In Oak Crest Manor Nursing Home, LLC v. Barba, a plaintiff sued a nursing home for negligently allowing a patient with mental disorders to leave the facility and jump from a bridge in an attempt to commit suicide. No. 03-16-00514-CV, 2016 Tex. App. LEXIS 12710 (Tex. App.—Austin December 1, 2016). The nursing home filed a motion to compel arbitration based on a facility admission agreement that the patient signed. The plaintiff’s response contended that due to the patient’s psychological and mental disorders, he lacked capacity to enter into an enforceable contract and, therefore, the agreement and its arbitration provision were unenforceable and void. The court denied the motion to compel, and the defendant sought an interlocutory appeal.

The court of appeals noted that it was the plaintiff’s burden to prove that the patient did not have the requisite mental capacity. The court held that “[t]o establish mental capacity to execute a contract, a party ‘must have had sufficient mind and memory at the time of execution to understand the nature and effect of [his] act.’” The court reviewed evidence that the patient was mentally incompetent around the time of his admission to the home. It also reviewed the defendant’s evidence that he was competent on the day he signed the agreement. The court held that “While the time of execution of a contract is indeed the relevant time for ascertaining competency to contract, evidence of competency from other periods is probative to establish competency at the time of execution if there is evidence that the later mental condition had some probability of being the same condition at the time of execution.” The court concluded:

Dr. McRoberts’s report, issued only 49 days after the Agreement’s execution, is probative of Frank’s mental condition on the date of execution in light of the other evidence in the record indicating that Frank’s psychiatric diagnoses were already present and were the same as when Dr. McRoberts examined him. We conclude that the record contains legally sufficient evidence to support the probate court’s implied determination that Frank did not possess the requisite capacity to contract when he signed the Agreement.

The court also held that the patient’s mental incompetency made the agreement void: “the supreme court has held that when the issue of mental capacity to contract is raised, ‘the very existence of a contract is at issue,’ as with other contract-formation issues, and therefore the court’s determination that a party lacked the capacity to contract would render that contract non-existent and void rather than merely voidable.” Finally, the court determined that because there was no contract to begin with, the defendant could not rely on other theories such as direct-benefits estoppel to enforce the arbitration clause. The court affirmed the order denying the motion to compel arbitration.

Interesting Note: This case raises an important issue for financial institutions. Financial institutions routinely have arbitration and other dispute resolution clauses in its contracts with customers. It is also common for a customer to be an elderly person or person with some mental disability. When disputes arise, the customer or his or her representative may challenge the invocation of arbitration or other dispute resolution clause due to mental incompetence. Financial institutions should be very careful that when they enter into these types of contracts that the other contracting party has mental competence. Alternatively, the financial institution should rely on a guardian or power of attorney holder to execute the contract for the customer.

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Photo of David Fowler Johnson David Fowler Johnson

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David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary…

[email protected]

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the The Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. Read More

David’s financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class action, RICO actions, usury, various tort causes of action, breach of fiduciary duty claims, and preference and other related claims raised by receivers.

David also has experience in estate and trust disputes including will contests, mental competency issues, undue influence, trust modification/clarification, breach of fiduciary duty and related claims, and accountings. David’s recent trial experience includes:

  • Representing a bank in federal class action suit where trust beneficiaries challenged whether the bank was the authorized trustee of over 220 trusts;
  • Representing a bank in state court regarding claims that it mismanaged oil and gas assets;
  • Representing a bank who filed suit in probate court to modify three trusts to remove a charitable beneficiary that had substantially changed operations;
  • Represented an individual executor of an estate against claims raised by a beneficiary for breach of fiduciary duty and an accounting; and
  • Represented an individual trustee against claims raised by a beneficiary for breach of fiduciary duty, mental competence of the settlor, and undue influence.

David is one of twenty attorneys in the state (of the 84,000 licensed) that has the triple Board Certification in Civil Trial Law, Civil Appellate and Personal Injury Trial Law by the Texas Board of Legal Specialization.

Additionally, David is a member of the Civil Trial Law Commission of the Texas Board of Legal Specialization. This commission writes and grades the exam for new applicants for civil trial law certification.

David maintains an active appellate practice, which includes:

  • Appeals from final judgments after pre-trial orders such as summary judgments or after jury trials;
  • Interlocutory appeals dealing with temporary injunctions, arbitration, special appearances, sealing the record, and receiverships;
  • Original proceedings such as seeking and defending against mandamus relief; and
  • Seeking emergency relief staying trial court’s orders pending appeal or mandamus.

For example, David was the lead appellate lawyer in the Texas Supreme Court in In re Weekley Homes, LP, 295 S.W.3d 309 (Tex. 2009). The Court issued a ground-breaking opinion in favor of David’s client regarding the standards that a trial court should follow in ordering the production of computers in discovery.

David previously taught Appellate Advocacy at Texas Wesleyan University School of Law located in Fort Worth. David is licensed and has practiced in the U.S. Supreme Court; the Fifth, Seventh, and Eleventh Federal Circuits; the Federal District Courts for the Northern, Eastern, and Western Districts of Texas; the Texas Supreme Court and various Texas intermediate appellate courts. David also served as an adjunct professor at Baylor University Law School, where he taught products liability and portions of health law. He has authored many legal articles and spoken at numerous legal education courses on both trial and appellate issues. His articles have been cited as authority by the Texas Supreme Court (twice) and the Texas Courts of Appeals located in Waco, Texarkana, Beaumont, Tyler and Houston (Fourteenth District), and a federal district court in Pennsylvania. David’s articles also have been cited by McDonald and Carlson in their Texas Civil Practice treatise, William v. Dorsaneo in the Texas Litigation Guide, and various authors in the Baylor Law ReviewSt. Mary’s Law JournalSouth Texas Law Review and Tennessee Law Review.

Representative Experience

  • Civil Litigation and Appellate Law