The 9th circuit federal Court of Appeals decided that a lawyer who steals $25,000 from a marijuana dispensary cannot discharge the obligation to repay the funds in bankruptcy. Because the marijuana business is becoming a big part of the Colorado economy, I thought I would use this case to explain a few aspects of the bankruptcy Code.
In this matter the Bankruptcy Court found that a particular lawyer, a Michael K. Beyries can discharge (that is not have to repay) $25,000 he had stolen from a marijuana dispensary called Northbay Wellness Group, Inc (Northbay). Apparently the $5,000 monthly cash retainer paid to Mr. Beyries was not enough to keep him in legal pads, and so he made off with $25,000 of funds contained in a legal defense fund. A California state court found him liable for the $25,000 he stole, $350,000 of damages for breach of contract and $5,000 of punitive damages. (He was also disbarred).
Because marijuana sales are still illegal federally, the Bankruptcy Code can prove unhelpful to people involved in that business in Colorado. In this case the Court had ruled that because Northbay was selling marijuana illegally it was barred from recovering the stolen money under the doctrine of “unclean hands.” Meaning that because you were also doing wrong, you cannot recover from someone else who does wrong to you. The District Court heard an appeal and agreed with the Bankruptcy Court. Appeal was taken to the 9th Circuit Court of Appeals in San Francisco, which reversed the decision of the lower court meaning despite his bankruptcy this lawyer must repay the money.
The Court ultimately decided that this attorney’s wrongdoing out weighed the wrongdoing of the marijuana dispensary to the degree that he should have to repay the funds. Additionally, the Court noted that allowing an attorney to file bankruptcy and get away with not repaying funds stolen from a client was against public policy. In other words, we cannot have such a thing and still have the public put their trust and confidence in lawyers.
In this particular case the non dischargeabiliy section of the Bankruptcy Code relied upon was 11 USC 523(a)(4); which states that you cannot avoid paying debts incurred by “for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.” Stated differently, lawyers cannot steal from their clients and then discharge the debt in bankruptcy.
People should also be aware that you do not have to be a fiduciary to have a debt ruled non dischargeable in bankruptcy. 11 USC 523(a)(2) makes any debt incurred by use of false pretenses, false representations or actual fraud (misrepresentation of a material fact) non-dischargeable. But the point for people involved in the marijuana business is that marijuana is still illegal federally and this can cause problems in the federal Bankruptcy Court.
The Bankruptcy Courts are federal courts, and appeals are taken to the federal district courts in Colorado. If you have a marijuana related business dispute that ends with in a bankruptcy of one of the participants, you will want to consult a qualified bankruptcy lawyer to sort the mess out. This true if you’re looking to get a fresh start by using the bankruptcy Code to discharge debts which you cannot pay, and also if someone or some business that owes you money has filed for Bankruptcy protection. The judges in Colorado are increasingly struggling with complex marijuana related fact patterns, and some bankruptcy lawyers are having problems having fees approved for helping persons involved in the marijuana business. Aside from the illegal status of marijuana federally the fact that banks will not accept cash also complicates the marijuana business in Colorado. Where everything is done in cash, you often have problems of proof.
In summary because of complexities caused by the illegal status of marijuana federally, not to mention problems of proof caused by the fact that the marijuana business is a cash business if you have any bankruptcy related issues in Colorado, you ought to seek counsel from a qualified lawyer as soon as possible.
Here for example, while Mr. Beyries must repay the $25,000 a chapter 13 filing may have saved him from the civil breach of contract damages and or the punitive damages. The point is bankruptcy is NOT a simple or straightforward area of the law, despite popular opinion to the contrary.