Northbay Wellness Group operated a California medical marijuana dispensary.   Beyries was on Northbay’s board of directors and acted as its attorney.  Northbay entrusted Beyries with at least $25,000 of its marijuana sales revenue as a legal defense trust fund.  Beyries absconded with the $25,000 trust fund.

Northbay sued Beyries in state court, alleging, among other things, conversion of the legal defense trust fund and breach of contract.  A jury found in favor of Northbay awarding $25,000 for conversion, $319,430.96 for breach of contract, and $5,000 in punitive damages.

Beyries filed a chapter 7 bankruptcy case….[que suspenseful music]

Beyries listed Northbay as a creditor for the judgment amount.  Northbay filed an adversary proceeding against Beyries alleging that the state-court award was nondischargeable under 11 U.S.C. § 523(a).

The bankruptcy court concluded that Beyries’s misappropriation of the $25,000 legal defense trust fund ordinarily would be nondischargeable under section 523(a)(4) of the Bankruptcy Code (a debt “for fraud or defalcation while acting in a fiduciary capacity” is not discharged).  However, the court held that the doctrine of unclean hands precluded a judgment for Northbay because Northbay created the trust fund using the proceeds of illegal marijuana sales. The bankruptcy court dismissed the adversary proceeding, and the district court affirmed.

The Ninth Circuit reversed.  Citing the Supreme Court decision in Johnson v. Yellow Cab Transit Co., 321 U.S. 383, 387 (1944), the court held that the bankruptcy court failed to apply the proper balancing test when both parties have unclean hands.  The Ninth Circuit stated, “determining whether the doctrine of unclean hands precludes relief requires balancing the alleged wrongdoing of the plaintiff against that of the defendant, and ‘weigh[ing] the substance of the right asserted by [the] plaintiff against the transgression which, it is contended, serves to foreclose that right.’”

The Ninth Circuit held that if the bankruptcy court had weighed the parties’ respective wrongdoing, it necessarily would have concluded that Beyries’s wrongdoing outweighed Northbay’s, both as to harm caused to each other and as to harm caused to the public.  Since Beyries was involved in the marijuana selling as the attorney for Northbay, that wrongdoing did not tip the balance either way.  However, a lawyer stealing from its client is a “gross violation of general morality likely to undermine public confidence in the legal profession and therefore merits severe punishment.”  The court cited a California Supreme Court decision holding that theft from a client is “an offense which involves moral turpitude and clearly warrants disbarment in the absence of extenuating circumstances.”  The court concluded that in the balance of wrongdoing, Beyries’ conduct was much worse than Northbay’s conduct.

The dismissal was reversed and remanded.  To read Northbay Wellness v. Beyries, click HERE.

Original article by: Paul Pascuzzi

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