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.
Showing posts with label Water Companies. Show all posts
Showing posts with label Water Companies. Show all posts
Sunday, July 12, 2020
Friday, August 4, 2017
Burr v. Koosharem Irrigation Company
The Utah Court of Appeals recently issued its opinion in the case of Burr v. Koosharem Irrigation Company. The case began in 2014 when Greg Torgerson, a shareholder in Koosharem Irrigation Company, filed a lawsuit against the Company. Shortly thereafter, two additional shareholders, Chad Torgerson and Bret Kouns, joined in the lawsuit. The three plaintiffs filed an Amended Complaint, which included a shareholder derivative claim against the Company and two of the Company's directors. The plaintiffs alleged that these two directors had breached their fiduciary duties to the Company, had engaged in self-dealing, and had failed to act in good faith and with loyalty. The plaintiffs also sought to have the two directors removed from the board due to "rigged elections."
Under the Utah Revised Nonprofit Corporation Act, a court action to remove a director must be commenced "by voting members holding at least 10% of the votes entitled to be cast in the election of the director's successor." The three plaintiffs owned a combined 11.9% of the outstanding shares in the Company. In 2015, however, plaintiff Bret Kouns passed away. The two remaining plaintiffs only owned a combined 5.3% of the outstanding shares.
Following an investigation by a court-appointed committee that determined that a derivative claim was not in the best interests of the Company, the court dismissed plaintiffs' derivative claims. The Company then sought to have the director removal claim dismissed as well, citing to the fact that the two remaining plaintiffs did not own the requisite number of shares.
Burr, another shareholder in the Company, then sought to join the lawsuit by filing a motion to intervene. If Burr was allowed to intervene in the lawsuit, the plaintiffs would collectively have sufficient shares to be above the required 10% threshold. The district court, however, denied Burr's motion to intervene, concluding that Burr had failed to adequately explain why he had waited nearly two years to try to join in the lawsuit. Burr appealed the decision to the Court of Appeals.
The Court began its opinion by noting the standard for a party seeking to intervene, which is that the party must demonstrate "(1) that its motion to intervene was timely, (2) that it has an interest relating to the property or transaction which is the subject of the action, (3) that the disposition of the action may as a practical matter impair or impede its ability to protect that interest, and (4) that its interest is not adequately represented by existing parties." The Court determined that Burr had met these requirements. Although Burr's motion to intervene was not filed for almost two years after the case was initiated, his participation in the case did not become necessary until Kouns passed away. Thus, the motion to intervene was timely. Furthermore, Burr had an interest in the subject matter of the case because he was a shareholder in the Company, and without Burr's participation in the case, the director removal claim would be dismissed and the interests of Burr (and the other two plaintiffs) would be affected. Finally, the Court determined that Burr's interests were adequately represented until Kouns' death -- but after Kouns' death, Burr's interests were not adequately represented by the remaining two plaintiffs who did not own sufficient shares to allow the case to continue.
For these reasons, the Court of Appeals held that Burr should have been allowed to intervene in the case. The Court of Appeals therefore reversed the decision of the district court and sent the case back to the district court to continue.
To read the full opinion, click here.
Under the Utah Revised Nonprofit Corporation Act, a court action to remove a director must be commenced "by voting members holding at least 10% of the votes entitled to be cast in the election of the director's successor." The three plaintiffs owned a combined 11.9% of the outstanding shares in the Company. In 2015, however, plaintiff Bret Kouns passed away. The two remaining plaintiffs only owned a combined 5.3% of the outstanding shares.
Following an investigation by a court-appointed committee that determined that a derivative claim was not in the best interests of the Company, the court dismissed plaintiffs' derivative claims. The Company then sought to have the director removal claim dismissed as well, citing to the fact that the two remaining plaintiffs did not own the requisite number of shares.
Burr, another shareholder in the Company, then sought to join the lawsuit by filing a motion to intervene. If Burr was allowed to intervene in the lawsuit, the plaintiffs would collectively have sufficient shares to be above the required 10% threshold. The district court, however, denied Burr's motion to intervene, concluding that Burr had failed to adequately explain why he had waited nearly two years to try to join in the lawsuit. Burr appealed the decision to the Court of Appeals.
The Court began its opinion by noting the standard for a party seeking to intervene, which is that the party must demonstrate "(1) that its motion to intervene was timely, (2) that it has an interest relating to the property or transaction which is the subject of the action, (3) that the disposition of the action may as a practical matter impair or impede its ability to protect that interest, and (4) that its interest is not adequately represented by existing parties." The Court determined that Burr had met these requirements. Although Burr's motion to intervene was not filed for almost two years after the case was initiated, his participation in the case did not become necessary until Kouns passed away. Thus, the motion to intervene was timely. Furthermore, Burr had an interest in the subject matter of the case because he was a shareholder in the Company, and without Burr's participation in the case, the director removal claim would be dismissed and the interests of Burr (and the other two plaintiffs) would be affected. Finally, the Court determined that Burr's interests were adequately represented until Kouns' death -- but after Kouns' death, Burr's interests were not adequately represented by the remaining two plaintiffs who did not own sufficient shares to allow the case to continue.
For these reasons, the Court of Appeals held that Burr should have been allowed to intervene in the case. The Court of Appeals therefore reversed the decision of the district court and sent the case back to the district court to continue.
To read the full opinion, click here.
Wednesday, June 10, 2015
Conversion of Shares into Acre-Feet
People often ask me how to convert shares into acre-feet. Unfortunately, the answer is not as easy as one might expect.
At the outset, please note that this post focuses on water shares, not water rights. To understand the distinction, visit here and here. Water rights should already have acre-foot quantities associated with them--with the exception of certain circumstances, including undefined sole supply amounts for a water right.
The amount of water associated with a share in a water company (irrigation company, ditch company, canal company, etc.) is not consistent between companies. As an example, there is one water company that I know of where 1 share is equal to 1/10th of an acre-foot of water, and there is another water company that I know of where 1 share is equal to 6 acre-feet of water. The determination of how many acre-feet are associated with each share in a water company is, for the most part, a function of three components: (1) how many total acre-feet the water company is entitled to under its water rights, leases, contracts, etc.; (2) how many shares have been issued in the water company; and (3) how much water the water company's source(s) are able to produce.
As an example, suppose that a water company's water rights, in total, allow for the diversion of 1,000 acre-feet of water from a river for the irrigation of 250 acres (assuming the water company is in an area of the state where the duty is 4 acre-feet per acre). Further suppose that the water company has issued 250 shares of stock. On paper, each share would entitle the owner to irrigate 1 acre with 4 acre-feet of water. Thus, each share represents 4 acre-feet of water. But if it is a drought year and the river is running low, each shareholder may not actually receive 4 acre-feet of water per share.
Some water companies know how many acre-feet are represented by each share, usually because of shareholder change applications or other applications that have previously been filed with the Utah Division of Water Rights. In fact, the Division keeps a list of water companies, and the list includes a spot for information about the number of acre-feet per share. Some companies have this information (see example below), but most do not. The reality is that many water companies will not know how many acre-feet are represented by each share, and a determination of this number could take some investigation, research, and calculation.
At the outset, please note that this post focuses on water shares, not water rights. To understand the distinction, visit here and here. Water rights should already have acre-foot quantities associated with them--with the exception of certain circumstances, including undefined sole supply amounts for a water right.
The amount of water associated with a share in a water company (irrigation company, ditch company, canal company, etc.) is not consistent between companies. As an example, there is one water company that I know of where 1 share is equal to 1/10th of an acre-foot of water, and there is another water company that I know of where 1 share is equal to 6 acre-feet of water. The determination of how many acre-feet are associated with each share in a water company is, for the most part, a function of three components: (1) how many total acre-feet the water company is entitled to under its water rights, leases, contracts, etc.; (2) how many shares have been issued in the water company; and (3) how much water the water company's source(s) are able to produce.
As an example, suppose that a water company's water rights, in total, allow for the diversion of 1,000 acre-feet of water from a river for the irrigation of 250 acres (assuming the water company is in an area of the state where the duty is 4 acre-feet per acre). Further suppose that the water company has issued 250 shares of stock. On paper, each share would entitle the owner to irrigate 1 acre with 4 acre-feet of water. Thus, each share represents 4 acre-feet of water. But if it is a drought year and the river is running low, each shareholder may not actually receive 4 acre-feet of water per share.
Some water companies know how many acre-feet are represented by each share, usually because of shareholder change applications or other applications that have previously been filed with the Utah Division of Water Rights. In fact, the Division keeps a list of water companies, and the list includes a spot for information about the number of acre-feet per share. Some companies have this information (see example below), but most do not. The reality is that many water companies will not know how many acre-feet are represented by each share, and a determination of this number could take some investigation, research, and calculation.
Thursday, April 30, 2015
Water Right vs. Water Share - revisited
One of the my most visited blog posts is a post I wrote back in 2010 entitled "What Is the Difference Between a Water Right and a Water Share?" The post explained that the two terms are not interchangeable, and that there are important differences between water rights and water shares. Understanding the difference between water rights and water shares continues to be the most common confusion I encounter when speaking with people about Utah water. Accordingly, I have decided to revisit my prior post, and this time provide some visual elements to help with the explanation.
Water rights are rights granted by the State of Utah, through the Utah Division of Water Rights (also known as the State Engineer's Office), that allow a person to use a specified amount of water from a specified source at a specified place for a specified use. For example, the State may grant you a water right that allows you to divert 1 acre-foot from a well to use on your residential parcel to irrigate 0.25 acres. Thus, a water right is granted directly from the State to the water right owner, as depicted below.
With water shares, the State issues water rights to a water company (ditch company, canal company, irrigation company, etc.). So the company is the owner of the water rights. The company issues shares to its shareholders. By virtue of owning shares, the shareholders are entitled to receive and use a portion of the company's water rights.
Many times people say "I have 3 shares of water," when what they really mean is that they own a water right that allows them to divert and use 3 acre-feet of water. Conversely, many times people say "I have 5 water rights," when what they really mean is that they have 5 shares in a particular irrigation company.
The distinction between water rights and water shares is important in many contexts, including how the water rights or water shares are transferred, how change applications are filed, and whether the water transfers automatically with the land when the land is sold.
Water rights are rights granted by the State of Utah, through the Utah Division of Water Rights (also known as the State Engineer's Office), that allow a person to use a specified amount of water from a specified source at a specified place for a specified use. For example, the State may grant you a water right that allows you to divert 1 acre-foot from a well to use on your residential parcel to irrigate 0.25 acres. Thus, a water right is granted directly from the State to the water right owner, as depicted below.
With water shares, the State issues water rights to a water company (ditch company, canal company, irrigation company, etc.). So the company is the owner of the water rights. The company issues shares to its shareholders. By virtue of owning shares, the shareholders are entitled to receive and use a portion of the company's water rights.
Many times people say "I have 3 shares of water," when what they really mean is that they own a water right that allows them to divert and use 3 acre-feet of water. Conversely, many times people say "I have 5 water rights," when what they really mean is that they have 5 shares in a particular irrigation company.
The distinction between water rights and water shares is important in many contexts, including how the water rights or water shares are transferred, how change applications are filed, and whether the water transfers automatically with the land when the land is sold.
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