Cannabusiness Advisory

Recently, in a closely watched cannabusiness case, U.S. District Court for the District of Massachusetts Judge Allison D. Burroughs issued a memorandum and order on motions to dismiss in Crimson Galeria Limited Partnership, et al. v. Healthy Pharms, Inc., et al. [1] For a bit of background, the Plaintiffs are property owners in Cambridge, Massachusetts’ Harvard Square, whose property either abuts or is located within 200 feet of Healthy Pharms’ now-open registered marijuana dispensary. At the time the Plaintiffs filed suit, Healthy Pharms was not open for business, so the Plaintiffs based their claims on the idea that Healthy Pharms’ disclosure of the potential dispensary hurt their property values and interests.

The Plaintiffs alleged that Healthy Pharms’ potential operation diminished the market value of their properties and hurt development opportunities, in their eyes, the RMD made Harvard Square a less desirable location for prospective buyers or renters who “reasonably worry” about “increased crime” and “pungent odors.” The Plaintiffs asserted claims against the “Government Defendants” for declaratory and injunctive relief, arguing that federal law (i.e., the Controlled Substances Act) preempts Massachusetts’ legalization of medical marijuana dispensaries. This was a clear attempt by the Plaintiffs to create a private right of action under the CSA, which the court refused to acknowledge.

The Plaintiffs also asserted claims against Healthy Pharms and the other Dispensary Defendants alleging civil violations of the Racketeer Influenced and Corrupt Organizations Act, for acting and conspiring to distribute marijuana in violation of the CSA. The Plaintiffs sought declaratory and injunctive relief against the Dispensary Defendants.

In this first of a two-part series, I will provide a general description and summary of the court’s ruling. Next week, I’ll evaluate the court’s discussion regarding whether a private RICO action could be maintained against Century Bank for simply providing ordinary banking services in accordance with federal guidance.

The Government Defendants

The Plaintiffs allege that Massachusetts’ regulations pertaining to RMDs conflict with the CSA and are, therefore, preempted by federal law. The Plaintiffs argue further that, despite the fact that neither the Supremacy Clause nor the CSA provide a private right of action, the court has the equitable power to enjoin the Government Defendants from enforcing regulations that conflict with the CSA. The Plaintiffs do not contend that any section of the CSA vests private citizens with substantive rights, but they do attempt to invoke the court’s equitable power to enjoin actions by the state that are preempted by the CSA, and that allegedly violate the Supremacy Clause. However, as the court noted, the Plaintiffs had to plausibly allege that they were vindicating a federal substantive right in order to maintain a cause of action in equity, which they failed to do.

The court makes clear that the authority to enforce the CSA is vested only with the United States Attorney General and Department of Justice, and referenced the Cole Memorandum as a clear expression of their collective ultimate discretion whether to assert the supremacy of federal law over conflicting state marijuana laws. The court reasoned that, even if the Plaintiffs’ lack of substantive rights under the CSA did not preclude their claims against the Government Defendants, the text of the CSA and analysis under relevant case law certainly did. As such, the court granted the Government Defendants’ motion to dismiss.

The Dispensary Defendants

At the time the Plaintiffs filed their complaint, Healthy Pharms had yet to open its dispensary. As such, the complaint was premised on the hypothetical eventual opening of the dispensary and sale of marijuana therefrom. Rather than seek leave and file an amended complaint once the dispensary opened, the Plaintiffs requested that the court take judicial notice of the dispensary’s opening, which the court declined to do. Rather, the court granted 30 days leave to allow the Plaintiffs to file an amended complaint, finding that the arguments raised by the Dispensary Defendants’ motions did not render the grant of leave futile. The court also found that the Dispensary Defendants would be permitted to renew their motions to dismiss after Plaintiffs amended their complaint.

The Dispensary Defendants’ motions to dismiss were based on lack of standing and ripeness, abstention, and the fact that the Plaintiffs had not suffered an injury that was proximately caused by alleged predicate acts under RICO.[2] Setting aside standing and ripeness, and abstention, the court reasoned that the types of injuries alleged by Plaintiffs (e.g., odors interfering with use and enjoyment of Plaintiffs’ respective properties, banks and investors not financing projects at the properties, the stigma of the dispensary negatively impacting the properties’ values, etc.) rendered leave to amend not futile, because the Plaintiffs could allege facts sufficient to overcome the current defects in the complaint and the attendant motions to dismiss.

Century Bank moved to dismiss on the basis that it did not engage in any predicate acts under RICO by providing Healthy Pharms ordinary banking services and, therefore, did not engage in a RICO conspiracy. The court appeared to favor that argument, finding that “Plaintiffs have not adequately shown that providing ordinary banking services to marijuana-related businesses, in compliance with Treasury Department guidance aimed at enabling banks to provide such services, sufficiently demonstrates that it joined and intended to further a RICO conspiracy.”

Conclusion

It remains to be seen whether the Plaintiffs will amend their complaint and allege facts sufficient to stave off what are sure to be renewed motions to dismiss by the Dispensary Defendants. However, if and when that does occur, you can be sure to find an update on the matter here, so stay tuned!

[1] The following parties are defendants: 4Front Advisors, LLC, 4Front Holdings, LLC, and Kristopher Krane (“4Front Defendants”); Century Bank and Trust Company (“Century Bank”); Healthy Pharms, Inc., Timbuktu Real Estate, LLC, Paul Overgaag, Nathaniel Averill, and 3 Brothers Real Estate, LLC (“Healthy Pharms Defendants”), Red Line Management, LLC (“Red Line”); Tomolly, Inc. (“Tomolly”); the Massachusetts Department of Health and Maura T. Healey, in her official capacity as Attorney General of the Commonwealth of Massachusetts (“DPH”); and the City of Cambridge (“Cambridge”) (the DPH and Cambridge are collectively known as the “Government Defendants” and all other defendants are collectively known as the “Dispensary Defendants”).

[2] Rico damages must be based on more than mere speculation. (Circiello v. Alfano, 612 F. Supp. 2d 111 [D. Mass. 2009]).