Fingerhut v. Kralyn Enterprises, Inc.

New York Supreme Court
71 Misc.2d 846 (1971)

ELI5:

Rule of Law:

A contract is not voidable due to mental incompetence if the party's objective behavior surrounding the transaction is rational and calculated, despite a diagnosis of manic-depressive psychosis. Furthermore, a contract that is voidable due to incompetence may be ratified by the party's conscious actions in furtherance of the contract after they have regained mental capacity.

Facts:

In the summer of 1968, Stanley Fingerhut, a successful 33-year-old investment advisor, began touring country clubs with the intent to purchase one.
Fingerhut investigated the Bel Aire Golf & Country Club, owned by Kralyn Enterprises, Inc., and obtained an appraisal valuing it at $2,728,000.
On September 22, 1968, Fingerhut and his attorney met with the principals of Kralyn Enterprises and their attorney, negotiated a purchase price of $3,075,000, and executed a binder, for which Fingerhut paid a $25,000 deposit.
On September 26, 1968, following six hours of negotiation between the parties and their respective lawyers, a formal contract was executed, and Fingerhut paid an additional $200,000.
In the weeks that followed, Fingerhut informed his business partners of the purchase, sought refinancing from the bank holding the property's mortgage, and met with the bank's officer, who found him to be rational.
Fingerhut had a medical history that included several hospitalizations for 'manic-depressive reaction' in 1964 and 1965.
On November 8, 1968, Fingerhut's attorney sent a letter to Kralyn Enterprises exercising an option to adjourn the closing date to December 15, 1968, and discussing other business matters related to the club's operation.
On November 19, 1968, Fingerhut's attorneys sent a second letter claiming he was suffering from manic-depressive psychosis at the time the contract was made, was therefore incompetent, and was electing to rescind the contract and demand the return of his $225,000 down payment.

Procedural Posture:

Stanley Fingerhut filed a complaint against Kralyn Enterprises, Inc. in a New York trial court, seeking rescission of the contract and the return of his $225,000 down payment.
Kralyn Enterprises filed an answer with a counterclaim for $500,000 in damages and a second counterclaim for specific performance.
The trial court struck the counterclaim for damages due to the defendant's failure to furnish information in a bill of particulars.
The defendant discontinued its counterclaim for specific performance during the trial.
At the close of the case, the defendant moved to amend its pleadings to conform to the proof by adding the defense of ratification, which the trial court granted.

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Issue:

Does a party's alleged manic-depressive psychosis render a contract for the sale of real property voidable when the party was represented by counsel, the terms were fair, and their actions appeared rational to others involved in the transaction?

Opinions:

Majority - Vincent A. Ltjpiano, J.

No, the contract is not voidable. A party must prove they suffered from a medically classified psychosis that rendered them unable to control their conduct, even if their cognitive ability was unimpaired. Here, the plaintiff failed to meet this burden. The court weighed conflicting psychiatric testimony but gave greater weight to objective behavioral evidence, which showed Fingerhut's actions to be calculated and studied, not compulsive or irrational. Unlike precedents such as Faber, Fingerhut was represented by counsel throughout the negotiations, the price was fair, and numerous business associates testified that his words and actions impressed them as rational. Therefore, the credible evidence did not establish that Fingerhut was in a manic phase of psychosis sufficient to invalidate the contract. As an alternative holding, the court found that even if Fingerhut had been incompetent, he ratified the contract through his conscious actions after his psychiatrist testified he was no longer psychotic on November 5, 1968; specifically, the November 8 letter from his attorney adjourning the closing recognized and acted in furtherance of the contract. As a defaulting buyer on a real property contract, Fingerhut is not entitled to recover his down payment.

Analysis:

This case clarifies the application of the modern 'motivational' test for contractual incompetence, establishing a high evidentiary bar for a party seeking to void a contract on such grounds. It prioritizes objective behavioral evidence over conflicting expert psychiatric testimony, signaling that if a party's actions surrounding a transaction appear rational, calculated, and counseled, a court is unlikely to find incompetence. The decision also reinforces the doctrine of ratification, demonstrating that even a potentially voidable contract can be made fully enforceable if the party, after regaining capacity, takes actions that acknowledge the agreement's validity. This makes it more difficult for parties to use a mental health diagnosis to escape contractual obligations they later regret.

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