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W. & S. Pappert v. V. Sargent (2/12/93), 847 P 2d 66
Notice: This is subject to formal
correction before publication in the Pacific
Reporter. Readers are requested to bring
typographical or other formal errors to the
attention of the Clerk of the Appellate
Courts, 303 K Street, Anchorage, Alaska
99501, in order that corrections may be made
prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
WILLIAM and SHERYL PAPPERT, )
) Supreme Court No. S-4021
) Trial Court No.
v. ) 3KO-83-108 Civil
VIRGINIA SARGENT, individually )
and as Guardian Ad Litem for )
HAROLD SARGENT, ) O P I N I O N
Appellee. ) [No. 3930 - February 12,
Appeal from the Superior Court of the
State of Alaska, Third Judicial District,
Kodiak, J. Justin Ripley, Judge.
Appearances: Susan S. McLean, Gray,
McLean, Cole & Razo, Kodiak, for Appellants.
Joel H. Bolger, Walter W. Mason, Jamin,
Ebell, Bolger & Gentry, Kodiak, for Appellee.
Before: Rabinowitz, Chief Justice,
Burke, Matthews, Compton and Moore, Justices.
BURKE, Justice, with whom COMPTON, Justice, joins,
William and Sheryl Pappert appeal the trial court's
decision to rescind their 1981 transaction with Harold Sargent,
in which the Papperts traded a mobile home for Mr. Sargent's
property on Ugak Bay. The trial court found that Mr. Sargent was
incompetent when he traded the property and that the Papperts
knew or should have known of his condition. The trial court
therefore voided the transaction and denied the Papperts
restitution. Although the record supports the trial court's
finding that Mr. Sargent was incompetent, it does not support the
court's finding that the Papperts were aware of his condition.
We therefore remand this case to the trial court to determine the
proper restitutionary remedy.
I. FACTS AND PROCEEDINGS
Harold Sargent and his wife Virginia moved to Kodiak in
1965 and started operating the Kalsin Bay Inn in the early 1970s.
In 1978, the Sargents took over a nearby cattle ranching
operation. William Pappert and Mr. Sargent were friends who met
frequently during the 1970s at the Kalsin Bay Inn. In late 1978,
Mr. Pappert purchased a 1965 Kozy mobile home for $8,000. Mr.
Pappert moved the trailer on Mr. Sargent's land near the American
River in the spring of 1979. The Papperts lived in the trailer
for eighteen months, adding a mud room and making other
improvements worth approximately $3,000.
In the spring of 1981, the Papperts reached an oral
agreement with Mr. Sargent in which they would trade the mobile
home for his property at Ugak Bay. In August 1981, Mr. Sargent
executed a deed to the Ugak Bay property, transferring all of his
interest to the Papperts.
Mrs. Sargent first learned of the transaction with the
Papperts in early 1982 while reviewing business records for tax
purposes.1 After she consulted with Dr. Nemiroff and her lawyer,
her lawyer notified the Papperts that Mr. Sargent had not been
competent when he executed the deed. The Papperts recorded their
deed the next day. In March 1983 Mrs. Sargent filed a complaint
for rescission of the transaction. Although the parties agreed
that Mr. Sargent's condition should be evaluated, the court
refused to approve the evaluation because Mrs. Sargent had failed
to obtain legal status as Mr. Sargent's guardian. Mrs. Sargent
took no further action for over four years. Mrs. Sargent finally
reinitiated the action in December 1988 in her capacity as
representative of Mr. Sargent's estate.
At trial, Mrs. Sargent entered the deposition of Dr.
Nemiroff to establish that Mr. Sargent was incompetent in August
1981. Dr. Nemiroff treated Mr. Sargent from approximately
September 1980 through the time period relevant to this case. In
the fall of 1980, Dr. Nemiroff diagnosed Mr. Sargent as suffering
from chronic obstructive pulmonary disease, including acute and
chronic bronchitis, emphysema, and asthma. According to Dr.
Nemiroff these conditions generally lead to lowered levels of
oxygen and elevated carbon dioxide levels in the blood, often
resulting in headaches, confusion, and lack of normal judgment.
In June 1981, Dr. Nemiroff diagnosed Mr. Sargent as having
suffered from a transient ischemic attack ("TIA"). He described
a TIA as a condition in which the brain is not getting enough
blood, and he thought that there was potential for a stroke. Mr.
Sargent's condition continued to deteriorate after the TIAs
began, and Dr. Nemiroff estimated that Mr. Sargent had over one
hundred TIAs between July and December of 1981. Dr. Nemiroff
noted that the effects of a TIA may include clouded judgment and
affected motor ability such as temporary paralysis of a limb. He
distinguished a TIA from a stroke by observing that the paralysis
of an arm or a leg resulting from a TIA would go away in a few
minutes to a few hours, but paralysis resulting from a stroke
would be more permanent. Dr. Nemiroff offered his opinion that,
in the summer of 1981, Mr. Sargent would have had trouble making
judgments at every moment of the day about transactions such as
real estate contracts.
Mrs. Sargent, Dorothy Hopper and Thomas Truitt
testified to the physical and mental manifestations of Mr.
Sargent's condition. Mrs. Sargent testified that Mr. Sargent
suffered TIA attacks almost on a daily basis during the summer of
1981 and that these attacks would last one or two minutes,
leaving him exhausted. She also testified that her husband could
not remember things and that he would leave words out of
Ms. Hopper worked with Mr. Sargent on a daily basis in
the kitchen of the Kalsin Bay Inn. She testified that Mr.
Sargent became increasingly forgetful over the summer, that he
was unable to control his body or communicate during his attacks
and that he sometimes could not perform the simplest routine
tasks. She emphasized that she and Mrs. Sargent had to keep a
very close eye on him. Ms. Hopper further testified that these
changes in Mr. Sargent's behavior would be noticed by someone who
knew him well and worked closely with him.
Mr. Truitt worked as a ranch hand during the summer of
1981 and also saw Mr. Sargent on a daily basis. He testified
that he witnessed some of Mr. Sargent's attacks and that he
believed at the time that Mr. Sargent was having trouble
breathing. He also testified that Mr. Sargent was "doing things
different" that summer, but that, at the time, he "didn't take
any meaning to it at all, it was just Sarge."
The Papperts testified that they saw Mr. Sargent
several times a week at the Kalsin Bay Inn and noticed some of
his physical problems, but that neither of them thought that
these problems reflected any mental incapacity.
At the close of evidence, Superior Court Judge J.
Justin Ripley found that Mrs. Sargent had established, by a
preponderance of the evidence, that Mr. Sargent was incompetent
when he signed the deed in August 1981. The court further found
that the manifestations of Mr. Sargent's incapacity were
sufficiently obvious that the Papperts knew or should have known
that Mr. Sargent was unable to act in a reasonable manner in
relation to the transaction. Judge Ripley voided the transaction
and concluded that the Papperts were not entitled to restitution.
The court subsequently awarded Mrs. Sargent $6,000 in attorney's
fees. This figure represented 50% of Mrs. Sargent's actual fees
augmented by an additional 15% due to the court's finding that
the Papperts "knew or should have known of Sarge's condition, and
the implications to be drawn therefrom." This appeal followed.
A: MR. SARGENT'S INCOMPETENCY
The trial court found that Mr. Sargent was unable to
understand the nature and consequences of the August 1981
transaction. The Papperts contend that the trial court's finding
of incompetency was clearly erroneous.2 We disagree.
Dr. Nemiroff testified that Mr. Sargent would have had
difficulty making judgments about real estate transactions during
the summer of 1981.3 Testimony by Mr. Sargent's employees and
his wife indicated that Mr. Sargent was often forgetful and
confused during this time. Although the evidence of incompetency
in August 1981 is not overwhelming, deference to the findings of
the trial court is particularly appropriate when, as in this
case, "the bulk of the evidence at trial is oral testimony."
Martens v. Metzgar, 591 P.2d 541, 544 (Alaska 1979).
B: THE PAPPERTS' KNOWLEDGE OF MR. SARGENT'S INCOMPETENCY
The trial court also found that "[a]nyone with an eye
to see it would have known that Mr. Sargent . . . was not
uniformly right in his thinking, recall and other mental
functioning" and ruled that the Papperts knew or should have
known that Mr. Sargent was incompetent. After reviewing the
record, we conclude that this finding is clearly erroneous.
Dr. Nemiroff's expert opinion concerning Mr. Sargent's
condition was based on his extensive experience with the
incapacitating effects of lung disease and oxygen deprivation and
we do not believe that laypersons can reasonably be charged with
such knowledge. We also conclude that the testimony of Mrs.
Sargent and her employees, taken in the light most favorable to
Mrs. Sargent, fails to establish that a person having dealings
with Mr. Sargent would be plainly aware of his lack of competency
to contract. The record reveals that those who saw Mr. Sargent
on a daily basis noticed that he was increasingly forgetful and
confused but fails to establish that these changes would be
noticed by someone who did not work closely with him. Nor does
the testimony establish that his deteriorating mental condition
was generally known. Cf. Citizen's Nat'l Bank v. Gardner, 125
N.W. 161 (Iowa 1910) (knowledge of person's excessive drug use
together with his general reputation of incompetency held
sufficient to charge another with knowledge of his incompetency);
Sprinkle v. Wellborn, 52 S.E. 666 (N.C. 1905) (when person
contracts with obviously intoxicated person, knowledge of
incompetency may be presumed). Although it was obvious that Mr.
Sargent was quite ill, awareness of his physical condition would
not necessarily lead a reasonable person to conclude that Mr.
Sargent was incapable of making a reasoned decision.
It is also significant that Mr. Sargent was still
nominally running both of the businesses in the summer of 1981.
Although his employees and his wife believed that he was losing
it, they strove to make him think that he was still in charge.
It is only reasonable to conclude that their efforts would
encourage others to believe that Mr. Sargent was still in control
of his affairs. "People are not obliged to be filled with
suspicion of the sanity of others with whom they deal." McClaney
v. Scott, 146 A.2d 653, 656 (Pa. 1958). Although the parties
dispute the market values of the mobile home and the Ugak Bay
property at the time of the trade, the trial court's findings
indicate that the terms of the transaction itself were not
unfair. In the absence of solid evidence, we hold that the mere
possibility of bad faith is insufficient. On the record
presented, there is simply no basis to find that the Papperts
should have been aware that Mr. Sargent was not competent to
complete this transaction.
In general, a party who contracts with an incompetent
person in good faith, without actual or constructive knowledge of
his condition, is entitled to restitution.4 See Metter Banking
Co. v. Millen Lumber & Supply Co., Inc., 382 S.E.2d 624, 628 (Ga.
1989); Pennsylvania Co. for Banking & Trusts v. Philadelphia
Title Ins. Co., 93 A.2d 687, 690 (Pa. 1953). This rule is
founded on the equitable principle that it is fundamentally
unfair to allow a person to repudiate a contract without
returning the benefits received thereunder. See Pennsylvania
Co., 93 A.2d at 690. Thus a party's right to void a contract due
to incompetency may be defeated if he cannot restore the other
party to his original position.
The Restatement (Second) of Contracts clearly lays out
the factors a trial court should take into account when faced
with this type of situation.
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. Where the other party, though
acting in good faith, had reason to know of
the incompetency at the time of contracting
or performance, or where the equities can be
partially adjusted by the decree, the court
may grant or deny relief as the situation
requires. Factors to be taken into account
in such cases include not only benefits
conferred and received on both sides but also
the extent to which avoidance will benefit
the incompetent and the extent to which
others who will benefit from avoidance had
opportunities to prevent the situation from
Restatement (Second) of Contracts 15, comment f (1981); see
also Davis v. Colorado Kenworth Corp., 396 P.2d 958, 961-62
(Colo. 1964) (where the contract is made on fair terms and the
other party is without knowledge of the incompetency, the power
to void the contract terminates to the extent that the contract
has been performed). Since we conclude that the Papperts could
not reasonably be expected to know of Mr. Sargent's condition,
they are entitled to restitution.5
In this case the passage of time makes a return to the
status quo in 1981 impossible -- the parties agree that the
mobile home has significantly depreciated in value. In its oral
findings, the trial court recognized the unfairness of rescinding
the transaction at this late date, but declined to order any
further restitution, commenting that the Papperts had had an
opportunity to resolve this dispute at an earlier time but had
failed to do so. On our review of the record, this result is
clearly inequitable. Mrs. Sargent filed this action in 1983 but
was unable to proceed further because she had neglected to obtain
formal guardianship of Mr. Sargent. She only reinitiated the
action in 1988, two years after Mr. Sargent's death. Since we
conclude that the Papperts should not be charged with knowledge
of Mr. Sargent's condition, they are entitled to some form of
restitution. Thus we remand this case to the trial court to
determine the proper measure of restitution. If, after a
hearing, the court determines that meaningful restitution is not
possible, it should decline to void the transaction. See
Sprinkle v. Wellborn, 52 S.E. 666 (N.C. 1905) (contract voidable
on grounds of incompetency should not be set aside where other
party had no notice of incompetency and derived no inequitable
advantage from the contract and the parties cannot be returned to
their original positions); Davis, 396 P.2d at 961-62.
D: ATTORNEY'S FEES
Where there is no money judgment in a case, attorney's
fees may be awarded by the trial court "in its discretion in a
reasonable amount." Alaska R. Civ. P. 82(a)(1). The purpose of
Rule 82 is to partially compensate a prevailing party for the
costs and fees incurred where such compensation is justified but
not to penalize a party for litigating a good faith claim. Malvo
v. J. C. Penney, Inc., 512 P.2d 575, 588 (Alaska 1973). However,
where there is evidence that the losing party did not have a good
faith claim, the trial court may appropriately impose a heavier
burden, up to and including the full amount of the fees
In this case, the trial court ordered a 15%
augmentation of its fee award on the grounds that the Papperts
"knew or should have known of [Mr. Sargent's] condition, and the
implications to be drawn therefrom." Since the trial court
concluded that the Papperts knew all along that Mr. Sargent was
not competent, it apparently reasoned that they had litigated
this case in bad faith. Since we have held that this finding was
erroneous, we vacate that portion of the fee award.
We therefore AFFIRM the trial court's finding of
incompetency, REVERSE its finding concerning the Papperts'
knowledge of Mr. Sargent's condition, VACATE the augmented
portion of the fee award and REMAND for further proceedings to
determine the proper restitutionary remedy.
BURKE, Justice, with whom COMPTON, Justice, joins,
I dissent. I believe the record supports the trial
court's finding that the Papperts knew or should have known, when
dealing with Sargent, that Sargent was incompetent. Accordingly,
I would affirm the judgment below.
I am authorized to state that Justice Compton joins in
1. Mr. Sargent suffered strokes in October and December
1981, and his physical condition steadily deteriorated over the
next four years. He died in 1986.
2. We will disturb the trial court's findings of fact only
when we are left with a definite and firm conviction on the
entire record that a mistake has been made. Parker v. Northern
Mixing Co., 756 P.2d 881, 891 n.23 (Alaska 1988).
3. We are not persuaded by the Papperts' claim that Dr.
Nemiroff was not qualified to offer an opinion as to Mr.
Sargent's competency. Although Dr. Nemiroff is not a
neurologist, he has had extensive experience in the effects of
oxygen deprivation. Cf. Stallworth v. Ward, 31 So.2d 324, 326
(Ala. 1947) (medical doctor's professional opinion concerning
competency of his patient should be accorded greater weight than
the opinion of non-expert witnesses).
4. Although the Papperts did not raise the issue of
restitution until final argument before the trial court, we
believe that failure to consider this issue on appeal would
constitute "plain error." Sea Lion Corp. v. Air Logistics of
Alaska, Inc., 787 P.2d 109, 115 (Alaska 1990).
5. We emphasize that in an action to set aside a deed or
contract on the grounds of the incompetency of one of the
parties, it is not necessary to show that the other party knew or
should have known of the incompetency. Metter Banking, 382
S.E.2d at 628; see, e.g., Hebert v. Bailey, 672 P.2d 1307
(Alaska 1983). Actual or constructive knowledge of a party's
competence is only relevant if a party is seeking to avoid
restitution or to establish fraud. See Metter Banking, 382
S.E.2d at 628; Hunt v. Golden, 532 P.2d 26, 28 (Or. 1975).