Hernandez v. Banks

We granted appellees’ petition for rehearing en banc to consider whether we should continue to follow the rule of Sulli*61van v. Flynn, 20 D.C. (9 Mackey) 396 (1892), that the contracts of mentally incapacitated persons are inherently void, or should instead join the majority of jurisdictions in deeming such contracts only voidable.

The background is as follows. Appellant’s predecessor-in-interest, 718 Associates,1 appealed a decision by the trial court determining that it was not entitled to a non-redeemable judgment for possession of property located at 718 Marietta Place, N.W., Washington, D.C. (the “Property”). Appellees Bryant and Sheillia Banks (the “Bankses”) contend that they are legally entitled to continue living in the Property by virtue of a lease entered into with the previous owner of the Property, Ms. Patricia Speleos. At trial, 718 Associates argued that appellees’ lease was void because Ms. Speleos was mentally incapacitated when she signed the lease. The trial court upheld the validity of the lease, finding that although Ms. Speleos was mentally incapacitated when she entered into the lease agreement, her incapacity rendered the lease voidable at her election, rather than inherently void. The trial court found that the lease had not been disaffirmed by Ms. Speleos or her representatives and therefore did not award possession of the Property to 718 Associates. 718 Associates appealed, and a three-judge division of this court reversed the trial court’s decision, holding that Sullivan controlled and the lease was inherently void.2 718 Assocs. v. Banks, 21 A.3d 977, 984 (D.C.), reh’g en banc granted, opinion vacated sub nom. 718 Assocs. Tr. 718 NW Trust v. Banks, 36 A.3d 826 (D.C.2011). We conclude that the voidable standard better comports with modern contract law and modern understandings of mental illness and therefore overrule Sullivan and adopt the majority approach that such contracts are voidable, rather than inherently void.

I. Background

The Bankses entered into a lease agreement regarding the Property at issue in this case with Ms. Speleos in March 2001. Pursuant to that lease, appellees were obligated to pay $500 per month in rent and were given the exclusive option to purchase the Property at any time for $50,000. In July 1997, 718 Associates purchased a tax sale certificate to the Property for $2,103 and was subsequently issued a tax deed in August 2001. See D.C.Code § 47-1304 (1997 Supp.) (providing that when a *62property is not redeemed by the owner following the issuance of a tax sale certificate, a deed shall be given to the tax sale purchaser).

In November 2001, as part of a separate proceeding initiated by Adult Protective Services, Superior Court Judge Kaye K. Christian found Ms. Speleos, who was then eighty-four years old, to be mentally incapacitated as defined by D.C.Code § 21-2011(11) (2001).3 Pursuant to the finding of incapacity, Judge Christian appointed Stephanie Bradley as conservator of Ms. Speleos’s estate and Ms. Speleos’s nieces as guardians of Ms. Speleos. See D.C.Code §§ 21-2051, -2044 (2001) (appointment of conservators and guardians, respectively). A hearing was later held to determine the status of seven real estate transactions Ms. Speleos had entered into in March 2001, prior to her adjudication of incapacity. Ms. Bradley alleged that Ms. Speleos was already incapacitated at the time of the transactions, in which she purportedly transferred seven properties with tax-assessed values of over half a million dollars for only $41,000 in recited consideration. Judge Christian voided the transactions, but did not rule on the validity of the Bankses’ lease, which was also entered into prior to Ms. Speleos’s adjudication of incapacity. Instead, Judge Christian noted that another hearing would need to be held to address that lease. However, that additional hearing was never held.

On August 4, 2003, Judge Hiram E. Puig-Lugo found, based on the testimony of Ms. Speleos’s conservator and guardians, that Ms. Speleos was mentally ill and was likely to injure herself. See D.C.Code § 21-545(b)(2) (2001). For that reason, Ms. Speleos was committed indefinitely to the District of Columbia Department of Mental Health for outpatient treatment. On August 5, 2003, 718 Associates filed suit against Ms. Speleos’s estate to quiet title to the Property, claiming that their tax deed divested all interest and title of the Estate and vested good title to the Property in 718 Associates. See D.C.Code § 47-1304 (2001). While the suit to quiet title was pending, Ms. Speleos passed away, and her sister, Ann E. Pizzulo, became Personal Representative of the Estate. The suit to quiet title was resolved in October 2006, when 718 Associates and the Estate entered into a settlement agreement, which resulted in 718 Associates obtaining title to the Property. Pursuant to that settlement agreement, the Estate provided an affidavit attesting that there were no valid leases or permissive tenants on the Property.4

In April 2008, 718 Associates filed the present action seeking a non-redeemable judgment for possession of the Property *63against the Bankses. The Bankses claimed that they were entitled to remain tenants when 718 Associates obtained title to the Property because they had a valid lease with the Property’s former owner, Ms. Speleos. 718 Associates challenged the validity of that lease, claiming that Ms. Speleos lacked capacity at the time that she entered into the lease transaction with the Bankses and, as a result, the lease was void.5 The trial court, Judge Stephanie Duncan-Peters, found that Ms. Speleos was mentally incompetent when she entered into the lease agreement with appel-lees.6 The trial court concluded, however, that the lease was voidable, rather than void. Citing Sullivan v. Flynn, 20 D.C. (9 Mackey) 396 (1892), the trial court recognized that “[historically, a conveyance or contract by an insane or non compos men-tis individual was declared void, and not merely voidable.” The trial court observed that “the District of Columbia has not considered this particular issue,” but did not discuss whether Sullivan remained binding precedent in the District of Columbia. The trial judge then examined what she described as the “modern view” that such a transaction is voidable, citing to cases from other jurisdictions7 and discussing the public interest in protecting incapacitated persons’ personal and property rights. After concluding that contracts entered into by mentally incapacitated persons are voidable, rather than void, the trial court found that there was “no ratification or disaffirmance by Ms. Spel-eos or an authorized representative on her behalf....”8 The trial court concluded by observing that “[t]he public policy considerations that would give the [cjourt power to void the lease agreement, namely protection of the incompetent party, are not applicable to [718 Associates, a subsequent purchaser].”

*64On appeal to the division, although 718 Associates “largely accede[d] to the trial court’s determination that the lease was voidable and not void,” they did “ask [the division] to find ‘that the lease agreement is void in accordance with’ Sullivan, supra, 20 D.C. (9 Mackey) at 401 (1892) (holding that ‘the deed of an insane person is void, and therefore cannot be ratified by acts in pais ’).”9 718 Assocs., supra, 21 A.3d at 981 n. 9. The division concluded that it was constrained to apply Sullivan because Sullivan remained binding precedent in the District of Columbia and therefore could only be overruled by this court sitting en banc.10 718 Assocs., supra, 21 A.3d at 984 (citing M.A.P., supra note 2, 285 A.2d at 312).

II. Discussion

We begin our discussion by outlining the relevant legal principles governing the contracts of mentally incapacitated persons. We then explain our reasons for overruling Sullivan and adopting the voidable rule, as stated in the Restatement (Second) of Contracts, as the law of the District of Columbia.

A. Legal Background

We granted rehearing en banc to consider whether the rule from Sullivan, that contracts entered into by mentally incapacitated persons are inherently void, should continue to be followed in the District of Columbia, or if we should join a majority of jurisdictions and hold that such contracts are voidable. We first address the applicable standard of review and define the void and voidable rules concerning the contracts of mentally incapacitated persons.

1. Standard of Review

Because neither this court sitting en banc nor the D.C. Circuit (prior to 1971) overturned or announced a departure from Sullivan, it remains the law in the District of Columbia. This court sitting en banc may overrule our predecessor courts’ decisions, including common law decisions. See, e.g., Davis v. Moore, 772 A.2d 204, 234 (D.C.2001) (en banc) (Ruiz, J., concurring in part and dissenting in part). “[I]n common law cases our task is to carefully consider our own precedents, weigh rulings from other jurisdictions for their persuasive authority, and, guided by judicial doctrines such as stare decisis and the uniquely judicial means of case-by-case adjudication, declare the common law of the District of Columbia.”11 Id. “The doc*65trine of stare decisis is of course ‘essential to the respect accorded to the judgments of the [cjourt and to the stability of the law,’ but it does not compel us to follow a past decision when its rationale no longer withstands ‘careful analysis.’ ” Arizona v. Gant, 556 U.S. 332, 348, 129 S.Ct. 1710, 173 L.Ed.2d 485 (2009) (quoting Lawrence v. Texas, 539 U.S. 558, 577, 123 S.Ct. 2472, 156 L.Ed.2d 508 (2003)). Furthermore, the doctrine of stare decisis “‘does not irreversibly require that we follow without deviation earlier pronouncements of law which are unsuited to modern experience and which no longer adequately serve the interests of justice.’ ” Carl v. Children’s Hosp., 702 A.2d 159, 178-79 (D.C.1997) (Schwelb, J., concurring) (quoting Beaulieu v. Beaulieu, 265 A.2d 610, 613 (Me.1970)). Before discussing why Sullivan should be overruled, we briefly explain the void and voidable rules as they relate to the contracts of mentally incapacitated persons.

2. Void Rule

Sullivan held “that the deed of an insane person is void, and therefore cannot be ratified by acts in pais.”12 20 D.C. (9 Mackey) at 401. Although Sullivan did not go into such detail, it is generally understood that “[a] void bargain is not a contract at all;” a void “contract” cannot be ratified and therefore does not bind the parties. RichaRD A. LORD, 5 Williston on Contracts § 10:2, at 278-79 (4th ed. 2009). Because the parties were never bound, the party with capacity can repudiate an agreement even though the incapacitated party has already performed. Id. A minority of jurisdictions continue to follow the rule that contracts entered into by mentally incapacitated persons are void.13

3. Voidable Rule

A majority of jurisdictions follow the rule that contracts entered into by mentally incapacitated persons are voida*66ble, rather than inherently void. Under that rule, the contractual act of a person later found mentally incapacitated, rather than adjudicated incapacitated or under a guardianship at the time of the contract,14 is not inherently void but at most voidable at the instance of the mentally incapacitated party, and then only if avoidance is equitable.15 A voidable contract is presumed valid and legally binding,16 subject to possible avoidance by the mentally incapacitated party,17 who must manifest an election to do so.18 The voidable rule is set forth in the Restatement as follows:

(1) A person incurs only voidable contractual duties by entering into a trans*67action if by reason of mental illness or defect

(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or

(b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

(2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.

Restatement (Second) of Contracts § 15 (1981). In sum, a voidable contract — unlike a void contract, which has no legal effect — binds both parties unless disaf-firmed or avoided by the incapacitated party. Absent fraud or knowledge of the asserted incapacity by the other contracting party, the power of avoidance is subject to limitation based on equitable principles.19 The power of avoidance also terminates if the incapacitated party, upon regaining capacity, affirms or ratifies the contract.20 Having explained the relevant legal principles, we proceed to consider whether Sullivan should be overruled and the voidable rule adopted in its place.

B. Overruling Sullivan v. Flynn

In considering whether the precedent established in Sullivan should be overruled, we examine whether Sullivan’s rationale still withstands careful analysis. Concluding that it does not, we first explain why the outcome in Sullivan was not compelled by the holding in Dexter v. Hall, 82 U.S. (15 Wall.) 9, 21 L.Ed. 78 (1872). Next, we examine the validity of the rationales supporting the void rule: that a mentally incapacitated person is not capable of forming a contract and that the void rule best protects the incapacitated party. Finally, we conclude that the voidable rule better balances the competing interests of protecting the incapacitated party while ensuring the security of transactions.

The court in Sullivan reasoned that it was bound by the United States Supreme Court’s decision in Dexter to hold that the deed of an insane person is void. Sullivan, supra, 20 D.C. (9 Mackey) at 401-02. The only issue before the Court in Dexter was “whether a power of attorney executed by a lunatic is void, or whether it is only voidable.” 82 U.S. (15 Wall.) at 20 (emphasis added). Analogizing to contracts involving infants, the Court held that a power of attorney granted by a “lunatic” was void. Id. at 25-26. At the time Dexter and Sullivan were decided, it was common for courts to distinguish powers of attorney from contracts. See 5 Williston on Contracts § 9:5, at 37-44 (observing that although the general rule is that an infant’s contract is voidable rather than void, “[a]t one time, certain contracts made by an infant were held void, rather than voidable” and “it has often been asserted and sometimes decided that an infant’s power of attorney or agreement to make another his agent is void” (citing, inter alia, Dexter, supra, 82 U.S. (15 Wall.) 9). However, the distinction between powers of attorney and contracts is no longer widely accepted. See 5 Williston on Con*68tracts § 9:5, at 46-47 (“[T]he better view has been to treat the creation of an agency by a minor like other agreements made by infants, as merely voidable.... ” (citing, inter alia, Restatement (Second) of Agency § 20 (1958) (“A person who has capacity to affect his legal relations by the giving of consent has capacity to authorize an agent to act for him with the same effect as if he were to act in person.”)))); 12 Williston on Contracts § 35:1, at 202 (4th ed. 2012) (“An agency contract is formed according to the same rules that are applicable to any other contract; an agency is created in much the same manner as a contract is made, in that the agency results from an agreement between the principal and the agent to serve in that capacity.”); see also Restatement (Second) of Agency § 32 (1958) (“Except to the extent that the fiduciary relation between principal and agent requires special rules, the rules for the interpretation of contracts apply to the interpretation of authority”). In the years following Dexter, there was disagreement over whether it should be interpreted narrowly, to apply only to powers of attorney, or broadly to encompass other contracts.21 That the Supreme Court did not intend to establish a sweeping rule that all contracts of mentally incapacitated persons are void is demonstrated by the Court’s decision in Luhrs v. Hancock, 181 U.S. 567, 21 S.Ct. 726, 45 L.Ed. 1005 (1901), where the Court observed, without even addressing Dexter, that “[t]he deed of an insane person is not absolutely void; it is only voidable; that is, it may be confirmed or set aside.” 181 U.S. at 574, 21 S.Ct. 726 (citation omitted). However, Luhrs is not binding on this court and therefore does not replace Sullivan as the law of the District of Columbia.22

*69The court in Sullivan acknowledged that contracts generally, as opposed to powers of attorney specifically, were not at issue in Dexter; nonetheless, the Sullivan court felt “bound to recognize, in so full and careful a discussion, a deliberate intention of the [Dexter ] court to establish a rule.”23 20 D.C. (9 Mackey) at 402. Although Dexter did not actually hold that all contracts entered into by mentally incapacitated persons are void, and therefore did not compel the Sullivan court to hold such, Dexter did use some broad language (dictum) to explain the rationales used to support the void rule.

Next, we examine the rationales commonly used to support the void rule, as explained by the Court in Dexter: 1) that a mentally incapacitated person cannot enter into a valid contract because to do so “requires the assent of two minds” and a mentally incapacitated person “has nothing which the law recognizes as a mind;” and 2) that a mentally incapacitated person, unlike an infant, will never gain the mental capacity necessary to avoid a contract and therefore “has no protection if his contract is only voidable.” Dexter, supra, 82 U.S. (15 Wall.) at 20-21.24 As we discuss below, these rationales no longer comport with *70modern contract law and modern understandings of mental illness.

1. Contract Formation

Implicit in the holdings of both Dexter and Sullivan is the premise that formation of a contract requires the mental assent of the parties involved, or a “meeting of the minds.”25 Under this subjective theory of contract formation, it would seem logical to conclude that if one of the parties lacked a sufficient “mind” there could be no such mental assent or “meeting of the minds” and therefore no contract. Weihofen, supra note 24, at 230. The question of whether a party’s actual mental assent was necessary to the formation of a contract was the subject of a “significant doctrinal struggle in the development of contract law” between subjective theorists, who argued that a “meeting of the minds” was necessary to contract formation, and objective theorists, who took the view that “[t]he expression of mutual assent, and not the assent itself, was the essential element in the formation of a contract.” Newman v. Schiff, 778 F.2d 460, 464 (8th Cir.1985) (emphasis added). “By the end of the nineteenth century, the objective theory had become ascendant and courts universally accept it today.”' 1 E. Allan Farns-worth, Farnsworth on Contracts § 3.6, at 210 (3d ed. 2004); see also Hart v. Vermont Inv. Ltd. P’ship, 667 A.2d 578, 582 (D.C.1995) (observing that the District of Columbia follows the objective law of contracts) (citation omitted). The basis for the void rule — that a mentally incapacitated person has no “mind” and is incapable of mental assent — “has given way to ... the doctrine that contractual obligation depends on manifestation of assent rather than on mental assent [or meeting of the minds].” Restatement (Second) of Contracts § 15 cmt. a (emphasis added).

To continue to adhere to the Court’s rationale in Dexter, and by extension Sullivan, one also has to accept the premise that “a lunatic, or a person non compos mentis, has nothing which the law recognizes as a mind....”26 82 U.S. (15 Wall.) at 20. The notion that a person either does or does not have a “mind” has given way to a more nuanced understanding of mental capacity.27 Courts have recognized that a person who is declared incapacitated *71“may be subject to varying degrees of infirmity or mental illness, not all equally incapacitating.” 5 Williston on Contracts § 10.3, at 296; see also Cundick v. Broadbent, 383 F.2d 157, 160 (10th Cir.1967) (recognizing “different degrees of mental competency” when addressing whether a contract could be voided for lack of capacity). Furthermore, a person may have some capacity to contract and its existence in a specific case may depend on the nature of the particular transaction at issue.28 Thus, the first rationale supporting the void rule — that a mentally incapacitated person “has nothing which the law recognizes as a mind” and therefore cannot form a contract — no longer withstands careful analysis in light of changes in contract law and evolving understanding of the complexities of mental illness.

2. “Protection” of the Party with a Mental Illness or Defect

The other rationale relied on by Dexter and incorporated in Sullivan is that a mentally incapacitated person, unlike an infant, will never regain the mental capacity necessary to avoid a contract and therefore “has no protection if his contract is only voidable.” Dexter, supra, 82 U.S. at 20-21. This rationale is based upon an outdated understanding of mental illness and of what it means to “protect” mentally incapacitated persons.

At the time Dexter and Sullivan were decided, “idiocy” and “lunacy” were primarily understood to be permanent conditions.29 Therefore, the view that a mentally incapacitated person would never gain the mental capacity necessary to avoid a contract made some sense, although it overlooked the fact that the contract could also be avoided by a guardian or, after death, by a personal representative. See Restatement (Second) of Contracts § 15 cmt. d. Evolving understanding of mental illness and advances in medicine have shown that mental capacity can vary over *72time and is susceptible to significant improvement with treatment. See, e.g., Trepanier v. Bankers Life & Cas. Co., 167 Vt. 590, 706 A.2d 943, 944 (1997) (recognizing that certain types of incapacity are only temporary); Street v. Street, 211 P.3d 495, 499 (Wyo.2009) (“Mental incapacity is not always permanent and a person may have lucid moments or intervals when that person possesses the necessary capacity to convey property.”); cf. Wallace v. United States, 936 A.2d 757, 769 (D.C.2007) (recognizing that a defendant may regain competence to stand trial). Therefore, having the choice of whether to follow through on a contract or avoid it can be very beneficial to a person who entered into the contract during a period of incapacity. See, e.g., Blinn v. Schwarz, 177 N.Y. 252, 69 N.E. 542, 545 (1904) (“If the deed or contract is void, it binds neither party, and neither can derive any benefit therefrom; but, if voidable, the lunatic, upon recovering his reason, can hold onto the bargain if it is good, and let go if it is bad.”).

Dexter, upon which Sullivan was predicated, relies on an outdated understanding of what it means to “protect” a person with a mental illness or defect. Whereas people with mental illnesses were once stigmatized and segregated from the rest of society as a common form of “treatment,” 30 modern statutes focus on protecting the civil and legal rights of people with mental illnesses and on encouraging participation in society. The policy of the District of Columbia is that residents with intellectual disabilities “shall have all the civil and legal rights enjoyed by all other citizens.” D.C.Code § 7-1301.02(a)(l) (2012 Supp.).31 For example, commitment to a residential facility of the Department of Health is permitted only when it is “the least restrictive alternative consistent with the best interests of the person and the public.” D.C.Code § 21-545(b)(2) (2004 Supp.). Consistent with that policy, the voidable rule better “protects” mentally incapacitated persons by facilitating meaningful participation in society. If the contracts of mentally incapacitated persons are void, rather than voidable, their legal “protection” is the opposite of what it should be — “[i]t would be a handcuff instead of a shield.” Breckenridge’s Heirs v. Ormsby, 24 Ky. (1 J.J. Marsh.) 236, 239 (1829). Similarly, by limiting the ability to disaffirm the contract to the mentally incapacitated party or her representative, the voidable rule protects against cases in *73which the other contracting party seeks to take advantage of an individual’s mental incapacity to avoid an otherwise fair and enforceable contract.32 If the contracts of a mentally incapacitated person are treated as void, the competent party to the contract would not need to perform even if the incapacitated party is ready to, or already has, performed the bargain. 5 Wil-liston on Contracts § 10.2, at 279.

Determining how to treat the contracts of mentally incapacitated persons requires the reconciliation of two conflicting policies: “the protection of justifiable expectations and of the security of transactions, and the protection of persons unable to protect themselves against imposition.” Restatement (Second) of Contracts § 15 cmt. a. We have already discussed how the voidable rule better serves the second policy. The voidable rule also better serves the first policy of creating greater certainty for real property and other commercial transactions. Under the Sullivan rule, because a mentally incapacitated person’s contract is inherently void, the competent contracting party and others with rights dependent on that party cannot obtain the benefit of their bargain, regardless of the inequities (although he or she may still have some remedy based on a quasi-contract theory). See, e.g., Nevin v. Hoffman, 431 F.2d 43, 47 (10th Cir.1970) (“[I]f a deed is absolutely void, a subsequent bona fide purchaser obtains nothing despite his innocence.”); Metro. Life Ins. Co. v. Bramlett, 224 Ala. 473, 140 So. 752, 754 (1932) (explaining that because the contracts “of an insane person” are inherently void, “one who contracts with an insane person takes nothing, though ignorant of his insanity, and though he paid value, and his contract is valid for no purpose”). The Restatement rule, by contrast, instructs a court to “grant relief as justice requires.” Restatement (Second) of Contracts § 15(2). Under this rule, a contract might be enforced despite one party’s incapacity where the other party had no reason to know of the incapacity and has substantially performed, cannot recover his or her consideration, or would otherwise suffer hardship. See Restatement (Second) of Contracts § 15 cmt. f & illustrations thereto (discussing situations in which avoidance would be inequitable).

Because we conclude that the void rule relies on an outdated theory of contract formation and outdated understandings of mental illness, we overrule the holding of Sullivan v. Flynn, 20 D.C. (9 Mackey) 396 (1892), that contracts entered into by mentally incapacitated persons are inherently void. In its place, we adopt the voidable rule as set forth in the Restatement (Second) of Contracts § 15, which better balances the competing interests of ensuring the security of transactions and enabling mentally incapacitated persons to participate in society, while protecting them from unfair imposition.

III. Application of the Voidable Rule to This Case

In the instant case, Ms. Speleos was found to have been incapacitated at the time she entered the lease with appellees.33 *74Therefore, the contract was voidable at the election of Ms. Speleos or her representative unless avoidance of the contract would be unjust. See Restatement (Second) of Contracts § 15 cmt. f (“If the contract is made on fair terms and the other party has no reason to know of the incompetency, performance in whole or in part may so change the situation that the parties cannot be restored to their previous positions or may otherwise render avoidance inequitable. The contract then ceases to be voidable.”).34 Here, the trial court upheld the lease based on its determination that the lease was voidable and its finding that Ms. Speleos or her representatives did not effectively avoid or disaffirm the lease. Because the division was bound by the Sullivan rule deeming contracts entered into by mentally incapacitated persons void, the division did not reach 718 Associates’ arguments challenging the finding that the contract had not been disaf-firmed.35 Now, as an en banc court we overrule Sullivan and join a majority of jurisdictions in holding that contracts entered into by mentally incapacitated persons are voidable, rather than inherently void. As a result, we remand to the division to consider whether the trial court erred in determining that the lease between Ms. Speleos and appellees was never disaffirmed.36

So ordered.