Rocky Ford Irr. Co. v Kents Lake Reservoir Co. (amended)

In July 2019, the Utah Supreme Court issued a decision in the case of Rocky Ford Irrigation Company v. Kents Lake Reservoir Company. Following that decision, both parties filed Petitions for Rehearing, which the Court granted. After additional briefing from the parties (and the Utah State Engineer) and additional oral arguments, the Court withdrew its prior decision and issued a new decision. This case focuses on the issues of water efficiency savings, impairment of others' water rights, and obligations to measure water diversions.

Rocky Ford and Kents Lake are two irrigation companies on the Beaver River system. Both irrigation companies have various direct flow water rights and storage water rights with varying priority dates. In 1931, the Fifth District Court issued the Beaver River Decree, which divided the Beaver River system into an upper portion and a lower portion. Upper water users were allowed to divert water prior to lower water users, despite later priority dates, in part because the lower water users benefitted from return flows from the upper water users' flood irrigation. The Decree also required that all points of diversion be equipped with measuring devices.

In the 1930s and 1940s, Kents Lake filed two applications (a change application and an application to appropriate) with the State Engineer to construct Three Miles Reservoir in the upper portion of the Beaver River system. Rocky Ford protested the applications, but the State Engineer ultimately approved the applications. In 1953, Rocky Ford and Kents Lake entered into an agreement in which Rocky Ford agreed not to protest future change applications associated with Three Mile Reservoir, and Kents Lake agreed not to oppose Rocky Ford's expansion of its reservoir located in the lower portion of the Beaver River system. Kents Lake later filed a change application, and Rocky Ford did not protest it. Kents Lake later certificated this change application with the State Engineer.

Beginning in the 1970s, Beaver River water users began converting from flood irrigation to sprinkler irrigation. Rocky Ford alleged that it was being harmed due to the reduced return flows from upper water users and due to Kents Lake storing the "saved" water from the efficiency gains in its reservoir. In 2010, Rocky Ford filed a lawsuit against Kents Lake seeking damages, declaratory relief, injunctive relief, and rescission of the 1953 Agreement, based on allegations of water right interference, conversion of water rights, and negligence. Rocky Ford asserted that its water rights had been injured by the actions of Kents Lake, including the storage change application and the failure to measure water diversions. In one decision, the district court concluded that Rocky Ford had effectively waived some of its claims based on prior rights due to the 1953 Agreement. Following this decision, Rocky Ford stipulated to dismiss its damage claims. The remaining claims went forward to trial, and the district court ruled in favor of Kents Lake. The district court also awarded attorney fees to Kents Lake. Rocky Ford then appealed the case to the Utah Supreme Court. The Utah Supreme Court focused its decision on answering five questions, which are discussed below.

1. Did the district court err in denying Rocky Ford's motion for summary judgment?

The Court determined that there was a legitimate dispute about which of Rocky Ford's water rights were subject to the 1953 Agreement, and that the district court therefore erred in granting summary judgment on its interpretation of the 1953 Agreement.

The Court confirmed the principle that a "change maintains its original priority only so long as it does not harm preexisting rights." Thus, the Court determined that Kents Lake's changed storage rights maintained their original priority date of 1890 only if Kents Lake's changed water storage did not injure Rocky Ford's preexisting water rights.

The Court then explored the issue of impairment vs. interference. This was a central issue of dispute in the case. Rocky Ford asserted that impairment and interference meant the same thing, whereas Kents Lake asserted that the two terms have different meanings and contexts. The Court agreed with Kents Lake, and clarified the distinction between the two terms (while also noting that some of the Court's prior decisions were causes for the confusion due to the Court using the two terms interchangeably). The Court clarified that impairment claims are statutory claims made with the State Engineer during the application approval process. If a water user thinks their prior rights will be injured by a new application, the water user asserts impairment by filing a protest in the application proceedings (and, if necessary, by seeking judicial review of the State Engineer's decision). The standard of review is that the State Engineer should approve the application if there is "reason to believe" that the application will not impair existing water rights. Interference claims, on the other hand, are common law claims that are brought after an application has been approved and actual injury has been inflicted on prior rights. When interference claims are brought to a court, the opponent of the change must show, by a preponderance of the evidence, that the change has interfered with its water rights. The Court also clarified that a water user may bring an interference claim even if they did not file a protest and assert impairment during the application process. The Court concluded that Rocky Ford had waived its impairment claim when it failed to protest Kents Lake's change application, and that Rocky Ford had waived its interference claim when it dismissed its damage claim prior to trial.

2. Did the district court err in refusing to declare that Kents Lake could not store its efficiency gains?

The district court had concluded that Rocky Ford had failed to establish that any injury to its water rights was caused by Kents Lake's storage changes, rather than by intervening causes -- such as the impact of groundwater pumping or the conversion to sprinkler irrigation by water users other than Kents Lake. Based on the record of the district court, the Court affirmed the district court's decision.

3. Did the district court err in refusing to declare that Kents Lake must measure its water usage?

The Court next examined Kents Lake's obligations to measure its water diversions. Kents Lake asserted--and the district court had agreed--that even though Kents Lake did not measure all of its diversions, it was compliant because it did all measuring required by the State Engineer. But the Court noted that both Utah law (Utah Code section 73-5-4) and the Beaver River Decree require Kents Lake to measure all of its diversions. Thus, the Court reversed the district court on this point.

4. Did the district court err in refusing to rescind the 1953 Agreement?

Rocky Ford had asserted that the 1953 Agreement should be rescinded because Kents Lake had breached material provisions of the agreement. The Court determined that the alleged breaches were not material terms to the agreement, and therefore concluded that the district court had correctly refused to rescind the 1953 Agreement.

5. Did the district court err in awarding attorney fees to Kents Lake?

The Court finished its opinion by determining that the district court had not provided sufficient detail to support its conclusion to award attorney fees against Rocky Ford based on bad faith. Accordingly, the Court reversed this determination.


To read the full opinion, click here.

Black Diamond Financial LLC v. Big Cottonwood Pine Tree Water Co.

The Utah Court of Appeals recently issued its decision in the case of Black Diamond Financial LLC v. Big Cottonwood Pine Tree Water Company. The case focused on a water company's liability for a share transfer that was in violation of its Bylaws.

Big Cottonwood Pine Tree Water Company serves water to a cabin subdivision in Big Cottonwood Canyon in Salt Lake County. The Company's Bylaws provide that each lot owner was a member of the Company and was entitled to one Company water share that was only transferable with the lot. The Bylaws provided that the shares could not be transferred to other lots and could not be transferred separate from the lot. But as a matter of practice, the Company did not ensure that share transfers were performed according to these Bylaws.

Steven Rollins owned Lot 25 in the subdivision and owned one share that was associated with his lot. He was in a relationship with Vicki Kincaid, who loaned him money to remodel the property. When Rollins was unable to repay Kincaid, he agreed to transfer his water share to Kincaid as repayment. Both parties were unaware that the Bylaws prohibited the share transfer separate from the lot. Kincaid took the endorsed share to the Company, who issued a new share certificate to Kincaid. Later, Rollins' lender foreclosed on the lot. The lender found out that the lot had no water service because Kincaid owned the water share. Black Diamond Financial LLC purchased the lot from the lender at a discounted price due to the lack of water service. Black Diamond thought it would be able to resolve the water service issue, but was unable to reach an agreeable price to purchase the share from Kincaid or find water service in some other way. Black Diamond then filed suit against Kincaid and the Company.

Kincaid moved for summary judgment and asserted that she was a protected purchaser of the share under the Utah Uniform Commercial Code. Black Diamond and the Company also filed motions for summary judgment on breach of contract issues. The district court concluded that Kincaid was a protected purchaser, and was therefore entitled to retain the share. The district court also concluded that the Company was in breach due to its failure to follow the share transfer provision in its Bylaws. (Utah courts have long held that the Articles and Bylaws of a water company form a contract or agreement between the company and its shareholders.) But the district court determined that Black Diamond was not damaged by the breach because Black Diamond purchased the lot at a discounted price because of the water share issue. The district court required the Company to pay $1.00 in nominal damages to Black Diamond. Black Diamond then appealed to the Utah Court of Appeals.

The Court of Appeals first analyzed if Kincaid was a protected purchaser of the water share under the UCC. The Court reviewed the elements of a protected purchaser in Utah Code section 70A-8-3, and concluded that Kincaid met all of these elements. The Court therefore upheld the determination that Kincaid was entitled to retain ownership of the share.

The Court next examined Black Diamond's assertion that it was entitled to more than just nominal damages. The Court determined that even though the Company had breached its obligations under the Bylaws, Black Diamond was not injured by the breach because Black Diamond had purchased the lot at a discounted price due to the fact (and with full knowledge) that the lot lacked water service due to Kincaid's ownership of the water share. The Court noted that Black Diamond would receive a windfall if it was able to purchase the property at a discount and get damages based on property devaluation due to the lack of a water share. Based on these determinations, the Court of Appeals upheld the district court's decision.

It is important to note that the Court clarified that the result could have been very different if Black Diamond had acquired the lot without knowledge of the share issue. In such a circumstance, the Company would have been required to pay damages to Black Diamond due to the Company's failure to follow the share transfer provisions contained in its Bylaws. Water companies should, therefore, take heed to follow the share transfer provisions in its Articles and Bylaws (or, alternatively, amend its Articles and Bylaws to conform the share transfer provisions to match the Company's actual share transfer practices). Failure to do so could result in significant liability and monetary damage claims for the Company.

To read the full text of the opinion, click here.