Although selling marijuana in California is a violation of federal law, that doesn’t mean dispensaries have no legal recourse in the U.S. court system when they get ripped off.
A three-judge panel of the U.S. Ninth Circuit Court of Appeals reversed a bankruptcy-court decision (pdf) last month and ruled that Northbay Wellness Group, a medical marijuana dispensary, could go after a lawyer who absconded with $25,000 of its money just before declaring Chapter7.
Michael Beyries, who served on the Northbay board of directors and was on retainer as the nonprofit’s attorney, was given the money in cash to serve as a legal defense trust fund for any employee, board member or patient arrested in connection with the dispensary. Beyries abruptly resigned from his position on the Northbay board and quit as its attorney in June 2006.
Northbay sued him in Sonoma County Superior Court in February 2008 for the $25,000 and $319,430.96 for breach of contract, and won. The jury also awarded an additional $5,000 in punitive damages. Beyries filed for bankruptcy in September 2010, claiming he couldn’t pay any of the money owed to Northbay.
The dispensary wanted the $319,430.96 as compensation for bad tax advice from Beyries, according to the San Francisco Chronicle, but they lost that effort in bankruptcy court. The dispensary also initially lost the argument over the $25,000 when the judge applied the doctrine of “unclean hands.” The doctrine requires that a plaintiff seeking relief from the court must “have acted fairly and without fraud or deceit.”
Northbay, the judge ruled, had dirty hands because it was breaking federal law by selling pot to fund the defense trust. Medical marijuana is illegal under federal law but has been OK under state law since 1996. The conflict manifests the nation’s schizophrenic approach to the drug and probably won’t be resolved anytime soon.
President Obama and members of his administration, including former Attorney General Eric Holder, had signaled since 2008 that the federal law against possession, sale and cultivation of marijuana would not be aggressively enforced in states that had passed laws legalizing medical marijuana. That included California.
But that has not been the case.
Although marijuana is dirty enough to make the Obama administration cringe, it was not dirty enough for the appellate court judges. They cited the U.S. Supreme Court’s Johnson v. Yellow Cab Transit Co. case that stated unclean hands “does not mean that courts must always permit a defendant wrongdoer to retain the profits of his wrongdoing merely because the plaintiff himself is possibly guilty of transgressing the law.”
The bankruptcy judge had simply seen unclean hands and tossed the case. The appellate court said the judge should have weighed the dispensary’s dirty hands against the fact that the bad guy was a LAWYER!!! making off with a client’s money.
That is really bad publicity for the profession. The court cited another precedent on that subject: A lawyer’s “[m]isappropriation of a client’s property is a gross violation of general morality likely to undermine public confidence in the legal profession and therefore merits severe punishment,” the California Supreme Court ruled in Greenbaum v. State Bar.
“Allowing Beyries to avoid through bankruptcy his responsibility for misappropriating his client’s money would undermine the public interest in holding attorneys to high ethical standards,” the court concluded.
The court did not revive Northbay’s claim for the other money.
–Ken Broder
To Learn More:
Bankrupt Lawyer Loses Appeal to Pot Dispensary (by Katherine Proctor, Courthouse News Service)
Pot Club, Even if Illegal, Can Collect Stolen Funds, Court Rules (by Bob Egelko, San Francisco Chronicle)
Attorney Who Works with Pot Dispensaries Facing Felonies over Recent Case (by Paul Payne, Santa Rosa Press Democrat)
Northbay Wellness Group, Inc. v. Michael Kenneth Beyries (U.S. Ninth Circuit Court of Appeals) (pdf)