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*Note: The following opinion was edited by AudioCaseFiles' staff.
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Ortelere v. Teachers' Retirement Bd.
250 N.E.2d 460
New York Court of Appeals, 1969

Breitel, J.

. . . This appeal involves the revocability of an election of benefits under a public employees' retirement system and suggests the need for a renewed examination of the kinds of mental incompetency which may render voidable the exercise of contractual rights. The particular issue arises on the evidently unwise and foolhardy selection of benefits by a 60-year-old teacher, on leave for mental illness and suffering from cerebral arteriosclerosis, after service as a public schoolteacher and participation in a public retirement system for over 40 years. The teacher died a little less than two months after making her election of maximum benefits, payable to her during her life, thus causing the entire reserve to fall in. She left surviving her husband of 38 years of marriage and two grown children.

. . . [The issue] is whether an otherwise irrevocable election may be avoided for incapacity because of known mental illness which resulted in the election when, except in the barest actuarial sense, the system would sustain no unfavorable consequences.

The husband and executor of Grace W. Ortelere, the deceased New York City schoolteacher, sues to set aside her application for retirement without option, in the event of her death. It is alleged that Mrs. Ortelere, on February 11, 1965, two months before her death from natural causes, was not mentally competent to execute a retirement application. By this application, effective the next day, she elected the maximum retirement allowance. She thus revoked her earlier election of benefits under which she named her husband a beneficiary of the unexhausted reserve upon her death. Selection of the maximum allowance extinguished all interests upon her death.

. . . Traditionally, in this State and elsewhere, contractual mental capacity has been measured by what is largely a cognitive test. . . . Under this standard the "inquiry" is whether the mind was "so affected as to render him wholly and absolutely incompetent to comprehend and understand the nature of the transaction. . . “ A requirement that the party also be able to make a rational judgment concerning the particular transaction qualified the cognitive test. . . .Conversely, it is also well recognized that contractual ability would be affected by insane delusions intimately related to the particular transaction. . . .

These traditional standards governing competency to contract were formulated when psychiatric knowledge was quite primitive. They fail to account for one who by reason of mental illness is unable to control his conduct even though his cognitive ability seems unimpaired. When these standards were evolving it was thought that all the mental faculties were simultaneously affected by mental illness. . . .

Hence, because the cognitive rules are, for the most part, too restrictive and rest on a false factual basis they must be re-examined. Once it is understood that, accepting plaintiff's proof, Mrs. Ortelere was psychotic and because of that psychosis could have been incapable of making a voluntary selection of her retirement system benefits, there is an issue that a modern jurisprudence should not exclude, merely because her mind could pass a "cognition" test based on nineteenth century psychology.

There has also been some movement on the civil law side to achieve a modern posture. For the most part, the movement has been glacial and has been disguised under traditional formulations. Various devices have been used to avoid unacceptable results under the old rules by finding unfairness or overreaching in order to avoid transactions. . . .

It is quite significant that Restatement, 2d, Contracts, states the modern rule on competency to contract. This is in evident recognition, and the Reporter's Notes support this inference, that, regardless of how the cases formulated their reasoning, the old cognitive test no longer explains the results. Thus, the new Restatement section reads: "(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition." (Restatement, 2d, Contracts).

The system was, or should have been, fully aware of Mrs. Ortelere's condition. They, or the Board of Education, knew of her leave of absence for medical reasons and the resort to staff psychiatrists by the Board of Education. Hence, the other of the conditions for avoidance is satisfied.

Lastly, there are no significant changes of position by the system other than those that flow from the barest actuarial consequences of benefit selection.

Nor should one ignore that in the relationship between retirement system and member, and especially in a public system, there is not involved a commercial, let alone an ordinary commercial, transaction. Instead the nature of the system and its announced goal is the protection of its members and those in whom its members have an interest. It is not a sound scheme which would permit 40 years of contribution and participation in the system to be nullified by a one-instant act committed by one known to be mentally ill. This is especially true if there would be no substantial harm to the system if the act were avoided. . . .

Of course, nothing less serious than medically classified psychosis should suffice or else few contracts would be invulnerable to some kind of psychological attack. Mrs. Ortelere's psychiatrist testified quite flatly that as an involutional melancholiac in depression she was incapable of making a voluntary "rational" decision. Of course, as noted earlier, the trial court's finding and perhaps some of the testimony attempted to fit into the rubrics of the traditional rules. For that reason rather than reinstatement of the judgment at Trial Term there should be a new trial under the proper standards frankly considered and applied.

Accordingly, the order of the Appellate Division should be reversed, without costs, and the action remanded to Trial Term for a new trial.


Jasen, J., dissenting.

. . . As I read the record, the evidence establishes that the decedent's election to receive maximum payments was predicated on the need for a higher income to support two retired persons -- her husband and herself. . . . Under these circumstances, an election of maximal income during decedent's lifetime was not only a rational, but a necessary decision.

Nor can I agree with the majority's view that the traditional rules governing competency to contract "are, for the most part, too restrictive and rest on a false factual basis.". . .

The generally accepted test of mental competency to contract which has thus evolved is whether the party attempting to avoid the contract was capable of understanding and appreciating the nature and consequences of the particular act or transaction which he challenges. This rule represents a balance struck between policies to protect the security of transactions between individuals and freedom of contract on the one hand, and protection of those mentally handicapped on the other hand. In my opinion, this rule has proven workable in practice and fair in result . . . and the generally accepted test harmonizes the competing policy considerations with human experience to achieve the fairest result in the greatest number of cases.

As in every situation where the law must draw a line between liability and nonliability, between responsibility and nonresponsibility, there will be borderline cases, and injustices may occur by deciding erroneously that an individual belongs on one side of the line or the other. To minimize the chances of such injustices occurring, the line should be drawn as clearly as possible. . . .

Accordingly, I would affirm the order appealed from.

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