Harvard College & Massachusetts General Hospital v. Armory (1830)

Harvard College & Massachusetts General Hospital v. Armory (1830) is a famous case from the Massachusetts Supreme Judicial Court that is credited for establishing the prudent investor rule. The case involved a trust where Armory, the defendant, was the trustee. The creator of the trust put $50,000 (millions in today's dollars) into the trust for the trustees to invest and generate money for the trustor's spouse while she was living. After her death, the trust money was to be given partially to Harvard College and the Massachusetts General Hospital (the plaintiffs). The plaintiffs sued Armory as the trustee for investing the money in stocks they saw as overly risky, going against the directions given by the creator of the trust to invest safely. The court ruled that Armory was not liable to the plaintiffs for the losses in investment because Armory exercised fair judgment in investing in those stocks. 

This prudent person or investor rule has been cited in countless cases as the foundational block for modern responsibilities of trustees and fiduciaries. The court famously stated that a trustee “is 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.” This court ruling acknowledged that different investment strategies are needed for different situations, but generally, a trustee must consider both the long-term and short-term needs when deciding the level of risk to tolerate. Unless the trustee acts in an overtly risky manner, the court finds a trustee should not be held liable for losses because investments naturally entail the possibility of loss. 

[Last updated in February of 2022 by the Wex Definitions Team]