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Wisconsin Court of Appeals - 192 Wis. 2d 576
tl;dr:
A bank made a loan to plaintiff where there was evidence that the bank knew that the plaintiff was not competent to enter into the agreement at the time.Video Summary
Case Summary
In Hauer v. Union State Bank of Wautoma (1995), the Wisconsin Court of Appeals dealt with a loan contract voided due to the borrower's mental incapacity. Kathy Hauer, the borrower, had a brain injury and was previously deemed incompetent. Her guardianship was terminated based on a physician's letter, and she received income from social security and a mutual fund. Persuaded by Ben Eilbes, Hauer invested in his business and took a loan from Union State Bank, using her mutual fund as collateral, despite the bank being warned by her financial consultant².
Hauer lost her money and sued the bank and Eilbes, alleging the bank knew or should have known of her mental incapacity, misrepresented the loan circumstances, and breached fiduciary duty. The jury found Hauer mentally incompetent and the bank in bad faith. The trial court voided the loan and ordered the bank to return Hauer's collateral. The bank appealed, seeking to recover the loan proceeds.
The court of appeals upheld the trial court's decision, stating a contract involving someone lacking mental capacity is voidable, and a party with knowledge of such incapacity cannot be restored to their original position if impossible. The court dismissed the bank's good faith and fiduciary duty claims.
This case highlights contract law's protection of vulnerable parties against exploitation by those with superior knowledge or bargaining power. It demonstrates how courts balance fairness and efficiency in contract enforcement decisions and apply mental capacity, good faith, and fiduciary duty concepts in contract disputes.
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The court found that Kathy Hauer lacked mental capacity when she took out a loan from Union State Bank of Wautoma, which was subsequently voided. The Bank acted in bad faith by accepting Hauer's mutual fund stocks as collateral, which they knew or should have known was not in her best interest. The trial court dismissed the Bank's counterclaim and ordered the Bank to return Hauer's collateral. Hauer's claim of mental incompetence is valid, and the Bank's argument that there is no credible evidence to support the jury's verdict is dismissed. The court must now decide whether Hauer can recover her collateral without being liable for the loan proceeds. The infancy doctrine does not apply when the voidness arises from mental incapacity to contract.
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