5.1 The “Prudent Man Standard”
Before the enactment of Estates & Trusts § 15-114 (The Prudent Investment Standards), Maryland generally followed the “prudent man standard”:
As stated above, one of the common-law fiduciary duties is the requirement that trustees act prudently in managing trust affairs. Shipley v. Crouse, 279 Md. 613, 621, 370 A.2d 97 (1977); Zimmerman v. Coblentz, 170 Md. 468, 484, 185 A. 342, 349 (1936); Johnson v. Webster, 168 Md. 568, 576, 179 A. 831, 834 (1935); Fox v. Harris, 141 Md. 495, 506, 119 A. 256, 260 (1922); Gilbert v. Kolb, 85 Md. 627, 634–636, 37 A. 423 (1897); Gray v. Lynch, 8 Gill 403, 431 (1849); Green v. Lombard, 28 Md.App. 1, 5, 343 A.2d 905, 909, cert. denied, 276 Md. 743 (1975). The Court in Shipley v. Crouse, supra, 279 Md. at 621, 370 A.2d at 102 (quoting G. Bogert, The Law of Trust and Trustees, § 541 (2d ed. 1960), explained as follows: ” ‘A trustee is required to manifest in all his management of the trust the care, skill, prudence, and diligence of an ordinarily prudent man engaged in similar business affairs and with objectives similar to those of the trust in question.'”
The prudent man standard had its origin in Harvard College v. Amory, which generally proscribed the trustees were to manage trust investments as a prudent man would manage his investments with an eye toward the long-term health of those investments rather than investing in speculative ventures:
Trust investment law in the prior Restatements was founded on the classic dictum of Harvard College v. Amory, admonishing trustees in general and flexible terms “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.” Restatement Second of Trusts (“Restatement Second”) section 227 thus directed trustees “to make such investments and only such investments as a prudent man would make of his own property having in view the preservation of the estate and the amount and regularity of the income to be derived.” Language similar to that of Restatement Second is now found in statutes and judicial opinions in most American jurisdictions.
In the hands of the judiciary, general prudent-man principles of care, skill and caution were developed, applied and elaborated on case by case. As generalizations were articulated and an effort was made to offer guidance to trustees, the prudent man rule tended to lose much of its generality and adaptability. Decades ago it was acknowledged in a leading treatise that “what was decided in one case as a question of fact tend[ed] to be treated as a precedent establishing a rule of law.” Courts showed a tendency “even in the absence of a statute to lay down definite subsidiary rules on what is and what is not a prudent investment” and to treat a case disapproving a particular investment by a trustee “as a precedent holding that no investment of that type is proper.”
The prudent man rule generally was applied by the Courts on an investment-by-investment basis. This approach to analyzing trustee behavior distorted “real world” investment behavior of examining the portfolio as a whole.
Although the general interpretation of the prudent man rule seemed to focus on asset-by-asset basis, the Maryland Courts may not take such a constrained view of the rule. In the Baltimore City Trustees case, for example, the issues of whether the city ordinance requiring divestment from companies doing business with South Africa impaired the trustees’ duty of prudence was discussed in something that might be viewed as a whole portfolio theory although ultimately that Court dismissed the concern that the ordinance would preclude any investments in the largest of American large cap stocks.