Francine Shulman v. Todd Kaplan ( 2023 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FRANCINE SHULMAN; IRON No. 20-56265
ANGEL, LLC; 3F, INC.,
D.C. No.
Plaintiffs-Appellants, 2:19-cv-05413-
AB-FFM
v.
TODD KAPLAN; MEDICAL OPINION
INVESTOR HOLDINGS LLC, DBA
Vertical Companies; CHARLES
HOUGHTON; MATT KAPLAN;
DREW MILBURN; COURTNEY
DORNE; SMOKE WALLIN;
ROBERT SCOTT KAPLAN, AKA
Robert Scott; ELYSE KAPLAN; JEFF
SILVER; IRON ANGEL II, LLC;
NCAMBA9, INC.; VERTICAL
WELLNESS, INC.,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Andre Birotte, Jr., District Judge, Presiding
Argued and Submitted September 1, 2022
Pasadena, California
2 SHULMAN V. KAPLAN
Filed January 18, 2023
Before: MILAN D. SMITH, JR. and RYAN D. NELSON,
Circuit Judges, and GERSHWIN A. DRAIN, * District
Judge.
Opinion by Judge Milan D. Smith, Jr.
SUMMARY **
RICO / Standing
The panel affirmed the district court’s dismissal of
claims brought by a cannabis entrepreneur and two cannabis
businesses under the Racketeer Influenced and Corrupt
Organizations Act, based on alleged harms to their cannabis
business and related property through acts of mail and wire
fraud by a former business partner and other defendants.
The panel held that while appellants had Article III
standing, they lacked statutory standing under RICO.
As to Article III standing, the panel held that appellants
satisfied the injury requirement, which requires a showing of
an invasion of a legally protected interest, because cannabis-
related property interests are recognized under California
law. Appellants satisfied the causation requirement because
*
The Honorable Gershwin A. Drain, United States District Judge for the
Eastern District of Michigan, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
SHULMAN V. KAPLAN 3
they pleaded that their alleged injuries were caused by
appellees’ actions. Appellants also satisfied the requirement
that their injury would likely be redressed by legal
relief. Appellees argued that appellants’ alleged injuries
were not redressable because they related to a cannabis
business, which was illegal under the Controlled Substances
Act. The panel held that the fact that appellants sought
damages for economic harms related to cannabis was not
relevant to whether a court could, theoretically, fashion a
remedy to redress their injuries. Appellants sought money
damages, and an award of money damages is the
quintessential remedy for a civil RICO violation. Therefore,
the alleged harm was redressable by a federal court, and
appellants had Article III standing.
The panel held that appellants nonetheless lacked
statutory standing to bring their claims under RICO Section
1964(c). Statutory standing requires plaintiffs to show (1)
that their alleged harm qualifies as injury to their business or
property and (2) that their harm was by reason of the RICO
violation, which requires a showing of proximate
causation. The panel concluded that, for appellants to
establish RICO standing, the statute’s use of the term
“business or property” must encompass businesses and
property engaged in the cultivation, sale, and marketing of
cannabis—an enterprise that was legal under California law,
but was illegal under federal law. Agreeing with other
circuits, the panel held that state law does not control where
RICO’s statutory purpose or congressional intent in enacting
the statute conflicts with the relevant state law. The panel
concluded that the statutory purpose of RICO and the
congressional intent animating its passage conflicted with
the California laws recognizing a business and property
interest in cannabis. Looking to RICO as a whole, and
4 SHULMAN V. KAPLAN
considering RICO in tandem with the Controlled Substances
Act, which was enacted almost contemporaneously, the
panel found it clear that Congress did not intend “business
or property” to cover cannabis-related commerce.
Accordingly, the panel held that appellants lacked a statutory
right to bring a claim under RICO.
COUNSEL
Kristin C. Cope (argued), O’Melveny & Myers LLP, Dallas,
Texas; Cheryl Cauley, Baker Botts LLP, Palo Alto,
California; Christopher E. Tutunjian, Baker Botts LLP,
Houston, Texas; Christopher Hunt; Baker Botts LLP, Dallas,
Texas; for Plaintiffs-Appellants.
John C. Scholz (argued), Lafayette, Colorado; Melissa G.
Fulgencio, Uplift Law, Placentia, California; Charles
Houghton, Colorado Springs, Colorado; Rachel F. Kashani
and Priscilla B. George, Medical Investor Holdings LLC,
Agoura Hills, California; Elyse S. Kaplan, Camarillo,
California; for Defendants-Appellees.
SHULMAN V. KAPLAN 5
OPINION
M. SMITH, Circuit Judge:
The question presented in this case is whether
Appellants, a cannabis entrepreneur and two cannabis
businesses, have standing to bring claims arising pursuant to
the Racketeer Influenced and Corrupt Organizations Act
(RICO), 18 U.S.C. § 1961 et seq., based on alleged harms to
their cannabis business and related property. We have
appellate jurisdiction over this case pursuant to 28 U.S.C. §
1291. We hold that while Appellants have Article III
standing, they lack statutory standing under RICO.
I.
FACTUAL AND PROCEDURAL BACKGROUND
Appellant Francine Shulman is a cannabis farmer and
entrepreneur who operates a business that grows, markets,
and sells cannabis in California. Shulman formed an LLC
and a corporation through which to operate her cannabis
businesses, both of which are also appellants in this action.
After California voters passed a ballot proposition
permitting the sale of cannabis for recreational use, Shulman
sought to expand her operation and engaged Appellee Todd
Kaplan as a business partner. Appellants allege that Kaplan
and others subsequently engaged in unlawful, fraudulent
conduct that injured their cannabis business and related
property.
Appellants sued Appellees in federal district court,
asserting dozens of claims, two of which arise under RICO.
Appellants’ RICO claims are based on alleged mail and wire
fraud that Appellees allegedly committed in furtherance of
their scheme. Appellants also brought two Lanham Act
6 SHULMAN V. KAPLAN
claims and various state law claims, including fraud and
breach of contract.
The district court granted Appellees’ motion to dismiss
with prejudice, holding that Appellants lacked standing to
bring their RICO claims. The court also dismissed
Appellants’ Lanham Act claims on standing grounds as well
as their state law claims, declining to exercise supplemental
jurisdiction. Appellants now appeal the district court’s order
only as to their RICO claims.
II.
ANALYSIS
A.
The question of whether a party has standing to sue under
Article III is a threshold issue that must be addressed before
turning to the merits of a case. See Horne v. Flores, 557 U.S.
433, 445 (2009). We review standing determinations de
novo. 1 Tailford v. Experian Info. Sols., Inc., 26 F.4th 1092,
1
It is not apparent from the district court’s order whether it dismissed
Appellants’ RICO claims for a lack of statutory standing or Article III
standing. “‘[T]hough lack of statutory standing requires dismissal for
failure to state a claim, lack of Article III standing requires dismissal for
lack of subject matter jurisdiction under Federal Rule of Civil Procedure
12(b)(1).’ … The former is a determination on the merits, while the latter
is purely jurisdictional.” Naruto v. Slater, 888 F.3d 418, 425 n.7 (9th
Cir. 2018) (quoting Maya v. Centex Corp., 658 F.3d 1060, 1067 (9th Cir.
2011)). Here, Appellees brought a motion to dismiss for failure to state
a claim pursuant to Fed. R. Civ. P 12(b)(6), which the court granted.
However, the cases the district court cited in rendering its decision
pertain to Article III, rather than statutory, standing. “[W]e review
dismissals pursuant to both Rule 12(b)(1) and Rule 12(b)(6) de novo[.]”
Vaughn v. Bay Envtl. Mgmt., Inc., 567 F.3d 1021, 1024 (9th Cir. 2009)
(citing Rhoades v. Avon Prods., Inc., 504 F.3d 1151, 1156 (9th Cir.
SHULMAN V. KAPLAN 7
1098 (9th Cir. 2022). As the party “invoking federal
jurisdiction,” Appellants have the burden of establishing
standing pursuant to Article III. Lujan v. Defs. of Wildlife,
504 U.S. 555, 561 (1992). When assessing a party’s
standing at the pleading stage, we accept all facts alleged in
the complaint as true. See Vaughn v. Bay Envtl. Mgmt., Inc.,
567 F.3d 1021, 1024 (9th Cir. 2009).
To establish Article III standing, Appellants must show
(1) that they “suffered an injury in fact that is concrete,
particularized, and actual or imminent;” (2) “that the injury
was likely caused by the defendants;” and (3) “that the injury
would likely be redressed by judicial relief.” TransUnion
LLC v. Ramirez, 141 S. Ct. 2190, 2203 (2021).
An injury in fact is “an invasion of a legally protected
interest.” Lujan, 504 U.S. at 560. This legal right may be
“one of property, one arising out of contract, one protected
against tortious invasion, or one founded on a statute which
confers a privilege.” Tenn. Elec. Power Co. v. Tenn. Val.
Auth., 306 U.S. 118, 137 (1939), overruled in part on other
grounds by Bond v. United States, 564 U.S. 211, 216, 220
(2011). Appellants allege that they sustained an injury to
their cannabis businesses and related property. In the Article
III standing context, a party’s “[o]wnership interest is
determined under the law of the state in which the interest
arose.” United States v. 5208 Los Franciscos Way, 385 F.3d
1187, 1191 (9th Cir. 2004) (“The claimant’s burden under
Article III is not a heavy one; the claimant need demonstrate
2007)). Indeed, “federal courts are required to examine sua sponte
jurisdictional issues such as standing.” B.C. v. Plumas Unified Sch.
Dist., 192 F.3d 1260, 1264 (9th Cir. 1999). Therefore, Appellants must
establish Article III standing irrespective of whether the district court
dismissed their claims for lack of statutory or constitutional standing.
8 SHULMAN V. KAPLAN
only a colorable interest in the property, for example . . . .”).
No party disputes that California recognizes cannabis-
related property interests. See e.g. Cal. Health & Safety
Code § 11362.1; Cal. Bus. & Prof. Code §§ 26000–26260.
Accordingly, Appellants satisfy the injury requirement for
Article III standing.
To prove causation, Appellants must show that the injury
is “fairly traceable to the challenged action of the defendant,
and not the result of the independent action of some third
party not before the court.” Lujan, 504 U.S. at 560–61
(cleaned up). In this case, there is no dispute that Appellants
plead that their alleged injuries were caused by Appellees’
actions.
In contrast, the parties disagree respecting redressability
in this case. Appellees contend Appellants’ alleged injuries
are not redressable because they relate to a cannabis
business, which is illegal under federal law. According to
them, this means any remedy would contravene federal law
and constitute an illegal mandate. Appellants, in contrast,
argue that their injury based on Appellees’ past conduct
could be redressed by the money damages that they seek in
this action—noting that various federal courts have
exercised jurisdiction over cases where the plaintiffs’
activities contravened the Controlled Substances Act.
“To determine whether an injury is redressable, a court
will consider the relationship between the judicial relief
requested and the injury suffered.” California v. Texas, 141
S. Ct. 2104, 2115 (2021) (cleaned up). However, “if the
court is unable to grant the relief that relates to the harm, the
plaintiff lacks standing.” Gonzales v. Gorsuch, 688 F.2d
1263, 1267 (9th Cir. 1982). Redressability invokes the
separation of powers, asking whether the remedial action
SHULMAN V. KAPLAN 9
requested is “committed to the judicial branch.” Republic of
Marshall Islands v. United States, 865 F.3d 1187, 1192,
1200 (9th Cir. 2017). As such, evaluating the issue of
redressability “requires an analysis of whether the court has
the power to right or to prevent the claimed injury.”
Gonzales, 688 F.2d at 1267.
In this case, the district court could fashion a remedy that
would redress Appellants’ alleged injury. To determine the
extent of the district court’s remedial power, we “assume
that [the] plaintiff’s claim has legal merit.” M.S. v. Brown,
902 F.3d 1076, 1083 (9th Cir. 2018); see also Warth v.
Seldin, 422 U.S. 490, 500 (1975) (“Although standing in no
way depends on the merits of the plaintiff’s [claim], it often
turns on the nature and source of the claim asserted.”)
(citation omitted).
Here, Appellants seek money damages pursuant to RICO
based on alleged financial injuries to their business. An
award of money damages is the quintessential remedy for a
civil RICO violation. See Agency Holding Corp. v. Malley-
Duff & Assocs., Inc., 483 U.S. 143, 151 (1987) (“[RICO is]
designed to remedy economic injury by providing for the
recovery of treble damages, costs, and attorney’s fees.”);
Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 481–82, 498
(1985) (“The statute’s remedial purposes are nowhere more
evident than in the provision of a private action for those
injured by racketeering activity.”) (internal quotation
omitted). Contrary to Appellees’ argument, the fact that
Appellants seek damages for economic harms related to
cannabis is not relevant to whether a court could,
theoretically, fashion a remedy to redress their injuries.
Therefore, the alleged harm in this case is redressable by the
federal court. Accordingly, we find that Appellants have
Article III standing.
10 SHULMAN V. KAPLAN
B.
We next consider whether Appellants have statutory
standing to bring their RICO claims. See Canyon Cnty. v.
Syngenta Seeds, Inc., 519 F.3d 969, 974 n.7 (9th Cir. 2008)
(“[T]he question of statutory standing is to be resolved . . .
once Article III standing has been established.”) (citation
omitted).
RICO provides that it is “unlawful for any person
through a pattern of racketeering activity . . . to acquire or
maintain, directly or indirectly, any interest in or control of
any enterprise which is engaged in, or the activities of which
affect, interstate or foreign commerce” and proscribes
conspiracy to do the same. 18 U.S.C. § 1962(b), (d). 2 Under
RICO’s standing provision, “[a]ny person injured in his
business or property by reason of a violation” of the statute’s
substantive provisions may bring a RICO claim in federal
court to recover treble damages and costs. Id. § 1964(c)
(emphasis added). We have recognized that to establish
statutory standing pursuant to RICO, a plaintiff “must show:
(1) that his alleged harm qualifies as injury to his business or
property; and (2) that his harm was by reason of the RICO
violation, which requires the plaintiff to establish proximate
causation.” Canyon Cty., 519 F.3d at 972 (cleaned up); see
also Sedima, 473 U.S. at 496.
Here, Appellants allege that Appellees devised a
racketeering scheme to defraud them, committed acts of mail
and wire fraud, and injured them in “their business and
property, because their moneys, profits, and property” from
2
To establish a pattern of racketeering activity, a party must allege two
or more predicate acts as defined in 18 U.S.C. § 1961, such as mail and
wire fraud.
SHULMAN V. KAPLAN 11
their cannabis enterprise “have been wrongly diverted to and
converted by Defendants.” It is therefore clear from the face
of the complaint that Appellants’ claimed injury arises
pursuant to RICO Section 1964(c). Accordingly, for
Appellants to establish RICO standing, the statute’s use of
the term “business or property” must encompass businesses
and property engaged in the cultivation, sale, and marketing
of cannabis—an enterprise that is legal under California law,
but illegal under federal law.
The text of RICO does not define either “business” or
“property.” For this reason, courts usually look to state law
to determine whether a particular interest amounts to
property. Diaz v. Gates, 420 F.3d 897, 900 (9th Cir. 2005)
(en banc) (“Without a harm to a specific business or property
interest—a categorical inquiry typically determined by
reference to state law—there is no injury to business or
property within the meaning of RICO.”) (emphasis added).
California law, unlike federal law, recognizes licensed
cannabis businesses as well as a property interest in
cannabis. Compare Cal. Health & Safety Code § 11362.1and Cal. Bus. & Prof. Code §§ 26000-26260 with 21 U.S.C.
§ 881(a)(1); see also United States v. Jeffers, 342 U.S. 48,
52–53 (1951) (explaining that there is no cognizable
property interest in narcotics because they are items deemed
contraband under federal law).
We observe that numerous courts have held that state law
does not control where RICO’s statutory purpose or
congressional intent in enacting the statute conflicts with the
relevant state law. See e.g., Jackson v. Sedgwick Claims
Mgmt. Servs., 731 F.3d 556, 565 (6th Cir. 2013) (explaining
“whether Congress intended the damages that plaintiffs seek
in this case to be recoverable under civil RICO” determines
whether “business or property” is recognized for standing
12 SHULMAN V. KAPLAN
purposes); DeMauro v. DeMauro, 115 F.3d 94, 96–97 (1st
Cir. 1997) (“Where to set the ‘business or property’
threshold depends on federal statutory purpose[.]”); Doe v.
Roe, 958 F.2d 763, 768 (7th Cir. 1992) (“Of course, we are
not required to adopt a state interpretation of ‘business or
property’ if it would contravene Congress’ intent in enacting
RICO.”). We agree with the reasoning of our sister circuits
on this point.
This presents us with the following question: do either
the statutory purpose of RICO or the congressional intent
animating its passage conflict with the California laws
recognizing a business and property interest in cannabis?
We conclude that they do.
As always, we begin with the statute. See Ross v. Blake,
578 U.S. 632, 638 (2016) (“Statutory interpretation, as we
always say, begins with the text[.]”). RICO does not define
the terms “business” or “property,” and so the statutory text
does not compel an answer. However, a court “must
interpret the statute as a whole, giving effect to each word
and making every effort not to interpret a provision in a
manner that renders other provisions of the same statute
inconsistent, meaningless or superfluous.” Rodriguez v.
Sony Computer Ent. Am., LLC, 801 F.3d 1045, 1051 (9th
Cir. 2015).
Looking to RICO as a whole, it is clear that Congress did
not intend “business or property” to cover cannabis-related
commerce. When Congress enacted RICO, it expressly
defined “racketeering activity” to include the “manufacture,
importation, receiving, concealment, buying, selling, or
otherwise dealing in” cannabis. 18 U.S.C. § 1961(1)(D); 21
U.S.C. §§ 802, 812. Indeed, at least one other court has
correctly recognized that cultivating cannabis for sale
SHULMAN V. KAPLAN 13
constitutes racketeering activity under RICO, even if it is
legal under state law. See Safe Sts. for All. v. Hickenlooper,
859 F.3d 865, 882 (10th Cir. 2017). Because RICO’s
definition of racketeering activity necessarily encompasses
dealing in cannabis, it would be inconsistent to allow a
business that is actively engaged in cultivation of and
commerce in cannabis to recover damages under RICO for
injury to that business.
We also note that Congress passed the Controlled
Substances Act (CSA) and RICO in the same year. See
Controlled Substances Act (CSA), Pub. L. No. 91-513, 84Stat. 1236 (1970) (codified as amended at 21 U.S.C. § 801et seq.); Racketeer Influenced and Corrupt Organizations
Act (RICO), Pub. L. No. 91-452, 84 Stat. 941 (1970)
(codified as 18 U.S.C. § 1961 et seq.). At the time it was
passed—and ever since—the CSA has listed both
“Marihuana” and its psychoactive chemical component
Tetrahydrocannabinol (THC) as Schedule I controlled
substances, which are illegal to “manufacture, distribute, or
dispense, or possess” with intent do so. 21 U.S.C. § 812(c);
see also 21 C.F.R. 1308. The CSA declares it unlawful to
knowingly or intentionally “manufacture, distribute, or
dispense, or possess with intent to manufacture, distribute,
or dispense” these substances. 21 U.S.C. § 841. The CSA
further provides that all such “substances which have been
manufactured, distributed, dispensed, or acquired in
violation of [the CSA],” “shall be subject to forfeiture to the
United States and no property right shall exist in them.” Id.§ 881(a)(1) (emphasis added). This includes money given
in “exchange for a controlled substance.” Id. § 881(a)(6).
Since RICO and the CSA were enacted almost
contemporaneously, it is clear that Congress did not intend
the term “business or property” in RICO to include cannabis
14 SHULMAN V. KAPLAN
businesses or property. Congress enacted RICO as part of a
comprehensive legislative package aimed at combating the
influence of organized crime on interstate commerce. S.
Rep. No. 91-617, at 76 (1969). Considering the laws in
tandem, it is evident that Congress would have considered a
cannabis business to be a form of organized crime and that
Congress would not have intended RICO to provide
damages for injury to interests in which it explicitly
disclaimed the existence of any property rights.
Although some states, such as California, have changed
their legal regimes pertaining to the use, cultivation,
distribution, and sale of cannabis since the enactment of
RICO and the CSA, these activities are still clearly illegal
under federal law. Indeed, were we to substitute a drug like
heroin for cannabis for the purposes of our analysis, the
conclusion seems obvious: Congress could not have
intended to allow a heroin dealer to recover RICO damages
from someone who, by mail and wire fraud, stole a shipment
of heroin. Otherwise, RICO would serve to protect the same
variety of conduct it was intended to combat. For these
reasons, we hold that Appellants lack a statutory right to
bring a claim under RICO.
III.
CONCLUSION
For these reasons, we AFFIRM the district court’s order
dismissing Appellants’ RICO claims.
AFFIRMED.