Estate of Collins
139 Cal. Rptr. 644, 72 Cal. App. 3d 663 (1977)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A trustee's broad discretionary powers over investments do not relieve them of the duty to exercise reasonable care and skill, including the obligation to diversify investments, avoid inherently risky junior liens without adequate security, and conduct thorough due diligence on both borrowers and collateral under the prudent investor rule.
Facts:
- Ralph Collins died in 1963, establishing a testamentary trust for his family, naming his business partner Carl Lamb and lawyer Charles E. Millikan, Jr. as trustees.
- Collins' will granted trustees broad investment powers, allowing 'every kind of property' and 'every kind of investment' 'irrespective of whether said investments are in accordance with the laws then enforced in the State of California pertaining to the investment of trust funds by corporate trustees,' and stating 'all discretions conferred upon the Trustee shall be absolute,' but 'subject always to the discharge of its fiduciary obligations.'
- In June 1965, the trustees received about $80,000 as trust principal, with approximately $50,000 available for investment.
- The trustees lent the entire $50,000 to Millikan's clients, real estate developers Downing and Ward (who Millikan knew were facing financial difficulties after a lender withdrew a commitment), secured by a second trust deed on unimproved real property already subject to a $90,000 first trust deed.
- The trustees failed to obtain an appraisal for the specific property, did not check public records (which would have revealed six notices of default and three lawsuits pending against the borrowers), and accepted a stock pledge and personal guarantees without taking possession of the stock or reviewing the guarantors' financial statements.
- Downing and Ward declared bankruptcy in October 1966, and in September 1968, the holder of the first trust deed foreclosed, extinguishing the trust's interest and resulting in a total loss of approximately $60,000 of trust funds (the $50,000 loan plus $10,000 in salvage efforts).
- When the loan was made in July 1965, construction in the Upland area was 'enjoying boom times, although the bubble was to burst just a few months later.'
Procedural Posture:
- Ralph Collins died in 1963, and his will was admitted to probate.
- In 1973, Carl Lamb and Charles E. Millikan, Jr., as trustees, filed a petition in superior court for an order approving and settling the first and final account and discharging the trustees.
- Beneficiaries (Margaret B. Collins Hughes et al.) objected to the petition, alleging improper investment and seeking to surcharge the trustees.
- The superior court ruled in favor of the trustees, approved the account, terminated the trust, and discharged the trustees.
- The beneficiaries (Objectors/appellants) appealed this decision to the California Court of Appeal, Second District, Division Five.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Did the trustees, Carl Lamb and Charles E. Millikan, Jr., breach their fiduciary duty under the prudent investor rule by making a speculative, undiversified investment without adequate investigation, despite broad discretion granted in the trust instrument?
Opinions:
Majority - Kaus, P.J.
Yes, the trustees breached their fiduciary duty under the prudent investor rule. The court found that the trustees failed to exercise the judgment and care expected of a prudent investor. First, they failed entirely to diversify the trust's investments, placing two-thirds of the principal ($50,000 out of $80,000 total principal initially, or $50,000 out of the available $50,000 for investment) in a single speculative investment, which violates the duty to distribute risk as per Restatement (Second) of Trusts § 228. Second, the investment in a junior mortgage (second trust deed) on unimproved real property, with an inadequate margin of security (property sold for $107,000, first trust deed was $90,000, and the trust lent $50,000, meaning a total of $140,000 in liens on property last valued at $107,000), is ordinarily not a proper trust investment unless unusual circumstances justify it (Restatement (Second) of Trusts § 227). Third, the trustees made the investment without adequate investigation of either the borrowers or the collateral, relying on an unaudited financial statement, oral assurances, and a general broker opinion instead of an appraisal and public records search. The court emphasized that the trust instrument's 'absolute discretion' clause did not excuse the trustees from their fiduciary obligations or the standard of care in investigating specific investments; it only broadened the permissible types of investments, not the diligence required for selection. Even trustees with 'absolute discretion' cannot neglect their trust or act with 'reckless indifference.' The court found that the trustees' conduct did not meet the prudent investor standard because they both lacked and ignored information about the circumstances at the time of the investment.
Analysis:
This case clarifies that broad grants of discretion in a trust instrument do not negate a trustee's fundamental fiduciary duties, particularly the 'prudent investor' standard. It reinforces that trustees must actively diversify investments, be exceptionally cautious with junior liens, and conduct thorough due diligence, regardless of seemingly exculpatory language. The decision sets a high bar for trustee conduct, emphasizing that the method of selecting an investment is as crucial as the type of investment permitted, thereby protecting beneficiaries from imprudent risk-taking masked by discretionary clauses. Future trustees will need to demonstrate active and documented investigation to avoid personal liability for losses.
