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April 6, 1936


The opinion of the court was delivered by: KNIGHT

KNIGHT, District Judge.

This action is brought to recover on two promissory notes, each dated May 19, 1925, executed by Hoyt C. Le Master, delivered and payable to the defendant. One note is for $4,283, payable at West Palm Beach, Fla., with interest, and maturing May 19, 1927, and one note is for $4,284, payable at the place aforesaid, with interest, and maturing May 19, 1928. Both notes, upon the face thereof, provide for the payment of reasonable attorney's fees for making collection thereof, and also for the payment of interest on deferred interest payments. Each note recites that the maker and indorser waive demand, notice of nonpayment and protest. The abovementioned notes, with two other notes, were executed and delivered by the maker to the defendant in part payment of the purchase price of certain real estate situated in Florida, for which the agreed price was $26,000.

On November 21, 1925, the James Ebert Company, for the purported consideration of $33,000, conveyed to the defendant certain real estate in Florida, and as a part of the consideration thereof, the defendant indorsed and delivered to that company three of the aforesaid notes. Two of the notes given by Le Master were paid. One of these was paid to James Ebert Company. One was paid to the defendant or his order. At least there is no showing to the contrary. These four notes were secured by a second mortgage on premises conveyed by Le Master. The first mortgage was foreclosed and nothing was realized on the second mortgage.

 The foregoing statement of facts is not denied. The complaint alleges, among other things, that the plaintiff purchased the two notes above described from the James Ebert Company in March, 1927, and paid $6,500 therefor; that the plaintiff has been the holder and owner of such notes since their purchase, and that the only payment thereon is $603.12 paid in May, 1929. Plaintiff further alleges that he has expended $935.75 in disbursements in the attempt to collect such notes, and that the reasonable unpaid attorney's fees therefor are $2,000. While the answer denies the transfer of the note by the aforesaid indorsements, and denies that the plaintiff became the owner and holder before maturity, and denies demand for payment and notice of nonpayment, there is no proof in contradiction of the above-mentioned allegations, saving and excepting as such denials are claimed to be supported by the allegations in an affirmative defense in the answer that the defendant was wholly incompetent and insane when the notes were executed, and that this was known to the plaintiff when he procured such notes, and that he was then put upon his inquiry. As a further affirmative defense, it is alleged that after his indorsement defendant rescinded the indorsements and returned all benefits received therefrom. The issues are narrowed to the competency of the defendant at the time of the indorsements of the notes and the defense of rescission, as questions of fact, and to whether the plaintiff is a holder in due course, as an issue of law.

 The rule applicable in this case in deciding the question of competency is well and thoroughly stated this wise: "The test of mental capacity to contract is whether the person possesses sufficient mind to understand, in a reasonable manner, the nature and effect of the act in which he is engaged; and in order to avoid a contract it must appear not only that the party was of unsound mind or insane when it was made, but that this unsoundness or insanity was of such a character that he had no reasonable perception or understanding of the nature and terms of the contract. However, the insanity need not be so great as to dethrone his reason or as to amount to an entire want of reason, but it is sufficient if he is insane to such an extent as to be incapable of comprehending or understanding the subject of the contract and its nature and probable consequences." Corpus Juris, vol. 32, § 496, p. 727. This rule is uniformly followed and finds support in many federal and state courts. In effect, this means that it must appear that the defendant, at the time of the indorsement of the notes in question to the James Ebert Company did not possess "sufficient mind to understand, in a reasonable manner, the nature and effect of" his act in connection with the transaction of the Ebert purchase. This is in nowise in conflict with the numerous authorities cited by defendant. Edwards v. Davenport (C.C.) 20 F. 756; In re Delinousha v. National Biscuit Co., 248 N.Y. 93, 161 N.E. 431; Aikens v. Roberts (Sup.) 164 N.Y.S. 502.

 The indorsements being admitted, the burden is upon the defendant to establish these facts by a fair preponderance of the evidence. "One who alleges the mental incapacity of a party to a contract must establish it by a preponderance of the evidence." 13 C.J., § 978, p. 778.

 It is not claimed that the defendant was permanently or continuously insane. He has never been adjudged to be insane. It is claimed that he was suffering from "an exalted phase of manic depressive insanity," described as a recurring condition of a mental disease during which recurrence the individual disregards "the impulse of inhibition that a man ordinarily uses in normal health in checking up his transactions," and the individual is "led by his rosy promise of great success in his transactions."

 In 1923 and until March, 1924, he was an inmate for observation for short periods, except in one instance, at various health institutions, including Bloomingdale Hospital. From that time until 1929 there is no record of any institutional attendance or observation. The transactions involved here occurred in November, 1925. Little, if any, question is made that defendant was competent to transact business in May, 1925, when the Le Master sale was made. Numerous transactions of major importance intervening May and November, 1925, are not claimed to be invalid by reason of incompetency. It is asserted that a recurring condition of this type of insanity began again to show itself in October, 1925, and continued for at least three months thereafter.

 The record discloses an extraordinary situation. While it appears that in 1923 and 1924 defendant was suffering from some type of mental disability, from that year on to the early part of 1928, at least, defendant conducted his business of considerable volume and carried out many real estate transactions in the ordinary and usual way without let or hindrance. Assuming the defendant to be a victim of manic insanity, the record discloses, and the testimony of both physicians called on behalf of the defendant shows, that, intervening these periods of mental exaltation or depression, the defendant was able to carry on his business with an understanding and comprehending mind. Certain of defendant's activities will be taken up in the order of their sequence.

 All the transactions connected with the Le Master sale reflect normal activities and mentality. Negotiations concerning the sale continued several days. A temporary written contract was first made. Later, defendant and his wife executed the deed of conveyance. The purchaser executed to the defendant a mortgage on the premises and several notes. During these negotiations defendant was represented by his attorney.

 On June 26, 1925, in Rochester, N.Y., where defendant made his home, he and his wife leased certain lands to one Keenan for $8,000 a year for five years and $12,000 for each of two succeeding years. On September 1, 1925, defendant and his wife conveyed the five parcels of property to Keenan for $65,000, receiving $5,000 in cash, the balance being secured by a mortgage. The various instruments of conveyance were executed with the approval of the attorney for the defendant. The attorney testified that defendant was then competent to enter into these transactions. In November, 1925, the Ebert Company transaction concededly took place. Unless it is found in the price paid for the Ebert property, there is no evidence showing any act of the defendant then indicating an unsound mind or mental incapacity. Defendant introduced the subject of the purchase. He bartered with Ebert over the price. Ebert refused to sell for less than $35,000. All this took place about November 1, 1925. Some two weeks later defendant opened up negotiations again, resulting in an agreement by the terms of which $33,000 was fixed as the purchase price. On November 21, 1925, an agreement of purchase was executed by the defendant. This called for the payment of $1,000 in cash, $4,000 on delivery of the deed, $7,150 by a three month's note, secured by a second mortgage on the property, and $12,850 represented by three Le Master notes. When the agreement was made, $1,000 cash was paid. Two days later, purchaser and seller went to defendant's attorney's office where the deed was executed, $4,000 cash paid by defendant to Ebert, the note for $7,150 executed, mortgage collateral to it executed, and the three Le Master notes indorsed by defendant to Ebert. Mr. Hatfield, the attorney, acted for the defendant in these transactions. The instruments of the written documents are all in the usual form.

 A photograph of the house so purchased has been introduced in evidence. It is not necessary for the court to take judicial notice of the so-called Florida boom in real estate during that period. The evidence discloses that Florida real estate then reached high valuations in an excited and exciting market. There is evidence to sustain the claim that the $33,000 was then a fair value for this property. At least it cannot be said that the price paid and value were so unequal as to raise any presumption that the purchaser was mentally unsound, or, indeed, to establish any fact as bearing upon the question of such unsoundness.

 In December, 1925, the defendant and his wife conveyed several lots in Florida to N. Saadi, for the consideration of $45,000. Saadi saw the house advertised for sale, met the defendant and discussed terms of purchase. Defendant at first asked $55,000 for it; Saadi offered $45,000. This offer the defendant, at first, refused, but later accepted. The terms, of this sale were $10,000 in cash, $3,500 in rugs in which Saadi was a dealer, and the remainder in three installments, secured by a mortgage on the property. The conveyance was made subject to a first mortgage of $6,000. The evidence discloses that negotiations for this purchase first took place in the latter part of November, 1925. The deed was executed by Gibaud on December 4, 1925. The mortgage, it appears, was executed some days later. This transaction, like those with Ebert, was carried out with the knowledge of defendant's attorney and closed under his supervision. The attorney testified that defendant then, in his opinion, was able to "understand that he was selling that property to Mr. Saadi and what he was getting for it." On December 17, 1925, Saadi executed and defendant's attorney witnessed the mortgage given as a part of the consideration. The evidence, relating to the conduct of the transactions under the guidance or legal advice of defendant's attorney, is most significant, when considered in connection with the attorney's testimony offered to show that the defendant was incompetent during these periods. The court is loath to believe that these acts, if true, indicated to the attorney an abnormal mind. In December, 1925, the attorney refused to carry out certain directions of the defendant with regard to several purchases. The record supports the conclusion that at this time some check was being attempted to be made by others on defendant's real estate activities. As regards the Saadi sale and the value of the real estate sold and the rugs taken as a part of the purchase price, we have only to repeat that these transactions took place in the so-called real estate "boom" period. It is also significant that only a few days subsequent to these transactions of November 23, 1925, the attorney testified to various acts of the defendant which impressed him as irrational. While Mr. Hatifield, the Florida attorney, during a period in which he had communications from defendant's Rochester attorney and the defendant's wife, refused to carry out defendant's instructions with regard to certain purchases, three separate transactions with the defendant were closed during that month. During this period, December, 1925, and in January, 1926, defendant's wife and his Rochester attorney were solicitous about certain of these Florida transactions. Such solicitations naturally might arise from the feeling of probable financial loss.

 Aside from his real estate activities, defendant, during this time, and for a considerable time preceding this, had been engaged in the auto supply business with his brother-in-law, one Stoffel, at Rochester, N.Y. January 1, 1926, he sold his interest in this business to his partner. An inventory of the stock was made. The terms of purchase were agreed upon between Stoffel and the defendant. While Stoffel testified that he figured defendant was irrational, he also testified the deal itself "was a perfectly rational deal" and "the price paid was a reasonable price." On January 16, 1926, Dunton and one conveyed certain lots to Gibaud and Gibaud contemporaneously therewith executed a mortgage of $500. This mortgage was paid and discharged March 18, 1926. Again, on January 16, 1926, two lots at West Palm Beach, Fla., were conveyed to the defendant, and defendant then executed the purchase money mortgage thereon.This mortgage was later paid. On February 26, 1926, defendant paid to Ebert $7,150 to pay a note in that amount given on the purchase of the Ebert property, and the mortgage securing that note was paid. This also is a most significant transaction. These transactions took place at the office of defendant's attorney. Defendant and his wife were present.

 Important business transactions by the defendant in 1926 are disclosed. He did a very substantial banking business during that time. On January 19, 1926, he deposited $15,000. At other times large deposits were made by him. His account shows 13 separate deposits and 37 separate withdrawals in six months. Defendant continued to own the Ebert property until February, 1928, when the property was reconveyed to the Keystone Construction Company pursuant to an agreement then made with Ebert. Gibaud conveyed the property to Ebert subject to a mortgage of $8,000 and for the consideration of $3,000 represented by note of the Ebert Company and secured by stock of the Ebert Company. The Ebert Company subsequently went into bankruptcy, and the value of the note was nil. This transaction was two years and three months after the purchase by the defendant. There is nothing in the case showing that the defendant at any time prior to February, 1928, did any act in the way of a rescission or disclaimer of the purchase of November, 1925. Testimony has been given on behalf of the defendant that when the Ebert propert was conveyed back, as stated, Ebert agreed to cancel the notes endorsed to him. Ebert denies this. I am disinclined to believe the testimony so given.

 On April 1, 1926, James Ebert Company assigned the notes in question together with the mortgage given by Le Master securing them to one Baker. That assignment was recorded December 26, 1926. On February 26, 1927, Baker assigned the aforesaid mortgage and notes to the plaintiff. This assignment was in writing. It was recorded in the office of the clerk of the circuit court, Palm Beach county, Fla., on March 16, 1927. By the terms of these assignments only the two notes ...

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