Citation. Estate of Collins, 72 Cal. App. 3d 663, 139 Cal. Rptr. 644, 1977)
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Brief Fact Summary.
The defendants, Carl Lamb and C.E. Millikan, were the trustees over a testamentary trust which authorized the trustees to purchase every kind of property, real, personal or mixed, and every kind of investment.” The defendants lost about $60,000 of the trust fund that was initially $80,000.
Synopsis of Rule of Law.
In dealing with trust property, trustees must exercise the judgment and care, under the circumstances then prevailing, which men of prudence, discretion and intelligence exercised in the management of their own affairs, not in regard to speculation, but in regard to the disposition of their funds, considering the probable income, as well as the probable safety of their capital. A trustee is under a duty to the beneficiary to distribute the risk of loss by reasonable diversification of investments, unless under the circumstances it is not prudent to do so. Second or other junior mortgages are not proper trust investments, “unless taking a second mortgage is a reasonable method of settling a claim or making possible the sale of property.” In buying a mortgage for trust investment, the trustee should give careful attention to the valuation of the property, in order to make certain that his margin of security is adequate. He must use every reasonable endeavor
to provide protection which will cover the risks of depreciation in the property and changes in price levels. And he must investigate the status of the property and of the mortgage, as well as the financial situation of the mortgagor.
The defendants, Lamb and Millikan were, respectively, Collin’s business partner and lawyer. The two men were named in Collin’s will as trustees. The beneficiaries in Collins’ testamentary trust were his wife, children, his mother and father. The will included general support provisions. It also specifically provided that the trustees pay the testator’s daughter $4,000 a year for her undergraduate and graduate education. The trust also stated that the trustees were not limited by “what the law provides are proper investments.” The defendants invested two-thirds of the trust principal in a single investment. They invested in real property that was secured only by a second deed of trust. The land had sold for $107,000 and was subject to a first deed of $90,000. The land was never appraised and the defendants only had the word of a real estate broker that the property in the area was going for $18,000 to $20,000 a parcel. The builder pledged 20 percent of their stock but
the defendants never obtained possession of the stock nor did they place it in escrow or have it legended. The defendants accepted the personal guarantees of the builders and their wives without investigation the financial status of these persons.
Whether the defendants breached their duty to disturb the risk of loss by reasonable diversification of investments?
Whether the defendants acted as prudent investors when they used the trust funds to invest in a junior mortgage on unimproved real property?
Whether the defendants acted as prudent investors in light of the circumstances existing at the time of the investment?
Whether the defendants acted as prudent investors because they had the power under the trust to make investments of any kind irrespective of whether such investments are in accordance with the laws then enforced in the State of California pertaining to the investment of trust funds by corporate trustees?
Yes. The defendants breached their duty to distribute the risk of loss of reasonable diversification of investments because they did not totally diversity the investments in the small trust fund.
No. The defendants did not act as prudent investors by taking out a junior mortgage on unimproved property. Here, the defendants did not insure that the margin of security was adequate. The land had sold for $107,000 and was subject to a first deed of $90,000. Unless the land was wroth more than $140,000, the land has no security. Also, the land was never appraised and the defendants only had the word of a real estate broker that the property in the area was going for $18,000 to $20,000 a parcel. The defendants did not have any backup security. The builder pledged 20 percent of their stock but the defendants never obtained possession of the stock nor did they place it in escrow or have it legended. The defendants accepted the personal guarantees of the builders and their wives without investigation the financial status of these persons.
No. The defendants did not act as prudent investors in light of the circumstances existing at the time of the investment because occurred after the loan was made that can change the fact that defendants invested two-thirds of the principal of the trust in a single second deed of trust on unappraised property, with no knowledge of the borrower’s true financial status, and without any other security.
No. The rule does granting the trustees the right to make investments that may not be made in accordance with the laws of California does not authorize trustees to make improper investments. Corporate trustees are held to a greater standard of care based on their presumed experience. The instant case did not involve a situation where the investors accepted a well-secured second trust deed or a first deed of trust without careful investigation. None of the investments that the defendants made were correct.
The defendants’ investments were improper because all of their investments here were made without any reliable investigation and without reasonable security.