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Law School Case Brief

First State Bank v. Hyland - 399 N.W.2d 894 (S.D. 1987)

Rule:

A voidable contract may also be ratified by the party who had contracted while disabled. Upon ratification, the contract becomes a fully valid legal obligation. S.D. Codified Laws § 53-3-4. Ratification can either be express or implied by conduct. In addition, failure of a party to disaffirm a contract over a period of time may, by itself, ripen into a ratification, especially if rescission will result in prejudice to the other party.

Facts:

The son signed promissory notes which were unpaid. Upon delinquency, the bank agreed to combine the notes and extend the time for payment on the condition that the father co-sign the promissory note for the combined amounts of the delinquent notes. The son did not pay the co-signed note, and filed for bankruptcy, discharging the obligation. The bank brought an action to collect from the co-signer on the note, who alleged that he was incapacitated through use of liquor and did not recall the note or signing it. The trial court ruled that the co-signer was incapacitated, the contract was void at its inception, and that the co-signer did not ratify the contract. The bank appealed, alleging that the trial court erred when it ruled that the co-signer was incompetent, that the co-signer's obligation was void, and that the co-signer did not later ratify the obligation. 

Issue:

Was defendant incompetent to transact business when he signed the note rendering his obligation to the bank void?

Answer:

No

Conclusion:

The court reversed the judgment of the trial court and remanded the case. The court determined that the co-signer had not carried his burden of proving his incapacitation because he did conduct some business during the time of the contract, and that his payment of interest was a ratification of the contract. Defendant paid the interest owing with a check which was delivered to the bank. This by itself could amount to ratification through conduct. If defendant wished to avoid the contract, he should have then exercised his right of rescission. The court found it impossible to believe that defendant paid almost $900 in interest without, in his own mind, accepting responsibility for the note. His assertion that paying interest on the note relieved his obligation is equally untenable in light of his numerous past experiences with promissory notes.

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