Smalley v. Baker

• Decision Date: 11 June 1968
• Court: California Court of Appeals Court of Appeals
• Parties: Donald M. SMALLEY, Plaintiff and Respondent, v. Thomas E. BAKER, Defendant and Appellant. Civ. 24865.

Page 521

69 Cal.Rptr. 521

262 Cal.App.2d 824

Donald M. SMALLEY, Plaintiff and Respondent, v. Thomas E. BAKER, Defendant and Appellant.

Civ. 24865.

Court of Appeal, First District, Division 1, California.

June 11, 1968.

Howard S. Dattan, San Diego, for appellant.

Barrett, Ferenz, Trapp & Gayle, W. Scott Barrett, Oakland, for respondent.

MOLINARI, Presiding Justice.

This is an appeal by defendant Baker from a judgment entered in favor of plaintiff Smalley ordering restitution of a $10,000 deposit, together with all accumulated interest, and decreeing rescission of an agreement between Baker, on the one hand, and plaintiffs Smalley and Bratton, on the other, whereby Baker, for the sum of $10,000, licensed Smalley and Bratton to market an axle puller. The case was tried by the court, which entered findings of fact and conclusions of law to the effect that Smalley and Bratton were entitled to rescission on the basis of a material failure of consideration and the mental incompetence of Smalley. ¹

Facts

In May of 1961, Baker had given to Pendleton Tool Industries, Inc., a California corporation (hereafter referred to as 'Pendleton'), a license to make and sell an axle puller invented and patented by Baker. The license was exclusive except that Baker reserved the right to himself to make and sell the device also. In July of 1965, Baker met Smalley for the first time and they discussed Baker's patent. Smalley stated that he was going into a partnership with Bratton and that they were interested in arranging sales of the device to the government.

Since Baker had already granted Pendleton exclusive sales rights on the device, a modification of the 1961 Baker-Pendleton agreement was a necessary prerequisite to a sales arrangement between Baker and other parties. Accordingly, after preliminary negotiations, Baker, Smalley and Bratton entered into the following arrangement: on October 20, 1965, they executed and deposited into escrow with one Haile, a Santa Cruz attorney, three documents, and additionally Smalley deposited the sum of $10,000. The documents were as follows: one, a written license agreement (hereafter referred to as 'the contract') signed by Smalley, Bratton and Baker, in which Baker granted Smalley and Bratton a nonexclusive right to sell the invention to all the world, and an exclusive right to sell said invention to United States government agencies; two, a proposed modification of the 1961 Baker-Pendleton contract, not yet signed by Pendleton, permitting Baker to license independent contractors to purchase the invention from Pendleton and to market the same; and three, written escrow instructions directing Haile to deliver the $10,000 deposit to Baker upon full execution of the modification of the Baker-Pendleton contract, and further directing Haile to return the deposit to Smalley if Baker did not deliver an executed modification agreement within 90 days. The contract provided that the deposit was to be paid to Baker only on condition that he obtain and deliver to Smalley and Bratton an executed copy of the modification of the Baker-Pendleton contract, and further provided that said modification was subject to the approval of Smalley and Bratton.

Baker took the proposed modification of his 1961 contract with Pendleton to Los Angeles for Pendleton's approval. Pendleton refused to sign the modification, but on October 29 drew up a draft of a substitute modification, which was delivered by Baker's wife to Bratton in Santa Cruz with instructions to bring it back to Los Angeles after it was approved by Smalley and Bratton. Mrs. Baker delivered the document to Bratton on October 30, 1965, when Smalley was not present. Bratton discussed the substituted modification with Smalley, who said that it would be satisfactory with the deletion of four words, which Bratton circled, ² but that he wanted Haile to see the agreement before it was returned to Los Angeles. Instead of showing the agreement to Haile, Bratton, without Smalley's knowledge, delivered it directly to Mrs. Baker, who took it to Los Angeles for final approval by Pendleton. Pendleton then signed the agreement.

Subsequently there was a meeting in Haile's office with Baker, Mr. and Mrs. Smalley and Bratton present. Haile was acting as the attorney for all parties. The modification agreement was discussed, and Smalley said that Mr. Barrett, his attorney, should see the agreement. There was also a meeting in Mr. Barrett's office around November 9, 1965, with the Smalleys, Baker, and Haile present, at which meeting the modification was not discussed.

The original and substituted modification differed as follows: By the original modification Smalley and Bratton would have received under their contract with Baker the nonexclusive right to sell the device to the entire world plus the exclusive right to sell to the United States government, and would have been forced to purchase the device in lots of 1,000 units minimum. Under the substituted modification, plaintiffs got the exclusive right to sell the device to the United States government and they could buy in lots of less than 1,000 units, but they could not sell the device to anyone else.

As to the relationship between Smalley and Bratton, there is no evidence that any formal agreement was ever drawn up between them. There is some evidence that they referred orally to each other as 'partners,' and intended to form a 'partnership,' but the agreement between them and Baker referred to them as individuals and made no mention of a partnership. In testifying, Bratton referred to their deal as a business venture. None of the letters between the parties or drafts of agreements that were introduced into evidence made mention of a partnership relation between Smalley and Bratton. Apparently their agreement was that Smalley would supply the $10,000 and get the government contract, whereas Bratton would supply mechanical ability and do all the nongovernmental sales work.

The evidence of Smalley's mental condition was as follows: Smalley was treated for mental illness at a private sanitarium and at Los Angeles County Hospital in 1963, was committed to Camarillo State Hospital on December 13, 1963, was formally discharged in October of 1964, was then rehospitalized in Santa Cruz County Hospital August 12, 1965, and was transferred to Agnews State Hospital on August 21, 1965. On September 2, 1965, he was transferred to Twin Pines Hospital in Belmont, a private psychiatric hospital, and on September 16, 1965, he was discharged to the custody of his wife with the recommendation that he be returned to Agnews. He came under the care of a psychiatrist, Dr. Allison, on November 30, 1965; this doctor was still treating him at the time of trial. Dr. Allison diagnosed Smalley as a manic depressive, which psychosis characteristically causes the patient to be hyperactive, talkative, and unrealistic while in the manic stage. When Dr. Allison first saw Smalley, the latter was in the depressed stage, in which state he would have been able to understand a business contract but would not have wanted to enter into one. According to Dr. Allison, Smalley's records indicated that he began a manic stage around June of 1965, which spontaneously ceased sometime in October 1965. The doctor had no way of knowing whether Smalley was manic or depressed on October 20, 1965, but did know he was manic when he left the hospital on September 16, 1965, and depressed when the doctor first saw him on November 30, 1965. Dr. Allison testified that in the manic stage, Smalley 'might not be able to properly evaluate various types of business conduct.'

Mrs. Smalley testified that the Smalleys moved to Santa Cruz in late June 1965, and that about three weeks thereafter Smalley became hyperactive, entered into many business transactions, and was hospitalized on a police hold for disturbing a place of business. She further testified that his conduct had not changed noticeably by the date of his release from the hospital (September 16) but that around the first part of November he slowed down and became depressed. She testified that Smalley understood what he was doing at the time he got out of the hospital and at that point reinterested himself in the deal with Baker (which he had initiated in July).

Mr. Barrett, Smalley's attorney, testified that he knew Smalley was incompetent and never intended to let him go through with the deal with Baker, but that he and Mrs. Smalley thought it would be good therapy for Smalley to go through the negotiations, and therefore did not tell Baker or Haile that Smalley was incompetent.

Dr. Giese, a psychiatrist, testified that he treated Smalley between August 3 and 12, 1965, and that Smalley was then in the manic phase of his manic-depressive psychosis. Smalley was euphoric, felt that he was invincible, and his judgment of his own behavior and actions was grossly affected. Smalley was not competent to handle simple matters of living in the ward, such as staying where he was supposed to and taking medication. According to Dr. Giese, people with these defects in judgment can come to grief in business transactions because they are unrealistic. In response to the question, how Smalley's psychosis would affect his ability to enter into a business transaction where Smalley bought the privilege of selling a mechanical device to the government under a license that required considerable sales work on Smalley's part, ³ Dr. Giese replied that if Smalley was anything like what he was when he left the hospital, 'his evaluation of the prospects of such a type of business would be colored in exactly the same way by his feelings, his grandiose feelings of his own invincibility.'

Bratton was a service station operator who first met Smalley in June of 1965, when Smalley got him interested in the deal with Baker. Bratton testified that Smalley had always seemed perfectly normal and competent to him from the time that...