Estate of Collins
72 Cal. App. 63, 139 Cal. Rprt. 644 (1977)

  • Collins died, leaving an $80k trust for his family. His trustees were his business partner, Lamb, and his lawyer, Millikan.
    • The trust had a clause saying that all decisions about how to invest the trust were the sole discretion of the trustees.
  • Millikan decided that the best way to invest $50k of the money was to loan it to one of his clients, real estate developers named Downing and Ward.
    • The loan was secured by a lien on another piece of property Downing and Ward owned, but Millikan didn’t bother to check and see that there was already a lien on that property. Downing and Ward also promised some stock in their company, but never delivered it.
    • Millikan also didn’t bother to look into Downing and Ward’s finances. If he had, he would have found six notices of default and three pending lawsuits!
  • Unsurprisingly, Downing and Ward went bankrupt. Millikan tried to seize the property, but other creditors had better claim to it. Millikan wound up losing about $60k of the trust’s assets.
  • Collins’ family sued for breach of fiduciary duty and tried to get the trustees discharged.
    • Millikan admitted that he’d lost money, but hey, investing is risky, so he didn’t breach any duties. Also, since the trust gave him complete discretion to make investments the family had no right to complain about his choices.
  • The Trial Court terminated the trust and discharged the trustees, but declined to awarded damages. The family appealed.
    • The Trial Court looked to Restatement of Trusts § 227, which said that trustees must “exercise the care and judgment which men of prudence, discretion, and intelligence exercise in the management of their own affairs.”
  • The Appellate Court partially reversed, and remanded to the Trial Court to determine appropriate damages.
    • The Appellate Court found that investing $50k out of $80k in one investment was not prudent.
      • Restatement of Trusts § 228 says that, “a trustee is under a duty to the beneficiary to distribute risk of loss by reasonable diversification of investments.”
    • In addition, not doing an adequate investigation into Downing and Ward’s finances was not exercising due care.
    • The Appellate Court rejected Millikan’s argument that he had absolute discretion. The Court found that “absolute discretion” is specifically limited by the requirement that the trustee is subject always to the discharge of their fiduciary obligations.