United States District Court, N.D. California, San Jose Division
ORDER REVERSING DECISION OF BANKRUPTCY COURT AND
REMANDING CASE RE: DKT. NO. 1
H. KOH United States District Judge.
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.
employed Nelli Markushevska as an accountant from June 2014
to September 2015. ER 225. 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.
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.
Court first discusses Appellant's suit against Appellees
in state court, then turns to the proceedings before the
State Court Action
September 15, 2015, Appellant filed suit against Appellees in
the California Superior Court of Alameda County. ECF No. 4-4
at 8. 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
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.).
Bankruptcy Court Proceedings
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.
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); (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.
to trial in the adversary proceeding, the parties stipulated
to certain facts. ER 165. Some of the stipulated facts are as
• 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
• Markushevska created falsified invoices for
Appellant's legitimate vendors reflecting money owed to
those vendors for goods never delivered or services never
• 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
• 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.
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.
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.
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 ...