Monday, December 17, 2012

Hardy v. Eagle Mountain City

Last week, the Utah Court of Appeals issued its opinion in Hardy v. Eagle Mountain City.  The opinion addresses issues of appurtenance of water rights and trust deeds.

The plaintiffs in the case were lenders who loaned money to a development company.  The loan was secured by a trust deed and promissory note.  The trust deed secured two parcels of land and "all water rights . . . and appurtenances thereunto belonging."  The development company later conveyed a 160 acre-foot water right to a sister company, who in turn conveyed the water right to Eagle Mountain City and received "banked water entitlements" in exchange.  When the development company defaulted on its loan, the lenders attempted to foreclose on the 160 acre-foot water right, asserting that the water right was encumbered by the trust deed.  This lawsuit followed.

The district court ruled in favor of the lenders, and issued a decree of foreclosure under which the lenders were allowed to foreclose on the remaining banked water entitlements.  Eagle Mountain City appealed the decision to the Utah Court of Appeals.

One of the primary arguments put forward by the City was that the trust deed was ambiguous, and that the trial court therefore should have considered extrinsic evidence regarding the parties' intent.  The Court of Appeals began its analysis by noting that a trust deed is a conveyance document for purposes of the relevant code section: Section 73-1-11.  The Court then determined that none of the exceptions listed under 73-1-11(1) applied in this case.  The City had argued that because the promissory note had specifically mentioned other water rights that were put up as collateral, that the exception for "convey[ing] a part of the water right" should apply.  The Court rejected this argument on two bases.  First, the Court held that the trust deed--and not the promissory note--was the relevant conveyance document, and the trust deed had conveyed all appurtenant water rights.  Second, the Court held that even if the promissory note could be considered a conveyance document, the exception still would not apply because the promissory note listed other, separate water rights, and not a portion of the 160 acre-foot water right.  The Court also determined that the language in the deed covering "all water rights . . . and appurtenances thereunto belonging" was unambiguous.  Accordingly, the Court rejected the City's argument of ambiguity, and interpreted the trust deed based on its unambiguous language.  The Court of Appeals also upheld the district court's determination that the water right was appurtenant to one of the parcels of land listed in the trust deed.

The Court of Appeals also upheld the district court's alternative determination that the conveyance from the development company to its sister company was a fraudulent transfer, as no value was given by the sister company.  Furthermore, the Court of Appeals upheld the district court's determination that the City did not qualify as a good-faith transferee for value. 

In the end, the Court of Appeals affirmed the district court's decision in its entirety and upheld the lenders' ability to foreclose on the banked water entitlements.

To read the full opinion, click here.

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