Mental Competence to Do Business In Pennsylvania

In Pennsylvania, mental competence to do business is presumed, and the burden lies on him who denies it. Der Hagopian v. Eskandarian, 396 Pa. 401, 153 A.2d 897 (1959), cert. denied, 361 U.S. 938, 80 S. Ct. 381, 4 L. Ed. 2d 358 (1960). Thus, contracts made with an incompetent before his adjudication as weakminded are voidable and can be avoided only on proper showing that he was in fact incompetent at the time. Der Hagopian; see Harrisburg Trust Co. v. Rashinsky, 59 Dauph. 399 (C.P. Dauphin 1949). The rule is otherwise after adjudication, when transactions are presumably invalid. Der Hagopian. In the parlance of a bygone era, "[e]ven a lunatic may be liable if a transaction is for his benefit and there is no evidence of overruling." Id. at 404, 153 A.2d at 899. The difference between a void transaction and a voidable one is noteworthy. Void acts have no legal effect whatsoever. They are absolute nullities. See Black's Law Dictionary at 1604 (8th Ed. 2004). Voidable acts, however, are valid until annulled. Id. at 1605. Where third parties become involved before an attempt at avoidance, the difference between a void transaction and a voidable one is critical. In 1982, Pennsylvania incorporated its version of the Uniform Durable Power of Attorney Act into existing statutes on the subject. It includes a provision that acts done by an agent pursuant to a durable power of attorney during any period of incapacity of the principal shall have the same effect and bind the principal as if the principal were competent and not disabled. 20 Pa. C.S. 5604(b). The statute was amended several times, including a 1992 amendment which added the following provision: (a) Third party liability.-- Any person who is given instructions by an agent in accordance with the terms of a power of attorney shall comply with the instructions. Any person who without reasonable cause fails to comply with those instructions shall be subject to civil liability for any damages resulting from noncompliance. Reasonable cause under this subsection shall include, but not be limited to, a good faith report having been made by the third party to the local protective services agency regarding abuse, neglect, exploitation or abandonment pursuant to section 302 of the act of November 6, 1987 (P.L. 381, No. 79), known as the Older Adults Protective Services Act. (b) Third party immunity.-- Any person who acts in good faith reliance on a power of attorney shall incur no liability as a result of acting in accordance with the instructions of the agent. 20 Pa. C.S. 5608. This new provision was "designed to encourage third parties to follow the instructions of an attorney-in-fact and to be relieved of liability for doing so." 20 Pa. C.S. 5608, Jt. St. Gov't Comm. Comment--1992. Other Pennsylvania statutes reduce risks for third parties who transact business in good faith with an agent. Thus, in 1990, a section of Pennsylvania's version of the Uniform Commercial Code was modified to protect banks when a customer loses capacity but the bank does not have actual knowledge of an adjudication of incompetency. 13 Pa. C.S. 4405. Similarly, under Pennsylvania's version of the Uniform Partnership Act, a partner's loss of capacity does not automatically dissolve the partnership and terminate fellow partners' authority. See 15 Pa. C.S. 8353.