Copperstate Farms, LLC Preservation of Documents in Anticipation of Future Litigation

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1 KORY LANGHOFER Managing Attorney Town of Snowflake Tom Poscharsky, Mayor, Kerry Ballard, Vice Mayor, Stuart Hensley, Council Member, Lynn Johnson, Council Member, Terril Kay, Council Member, Cory Johnson, Council Member, Byron Lewis, Council Member, Brian Richards, Town Manager, Barbara Flake, Town Clerk, 81 West First Street South Snowflake, Arizona Re: Copperstate Farms, LLC Preservation of Documents in Anticipation of Future Litigation Dear Sir or Madam: Our firm represents Sylvia Allen, Bob Thorpe, Lowry Flake, and Maylene Flake. I am writing on behalf of our clients to (a) identify certain procedural and substantive defects in the Town of Snowflake s pending approval of a special use permit and medical marijuana cultivation facilities agreement with Copperstate Farms, LLC and (b) request that you preserve documents in anticipation of litigation. The Town of Snowflake Has Provided Inadequate Public Notice As you know, on Tuesday, June 28, 2016 the Town of Snowflake is scheduled to consider and possibly approve a special use permit & medical marijuana cultivation facilities agreement for Copperstate Farms, LLC. Notice of this meeting and agenda item was posted by the Snowflake Town Clerk on June 23, Under Ariz. Rev. Stat and Town Code (A), formal public notice of the time and place of a public hearing on any zoning matter must be given at least fifteen days before the hearing. Because the special use permit concerns zoning and would allow a type and scale of activity that has not previously been approved by the Town or its residents with respect to the affected parcel of land, the notice requirements apply here. But because the Town Council will consider the special use permit only five days after notice was posted, the hearing as currently scheduled lacks adequate public notice. Consequently, if the Town Council approves the special permit and agreement with Copperstate tomorrow as scheduled, the approval will be invalid and subject to a legal challenge. The Special Use Permit and Facilities Agreement Constitute Illegal Contract Zoning. The granting of a special use permit to Copperstate in exchange for a medical marijuana cultivation facilities agreement whereby Copperstate will pay the Town of Snowflake approximately $800,000 per year will

2 constitute illegal contract zoning. 1 Under Arizona law, [t]he power to regulate land use through zoning ordinances is vested in municipal legislatures and they cannot bargain away this power. Davis v. Pima County, 121 Ariz. 343, 345, 590 P.2d 459, 461 (App. 1978); see also Citizens to Save Minnewaska v. New Paltz Central School Dist., 95 A.D.2d 532, 534, 468 N.Y.S.2d 920, 922 (3rd Dept. 1983) ( All legislation by contract is invalid in the sense that a Legislature cannot bargain away or sell its powers. ); League of Residential Neighborhood Advocates v. City of Los Angeles, 498 F.3d 1052, 1057 (9th Cir. 2007) ( Land use regulations... involve the exercise of the state s police power, and it is settled that the government may not contract away its right to exercise the police power. ). Here, the Town of Snowflake is considering whether to approve a special use permit that would modify the permissible uses of the property to allow a medical marijuana cultivation facility. In exchange, Copperstate reportedly will agree to make significant monthly payments to the Town of Snowflake under the facilities agreement or as a business license fee. This is exactly the kind of reciprocal agreement that has been deemed impermissible as illegal contract zoning. See Davis, 121 Ariz. at 345, 590 P.2d at 461 (A municipal legislature cannot, expressly or impliedly, bargain away its legislative zoning powers. ); see also Mayor and Council of Rockville v. Rylyns Enterprises, Inc., 372 Md. 514, 814 A.2d 469 (2002) (contract zoning is impermissible because it allows a property owner to obtain a special privilege not available to others, disrupts the comprehensive nature of the zoning plan, and most importantly, impermissibly derogates the exercise of the municipality s powers). As a result, should the Town of Snowflake approve the special use permit and corresponding facilities agreement, such actions would be subject to both (a) subsequent invalidation by the Town Council due to the illegal nature of the initial approval and (b) legal challenges by neighboring or affected property owners. The Special Use Permit and Facilities Agreement Would Affect State Shared Revenues The contemplated use of the land would violate state law. First, as stated above, the Town of Snowflake s approval of the special use permit and facilities agreement with Copperstate likely constitutes illegal contract zoning. Second, the proposed use of the law clearly violates Article II, Section 3 of the Arizona Constitution, which acknowledges that federal law takes precedent over state law and as you know, the proposed marijuana cultivation center inarguably violates federal law. Third, building the largest medical marijuana cultivation facility may lead to the creation of a public nuisance in violation of Ariz. Rev. Stat Under Section , a public nuisance is an interference with the comfortable enjoyment of life or property by an entire community or neighborhood, or by a considerable number of persons. To constitute a public nuisance, the complained-of interference must be substantial, intentional, and unreasonable under the circumstances. See Armory Park Neighborhood Ass n v. Episcopal Community Services in Arizona, 148 Ariz. 1, 8, 712 P.2d 914, 921 (1985). Courts look at the utility and reasonableness of the conduct and balance the nature of the affected neighborhood. Id.; see also Spur Industries, Inc. v. Del E. Webb Development Co., 108 Ariz. 178, 184, 494 P.2d 700, 706 (1972) (noting that what might amount to a serious nuisance in one locality by reason of the density of the population, or character of the neighborhood affected, may in another place and under different surroundings be deemed proper and unobjectionable. ). The proposed construction of a marijuana cultivation facility may violate other provisions of Arizona law but, for purposes of this letter, it is sufficient to show that at least one state law would be violated. 1 Contract zoning involves the process by which a local government enters into an agreement with a developer whereby the government extracts a performance or promise from the developer in exchange for its agreement to rezone the property. 1A Rathkopf, Zoning and Planning, 29A-25 and 29A-27. It is disapproved of largely on the basis of the principle that a municipality may not contract away its police power to regulate on behalf of the general welfare. Id. 2

3 Because the approval of the special use permit and proposed use of the law violate state law, the Town of Snowflake may face the termination of state shared revenues pursuant to S.B That bill, which was enacted earlier this year, allows the Arizona Attorney General to investigate any ordinance, regulation, order or other official action adopted or taken by the government body of a county, city or town that [a Arizona state legislator] alleges violates state law or the constitution of Arizona. If the Arizona Attorney General concludes that the ordinance, regulation, order or other action under investigation violates any provision of state law or the constitution of Arizona, and the county, city or town fails to revolve the violation within thirty days of notice, he must notify the state treasurer who shall withhold and redistribute state shared monies [under A.R.S and ] from the county, city or town. In addition, if the Arizona Attorney General determines that the ordinance, regulation, order or other action under investigation may violate a provision of state law or the constitution of Arizona, he must file a special action in Supreme Court to resolve the issue and the Superior Court must require the county, city or town to post a bond equal to the amount of shared revenue paid to the county, city or town pursuant to Section and in the preceding six months. Therefore, the issuance of the special use permit may result in a termination of state shared revenues, as well as a special action in the Arizona Supreme Court requiring the Town to post a substantial bond. The Proposed Marijuana Cultivation Facility May Constitute Racketeering Activities Although medical marijuana is now legal in Arizona, the cultivation and sale of marijuana, and the possession and sale of goods and materials needed to cultivate and process marijuana, are all crimes under the Controlled Substances Act of 1970 ( CSA ). See, e.g.., 21 U.S.C. 841(a), 843(a)(6), 856. Furthermore, under the Racketeer Influenced and Corrupt Organizations ( RICO ) Act, it is unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise s affairs through a pattern of racketeering activity or collection of unlawful debt. 18 U.S.C. 1962(C).2 Under federal RICO laws, those who engage in racketeering activity through a corporation or other enterprise may be civilly liable for three times the economic harm they cause plus costs and attorneys fees. 18 U.S.C. 1964(C). In addition, those who engage in racketeering activity may face criminal penalties, including fines and imprisonment, and asset forfeiture (although, to be fair, the risk of federal criminal prosecution remains unclear under the current administration s enforcement priorities). See 18 U.S.C Copperstate plans to open the largest medical marijuana grow facility in the world. It is reasonable to believe that the funding, goods and services that will be procured by Copperstate in furtherance of the cultivation and sale of marijuana at this facility will have moved in interstate commerce and/or that the facility will grow marijuana that will be sold in interstate commerce. As a result, the approval, establishment, and operation of this facility for the purpose of cultivating and selling recreational marijuana might constitute a racketeering activity under RICO. By approving the proposed facility, the Town of Snowflake and its officials might be considered complicit in racketeering activities under RICO and, therefore, subject to such civil and criminal penalties under federal law. We recognize that this legal theory is a serious one, and that the underlying elements and legal theories are complicated and would require substantial research and investigation before any formal allegations are made 2 Illegal racketeering activities under RICO include the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in a controlled substance or listed chemical [as defined in the CSA]. 18 U.S.C. 1962(1)(D). 3

4 or claims are brought. We nonetheless wish to bring the theory to your attention sooner rather than later so that you may independently research and consider the issue before taking further action. The Special Use Permit Is Referable The proposed special use permit and related agreement would convert Snowflake from a quiet town with conservative values into the world s largest cultivator and exporter of marijuana. Moreover, the proposed special use permit does not merely implement previously approved zoning regulations; instead, it authorizes new and transformative use on a scale never before contemplated or approved by the Town or its residents. As a result, the measure must be regarded as legislative in nature and referable to the voters at the next general election. In deciding whether an action is legislative (and therefore referable) or administrative (and therefore not referable), the courts look beyond the label attached to a piece of legislation and, instead consider the substance of the action. See Pioneer Trust Company of Arizona v. Pima County, 168 Ariz. 61, P.2d 22, 24 ( If form alone were to govern, a Board could exempt its legislative action from referendum simply by labeling the action as something other than an ordinance, franchise or resolution. ); see also GP Properties Carefree Cave Creek, L.L.C. v. Town of Carefree, 2008 WL , *9 ( Despite the label attached to a land use decision, courts must look to the substance of any decision to determine if it is merely an implementation of policy or policy-creation. ). To determine whether a city or town s decision is legislative or administrative, courts apply a three party test. A court must consider whether the action is (1) permanent or temporary, (2) of general or specific (limited) application, and (3) a matter of policy creation or a form of policy implementation. Redelsperger v. City of Avondale, 207 Ariz. 430, 433, 87 P.3d 843, 846 (App. 2004) (citing Wennerstrom v. City of Mesa, 169 Ariz. 485, 489, 821 P.2d 146, 150 (1991)). On balance, we believe a court would likely conclude that the proposed action is legislative in nature and, because the action is wildly unpopular with Town voters, the action would very likely become the subject of a referendum immediately after any vote in favor of Copperstate. Voters Would Pass an Initiative to Tax the Cultivation Facility Under Ariz. Rev. Stat , medical marijuana dispensaries are exempt from income tax. However, there is no similar provision exempting medical marijuana from sales taxes. Nor is medical marijuana exempt from more generally applicable tax rules. For example, medical marijuana sales proceeds do not constitute tax-exempt proceeds of income derived from the sale or prescription drugs under Ariz. Rev. Stat (A)(8) because doctors customarily do not write prescriptions for medical marijuana. Consequently, the marijuana to be grown at the proposed cultivation facility will almost certainly not be considered a prescription drug (especially not at the time of wholesale distribution). As a result, Town residents will be free to (and most likely would) approve an initiative petition that will tax all marijuana grown at or sold from the new facility and may, by extension, prevent the facility from opening due to clouded profitability projections. Voter Will Recall Any Elected Officials Approving the Special Use Permit The approval of the world s largest medical marijuana facility will almost inevitably result in the recall of all responsible elected officials. Once Town residents become aware of its nature and size, the proposed medical marijuana cultivation facility will be wildly unpopular. And after the responsible elected officials are recalled, their replacements will have the authority to unwind the unlawful acts of their predecessors. 4

5 Litigation Hold Because we reasonably anticipate litigation concerning one or more of the foregoing issues, I am writing to inform you of your duty to preserve documents that may be relevant to such litigation. In general terms, you have a duty to preserve all paper and electronic information that may be related in any way to the claims. You must preserve any written documents that you have, or that are reasonably in your possession, custody or control, as well as any electronic information stored on your current or former computer or data systems. Electronically stored information includes, for example, s; voic s; text messages; instant messages; social media posts; Word or WordPerfect documents; bank records, accounting or financial documents; spreadsheets; databases; telephone logs; audio recordings; videos; photographs or images; information contained on desktops, laptops, tablet computers, smartphones, or other portable devices; calendar records and diary data. If information is in both electronic and paper forms, you should preserve both forms. Failure to abide by this request could result in significant penalties, and could form the basis of legal claims, legal presumptions, or jury instructions relating to spoliation of evidence. Specifically, you must preserve all such records that relate in any way to the issues and legal theories described above or to the facts underlying such issues and theories. With this in mind, please immediately suspend deletion, modification, overwriting, or any other possible destruction of the information described above, including electronic information, and take all measures to preserve this information. You and any of your agents, employees, contractors, service providers, vendors, or other agents or representatives should take all reasonable steps to preserve the above-described information. Therefore, please inform such individuals or entities (including any managers and information technology personnel) of the above requirements immediately. We realize that implementing a litigation hold can be daunting and time consuming. Therefore, if you are in doubt as to whether any particular items or documentation should be preserved or whether a particular preservative measure is reasonably necessary under the circumstances, if you would like technological assistance, and/or if you would like assistance in drafting a notice letter to your agents or representatives, please contact us and we will gladly discuss the issues and do whatever we can to help you comply with these legal requirements. Alternatively, if you are already represented by legal counsel in this matter, contact your own attorney immediately and kindly ask him or her to contact us. Respectfully, /s/ Kory Langhofer Kory Langhofer North Fourth Avenue Phoenix, Arizona