Sears v. First Pioneer Farm Credit, Aca

• Decision Date: 27 December 2007
• Docket Number: 502297.
• Citation: 2007 NY Slip Op 10441,46 A.D.3d 1282,850 N.Y.S.2d 219
• Parties: WILLIS E. SEARS et al., Appellants, v. FIRST PIONEER FARM CREDIT, ACA, Respondent. (And a Third-Party Action.)
• Court: New York Supreme Court — Appellate Division

46 A.D.3d 1282

850 N.Y.S.2d 219

2007 NY Slip Op 10441

WILLIS E. SEARS et al., Appellants, v. FIRST PIONEER FARM CREDIT, ACA, Respondent. (And a Third-Party Action.)

502297.

Appellate Division of the Supreme Court of the State of New York, Third Department.

Decided December 27, 2007.

Appeal from a judgment of the Supreme Court (Krogmann, J.), entered January 9, 2007 in Washington County, which, among other things, ordered the sale of certain mortgaged property.

CREW III, J.P.

Plaintiff Willis E. Sears managed and ran all aspects of plaintiffs' dairy farm and apple orchard for a number of years. Beginning in the 1980s, Sears established a relationship with defendant—more specifically, one of its then loan officers, Christopher Truso. In the years that followed, Sears routinely sought and received annual operating loans from defendant to, among other things, facilitate the harvesting of plaintiffs' crops. In September 1994, Sears suffered a stroke, and he remained hospitalized until December of that year. Although he returned to the farm after that, Sears was unable to participate in the daily operation of the farm to the extent he had in the past, and additional personnel were brought in to assist with the physical labor.

After suffering a significant loss due to the poor price received for the 1995 apple crop, Sears refinanced his loans and took out an additional loan to pay back taxes and finance the 1996 fall apple harvest. Due to the prior operating losses sustained, defendant required Sears to obtain a guarantee from the Farm Service Agency (hereinafter FSA). FSA would guarantee only $700,000 and, as a result, defendant loaned Sears the additional $171,000. These loans were secured by mortgages on certain of plaintiffs' real property, as well as a lien on all livestock, machinery and equipment. Unfortunately, plaintiffs' financial difficulties persisted and Sears filed for bankruptcy in 2001.

Plaintiffs commenced this action in July 2002 alleging breach of fiduciary duty, breach of obligation of fair dealing, fraud, negligence and breach of various federal laws and regulations and seeking rescission of the underlying loan agreements. Defendant then brought a counterclaim and third-party action seeking, among other things, foreclosure^* and, in response thereto, plaintiffs raised the affirmative defense of lack of capacity. Supreme Court thereafter dismissed plaintiffs' causes of action for breach of fiduciary duty, breach of obligation of fair dealing and negligence upon statute of limitations grounds and discovery ensued.

Ultimately, defendant moved for summary judgment dismissing plaintiffs' remaining causes of action and their affirmative defense, and plaintiffs cross-moved to amend their complaint to assert a cause of action for negligent misrepresentation. Supreme Court granted defendant's motion for summary judgment dismissing plaintiffs' remaining causes of action, granted defendant summary judgment on its foreclosure action, denied plaintiffs' cross motion to amend the complaint and thereafter appointed a referee to determine the amount due under the mortgages. The referee's report was filed in October 2006, and defendant thereafter moved for, among other things, confirmation of the referee's report and reasonable counsel fees. Plaintiffs opposed the motion, noting that no hearing was held with respect to the referee's report and requesting a hearing on the amount of the counsel fees sought. Supreme Court granted defendant's motion and, in its January 2007 judgment of foreclosure and sale, confirmed the referee's award of $465,578.15, awarded defendant counsel fees in the amount of $175,036.38 and ordered that the subject properties be sold. This appeal by plaintiffs ensued.

Plaintiffs initially contend that Supreme Court erred in dismissing their cause of action seeking rescission of the underlying loan agreements because a question of fact exists as to Sear's competency at the time he executed the July 1996 loan documents. In this regard, the case law makes clear that "a person is presumed to be competent at the time of the performance of the challenged action and the burden of proving incompetence rests with the party asserting incapacity" (Matter of Obermeier, 150 AD2d 863, 864 [1989]). Thus, to prevail, plaintiffs had to demonstrate that Sears' mind was "so affected as to render him wholly and absolutely incompetent to comprehend and understand the nature of the transaction" (Aldrich v Bailey, 132 NY 85, 89 [1892]) and, further, that such incompetency/incapacity existed when he executed the loan documents in July 1996 (see Feiden v Feiden, 151 AD2d 889, 890 [1989]; Matter of Obermeier, 150 AD2d at 864). The record as a whole falls far short of meeting this burden.

To be sure, Sears suffered various physical limitations following his stroke and was unable to perform the actual labor necessary to run the farm on a daily basis; his speech was somewhat slurred, he experienced hearing difficulties and he read at a slower pace. Such proof, however, does not establish that Sears was incapacitated in July 1996. Although his wife now asserts that the entire loan transaction was completely beyond his comprehension at that point in time, it bears noting that she did not attend the closing because Sears had requested operating loans in the past and such transactions had become a "familiar pattern." Simply put, neither hindsight nor regret establishes incompetency. Nor are we persuaded by the affidavit of Sears' treating psychiatrist, who opined, in a conclusory and unsubstantiated fashion, that Sears was not competent to engage in any business transactions following his stroke. Although the psychiatrist describes Sears as "grossly handicapped" as of July 1996, there is nothing in his or his wife's examination before trial testimony to lend credence to that statement. Accordingly, we have no quarrel with Supreme Court's decision to dismiss the cause of action seeking rescission.

We reach a similar conclusion with regard to the cause of action for fraud. Actual fraud requires "a misrepresentation, known by the defendant[] to be false and...