Ninth Circuit Finds Doctrine of Unclean Hands Cannot Prevent Recovery of Stolen FundsThe U.S. Court of Appeals for the Ninth Circuit has ruled that the doctrine of unclean hands — when a defendant argues that a plaintiff is not entitled to an equitable remedy because the plaintiff acted unethically or in bad faith — cannot prevent the recovery of stolen funds.

In Northbay Wellness Group, Inc. v. Beyries, attorney Michael Beyries both represented and served on the board of directors of Northbay Wellness Group, a medical marijuana dispensary. Northbay gave Beyries $25,000 to put into a legal trust fund to cover potential future legal actions. Later, Beyries resigned from the board and did not return the money in the legal trust fund.

Northbay sued Beyries and a trial jury awarded the company almost $320,000 for breach of contract, $5,000 in punitive damages and $25,000 for conversion. Beyries then filed for Chapter 7 bankruptcy protection. Northbay initiated an adversary proceeding, saying that the court award was nondischargeable since it was an act of fraud committed while acting in a fiduciary capacity.

During a bankruptcy court trial, Beyries argued that the $25,000 came from the illegal sale of marijuana, so the doctrine of unclean hands applied. The bankruptcy court agreed, and dismissed Northbay’s complaint. A district court affirmed that ruling.

On appeal, the Ninth Circuit reversed, finding that the bankruptcy court erred by failing to carry out the necessary judicial balancing of the alleged wrongdoing by the plaintiff against that of the defendant. The court also found that the unclean hands doctrine could not be applied when doing so would undermine a substantial public interest.

The court noted that had the bankruptcy court conducted the proper judicial balancing, it would have found that the alleged wrongdoing by Beyries outweighed Northbay’s wrongdoing. The court noted that Beyries not only shared in Northbay profits, but that by stealing an additional $25,000, he was more at fault than Northbay. In addition, Beyries’ theft of the legal trust fund monies was a significant wrong that was likely to undermine public confidence in the legal profession.

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