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.
