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Estate of Collins

72 Cal. App. 3d 663 (1977)

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Estate of Collins

California Court of Appeal

72 Cal. App. 3d 663 (1977)

Facts

Ralph Collins created a testamentary trust and appointed his business partner, Carl Lamb, and his lawyer, Charles Millikan, as trustees (defendants). The trust provisions gave the trustees broad discretion in their choice of investment types. The trust’s purpose was to help provide support for Collins’s family (plaintiffs). The trust initially contained about $50,000 for the trustees to invest. The trustees loaned the entire $50,000 to a real estate development company that Millikan had represented in a dispute with a lender. The trustees did very little investigation of the company’s financial worthiness, mostly relying on the word of the company’s two owners. To secure the loan, the trustees agreed to accept a second mortgage on a parcel of undeveloped land. The land had a $90,000 first mortgage. The trustees never got an appraisal, but they learned that the land had last sold for $107,000. The trustees also accepted a promise of company stock and personal guarantees from the two owners as security. However, the development company was in default on six loans and involved in three lawsuits at the time the trustees loaned the trust’s money to it. A little over a year later, the development company and its owners went into bankruptcy and stopped making loan payments. The trustees foreclosed on the second mortgage and then spent $10,000 trying to prevent the first mortgage from being foreclosed. Eventually, the first mortgage holder foreclosed, which terminated the trust’s secondary rights in the undeveloped property for a total loss of $60,000. The trust beneficiaries sought damages from the trustees. The trial court found that the trustees had exercised the judgment of a prudent investor and, therefore, owed nothing. The trust beneficiaries appealed.

Rule of Law

Issue

Holding and Reasoning (Kaus, J.)

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