Business

Calif. Judge Tosses $200M RICO Suit Involving Pot Farmers

By Willis Jacobson
Oct 30, 2020

Update 4/1/21: The plaintiffs have challenged the dismissal of their case in California court. Their new complaint can be seen here. An attorney for the plaintiffs provided the following statement. A law firm representing the defendants did not respond to a request for comment.

As pleaded in the complaint, Ms. Shulman and her fellow plaintiffs had their current business, a future expansion site, and their own savings ruined and taken by the very people who were supposed to be their partners.  Plaintiffs are confident that, on appeal, the Ninth Circuit will find that parties cannot unlawfully conspire against others with impunity just because they work in the cannabis industry, which is recognized and legal under California law. In the meantime, Plaintiffs look forward to continuing the case in state court and having the merits of their claims addressed for the first time.  

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A federal judge in California dismissed a $200M civil racketeering, or RICO, suit brought by an elderly cannabis cultivator against a fellow grower and his business associates.

Francine Shulman was seeking the damages as part of a wide-ranging suit initially filed in June 2019 that alleged Todd Kaplan and his partners took advantage of Shulman, stole her farmland and kicked her off her property. On Thursday, U.S. District Judge André Birotte Jr. granted the defendants’ request to have the suit dismissed, ruling that a federally illegal business cannot obtain protections under federal law.

The case may have been the first involving a cannabis operator seeking RICO claims against another cannabis operator.

“Plaintiffs damages under RICO are inextricably intertwined with their cannabis cultivation — any relief would remedy Plaintiffs’ lost profits from the sale, production, and distribution of cannabis,” Judge Birotte wrote in his decision. “As such, the Court finds that any potential remedy in this case would contravene federal law under the [Controlled Substances Act].”

The decision marked the likely end for Shulman’s lawsuit, which alleged 25 different causes of action, including RICO conspiracy, fraud, breach of contract and elder financial abuse.

Shulman, who was 66 when the lawsuit was filed, purchased a 1,100-acre cultivation property in Santa Barbara County in 2014 with the goal of growing produce and medical cannabis, her lawsuit states. After California residents voted to approve REC in 2016, the property’s value quickly shot up and Shulman sought out a business partner with capital and experience to help guide her.

Shulman was introduced to Kaplan in June 2017, according to the suit, which described Kaplan as being “fully attuned to her vulnerabilities, already determined to strike it rich in cannabis at anyone’s expense, and desperate for a picturesque centerpiece for marketing materials used to steer funds to his own enterprise.”

“Kaplan was the worst thing that could have happened to Ms. Shulman,” the suit states.

Ultimately, the suit alleges, Kaplan and his cohorts schemed to steal Shulman’s business and its millions of dollars in profits by lying about their backgrounds; ousted Shulman from her property by convincing her to sign a lease that allowed them to do so; and stole money and property from Shulman and her family.

Kaplan, who pleaded guilty in 2007 to federal tax evasion, and the other defendants refuted the claims and pushed to have the lawsuit tossed. They argued that Shulman’s suit lacked grounds since the federal government does not extend protections to cannabis businesses – a position that was backed up by Judge Birotte.

“A court order requiring monetary payment to Plaintiffs for the loss of profits or injury to a business that produces and markets cannabis would, in essence (1) provide a remedy for actions that are unequivocally illegal under federal law; and (2) necessitate that a federal court contravene a federal statute (the CSA) in order to provide relief under a federal statute (RICO),” the judge wrote. “The Court finds this approach to be contrary to public policy.”

In its decision, the court dismissed all federal causes of action and declined to consider the merits of the remaining causes related to business and contract disputes, which the judge wrote were “more properly left with the state court.”

It is fairly common for legalization opponents to cite the RICO Act in lawsuits against cannabis companies, but Shulman may have been the first cannabis operator to do so. The RICO Act – formally the Racketeer Influenced and Corrupt Organizations Act – provides for extended criminal penalties and civil causes of action for acts performed as part of an ongoing criminal organization. It was originally enacted in 1970 to prosecute mobsters.

In May, a judge in Oregon tossed a RICO lawsuit that targeted more than 200 cannabis businesses. In that case, a woman sued on the grounds that smells from a neighboring marijuana processor reduced her ability to enjoy her property.

Shulman is represented in her suit by attorneys with Baker Botts LLP. They did not respond Friday to a message seeking comment.

Kaplan and the other defendants in the case are represented by attorneys with Elkins Kalt Weintraub Reuben Gartside LLP. They also did not respond to a message seeking comment.

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