Northbay Wellness v. Beyries

Debts that are incurred when an attorney steals money from a client are non-dischargeable in bankruptcy proceedings, regardless of “unclean hands.”

From 2005 until 2006, attorney Michael Beyries represented Northbay Wellness Group (“Northbay”), a medical marijuana dispensary, while simultaneously serving on the board of directors. During that time, Northbay gave Beyries $25,000 in order to create a legal defense trust fund that would be used in the event that any of Northbay’s board members, employees, or patients faced any marijuana related charges. In June of 2006, Beyries resigned as attorney and kept the $25,000 he had been entrusted. Northbay filed suit, and a jury awarded Northbay total damages amounting to $349,430.96. Following the judgment, Beyries filed for Chapter 7 bankruptcy. Northbay commenced an adversary proceeding against Beyries in bankruptcy court, arguing that the debt owed by Beyries was non-dischargeable under 11 U.S.C. § 523(a). The bankruptcy court found that the debt owed to Northbay would normally be non-dischargeable, but Northbay was precluded from any judgment under the doctrine of unclean hands because the trust fund was created with the profits of illegal marijuana sales, which the district court affirmed. On appeal, the Ninth Circuit held that the doctrine of unclean hands calls for a balancing of the wrongdoing of each party. The panel found that as a board member of Northbay, both Northbay and Beyries were equally responsible for generating profits from the illegal sales of marijuana, and that the illegality of those activities did not tip the scale in either direction. The panel found Beyries to be much more at fault because he committed the serious moral and ethical violations of stealing from a client. The panel further held that the unclean hands doctrine does not prevent a client from recovering funds that were stolen from them by their attorney. REVERSED and REMANDED.