Serving as a trustee comes with significant responsibility, often including managing assets for the benefit of others, and California law imposes serious consequences when that trust is abused.
A recent California appellate decision underscores just how serious those consequences can be, even when the trustee claims he simply cannot afford to pay.
In Moramarco v. Nowakoski, the California Court of Appeal addressed whether a trustee’s inability to pay can reduce the statutory penalty imposed for wrongfully taking trust property in bad faith. The court’s answer was clear: it cannot.
The case involved Edward J. Nowakoski, an attorney who created a family trust his client John A. Moramarco in 2003. Following Moramarco’s death in 2016, Nowakoski became successor trustee.
The trust owned two rental properties, which were sold for more than $680,000. Instead of distributing those funds to the beneficiaries, the trustee transferred substantial amounts from the trust account to other accounts he controlled that were not for trust purposes.
For three years, Nowakoski failed to provide an accounting despite repeated requests from the beneficiaries, Moramarco’s two sons. Eventually, the beneficiaries filed a petition seeking removal of the trustee, an accounting, and statutory penalties under Probate Code section 859.
Nowakoski ultimately resigned as trustee, but the consequences did not stop there.
The State Bar disbarred him after concluding he had intentionally misappropriated almost $395,000 in trust funds.
He also entered into a plea agreement to criminal charges and paid restitution of more than $540,000, including interest.
Even after restitution was paid, however, the beneficiaries pursued the statutory penalty provided under Probate Code section 859.
Section 859 says that a person who takes property belonging to a trust wrongfully or in bad faith is liable for twice the value of the property recovered. This penalty is in addition to other remedies, such as restitution, interest, and attorney fees.
In this case, the probate court imposed a penalty of approximately $399,000 – representing double damages – along with prejudgment interest and attorney fees.
The trustee appealed, arguing that the court should have reduced the penalty because he could not afford to pay it. He claimed he had exhausted his savings by paying restitution, was living on Social Security, and had no realistic ability to satisfy an additional judgment.
The Court of Appeal rejected the trustee’s argument.
The justices emphasized that Probate Code section 859 establishes a mandatory penalty structure once two elements are proven: the taking occurred in bad faith, and the property is recoverable.
Once those conditions are met, the statute provides that the wrongdoer “shall be liable” for twice the value of the property. The court concluded this language leaves no room for discretion based on mitigating factors such as financial hardship.
Nowakoski argued that prior cases suggested courts could consider inability to pay, particularly in light of constitutional protections against “excessive fines.”
The Court of Appeal disagreed, explaining that statutory penalties differ from punitive damages. Punitive damages require consideration of a defendant’s financial condition, but statutory penalties, particularly those set by the legislature, do not.
The court also rejected the trustee’s constitutional argument. It distinguished prior cases where statutory penalties were found excessive, noting that Probate Code section 859 is not unlimited or arbitrary. Instead, the penalty is tied directly to the amount wrongfully taken, and applies only when the conduct is in bad faith.
The court said the legislature had determined that double damages are appropriate to deter fiduciaries from abusing positions of trust, and it must respect that policy decision.
The justices also upheld the trial court’s award of prejudgment interest and attorney fees, which had been challenged by the trustee, and awarded the beneficiaries their costs on appeal.
This decision offers several important lessons:
- Trustees who act in bad faith face serious statutory penalties even if they make restitution.
- Inability to pay is not a defense to Probate Code section 859 penalties.
- Courts hold fiduciaries – particularly professionals such as attorneys – to high standards and are unlikely to show leniency when those standards are violated.
- Beneficiaries should not wait too long when their trustee fails to keep the beneficiaries informed. You can’t collect the money if the bad trustee is broke!
- Do not make the drafting attorney the sole trustee. In fact, the drafting attorney’s serving as the sole trustee can be removed as trustee under Probate Code section 15642.
By Lynda I. Chung