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Pot Banker Says Looming Criminal Charges Warrant Suit Stay


Law360 (June 21, 2021, 6:12 PM EDT) -- A cannabis banking firm has disclosed to a California federal court that its CEO is expected to face various charges in the wake of a federal criminal investigation, saying a suit filed by a client accusing it of withholding nearly $3 million should be paused until the criminal investigation concludes.

Pacific Banking Corp. noted in a Friday memo supporting its bid to stay the case filed by Cann Distributors Inc. that investigators anticipate handing down federal securities and banking charges against Pacific CEO Justin Costello. That information comes from a declaration in a separate civil case Costello is facing, which Pacific cited in Friday's filings.

In that separate case, a Washington state court judge granted a full stay of the action until the criminal prosecution is resolved. Costello's counsel in that case said he spoke with an assistant U.S. attorney for the U.S. Department of Justice and a special agent with the FBI, according to the declaration. The assistant U.S. attorney, Justin Arnold, works in the Western District of Washington and indicated Costello was the target of an investigation that was "very far along" and "moving quickly," and that third parties may also be charged, the declaration reads.

Pacific Banking said Friday that a stay is proper in Cann's case because if discovery were to move forward, Costello "will be faced with the difficult choice between asserting [his] right against self-incrimination, thereby inviting prejudice in the civil case, or waiving those rights, thereby courting liability in the civil case," citing the case of Javier H. v. Garcia-Botello .

Pacific Banking said it will move for an order staying the case on July 29.

The banking company said the court and the public would benefit from a temporary stay, noting that resolving the criminal matter may narrow the scope of civil discovery. But Steven M. Selna of Selna Partners LLP, counsel for Cann, said via email that the company's interest in getting back its funds would be prejudiced by a stay.

"We filed our complaint 15 months ago and the case has already been delayed by Mr. Costello's dilatory tactics, filing motions to dismiss based on lack of subject matter and personal jurisdiction that were not well-supported and ultimately denied by the court," Selna said. "Defendants have since been actively participating in this case, and their 5th amendment rights can be adequately protected here."

Counsel for Pacific Banking and Costello did not immediately respond to a request for comment Monday.

Pacific Banking said Cann filed a "virtually identical" suit in a Washington state court, which Costello is also moving to have dismissed or stayed.

Companies like Pacific Banking have stepped in for cannabis companies to fill the void left by traditional banks, which generally refuse to serve marijuana clients for fear of running afoul of federal drug and money laundering laws.

Pacific Banking serves as a middleman of sorts, part of an ecosystem of firms that help connect banks and cannabis businesses through software, auditing and cash collection. Without companies like Pacific Banking, marijuana businesses often have to deal almost exclusively in cash.

In its March 2020 complaint in the federal case, Cann said Pacific Banking failed to pay millions of dollars in California tax payments and vendor invoices on its behalf. The next month, before Pacific Banking appeared in the case, Cann secured an order blocking Pacific Banking from touching the nearly $2.8 million Cann said it had deposited.

Cann claimed Pacific Banking didn't follow through on two requested tax payments totaling $2.4 million since December, exposing Cann to $500,000 in penalties and possible blackballing from the industry by California regulators. Vendors, owed a total of $1.7 million, have also come knocking, according to the complaint.

Cann, which is part of the California-based marijuana company NUG, said it believes Pacific Banking deposited its funds into accounts controlled by Costello, through an entity known as GRN Funds LLC. Cann said it never got an explanation for its unpaid bills.

Pacific Banking hit back with a motion to dismiss in May 2020, saying it can't be sued for the funds in federal court because marijuana is illegal. The company also said Cann deserved sanctions for wasting the court's time with a suit concerning money earned from illicit drugs, but the court denied the sanctions bids in June 2020.

The court denied Pacific Banking's motion to dismiss in March, saying all the elements of diversity jurisdiction were sufficiently alleged.

Cann is represented by Steven M. Selna and Robert W. Selna of Selna Partners LLP.

Pacific Banking and Costello are represented by Loren Kieve.

The case is CCSAC Inc. et al. v Pacific Banking Corp et al., case number 3:20-cv-02102, in the U.S. District Court for the Northern District of California.

--Additional reporting by Jack Queen and Diana Novak Jones. Editing by Amy Rowe.

Read more at: https://www.law360.com/articles/1395717?copied=1