it were so applied, then the provision that the contracts of the ward are voidable by the guardian would lose practically all meaning. ORS 126.320 (3) was part of a general statute prescribing the duties of all guardians, including those of the “mentally ill.” The contracts of persons of unsound mind who are under guardianship are generally absolutely void, Woemer, Guardianship 425. Were the plaintiff’s argument to prevail, it would follow that it would become the duty of the guardian of such a person to carry out the void contract of his ward. The “just debts” referred to evidently include those incurred for necessaries and, in the case of spendthrifts, those ratified by the guardian. They do not include those which the guardian is authorized to, and does, avoid.

Cases cited by the plaintiff in support of the contention that the guardian is estopped by his conduct to avoid the contract are far afield and do not call for discussion. None of them deal with guardians' of spendthrifts or other incompetents.' Were this- an action against the guardian personally, the contention might require serious consideration, but we are not prepared to say that a guardian who is recreant to his duty can thereby render ineffectual the provisions of a statute governing the contracts of his ward.

Nor can we yield to the argument that the defendants are liable under some theory of restitution. The case is wholly unlike Petit v. Liston and Gaither v. Wallingford, both supra, the holdings in which have been heretofore stated. This is not a suit for restitution, but an action on a cheek and even though it were construed to be the former, to permit recovery by the plaintiff as though that were the theory of the case would be nothing less than an evasion of the statute.

In Sternlieb v. Normandie National Securities Corp., supra, Judge Crane made some observations about the policy of the law relative to infants’ contracts as enunciated in his opinion in that case and, among other things, said:

“As long as young men and women, under twenty-one years of age, having the semblance and appearance of adults, are forced to make a living and enter into business transactions, how-are-the persons dealing with them to be protected if the infant’s word cannot be taken or recognized at law? Are business men to deal with yonng people at their peril?” 263 NT at 250-251.

But he concluded:

“Well, the law is as it is, and the duty of this court is to give force and effect to the decisions as we find them. Some States have met the situation by legislation.” Idem.

The New Tork court was dealing with the rules of the common law relating to infants’ contracts as evolved by the courts. This case is governed by a statute and, whether the policy of this statute be salutary or otherwise, we have no choice but to give it “force and effect.”

The judgment is affirmed.