Davis v. Agua Sierra Resources, L.L.C.
| Citation | 203 P.3d 506,220 Ariz. 108 |
| Decision Date | 19 March 2009 |
| Docket Number | No. CV-08-0163-PR.,CV-08-0163-PR. |
| Parties | Merwyn C. DAVIS, Trustee under the Merwyn C. Davis Trust dated July 27, 1981, Plaintiff/Counter-Defendant/Appellee, and Chino Grande, L.L.C., Plaintiff/Intervenor/Counter-Defendant/Appellee, v. AGUA SIERRA RESOURCES, L.L.C., a Texas limited liability company, Defendant/Counter-Claimant/Appellant, and Red Deer Cattle, Inc., a Texas corporation; CJ Partners, a Nevada limited partnership; and Seibert Family Limited Partnership, a Nevada limited partnership, Defendants/Appellants. |
| Court | Supreme Court of Arizona |
Robert S. Lynch & Associates By Robert S. Lynch, Phoenix and Anna Young PLLC By Anna C. Young, Prescott, Attorneys for Merwyn C. Davis.
Lewis and Roca LLP By Dale Danneman, Michael F. McNulty, Robert G. Schaffer, Phoenix, Attorneys for Chino Grande, L.L.C.
Gallagher & Kennedy, P.A. By Michael R. Ross, Cober C. Plucker and Tom Galbraith Attorney at Law By Tom Galbraith, Phoenix, Attorneys for Agua Sierra Resources, L.L.C., Red Deer Cattle, Inc., CJ Partners, and Seibert Family Limited Partnership.
Maguire & Pearce, PLLC By Michael J. Pearce, Rita P. Maguire, Phoenix, Attorneys for Amicus Curiae Town of Prescott Valley.
Arizona Department Of Water Resources By W. Patrick Schiffer, Chief Counsel, Kenneth C. Slowinski, Scott M. Deeny, Phoenix, Attorneys for Amicus Curiae Arizona Department of Water Resources.
Ryley Carlock & Applewhite By Cynthia M. Chandley, L. William Staudenmaier, Jenny J. Pelton, Phoenix, Attorneys for Amici Curiae Freeport-McMoRan Copper and Gold, Inc., Roosevelt Water Conservation District, and the Town of Chino Valley.
Salmon, Lewis & Weldon, P.L.C. By M. Byron Lewis, John B. Weldon, Jr., Mark A. McGinnis, Phoenix, Attorneys for Amicus Curiae Salt River Project Agricultural Improvement & Power District.
¶ 1 Arizona law allows landowners, outside of Active Management Areas, to make reasonable and beneficial use of groundwater underlying their land. This case involves deeds that purported to reserve to the grantor, and to sever from the surface estate, rights to the potential future use of groundwater. Because a landowner has no real property interest in the future use of groundwater, we hold that the attempted reservation is invalid.
¶ 2 This case concerns land in the Chino Valley in Yavapai County that is commonly referred to as the CF Ranch. In 1981, Red Deer Cattle, Inc. ("Red Deer") bought this land from Chino Ranch, Inc. ("Chino Ranch"). In its 1981 deed to Red Deer, Chino Ranch reserved all mineral rights and "commercial water rights" but did not otherwise retain any ownership interest in the land. In 1984, Red Deer conveyed the CF Ranch to Merwyn C. Davis, acting as a trustee for a trust bearing his name. Similar to the 1981 deed, this deed purported to reserve to the grantor "all commercial water rights and waters incident and appurtenant to and within the real property," but provided that Davis could use water for "ranch, livestock and domestic and agriculturally related purposes."
¶ 3 Chino Ranch merged with Red Deer in 1989, thereby consolidating their respective claims to the commercial water rights associated with the CF Ranch. Following a series of conveyances involving third parties, in May 1998, Red Deer and CJ Partners each conveyed a one-half interest in the commercial water rights for the CF Ranch to Agua Sierra Resources L.L.C. ("Agua Sierra").
¶ 4 In April 2003, Davis granted the City of Prescott an option to purchase the CF Ranch and the adjacent CV Ranch, as well as the water rights appurtenant to the two properties, for $30 million. The option agreement included an addendum stating that Davis was uncertain about the water rights on the properties and that his interest "in said water rights may be unclear, incomplete, inappropriately described, or subject to challenge." At the time of the option contract, the properties appraised at $23 million, of which $18 to $21 million was attributable to the associated water rights. Accordingly, the City asked Davis to purchase the water rights so that the City could acquire them. Because Davis was unable to purchase the water rights from Agua Sierra, the City allowed the option to expire.
¶ 5 Four months later, Davis filed a complaint against Agua Sierra, Red Deer, CJ Partners, and the Seibert Family Limited Partnership (collectively, the "Agua Sierra parties"), seeking to invalidate the commercial water rights reservations associated with the CF Ranch. The Agua Sierra parties filed an answer raising several affirmative defenses. Agua Sierra separately filed a counterclaim seeking a judgment declaring the water rights reservation to be valid and quieting title to all commercial water rights on the CF Ranch. In the alternative, Agua Sierra sought to rescind the 1984 conveyance to Davis.
¶ 6 On cross-motions for summary judgment, the trial court held the reservation invalid and entered judgment for Davis. In doing so, the trial court relied on opinions of this Court stating that "there is no right of ownership of groundwater in Arizona prior to its capture and withdrawal," Town of Chino Valley v. City of Prescott ("Chino Valley II"), 131 Ariz. 78, 82, 638 P.2d 1324, 1328 (1981), and that "water rights cannot be established or reserved for some potential future use," In re the Rights to the Use of the Gila River Sys. ("Gila River I"), 171 Ariz. 230, 239, 830 P.2d 442, 451 (1992). After entering judgment, the trial court added Chino Grande, L.L.C. ("Chino Grande") as a party because it had bought the CF Ranch from Davis. The Agua Sierra parties timely appealed.
¶ 7 The court of appeals vacated the trial court's judgment, holding that Arizona law allows a grantor to reserve rights to the prospective commercial use of percolating groundwater beneath the land conveyed. Davis v. Agua Sierra Res., L.L.C., 217 Ariz. 386, 392-97 ¶¶ 21-42, 174 P.3d 298, 304-09 (App.2008). Without addressing other arguments by the Agua Sierra parties challenging the judgment for Davis, the court of appeals remanded for the trial court to determine whether the commercial water rights at issue are limited to percolating groundwater or also include surface-water rights. Id. at 397 ¶ 45, 174 P.3d at 309.
¶ 8 We accepted review because this case presents an issue of first impression and statewide importance. Our jurisdiction is based on Article 6, Section 5(3) of the Arizona Constitution and Arizona Revised Statutes ("A.R.S.") section 12-120.24 (2003).
¶ 9 The 1981 and 1984 deeds for the CF Ranch purport to reserve to the grantor, and thus to sever from the surface estate, all "commercial water rights." The parties agree that there has not been any historical use of such water rights on the CF Ranch and that there is no issue before the Court regarding appropriable waters. This case instead involves the potential future use of groundwater that has never been captured and put to reasonable use.
¶ 10 Arizona law distinguishes groundwater from surface water, even though such waters may be hydrologically connected. John D. Leshy & James Belanger, Arizona Law Where Ground and Surface Water Meet, 20 Ariz. St. L.J. 657, 659 (1988). Surface water is subject to the doctrine of prior appropriation. In re the Gen. Adjudication of All Rights to Use Water in the Gila River Sys. & Source ("Gila River IV"), 198 Ariz. 330, 334 ¶ 3, 9 P.3d 1069, 1073 (2000). In contrast, under Arizona's common law, groundwater "is not appropriable and may be pumped by the overlying landowner, subject to the doctrine of reasonable use." Id.
¶ 11 Because others have detailed the history of Arizona groundwater law, see Cherry v. Steiner, 543 F.Supp. 1270, 1273-76 (D.Ariz. 1982), aff'd, 716 F.2d 687 (9th Cir.1983); Leshy & Belanger, supra, at 666-700, we present only a brief overview here. Arizona's common law evolved from the territorial-day view that a landowner has a property interest in groundwater underlying the surface estate. E.g., Howard v. Perrin, 8 Ariz. 347, 353, 76 P. 460, 462 (1904) (). Later decisions clarified that land ownership does not include ownership of the groundwater itself, but instead may afford a qualified right to extract and use the groundwater for the benefit of the land. Chino Valley II, 131 Ariz. at 82, 638 P.2d at 1328.
¶ 12 Recognizing that groundwater is vital to our state, Arizona's legislature in 1980 established a comprehensive regulatory framework by enacting the Groundwater Management Act (the "GMA"). 1980 Ariz. Sess. Laws, ch. 1, § 86 (4th Spec. Sess.) (). With the goal of reducing the state's overdraft of groundwater, the GMA created a system of groundwater rights and conservation requirements. Id. § 45-401.
¶ 13 The GMA divided the state into three categories: Active Management Areas ("AMAs"), id. § 45-411, Irrigation Non-Expansion Areas ("INAs"), id. § 45-431, and areas outside a designated AMA, id. § 45-453. AMAs are "geographical areas where groundwater supplies are imperiled." Chino Valley II, 131 Ariz. at 79 n.*, 638 P.2d at 1325 n. *. In such areas, a person may withdraw and use groundwater only in accordance with the GMA's detailed regulations. A.R.S. § 45-451(A)(1).
¶ 14 The CF Ranch, located within the Big Chino sub-basin, is not within an AMA and thus is not subject to the extraction and use limits applicable to AMAs. The GMA, however, does govern the withdrawal of groundwater on land outside an AMA if the water is to be transported to an established AMA. Id. § 45-551.
¶ 15 The Prescott Active Management Area includes the City of Prescott. Id. § 45-411(A)(3). The...
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