Salt Lake City v. Big Ditch Irrigation Company

Today, the Utah Supreme Court issued its opinion in the case of Salt Lake City v. Big Ditch Irrigation Company. The case centers on a 1905 water exchange agreement (“the Agreement”) between Salt Lake City (“the City”) and Big Ditch Irrigation Company (“Big Ditch”). The Agreement states that Big Ditch “grants, bargains and sells” its right to water from Big Cottonwood Creek, and in return, the City would “perpetually and continuously deliver” water suitable for irrigation to the head of Big Ditch’s canal. Big Ditch and the City have operated under the Agreement for over 100 years. However, the amount of water Big Ditch has received from the City has declined over the years, as residential and commercial development in Big Ditch’s historic service area has reduced the number of irrigated acres.

In 2006, Big Ditch and some of its shareholders filed change applications to modify their use of the exchange water received from the City. The City protested, asserting that Big Ditch and its shareholders did not own the water rights, and were therefore not entitled to file change applications. The City then filed suit against Big Ditch and the shareholders, asserting that (1) under the Agreement, the City holds title to the Big Cottonwood Creek water rights and the exchanged water; (2) that Big Ditch and its shareholders do not have a right to file a change application on the exchanged water; (3) that the City is not in breach of its delivery obligations under the Agreement; and (4) that Big Ditch and its shareholders have the contractual right to receive only the amount of water necessary to satisfy the irrigation needs of Big Ditch shareholders whose lands are served by the Big Ditch system. Big Ditch and the shareholders filed counterclaims against the City, asserting among other things that the City was in violation of the Utah Antitrust Act.

In a series of decisions, the district court ruled in favor of the City. Specifically, the district court (1) denied the individual shareholders’ motion to dismiss the City’s claims against them; (2) held that the City holds title to all of the water under the Agreement; (3) held that Big Ditch did not have the right to file change applications on the exchanged water; (4) held that Big Ditch was barred from demanding the full amount of water to which it was entitled under the Agreement; and (5) dismissed the counterclaim against the City for violation of the Utah Antitrust Act.

The district court’s rulings were appealed to the Utah Supreme Court (“the Court”). The Court reviewed each of the five issues outlined above, ultimately concluding that the district court was correct on some issues, but erred on other issues. The Court’s conclusions on each of the five issues are discussed below.

First, the Court held that the district court erred when it denied the individual shareholders’ motion to dismiss the City’s claims against them. The Court noted that the district court had used the wrong legal standard when reviewing the motion to dismiss. Additionally, the Court noted that the shareholders’ rights were derivative of the corporation (Big Ditch), and that the corporation—and not the individual shareholders—were parties to the Agreement. Accordingly, the Court held the individual shareholder had no privity of contract with or duty to the City. Thus, the Court ruled that the individual shareholders were not properly named as defendants and that the district court should have dismissed all of the City’s claims against the individual shareholders.

Second, the Court affirmed the district court’s ruling that the City holds title to the water under the Agreement. The Court noted that under the Agreement, Big Ditch “grants, bargains and sells” its right to Big Cottonwood Creek water to the City. The Court noted that this was conveyance language that passed title of the water rights from Big Ditch to the City. On the other hand, the City agreed to “perpetually and continuously deliver” water to Big Ditch. The Court noted that this was not conveyance language, and therefore did not transfer title to the exchanged water from the City to Big Ditch. In sum, Big Ditch conveyed its water right to the City in exchange for a contractual commitment by the City to deliver water to Big Ditch. Thus, the Agreement vested in the City title to all of the water rights at issue.

Third, the Court held that the district court erred in its conclusion that because Big Ditch had failed to take the full amount of water to which it was entitled under the Agreement in prior years, Big Ditch was estopped from now demanding the full amount of water. The Court concluded that the legal doctrine of equitable estoppel did not apply because there was no inconsistency in Big Ditch’s conduct of taking less than its entitled amount of water in prior years and then later demanding the full amount of water to which it was contractually entitled. Thus, the Court held that the Agreement as originally drafted remains in force, meaning that Big Ditch may take the full amount of water to which it is entitled and that its use of the water is not limited to irrigation use or to use in Big Ditch’s historic service area.

Fourth, the Court held that the district court erred in its conclusion that because Big Ditch was not the appropriator or owner of the exchanged water, Big Ditch was not entitled to file a change application on the water. The Court distinguished prior cases that focused on ownership of the water right, and noted that “one with an entitlement to use water may file a change application,” as long as their right to use the water is not “subsumed to other competing interests.” The Court concluded that because Big Ditch is contractually entitled to receive the exchanged water from the City in perpetuity, Big Ditch is a “person entitled to the use of water” under Utah Code section 73-3-3, and therefore entitled to file change applications on the exchanged water.

Finally, the Court held that the district court properly dismissed the counterclaim against the City for violation of the Utah Antitrust Act. The Court noted that the Act exempts “the activities of a municipality to the extent authorized or directed by state law.” Because municipalities are expressly permitted to acquire water rights and operate water systems, the Court concluded that the City was exempt from the Antitrust Act.

As a final note, although the Court held that Big Ditch may file change applications based on the exchanged water, the Court specifically stated that it was offering no opinion on whether or not the change applications should be approved by the State Engineer. Each change application will still have to go through the administrative process and be reviewed under the applicable standards. It will be interesting to see how these change applications proceed through the change application process and if they will ultimately be approved.

To read the full opinion, click here.

Jensen v. Jones

This week, the Utah Supreme Court issued its opinion in the case of Jensen v. Jones (formerly known as Hamblin v. Olds and Hamblin v. Clayton). The question answered by the Court was whether the State Engineer can declare forfeiture of a water right as the basis for denying a change application.

The underlying facts of the case are that Ms. Hamblin owned a water right from Spring Creek, a tributary to the Provo River. Ms. Hamblin filed a change application, seeking to move the water right to wells in Highland City. The State Engineer rejected the change application based on his determination that the water right had not been used for over 20 years. Ms. Hamblin filed a petition for judicial review with the district court. The district court upheld the State Engineer's rejection of the change application, concluding that the water right had been automatically lost to forfeiture long before the change application was filed. The district court also held that recent changes to Utah's forfeiture statute--which require court action before a water right is adjudicated forfeited--did not apply retroactively.

The district court's decision was then appealed to the Utah Supreme Court. Ms. Hamblin argued (1) that the State Engineer lacks the authority in the context of a change application to determine that a forfeiture has occurred; and (2) that the water right was not forfeited because there has been no judicial determination of forfeiture. On the other side, the State Engineer argued that the water right had been forfeited automatically many years ago due to nonuse and that the amendments to Utah's forfeiture statute were not retroactive. The Court ultimately agreed with Ms. Hamblin's argument that the State Engineer cannot consider non-adjudicated forfeiture when reviewing a change application, and therefore did not answer the question of whether the amendments to the forfeiture statute apply retroactively.

The Court noted that the State Engineer is an executive officer tasked with administering and supervising the appropriation of water in the state, and that he acts in an administrative capacity only and has no authority to adjudicate water rights. The Court also noted that in the context of evaluating a change application, the State Engineer is limited to applying the criteria contained in Utah Code section 73-3-8, which do not include forfeiture. Further, the Court noted that in previous cases, the State Engineer had conceded that a forfeiture determination was beyond the State Engineer's authority in approving or rejecting a change application. In sum, the Court concluded that the State Engineer exceeded his authority by rejecting Ms. Hamblin's change application on a determination of forfeiture, and therefore reversed the district court's affirmance of the State Engineer's rejection.

It is important to note that the Supreme Court did not determine whether Ms. Hamblin's water right has or has not been forfeited, as it was beyond the scope of the appeal.

To read the full text of the Supreme Court's opinion, click here.

Rules to Remember When Purchasing Water Rights

Below is an article that I recently wrote for Western AgCredit's FenceLines magazine. A PDF copy of the full magazine can be seen by clicking here.

As an attorney whose practice focuses primarily on Utah water law, I often receive phone calls and questions about water rights. The most common questions I receive are about title to water rights: How is a water right properly conveyed? How do I know if the water right I am buying is valid? Is there paperwork I need to fill out with the Utah Division of Water Rights? The purpose of this article is to provide five general rules to remember when purchasing a water right (or land that includes a water right) in Utah.

1. Research Title to the Water Right
Before purchasing a water right, you should research the true ownership of the water right. In other words, does the seller really have title to the water right that they are trying to sell you? A printout from the Division of Water Rights’ database or a copy of the deed the seller received from a prior owner are not sufficient to establish ownership. Title research must be done in the records at the county recorder’s office and at the Division of Water Rights. If proper title research is not done, you run the risk of paying the seller for something that he/she does not own.

2. Consider Purchasing Water Right Title Insurance
When purchasing land, people almost always buy title insurance. However, people don’t generally think of buying title insurance for water rights. Water right title insurance is now available in Utah, and may be an option to consider if you are spending a lot of money to purchase water rights and/or want some assurance regarding the title to the water rights.

3. Research the Status of the Water Right
You should research the water right’s status and history. In other words, is the water right a valid, recognized water right that will allow you to use it in the manner represented to you? There are a lot of potential issues that a water right may have that can only be discovered by a thorough review of the documentation, maps, decrees, etc. on file with the Division of Water Rights.

4. Have the Water Right Conveyed by DeedThe proper way to convey a water right is by deed. As a buyer, you should request that the deed be a warranty deed rather than a quit-claim deed. If you are purchasing land and the water right, both can be conveyed in the same deed, but the deed should clearly state the water right that is being transferred. I prefer to use language such as: “Together with Water Right No. 33-1452, as identified of record with the Utah Division of Water Rights, including all change applications and other applications pertaining thereto.” You may also use the Water Rights Deed Addendum form, which is available on the Division of Water Rights’ website. The deed must be recorded with the County Recorder’s Office in the county where the water is diverted and the county where the water is used (which are generally the same).

5. File a Report of ConveyanceAfter the deed has been conveyed, you need to update the title with the Utah Division of Water Rights by filing a Report of Conveyance. The Division maintains a database of all water rights and associated information, which includes the name(s) of the owner(s) of each water right. Any notices or correspondence that affect a water right will be sent to the owner of record on the Division’s database. The Division does not, however, actively monitor any transfers of water rights; rather, the Division relies on each water right owner to file a Report of Conveyance to notify the Division when ownership transfers.

Water rights are a valuable asset and a vital resource in most farming operations. Unfortunately, however, people purchasing water rights oftentimes do not spend the time necessary to research and evaluate the water rights prior to the purchase. Following the five steps outlined in this article can go a long way in ensuring that you get what you pay for in your next water rights
purchase.