Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-17381/USCOURTS-ca9-13-17381-0/pdf.json

Parties Involved:
Michael Kenneth Beyries
Appellee
Northbay Wellness Group, Inc.
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

NORTHBAY WELLNESS GROUP, INC., 

a corporation,

Appellant,

v.

MICHAEL KENNETH BEYRIES,

Appellee.

No. 13-17381

D.C. No.

3:11-cv-06255-

JSW

OPINION

Appeal from the United States District Court

for the Northern District of California

Jeffrey S. White, District Judge, Presiding

Argued and Submitted—January 14, 2015

San Francisco California

Filed June 5, 2015

Before: Milan D. Smith, Jr., Jacqueline H. Nguyen,

and Michelle T. Friedland, Circuit Judges.

Opinion by Judge Friedland

 

 

 

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2 NORTHBAY WELLNESS V. BEYRIES

SUMMARY*

Bankruptcy

The panel reversed the district court’s affirmance of the 

bankruptcy court’s conclusion that a judgment debt was not 

nondischargeable under 11 U.S.C. § 523(a)(4) as a debt for 

fraud or defalcation while acting in a fiduciary capacity.

The debt was for the chapter 7 debtor’s breach of 

contract and conversion of a legal defense trust fund for 

Northbay Wellness Group, operator of a medical marijuana 

dispensary. The debtor served on Northbay’s board of 

directors and acted as its attorney. The bankruptcy court

held that under the doctrine of unclean hands, Northbay’s 

illegal marijuana sales prevented it from obtaining relief 

under § 523(a)(4). The panel reversed because the debtor’s 

wrongdoing outweighed Northbay’s and because application 

of the unclean hands doctrine to absolve an attorney of 

responsibility for stealing from his client would be contrary 

to the public interest.

 * This summary constitutes no part of the opinion of the court. It has 

been prepared by court staff for the convenience of the reader.

 

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NORTHBAY WELLNESS V. BEYRIES 3

COUNSEL

Lisa L. Gygax (argued), Law Offices of Lisa L. Gygax, 

Forestville, California, for Appellant.

Jon C. Chandler (argued), David N. Chandler, Sr., and David 

N. Chandler, Jr., Law Offices of David N. Chandler, Santa 

Rosa, California, for Appellee.

OPINION

FRIEDLAND, Circuit Judge:

Attorney Michael Beyries stole $25,000 from his client, 

a medical marijuana dispensary known as Northbay 

Wellness Group (“Northbay”). Beyries later filed for 

bankruptcy, and Northbay sought a determination that the 

$25,000 was a nondischargeable debt. The bankruptcy court 

recognized that debts arising from theft are typically 

nondischargeable, but it applied the doctrine of unclean 

hands to hold that Northbay’s illegal marijuana sales 

prevented Northbay from obtaining relief. Because 

Beyries’s wrongdoing outweighs Northbay’s, and because 

application of the unclean hands doctrine to absolve an 

attorney of responsibility for stealing from his client would 

be contrary to the public interest, we reverse.1

 1 We address Northbay’s other arguments in a concurrently filed 

memorandum disposition.

 

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4 NORTHBAY WELLNESS V. BEYRIES

I. Background

Northbay Wellness Group operated as a California 

medical marijuana dispensary in 2005 and 2006 under the 

leadership of Dona Frank. Michael Beyries served on 

Northbay’s board of directors and received $5,000 per 

month to act as its attorney. In addition to the monthly 

payments, Northbay entrusted Beyries with at least $25,000 

of its marijuana sales revenue as a legal defense trust fund, 

for use in the event that a Northbay employee, board 

member, or patient was arrested on marijuana-related 

charges. Northbay made the trust fund payments to Beyries 

in cash. Although Beyries assured Frank that he was 

keeping track of the trust fund deposits, Beyries never 

provided Frank with a receipt or other record of the funds.

On June 14, 2006, Beyries resigned from his roles at 

Northbay “effective immediately” and absconded with the 

$25,000 trust fund.

In February 2008, Northbay and Frank sued Beyries in 

California state court, alleging, among other things, 

conversion of the legal defense trust fund and breach of 

contract. A jury found against Beyries on both counts and 

awarded Northbay $25,000 for conversion and $319,430.96 

for breach of contract, as well as $5,000 in punitive damages.

Beyries filed for Chapter 7 bankruptcy in September 

2010 and listed Northbay as a creditor holding an unsecured, 

nonpriority claim for the total $349,430.96 awarded in the 

California judgment. Shortly thereafter, Northbay and Frank 

commenced an adversary proceeding against Beyries in the 

United States Bankruptcy Court for the Northern District of 

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NORTHBAY WELLNESS V. BEYRIES 5

California, alleging that the state-court award was 

nondischargeable under 11 U.S.C. § 523(a).2

After holding a trial, the bankruptcy court concluded that 

Beyries’s misappropriation of the $25,000 legal defense 

trust fund ordinarily would be nondischargeable pursuant to 

§ 523(a)(4) of the Bankruptcy Code, which provides that a 

debt “for fraud or defalcation while acting in a fiduciary 

capacity” may not be discharged. 11 U.S.C. § 523(a)(4). 

Nevertheless, the court held that the doctrine of unclean 

hands precluded any judgment for Northbay because 

 2 Specifically, Northbay and Frank relied upon the following 

provisions of 11 U.S.C. § 523:

(a) A discharge under section 727, 1141, 1228(a), 

1228(b), or 1328(b) of this title does not discharge an 

individual debtor from any debt—

. . . .

(2) for money . . . to the extent obtained by—

(A) false pretenses, a false representation, or 

actual fraud . . .

. . . .

(4) for fraud or defalcation while acting in a 

fiduciary capacity . . .

. . . .

(6) for willful and malicious injury by the debtor 

to another entity or to the property of another 

entity[.]

 

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6 NORTHBAY WELLNESS V. BEYRIES

Northbay created the trust fund using the proceeds of illegal 

marijuana sales. The court accordingly dismissed the 

adversary proceeding.

Northbay appealed to the United States District Court for 

the Northern District of California, which affirmed the 

bankruptcy court’s ruling, agreeing that the doctrine of 

unclean hands foreclosed relief. This timely appeal 

followed.

II. Standard of Review

We review a district court’s decision in an appeal from 

the bankruptcy court de novo. Mano-Y & M, Ltd. v. Field 

(In re The Mortgage Store, Inc.), 773 F.3d 990, 994 (9th Cir. 

2014). In doing so, we apply the same standard of review to 

the bankruptcy court’s decision as did the district court. Id. 

We review findings of fact for clear error and conclusions of 

law de novo. Id.

We review application of the unclean hands doctrine for 

abuse of discretion. Seller Agency Council, Inc. v. Kennedy 

Ctr. for Real Estate Educ., Inc., 621 F.3d 981, 986 (9th Cir. 

2010). A trial court—here, the bankruptcy court—“abuses 

its discretion if it does not apply the correct law or if it rests 

its decision on a clearly erroneous finding of material fact.” 

Jeff D. v. Otter, 643 F.3d 278, 283 (9th Cir. 2011) (internal 

quotation marks omitted).

III. Unclean Hands

A plaintiff asking a court for equitable relief “must come 

with clean hands.” Johnson v. Yellow Cab Transit Co., 321 

U.S. 383, 387 (1944). Specifically, the doctrine of unclean 

hands requires that a plaintiff “shall have acted fairly and 

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NORTHBAY WELLNESS V. BEYRIES 7

without fraud or deceit as to the controversy in issue.” 

Ellenburg v. Brockway, Inc., 763 F.2d 1091, 1097 (9th Cir. 

1985). Because bankruptcy courts are courts of equity, 

Young v. United States, 535 U.S. 43, 50 (2002), a plaintiff 

deemed to have unclean hands cannot obtain a judgment of 

nondischargeability. See Republic of Rwanda v. Uwimana 

(In re Uwimana), 274 F.3d 806, 810 (4th Cir. 2001) (“A 

plaintiff with unclean hands is not entitled to relief from a 

court of equity in the form of an order denying the 

dischargeability of debt.” (internal quotation marks 

omitted)), abrogated on other grounds by Bullock v. 

BankChampaign, N.A., 133 S. Ct. 1754, 1758–59 (2013).3

The Supreme Court has emphasized, however, that the 

doctrine of 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.” Yellow Cab, 321 

U.S. at 387. Rather, 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] 

 3 Federal law governs whether nondischargeability is barred by 

unclean hands. See Grogan v. Garner, 498 U.S. 279, 283–84 (1991) 

(“The validity of a creditor’s claim is determined by rules of state law. 

Since 1970, however, the issue of nondischargeability has been a matter 

of federal law governed by the terms of the Bankruptcy Code.” (citation 

and footnote omitted)); Shaver v. Shaver, 736 F.2d 1314, 1316 (9th Cir. 

1984) (“Because of the federal interests reflected in the Bankruptcy Act, 

the courts look to federal law to determine whether an obligation is . . . 

nondischargeable.” (internal quotation marks omitted)).

 

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8 NORTHBAY WELLNESS V. BEYRIES

plaintiff against the transgression which, it is contended, 

serves to foreclose that right.” Republic Molding Corp. v. 

B.W. Photo Utils., 319 F.2d 347, 350 (9th Cir. 1963). In 

addition, “the clean hands doctrine should not be strictly 

enforced when to do so would frustrate a substantial public 

interest.” EEOC v. Recruit U.S.A., Inc., 939 F.2d 746, 753 

(9th Cir. 1991).4

The bankruptcy court failed to conduct the required 

balancing, instead concluding solely from the fact that 

Northbay had engaged in wrongful activity that the doctrine 

of unclean hands applied. In so doing, the bankruptcy court 

made an error of law, and thus abused its discretion.

Had the bankruptcy court 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.

Beyries was on Northbay’s board of directors and 

partnered in Northbay’s business, so he was as responsible 

as Northbay for its illegal marijuana sales. That illegal 

 4 In EEOC, we upheld an injunction despite the plaintiff agency’s 

wrongdoing because denying the injunction “would disserve the public 

interest in eliminating age, sex, and race discrimination in employment 

and would punish the innocent victims of discrimination for the errors of 

the EEOC.” 939 F.2d at 754. The defendant corporation’s wrongdoing 

in engaging in employment discrimination was a greater wrong than the 

agency’s alleged violation of Title VII’s confidentiality provisions. Id. 

at 752–53.

 

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NORTHBAY WELLNESS V. BEYRIES 9

activity must be attributed to both parties in the weighing of 

wrongdoing, so it does not tip the balance in either direction.

The bankruptcy court appears to have believed that 

Northbay’s use of cash to create the trust fund, and its failure 

to carefully count and document that cash, were additional 

forms of wrongdoing by Northbay. But Northbay’s use of 

cash is unsurprising given that, until February 2014, the 

federal government had not authorized banks to do business 

with marijuana sellers in states that had legalized marijuana 

sales.5

 Northbay’s use of cash was (at the time) part and 

parcel to conducting illegal marijuana sales, which, as 

discussed, was wrongdoing attributable to Beyries as well. 

And to the extent that no one documented the exact cash 

deposits, it was Beyries’s responsibility to maintain those 

records. See Cal. Rules of Prof’l Conduct R. 4-100(B)(3) 

(2013) (requiring that members of the California bar 

“[m]aintain complete records of all funds, securities, and 

other properties of a client coming into the possession of the 

member or law firm and render appropriate accounts to the 

client regarding them”). Thus, if relevant to the balance of 

wrongdoing at all, Beyries’s failure to properly account for 

his client’s money weighs against Beyries.

On top of the illegal activity shared with Northbay, 

Beyries is also responsible for much more. Beyries stole 

 5 See Treas. Guidance FIN-2014-G001 (Feb. 14, 2014); Dep’t of 

Justice, Memorandum for All United States Attorneys, Guidance 

Regarding Marijuana Related Financial Crimes (Feb. 14, 2014), 

available at http://www.justice.gov/sites/default/files/usao-wdwa/

legacy/2014/02/14/DAG%20Memo%20-%20Guidance%20Regarding

%20Marijuana%20Related%20Financial%20Crimes%202%2014%201

4%20%282%29.pdf.

 

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10 NORTHBAY WELLNESS V. BEYRIES

$25,000 from his client. 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.” Greenbaum v. 

State Bar, 544 P.2d 921, 928 (Cal. 1976) (in bank) (internal 

quotation marks omitted). As the California Supreme Court 

has emphasized, theft from a client is “an offense which 

involves moral turpitude and clearly warrants disbarment in 

the absence of extenuating circumstances.” Persion v. State 

Bar, 509 P.2d 524, 527 (Cal. 1973) (in bank) (internal 

quotation marks omitted); see also Cal. Bus. & Prof. Code 

§ 6106 (“The commission of any act involving moral 

turpitude, dishonesty or corruption . . . constitutes a cause for 

disbarment or suspension.”). Indeed, the California State 

Bar disbarred Beyries because of the very conduct at issue 

here. See In re Michael Kenneth Beyries, Case No. 11-O15899-PEM, at 3–6 (State Bar Ct. Cal. Sept. 25, 2014), 

available at http://members.calbar.ca.gov/courtDocs/11-O15899-3.pdf. In the balance of wrongdoing, Beyries thus 

fares much worse than Northbay.6

Allowing Beyries to avoid through bankruptcy his 

responsibility for misappropriating his client’s money would 

undermine the public interest in holding attorneys to high 

 6 The Seventh Circuit has likewise concluded that theft may be a 

greater wrong than illegal drug sales for purposes of applying the 

doctrine of unclean hands. In Kaye v. Rose (In re Rose), 934 F.2d 901

(7th Cir. 1991) (per curiam), the Seventh Circuit held that the unclean 

hands doctrine did not prevent the plaintiff from enforcing a judgment 

requiring the return of stolen funds, even though the plaintiff may have 

acquired the stolen funds through illegal drug sales. Id. at 904 n.4.

 

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NORTHBAY WELLNESS V. BEYRIES 11

ethical standards.7 Recognizing the critical importance of

enforcing lawyers’ obligations to their clients, we previously 

have held that “[w]hen a lawyer has by immoral or illegal 

conduct violated his professional obligations to his client, an 

action by the client to recover the lawyer’s fee will not be 

barred on the lawyer’s plea that the client also engaged in 

immoral or illegal conduct.” Estrada v. Speno & Cohen, 244 

F.3d 1050, 1061 n.1 (9th Cir. 2001) (internal quotation 

marks and citation omitted). We similarly now hold that the 

doctrine of unclean hands cannot prevent recovery of funds 

stolen from a client by his or her lawyer.

IV. Conclusion

For the foregoing reasons, the bankruptcy court abused 

its discretion by applying the doctrine of unclean hands to 

bar Northbay’s request for a judgment of 

nondischargeability.

REVERSED and REMANDED.

 7 Because an action for breach of fiduciary duty is an action in equity, 

see Stebbins v. Crocker Citizens Nat’l Bank (In re Ahlswede), 516 F.2d 

784, 788 (9th Cir. 1975), extending the doctrine of unclean hands to 

situations like that at issue here would not only allow lawyers to 

discharge debts arising from thefts from clients, but could also block 

wronged clients’ suits against their lawyers for breaches of fiduciary 

duties.

 

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