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Estate of Collins - 72 Cal. App. 3d 663, 139 Cal. Rptr. 644 (1977)

Rule:

The trustee is under a duty to the beneficiary to distribute the risk of loss by a reasonable diversification of investments, unless under the circumstances it is prudent not to do so.

Facts:

On a petition by the trustees of a testamentary trust for an order approving and settling the first and final account and discharging the trustees, the trial court ruled in favor of the trustees over the objections of the beneficiaries of the trust. The beneficiaries had objected on grounds that the trustees had improperly invested $50,000, and the beneficiaries had requested that defendants be surcharged. The evidence indicated that the trustees had about $50,000 available for investment, which amounted to about two-thirds of the total trust principal, and that they invested it in a junior mortgage on unimproved real property which had recently sold for $107,000 and which was subject to a first deed of trust of $90,000, that the trustees did not have the land appraised, but merely had obtained the opinion of one real estate broker as to the value of property in the area. Further, the evidence indicated that the borrowers had pledged 20 percent of their company stock as additional security and had given the personal guaranties of themselves and their wives, but that the trustees never obtained possession of the stock, placed it in escrow nor even had it legended, that the trustees accepted the personal guaranties without investigating the financial status of the persons involved and accepted at face value the claimed $2 million value of the borrower's company shown in an unaudited statement. The investment resulted in the loss of $60,000 of the trust fund. 

Issue:

Did the trustees fail to follow the prudent investor standard in the investment of trust principal?

Answer:

Yes.

Conclusion:

The court reversed and held that respondents failed to follow the "prudent investor" standard when they invested two-thirds of the trust principal in a single investment, invested in real property secured only by a second deed of trust, and when they made that investment without adequate investigation of either the borrowers or the collateral. Respondents failed to diversify the investments in the relatively small trust fund where they invested in a junior mortgage on unimproved real property, left an inadequate margin of security, and the backup security obtained by respondents was no security at all. The court directed the trial court to determine the damages to which appellants were entitled.

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