Picking up from an earlier post this month post, this week, we’re drilling down into the arguments raised by Century Bank and Trust Company—one of the non-government defendants—as to why the Plaintiffs’ RICO claim against it should be dismissed. Century Bank provides banking services to Healthy Pharms and, according to the Plaintiffs, does so “knowing that [Healthy Pharms] intends to operate a marijuana business.” Plaintiffs bring one count against Century Bank for alleged violation of 18 U.S.C. § 1962(d), which makes it “unlawful for any person to conspire to violate any of the [substantive RICO provisions].” As explained in the prior post, the court left ultimate resolution of the pending motions to dismiss open-ended, granting 30 days’ leave to allow the Plaintiffs to file an amended complaint, based on the fact that Healthy Pharms opened and began operating after Plaintiffs’ original complaint was filed. However, the court also seemed to cast significant doubt as to whether an action could be maintained against Century Bank, as evaluated below.
Century Bank presented multiple arguments as to why Plaintiffs’ complaint should be dismissed, including abstention and failure to allege that Century Bank was involved in a RICO enterprise beyond providing ordinary banking services. Century Bank argued that the Federal Court should stay the case, pursuant to the Burford or Colorado River abstention doctrines, because there was an earlier-filed appeal of the City of Cambridge’s issuance of the special permit to Healthy Pharms to operate a registered marijuana dispensary currently pending. The Supreme Court has identified very specific circumstances when denying that a federal forum serves an important countervailing interest, and in those narrow circumstances, federal jurisdiction may be declined. However, abstention is the exception, not the rule, and the court determined that, in this case, it is not required to specifically decide issues of state or local law, so abstention does not apply. The state court action is a permit-based action and does not involve adjudication of the RICO claims, so there is minimal overlap between the two actions. As such, the case was not stayed on Century Bank’s abstention argument.
Moving on to Century Bank’s more substantive arguments, “[t]o survive a motion to dismiss, a RICO conspiracy count must allege (1) that an enterprise affecting interstate commerce existed, (2) that the defendant knowingly joined the conspiracy, and (3) that the defendant intended to further an endeavor which, if completed, would have satisfied the pattern requirement of RICO.” No overt act is required and a defendant may be part of a RICO conspiracy if it has not committed a substantive RICO violation. However, “[t]o be liable, an outsider ‘must knowingly agree to perform services of a kind which facilitate the activities of those who are operating the enterprise in an illegal manner.”
Plaintiffs allege that Century Bank had a banking relationship with Healthy Pharms and knew that Healthy Pharms intended to operate a registered marijuana dispensary. Per the court, “[p]lausible claims under § 1962(d) generally involve allegations of a financial institution’s involvement with the RICO enterprise beyond providing ordinary banking services.” For example, courts have denied motions to dismiss § 1962(d) claims against banks that were allegedly involved in fraudulent lending schemes or that allegedly facilitated a Ponzi scheme, because those plaintiffs pled facts sufficient to show knowledge of the frauds. Essentially, the banks were engaged in the frauds.
With the creation of the “legal” marijuana trade, the U.S. Treasury issued guidance to clarify how financial institutions, such as Century Bank, can provide services to marijuana-related businesses consistent with their obligations and to “enhance the availability of financial services for . . . marijuana-related businesses.” The guidance predates Century Bank’s alleged joinder in the conspiracy, and the Plaintiffs do not allege that Century Bank violated the guidance. Ultimately, the court found that, “[a]t this stage, 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.” The court stated that it could not fully assess the conspiracy claims without understanding the nature and extent of the enterprise and predicate acts, and that the Plaintiffs may develop those facts when they amend their complaint. However, the court suggested that “providing basic banking services to a known medical marijuana dispensary in compliance with the Treasury Department’s guidance, without more, may be insufficient to state a § 1962(d) claim.”
The decision, though not conclusory, should be met with a sigh of relief by those in the marijuana-related banking industry, as the court indicated that providing basic, ordinary banking services to those in the legal marijuana industry is insufficient to be held liable under RICO. The court cited similar decisions that have held that the provision of ordinary legal or accounting functions on behalf of an enterprise are insufficient acts to be held liable under RICO.
As mentioned in the prior post on this case, we will have to wait for the Plaintiffs’ amended complaint and the defendants’ renewed motions to dismiss to evaluate how this issue will ultimately be resolved. You can be sure to find an update here on the CannaBusiness Advisory blog when that occurs.