Medical Marijuana Dispensary Owners Have Unclean Hands in Eyes of Federal Bankruptcy Court

Medical Marijuana Dispensary Owners Have Unclean Hands in Eyes of Federal Bankruptcy Court

A medical marijuana dispensary, ex-clients of an attorney debtor in a bankruptcy action, sought a ruling by the bankruptcy court that debts incurred by the dispensary were nondischargeable because they were incurred as a result of the attorney's improper advice. 

Specifically, the dispensary contended that the attorney advised it not to pay state sales taxes and that the dispensary subsequently determined that it was liable for several hundred thousand dollars in unpaid sales taxes.  The bankruptcy court found that the dispensary failed to establish that the state sales tax assessments were proper.  More importantly, the bankruptcy judge held that even if the assessments were valid, the dispensary failed to prove that the attorney's advice was so baseless as to constitute malpractice.

The dispensary also claimed that it gave the attorney client funds for which the attorney failed to properly account.  The attorney in fact failed to account for the funds, failed to provide any records of the funds, and failed to provide receipts to the dispensary.  Nonetheless, the bankruptcy court determined that the funds were not for current legal expenses but instead were "intended as a defense fund" in case anyone associated with the dispensary was prosecuted by state or federal officials.  The court held that because the dispensary failed to establish that there was a fee agreement designating the money as prepaid fees, the funds belonged in the attorney's trust account and therefore were dischargeable under the Bankruptcy Code. 

However, because the dispensary was engaged in an unlawful activity, according to federal law, the judge held that he could not enter a judgment in favor of the dispensary, regardless of the fact that the dispensary was permissible under state law.  The bankruptcy court found that the unclean hands doctrine prevented it from providing the relief requested by the dispensary.

Lexis.com subscribers can access the Lexis enhanced version of the case, In re Beyries, 2011 Bankr. LEXIS 4710, decision with summary, headnotes, and Shepard's.

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