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Allure Labs, Inc. v. Markushevska

United States District Court, N.D. California, San Jose Division

July 18, 2019

ALLURE LABS, INC., Appellant,
v.
NELLI MARKUSHEVSKA, et al., Appellees.

          ORDER REVERSING DECISION OF BANKRUPTCY COURT AND REMANDING CASE RE: DKT. NO. 1

          LUCY H. KOH United States District Judge.

         Appellant Allure Labs, Inc. appeals an order of the United States Bankruptcy Court for the Northern District of California (the “Bankruptcy Court”), which declined to award treble damages, attorneys' fees, and costs to Appellant under California Penal Code § 496(c). The Appellees are Nelli Markushevska (“Markushevska”) and her husband Marlon Aviles (“Aviles”) (collectively, “Appellees”). Having considered the parties' submissions, the relevant law, and the record in this case, the Court hereby REVERSES the Bankruptcy Court's order and REMANDS the case to the Bankruptcy Court for further proceedings consistent with this decision.

         I. BACKGROUND

         A. Factual Background

         Appellant employed Nelli Markushevska as an accountant from June 2014 to September 2015. ER 225.[1] As part of her job, Markushevska had access to all of Appellant's financial records and invoices and could issue checks to vendors. ER 226. In August 2015, Markushevska was out on vacation, so someone else was assigned to temporarily fulfill Markushevska's duties. Id. However, Markushevska's temporary replacement discovered irregularities in some of the checks Markushevska had prepared, and brought the issue to the attention of Appellant's vice president. Id. Appellant's vice president reviewed one of the checks and determined that he did not sign the check, nor did he recognize the name of the purported vendor to whom the check was made out. Id. Appellant's vice president determined that a review of Appellant's financial records was necessary to uncover the extent of Markushevska's misconduct, and tasked three employees to complete the review. ER 237. The review of the financial records lasted three to four weeks and required fulltime and overtime work. Id.

         Appellant ultimately determined that Markushevska would first create a falsified invoice from a legitimate vendor, enter the false amount owed to the vendor in Appellant's bookkeeping software, then create and print a fraudulent check in the amount owed to the legitimate vendor. ER 227-28. However, instead of making the fraudulent check payable to the legitimate vendor, Markushevska forged the necessary signatures on the fraudulent check and made the check payable to “M. Aviles, ” Markushevska's husband Marlon Aviles. Id; see also ER 235 (“The Court: [A]re all the checks made payable to M. Aviles? Mr. Page: I can represent to the Court that they are, Your Honor.”). The fraudulent checks were first deposited into a joint bank account owned by Markushevska and her husband Aviles. ER 670-713. But the funds were moved, almost immediately after being deposited in the joint account, into an account in Markushevska's name only. ER 714-746. Appellant discovered that Markushevska issued and cashed 63 fraudulent checks totaling $137, 059.10. ER 400-401.

         B. Procedural History

         The Court first discusses Appellant's suit against Appellees in state court, then turns to the proceedings before the Bankruptcy Court.

         1. State Court Action

         On September 15, 2015, Appellant filed suit against Appellees in the California Superior Court of Alameda County. ECF No. 4-4 at 8.[2] Appellant alleged ten causes of action, all of which were predicated on Markushevska's embezzlement and misconduct. Id. at 10-12. On May 26, 2016, Appellant filed a first amended complaint, which added four additional causes of action, including a cause of action under Cal. Penal Code §§ 496(a) and (c). ER 642, 662. Specifically, Cal. Penal Code § 496(a) defines the crime of receiving stolen property, among others. Cal. Penal Code § 496(c) allows victims of the crimes defined in § 496(a) to bring civil lawsuits to recover three times the amount of actual damages, costs, and reasonable attorneys' fees.

         At various points in time, the Superior Court case was stayed, the stay was lifted, then once again stayed. ECF No. 13 at 11. Appellant's Superior Court case is still pending and is currently stayed. Allure Labs. Inc. v. Markushevska, No. RG15785690, May 3, 2019 Case Management Conference Order (Cal. Super. Ct.).

         2. Bankruptcy Court Proceedings

         On November 14, 2015, Appellees filed a voluntary petition for bankruptcy under Chapter 13 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of California. ER 001-045. On November 14, 2015, Appellants also filed a Chapter 13 bankruptcy repayment plan. On December 11, 2015, Appellees filed a first amended Chapter 13 plan. The Appellees' Chapter 13 plans proposed to repay Appellant. ER 368. However, on December 16, 2015, Appellant objected to confirmation of the Chapter 13 plan because Appellant thought the Chapter 13 plan was proposed in bad faith as the Chapter 13 plan did not adequately repay the amount Appellant believed it is owed. Id. As a result of the adversary proceeding, discussed below, and Appellant's objection to confirmation of the Chapter 13 plan, confirmation of Appellees' proposed Chapter 13 plan has been postponed. ER 368.

         On February 16, 2016, Appellant initiated an adversary proceeding for a determination of the dischargeability and amount of Appellant's claims against Appellees. ER 050-066. Thus, the issues before the Bankruptcy Court in the adversary proceeding were: (1) whether the debt owed to Appellant is not dischargeable as to Markushevska under 11 U.S.C. §§ 523(a)(2) and (a)(6)[3]; (2) whether the debt owed to Appellant is not dischargeable as to Aviles; and (3) whether the debt should be trebled, and attorneys' fees and costs awarded, based on Cal. Penal Code § 496(c). ER 368.

         Prior to trial in the adversary proceeding, the parties stipulated to certain facts. ER 165. Some of the stipulated facts are as follows:

• Markushevska worked as Appellant's bookkeeper from June 2014 until September 2015.
• Because of Markushevska's role as bookkeeper, Appellant entrusted access to its financial and banking records, including invoices, purchase orders, QuickBooks records and checks to Markushevska.
• Markushevska's role as bookkeeper was a position of trust because Appellant trusted Markushevska to use her access to the financial and banking records in Appellant's best interests.
• Appellant and Aviles had no business relationship.
• Aviles had no right to payment of any funds by Appellant.
• Markushevska created falsified invoices for Appellant's legitimate vendors reflecting money owed to those vendors for goods never delivered or services never rendered.
• Markushevska created fraudulent checks in connection with the falsified invoices.
• Markushevska inserted the name “M. Aviles” as the payee on the fraudulent checks, in place of the name of Appellant's legitimate vendors.
• None of Appellant's authorized signatories signed the fraudulent checks.
• Markushevska forged the signatures of Renu Dhatt and Sam Dhatt, Appellant's executives, on the fraudulent checks.
• The total amount of the fraudulent checks deposited into Appellees' joint bank account is $137, 059.10.
• Neither Markushevska or Aviles had a right to payment of the $137, 059.10 deposited into their joint bank account.
• The $137, 059.10 deposited into Appellees' joint bank account was embezzled from Appellant by Markushevska.

ER 165-66.

         The Bankruptcy Court held a one-day trial on August 15, 2018. ER 368. On November 30, 2018, the Bankruptcy Court filed its memorandum decision after trial. ER 367. First, the Bankruptcy Court found that Appellant's debt is not dischargeable as to Markushevska pursuant to 11 U.S.C. § 523(a)(6) because Markushevska caused willful and malicious injury to Appellant. ER 375. As aforementioned, 11 U.S.C. § 523(a)(6) excepts from discharge debts for “willful and malicious injury by the debtor to another entity or to the property of another entity.” Second, the Bankruptcy Court found that Appellant's debt is dischargeable as to Aviles because Aviles “credibly testified that he did not know Ms. Markushevska was stealing and that he did not use the Joint Account in a way that would have shown him the influx of cash, her transfers to the Markushevska Separate Account, or her withdrawals of significant amounts of cash.” ER 375.

         Third, the Bankruptcy Court found that Cal. Penal Code § 496(c) does not apply and thus Appellant cannot recover treble damages, attorneys' fees, and costs. ER 369. As aforementioned, Cal. Penal Code § 496(a) defines the crime of receiving stolen property and other related crimes such as concealing stolen property. Moreover, Cal. Penal Code § 496(a) states that a “principal in the actual theft of the property may be convicted pursuant to this section. However, no person may be convicted both pursuant to this section and of the theft of the same property.” In other words, California law permits a thief to be convicted of receiving or concealing stolen property under § 496(a) even if the thief stole the property at issue, so long as the thief is not also convicted of theft of the property.

         Cal. Penal Code § 496(c) permits victims of crimes defined in § 496(a) to initiate a civil lawsuit to recover treble the amount of actual damages, costs, and reasonable attorneys' fees. The Bankruptcy Court reviewed the case law surrounding § 496(c). Ultimately, the Bankruptcy Court concluded that if a defendant was also the thief that stole the property, the defendant must engage in some kind of “additional conduct, ” beyond the elements of receiving stolen property defined in § 496(a), in order for the plaintiff to be eligible to recover treble damages, attorneys' fees, and costs under § 496(c). ER 383. Thus, the Bankruptcy Court found that § 496(c) was not applicable because ...


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