Unreported / Non-Citable
Background
Damon Iammarino's father owned a home in San Clemente for 26 years until a homeowner's association foreclosed on the property in December 2017. The father died shortly after the foreclosure. SBS Trust Deed Network served as trustee at the foreclosure sale, which generated $591,650.10. After paying the secured obligation, a surplus of $576,738.19 remained. SBS sent notice to potential claimants in April 2018, but no claims were filed during the 30-day statutory period.
Approximately one year later, in April 2019, Iammarino was appointed executor of his father's estate. His counsel contacted SBS in May 2019 to claim the surplus funds and provided letters testamentary. SBS's legal supervisor initially delayed providing a claim form, then stated the claim would need auditor review without providing a timeframe. Despite repeated requests and a subpoena, SBS did not produce documentation showing the whereabouts of the funds. Iammarino filed a probate petition in April 2020 seeking recovery of the funds and double damages under Probate Code section 859.
In July 2021, the probate court ordered SBS to pay the surplus funds to the estate, which SBS did on July 26, 2021. At trial on the remaining claims in October 2024, SBS owner Mitchell Willet testified inconsistently about how many accounts held the funds and admitted he could only guess where the surplus had been moved. Bank statements showed the account where SBS claimed to hold the funds frequently had balances far below the surplus amount because SBS used it for ordinary business expenses. The trial court found SBS acted in bad faith and awarded double damages of twice $576,738.19, plus interest, but denied the elder abuse claim.
The Court’s Holding
The Court of Appeal affirmed, applying the substantial evidence standard. The court explained that Probate Code section 859 imposes liability when a person in bad faith wrongfully takes, conceals, or disposes of estate property, requiring both a prohibited act and bad faith. SBS argued it did not dispose of the funds because it initially obtained them lawfully as foreclosure trustee and eventually paid them to the estate.
The court rejected this argument, holding that the term 'dispose of' is broad and includes alienating, relinquishing, or parting with property. The evidence supported a finding that after depositing the surplus into its account, SBS spent down those funds to pay ordinary business expenses, which constituted a disposition. Although Willet claimed the funds were transferred to other accounts and kept whole, he produced no documentation to support that assertion, and the trial court was not required to credit his self-serving testimony.
The court also found substantial evidence of bad faith. Surplus funds do not belong to the trustee, and SBS knew the money was not its own. By using the funds for business operations, SBS essentially borrowed them without permission. Moreover, once the estate—the only claimant and the borrower's statutorily designated successor—submitted its claim, SBS continued to delay payment without valid reason. Willet's claim that he was unaware of the estate's claim until shortly before litigation was impeached by correspondence sent directly to him in October 2019. This evidence supported the finding that SBS disposed of the funds in bad faith.
Key Takeaways
- A foreclosure trustee's use of surplus sale proceeds for its own business expenses constitutes a 'disposition' of those funds under Probate Code section 859, even if the trustee initially obtained the funds lawfully and eventually pays them to the rightful claimant.
- Bad faith under section 859 can be established when a trustee knowingly uses funds belonging to another for its own purposes without permission, effectively borrowing the money without authorization.
- Unreasonable delay in paying surplus funds to the sole statutory claimant—here, the court-appointed executor of the borrower's estate—supports a finding of bad faith, particularly when the trustee offers no valid justification for the delay.
- Self-serving testimony about the location and handling of funds, without supporting documentation, need not be credited by the trier of fact when contradicted by bank records and prior inconsistent statements.
- The substantial evidence standard of review requires the appellate court to accept all evidence supporting the judgment, disregard contrary evidence, and draw all reasonable inferences to uphold the trial court's findings.
Why It Matters
This decision clarifies that Probate Code section 859's double damages remedy applies to foreclosure trustees who commingle or use surplus funds for their own purposes, even when no claim is filed during the initial statutory notice period. The ruling emphasizes that trustees hold surplus funds for the benefit of others and cannot treat those funds as available capital for business operations.
The opinion also reinforces that delay in paying a valid claim, combined with use of the funds for the trustee's own benefit, can establish the bad faith element necessary for enhanced damages. The court's broad interpretation of 'dispose of' and its focus on the trustee's knowledge that the funds belonged to another provide guidance for future cases involving mishandling of estate or trust property.