When you accept the responsibility of being trustee of an estate, you are required to act ethically. Stray too far from that and you could find yourself facing hefty punitive damages.

That was the lesson one trustee learned in a recent appellate court decision, which required her to return $5 million taken from an estate through and pay an additional $10 million in penalties. (Estate of Ashlock v. Carlson)

The ruling came in the latest of three trips to the appellate court by the family of Lonnie Ashlock and Stacey Carlson, the trustee of Ashlock’s estate.

In the two earlier cases, the trial and appellate courts determined that Carlson had breached her fiduciary duty as a trustee, misappropriated trust property, and committed financial abuse of a dependent adult.

The latest appeal was from the penalty imposed against her by the trial court under Probate Code section 859, which allows a penalty of “twice the value of the property recovered” from a trustee found to have acted in bad faith.

The litigation has a long and colorful history. In 2009, Carlson petitioned to admit into probate a will signed by Lonnie Ashlock. His son, Gabriel Ashlock, objected, noting that Carlson had drafted the will and named herself the sole beneficiary. The estate included 18 parcels of real estate, including a 190-acre almond ranch.

Gabriel later objected to multiple trust instruments which Carlson drafted and executed on Lonnie’s behalf in 2013.

The Stanislaus County Superior Court held a 53-day bench trial in late 2014 and early 2015, which included 13 days devoted to accounting issues.

In October of 2016 the trial judge found that Lonnie had been suffering from dementia since the middle of 2008, and could not have had the mental capacity needed to execute the 2009 will.

The judge also said that Carlson “had forged documents” when she set up partnerships between her and the estate and transferred various estate properties into new trusts and then into the partnerships.

The judge ruled that the “sham” partnerships that purported to give Carlson partial ownership of the ranch and other properties were the result of “fraud” by her.

The court ordered that Lonnie’s assets be removed from Carlson’s control and placed in a new trust. It also issued an interim judgment requiring Carlson to pay back $365,192.92 in legal and other expenses she had charged to the estate.

Carlson appealed that ruling, and eventually lost, as she did in a second appeal.

In the meantime, she and the beneficiaries continued to litigate various other disputes related to the estate.

In March of 2018, the trial court issued a second judgment that added $473,624.20 in further “surcharges,” or unwarranted expenses, that Carlson had to pay back. This brought the total surcharges to $1,677,554.24.

That was just the beginning, however. Under Section 859 of the Probate Code, the court’s findings of misconduct by Carlson exposed her to a penalty of double damages, meaning “twice the value of the property recovered.”

The various real estate parcels “misappropriated in bad faith” had a total value of $5,148,000, according to the trial court, which imposed a penalty on her of $10,296,000.

Including the penalty, Carlson owed nearly $12 million.

Her appeal of the trial court’s ruling on damages and penalties was the subject of the latest appellate case.

The higher court did not find her arguments persuasive.

It noted that the estate's accounting expert testified found “deficiencies” and “discrepancies” in her records.  Carlson's expert acknowledged that he didn’t actually attempt to verify all of her bookkeeping, but only “did a judgmental sample” that did not include looking at her bank statements or tax returns.

The appellate justices also noted that Carlson repeatedly referred “nine boxes of supporting documentation,” and even included a photo of the boxes in her brief, yet she never introduced the contents of the boxes into the record at trial or on appeal.

The justices did find two errors of arithmetic by the lower court, one for 4 cents and a second for about $22,000 (resulting from the trial judge’s use of Carlson’s inaccurate figures.)

They ordered the lower court to correct the mathematical errors, but upheld the rest of the ruling that required Carlson to return what she took from the estate and pay additional section 859 penalties of twice the properties’ value. Each side was ordered to pay its costs.

The takeaway is simple: a trustee who acts unethically can wind up paying a hefty penalty.

By Lynda Chung