Key Points

  • The Appellate Division, Third Department, unanimously affirmed the dismissal of a State Finance Law § 123-b taxpayer suit challenging state financing of conditional adult-use cannabis retail dispensaries.
  • The court held that financing under State Finance Law § 99-ii (3) (d) is not preempted by the federal Controlled Substances Act under conflict preemption.
  • The funding does not require anyone to violate the CSA, confer immunity from federal law, or impair federal prosecution, so any conflict is not an actual obstruction or physical impossibility.
  • The court applied its earlier 2026 ruling in Matter of Cannabis Impact Prevention Coalition, LLC v Hochul and cited federal tolerance of state-legal marijuana, quoting Matter of Buenos Hill Inc. v Saratoga Springs Planning Bd.
  • The defendants' alternative arguments for affirmance were rendered academic.

A New York appeals court on Thursday rejected a taxpayer lawsuit seeking to stop the state from using public money to lease, design and build out cannabis dispensaries for social-equity licensees, holding that the financing does not conflict with the federal law that still makes marijuana illegal.

A five-justice panel of the Appellate Division, Third Department, unanimously affirmed the dismissal of the suit brought by the Cannabis Impact Prevention Coalition LLC and a group of individual taxpayers and organizations. Justice Mackey wrote the decision, and Presiding Justice Garry and Justices Aarons, Pritzker and McShan concurred.

The ruling leaves in place the state-backed financing of New York's conditional adult-use cannabis retail dispensaries, known as CAURDs. It also follows an earlier ruling this year in which the Third Department turned away the coalition's argument that the federal Controlled Substances Act overrides the state's legal marijuana market. State funding of the shops, Justice Mackey wrote, "does not require any person to engage in conduct prohibited by the CSA."

Marijuana remains a Schedule I controlled substance under federal law, and with limited exceptions it is unlawful for anyone to knowingly manufacture, distribute, dispense or possess it, the court noted. New York nonetheless legalized adult-use marijuana in March 2021 through the Marihuana Regulation and Taxation Act, which created the state's Cannabis Law, the Cannabis Control Board and the Office of Cannabis Management.

In 2022, the Legislature authorized the Dormitory Authority of the State of New York, known as DASNY, to select a private debt or equity fund to finance the capital and related costs of establishing the dispensaries. The New York Social Equity Cannabis Investment Fund was chosen. According to the decision, DASNY and its subsidiary, the Social Equity Servicing Corporation, then used financing provided through the fund to acquire premises by lease or sublease and to design, build or improve them for use as dispensaries.

The plaintiffs sued under State Finance Law § 123-b. They sought to permanently bar the use of state funds for creating and outfitting the dispensaries, along with a declaration that the spending violates the Controlled Substances Act and other federal laws.

The defendants, including the board, the cannabis office, DASNY and the investment fund, moved to dismiss before answering the complaint. They argued that the plaintiffs lacked standing, that the claims were barred by the statute of limitations and the doctrine of laches, and that the complaint failed to state a cause of action.

Justice Peter Lynch of Albany County Supreme Court found that the plaintiffs had standing and that the suit was timely. But in a judgment entered Feb. 21, 2025, the court granted the motions to dismiss, concluding that the challenged spending did not conflict with the federal drug law and was not preempted by it.

On appeal, the case turned on conflict preemption, a doctrine rooted in the Supremacy Clause under which federal law displaces a state law that clashes with it. Quoting the coalition's earlier case, the court wrote that such a conflict exists "when compliance with both federal and state law is a physical impossibility, or where the state law at issue stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."

The plaintiffs argued that federal law preempts the 2021 legalization act and its broader statutory scheme, including the dispensary financing. Their reason, as the court described it, was that growing, making, distributing and possessing recreational marijuana in New York are "in direct conflict with the CSA's purpose and objective to proscribe the intrastate distribution and manufacture of marihuana."

Justice Mackey wrote that the court had already rejected a similar argument in Matter of Cannabis Impact Prevention Coalition, LLC v. Hochul. In that case, the court concluded that state rules on how medical and adult-use marijuana may be labeled, advertised and marketed neither created an impossibility nor obstructed Congress' purposes. Any clash amounted to "merely hypothetical or potential conflicts," the court found then, because "neither MRTA nor the challenged regulations pose any requirements on an individual or entity to manufacture, distribute or possess marihuana."

"We find these conclusions to be applicable to the instant matter as well, as the same preemption analysis controls," Justice Mackey wrote.

Applying that reasoning to the financing, the panel held that the state money does not "confer immunity from federal law or impair the federal government's ability to prosecute the manufacture, possession or distribution of marihuana should it choose to do so."

The court said the federal government's own application of the drug law "further bolsters this conclusion." It quoted its 2025 decision in Matter of Buenos Hill Inc. v. Saratoga Springs Planning Board, which drew on earlier authority in stating that "over the past 20 years, the federal government has come to tolerate such local use, including by prohibiting federal funds from being used to prosecute individuals who comply with state laws authorizing same."

The panel acknowledged that the financing scheme is "ultimately designed to facilitate the licensed distribution of marihuana within the state." Even so, it held, the plaintiffs had failed to show "the actual obstruction or physical impossibility of the relevant federal law necessary to establish conflict preemption," and the trial court had properly dismissed the complaint.

The court said it had considered the plaintiffs' remaining contentions and found them without merit. Because it affirmed on the preemption ground, it did not reach the defendants' alternative arguments for affirmance, which it said had been rendered academic.

The plaintiffs were represented by William J. Keniry of Tabner Ryan & Keniry LLP in Albany. Brian Lusignan of the office of Attorney General Letitia James represented the Cannabis Control Board and other state defendants.

The panel affirmed the judgment without costs. The decision, 2026 NY Slip Op 06364, is uncorrected and subject to revision before publication in the Official Reports.