## Facts

- Ralph W. Collins’s will created a testamentary trust benefiting his wife, children, and parents.
- After estate administration and required distributions, the trustees held roughly $50,000 available for investment.
- The trust instrument granted trustees broad authority to invest in “every kind of property” and “every kind of investment,” even if not permitted under California statutory investment rules, but stated that all powers were “subject always to the discharge of [the trustees’] fiduciary obligations.”
- Trustees Carl C. Lamb (business partner) and C. E. Millikan, Jr. (attorney) invested most of the available principal in a single real-estate-related loan to a development venture.
- The loan was secured only by a second deed of trust on undeveloped land that was already encumbered by a $90,000 first deed of trust; the property had previously sold for about $107,000.
- The trustees did not obtain an appraisal and relied on informal broker statements regarding expected parcel sale prices.
- Additional collateral and protections were weak: pledged stock was not placed in escrow or controlled by the trustees, and personal guarantees were accepted without investigation of the guarantors’ finances.
- The borrower was in financial distress, including defaults and litigation, and later entered bankruptcy; payments ceased.
- Trustees foreclosed on the second deed of trust and spent additional funds attempting to stave off foreclosure by the first deed of trust holder, but the first deed of trust was ultimately foreclosed, extinguishing the trust’s junior lien and producing a substantial loss.
- Trustees petitioned to approve their first and final account and terminate the trust; beneficiaries objected and sought a surcharge for the investment loss.
- The probate court approved the account, terminated the trust, and discharged the trustees; beneficiaries appealed.

## Issues

1. Whether a trust instrument’s broad investment powers and “absolute” discretion clauses relieve trustees of fiduciary duties of prudence and care.
2. Whether concentrating most trust assets in a speculative, under-secured second-deed-of-trust loan without adequate investigation and safeguards breached fiduciary duties warranting surcharge.

## Decision

- The Court of Appeal reversed the order approving the trustees’ account and denying surcharge.
- The court held that broad investment authorization and “absolute” discretion did not eliminate the trustees’ fiduciary duties, particularly where the instrument expressly made powers “subject always” to fiduciary obligations.
- The court concluded the trustees breached fiduciary duties by failing to diversify and by making and managing an imprudent, inadequately investigated, weakly secured loan, and that they were subject to surcharge for resulting losses.

## Legal Principles

- Trustee investment discretion granted by the settlor, even if expansive or “absolute,” remains constrained by fiduciary obligations unless clearly and lawfully altered; authority to invest outside “legal list” categories does not authorize reckless or speculative conduct.
- Under the prudent person standard, trustees must act with the care and judgment prudent persons use in managing their own affairs, focusing on both probable income and safety of principal and avoiding speculation.
- Trustees generally have a duty to diversify to spread risk, absent circumstances making nondiversification prudent.
- Junior-lien (second deed of trust) investments are disfavored for trusts unless justified and protected by careful valuation, adequate security margins, and reasonable investigation of the collateral, the borrower, and other risk factors.
- Accepting collateral or guarantees without obtaining control, verification, or financial investigation can evidence imprudence and breach of the duty of care.

## Conclusion

The court held that expansive investment powers did not excuse trustees from prudence, diversification, and reasonable investigation, and it reversed the approval of the trustees’ account because the trustees concentrated trust assets in an inadequately secured, insufficiently investigated second-deed-of-trust loan that resulted in substantial loss.


Estate of Collins, 72 Cal. App. 3d 663 (Ct. App. 1977)