Allure Labs, Inc. v. Aviles (In re Aviles)
| Decision Date | 30 November 2018 |
| Docket Number | Case No. 15-43510-RLE,Adv. Pro. No. 16-4010-RLE |
| Citation | 595 B.R. 383 |
| Parties | IN RE Marlon J. AVILES and Nelli Markushevska, Debtors. Allure Labs, Inc., Plaintiff, v. Marlon J. Aviles and Nelli Markushevska, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of California |
Zachary T. Page, H. Kim Sim Conkle, Kremer & Engel, PLC, Santa Monica, CA, for Plaintiff.
Drew Henwood, Law Offices of Drew Henwood, San Jose, CA, for Defendants.
In 2014, defendant Nelli Markushevska was employed as a bookkeeper at plaintiff Allure Labs, Inc. ("Allure"). While she was employed there, she embezzled $137,000 (the "Embezzlement"). When Allure discovered this, it sued her and her husband Marlon J. Aviles (collectively, with Nelli Markushevska, "Defendants") in state court and obtained an order freezing some $67,000 held in bank accounts in their names. While the state court case was still essentially in its pleading stage, Defendants filed this chapter 13 case. They have filed a chapter 13 plan through which they propose to repay Allure. Allure has objected to the confirmation of this plan on the ground that it is proposed in bad faith because it does not adequately repay the amount Allure believes it is owed. Confirmation of the plan has been postponed due to Allure's objection and this Adversary Proceeding.
In 2016, Allure filed its complaint seeking a determination that the debt of roughly $137,059 arising from the Embezzlement, trebled under the provisions of California Penal Code § 496(c), plus attorney's fees and costs, is not dischargeable. While the complaint ostensibly states claims based on Bankruptcy Code §§ 523(a)(2), (a)(4), and (a)(6), its allegations are a blend of statements that reflect an imprecise understanding of these different Bankruptcy Code sections.
Prior to trial, Ms. Markushevska stipulated that the $137,059 she embezzled from Allure is a nondischargeable debt under Bankruptcy Code § 523(a)(4). Therefore, the issues to be decided are whether the debt owed to Allure is nondischargeable as to Ms. Markushevska under § 523(a)(2) or (a)(6) ; whether it is nondischargeable as to Mr. Aviles; and whether the debt includes treble damages, attorneys fees, and costs based on California Penal Code § 496(c).
The court held a one-day trial on August 15, 2018. The court made several pretrial rulings on the record which are incorporated herein by this reference. The parties also entered a stipulation regarding certain facts and the admissibility of certain exhibits. As appropriate, the court also takes judicial notice of the docket in this adversary proceeding and in the underlying chapter 13 case.
The court has heard and considered the testimony of Allure's witness and the testimony of both Defendants. It has considered the documents admitted into evidence and the post-trial briefs it requested on the California Penal Code § 496 issues. These are the court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a) made applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7052.
For the reasons explained below, the court finds that Allure's debt is dischargeable as to Mr. Aviles and nondischargeable as conversion under § 523(a)(6) as to Ms. Markushevska. Allure's nondischargeable debt includes prejudgment interest at the California rate of 10% and the $11,000 it expended to reconstruct its books and records when it discovered the Embezzlement. The court also finds that California Penal Code § 496(c) does not apply and Allure is therefore not entitled to treble damages, attorney's fees, and costs.
This court has jurisdiction based on 28 U.S.C. § 1334. This is a core proceeding that this court may hear and determine. 28 U.S.C. §§ 157(b)(2)(A), (I), (J), and (O). Venue is proper under 28 U.S.C. § 1409.
After it discovered the Embezzlement, Allure sued Defendants in state court and obtained a temporary restraining order freezing the funds in Defendants' Technology Credit Union accounts. A preliminary injunction hearing was set for October 2015 and Defendants claim they notified Allure they had no opposition to issuance of the injunction. Approximately $67,000 remains frozen in these accounts. Defendants' state court counsel made multiple settlement offers to Allure in September and October 2015, all of which were rejected.
Defendants filed their chapter 13 case on November 14, 2015. Their schedules listed their principal residence valued at $462,000, and personal property valued at approximately $134,000.1 They also listed secured claims of $274,000, and unsecured claims of $152,000. Their combined monthly income was $8,5052 and their monthly household expenses were $5,621. Defendants filed their first amended chapter 13 plan on December 11, 2015. The plan provides for monthly payments of $2,876 for 60 months. The plan proposes direct monthly payments of the contract amounts totaling approximately $2,245 on the non-delinquent secured claims of Technology Credit Union for the deed of trust on their house and a 2012 Toyota Camry. The plan also states that Defendants will pay 100% of the unsecured claims that total approximately $152,364. The bulk of this is the principal amount of the debt owed to Allure.
Allure filed a timely objection to confirmation of the plan. Allure claimed, inter alia , that the chapter 13 case had been filed in bad faith to thwart its efforts to collect and to discharge its nondischargeable debt. A confirmation hearing was set for February 25, 2016.
Allure also filed a proof of claim stating it was owed at least $524,552 based on the allegations in its state court complaint. Claim No. 5.3 Aside from Allure's claim, the claims register shows two unsecured claims totaling approximately $6,600 and the two secured claims of Technology Credit Union. Accordingly, this case is essentially a two-party dispute.4
Allure timely filed its complaint commencing this adversary proceeding. The complaint states a claim for relief under Bankruptcy Code § 523(a)(2)(A), alleging that Ms. Markushevska made false representations to Allure in creating and cashing the fraudulent checks and Allure relied on these representations. It also states a claim for relief under Bankruptcy Code § 523(a)(4), alleging Ms. Markushevska committed fraud and defalcation as a fiduciary and embezzlement with Mr. Aviles acting in concert with her, plus larceny and receiving stolen property. The third claim for relief alleges that Allure's damages arise from Defendants' fraudulent acts causing willful and malicious injury under Bankruptcy Code § 523(a)(6). Defendants filed an answer generally denying these allegations.
Allure filed a motion for relief from stay in order to obtain permission to continue its state court litigation. The motion was granted in March 2016; at that point, confirmation of the plan was taken off calendar, and this adversary proceeding was stayed. (In state court, Allure then filed its first amended complaint adding the cause of action predicated on California Penal Code § 496(a).)
Six months later, Allure informed this court that no progress had been made in state court. In response, this court vacated the order granting relief from stay and vacated the order staying the adversary proceeding. After a failed attempt at mediation, the case was finally set for trial.
Renu Dhatt, vice president of Allure, testified as to how the Embezzlement was actually accomplished. Between August 2014 and August 2015, Ms. Markushevska created false invoices, entered them into QuickBooks, then wrote checks showing "M. Aviles" as the payee of the checks rather than the entity on the false invoices entered into QuickBooks. Using this technique, 63 checks - each in an amount of less than $3,000 - were made payable to "M. Aviles" and deposited by Ms. Markushevska into a checking account at Technology Credit Union in the names of both Nelli Markushevska and Marlon Aviles (the "Joint Account"). Exhibit 44. Ms. Dhatt testified, and the documentary evidence shows, that the funds were then moved, almost immediately after being deposited into the Joint Account, into an account at Technology Credit Union in Ms. Markushevska's name only (the "Markushevska Separate Account"). Exhibit 46. The documentary evidence also showed that Mr. Aviles maintained his own separate checking account into which he deposited his paychecks and from which he periodically transferred funds to the Joint Account (the "Aviles Separate Account"). Exhibit 48.
Ms. Dhatt testified that the Embezzlement was discovered when Ms. Markushevska went on vacation and another employee began to inspect Allure's books. From this point, several employees spent a considerable amount of time reconstructing what had actually occurred which she estimated took three weeks for three employees working full time with some additional overtime. She testified that these employees were regularly paid $30-$35 per hour with an increase to $45-$52 for overtime. She did not give a total cost for this effort but her counsel stated it was at least $11,000.
The Technology Credit Union records show that between August 2014 and August 2015, Defendants (1) spent approximately $9,000 on home improvements (some of these funds taken from the Markushevska Separate Account); (2) used approximately $23,000 to pay off the loan on one car, purchase a used BMW and for other car related expenses (some of these funds taken from the Markushevska Separate Account); and (3) withdrew approximately $13,500 in cash from the Joint Account and the Markushevska Separate Account. It is unclear how the balance of the $137,000 was used. The Technology Credit Union records also show that roughly $127,000 of the money taken from Allure was deposited into the Joint Account and roughly...
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