People of Puerto Rico v. Russell Co En

• Decision Date: 16 March 1942
• Docket Number: No. 95,95
• Citation: 62 S.Ct. 784,86 L.Ed. 1062,315 U.S. 610
• Parties: PEOPLE OF PUERTO RICO v. RUSSELL & CO., S. EN. C
• Court: U.S. Supreme Court

315 U.S. 610

62 S.Ct. 784

86 L.Ed. 1062

PEOPLE OF PUERTO RICO

v RUSSELL & CO., S. EN. C.

No. 95.

Argued Feb. 3, 4, 1942.

Decided March 16, 1942.

Rehearing Denied April 13, 1942.

See 316 U.S. 708, 62 S.Ct. 1030, 86 L.Ed. —-.

Mr. Wm. Cattron Rigby, of Washington, D.C., for petitioner.

Mr. George M. Wolfson, of New York City, for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

The question for decision is whether a statute of Puerto Rico impairs the obligation of certain contracts in violation of the Island's organic law.¹

The respondent's predecessor in title, Fortuna Estates, as owner or lessee of lands adjacent to the Jacaguas River, enjoyed under Spanish law, and respondent, as successor, still enjoys, rights appurtenant to the lands to draw from the river 12,612.1 acre feet of water per year for irrigation.

Puerto Rico adopted a law in 1908² which authorized an irrigation system, as part of which a dam was to be erected in Jacaguas River above Fortuna's intakes. Fortuna's lands were not within or a part of the irrigation district. Although the operation of the system would interfere with Fortuna's water rights they were not condemned, as the statute permitted, nor were they voluntarily surrendered.

By an amendatory law adopted in 1913³ it was provided: 'In the case of any land carrying a water right or concession of which the source of supply is destroyed or impaired by the construction or operation of the irrigation system, which shall not have been relinquished or surrendered to the People of Porto Rico, such land shall be entitled to receive from the irrigation system an amount of water which is the reasonable equivalent in value of the said water right or concession.' This Act empowered the Commissioner of the Interior to make agreements with holders of such rights fixing the amount and the time, place, and conditions of delivery, of water to be received as the equivalent of the rights suspended.

In the exercise of this authority the Commissioner executed contracts with Fortuna which called for the suspension of its rights appurtenant to two large tracts during the life of the contracts and assured delivery of a specified amount of water at Fortuna's intakes as the fair equivalent of the rights suspended.

Each contract enmerated the rights to take water appurtenant to a described tract of land which would be impaired or interrupted by the operation of the irrigation system; recited that the amount of water taken by Fortuna under its rights varied throughout the year, due to differences in rainfall, so that it was impossible to determine in advance the amount of water to which it would be entitled in any given period; and that Porto Rico was willing to deliver from the Jacaguas River the water to which Fortuna was entitled, but, in order to make the operation of the system more certain, desired to agree upon a fixed and regular amount which should be received by Fortuna as the fair equivalent in value for irrigation purposes of the water it would ordinarily take and use under its existing rights.

The contract then stated the agreement of the parties as to the quantities of water which, delivered in equal daily instalments, were to be considered such fair equivalents and the petitioner covenanted to deliver these quantities to Fortuna. It was also agreed that Fortuna might exercise its preexisting rights for ten days in each year to prevent their loss by nonuser.

Under the Irrigation Law, lands in a district were subjected to a uniform annual assessment per acre to discharge the cost of construction, maintenance, and operation of the system. Sales were also made of surplus waters and the proceeds used for maintenance.

Shortly after the contracts were made, a controversy arose between petitioner and respondent with respect to Puerto Rico's right to sell surplus waters. Litigation ensued which terminated in a decree restraining the insular government from diverting certain surplus waters to which the respondent was held to be entitled under the contracts. The decision also upheld the validity of the contracts.⁴

Thereupon the legislature adopted, July 8, 1921, 'An Act Fixing a Tax on Certain Lands using water from the Southern Coast Public Irrigation System, on which lands no Tax Whatever was Levied under the Public Irrigation Law, and for Other Purposes.'⁵ This is the statute enforcement of which is asserted to impair the obligation of the contracts. By this act a special tax is imposed on all lands supplied which, under existing law, contribute nothing to the expense of the maintenance of the system. The Treasurer of Puerto Rico is directed to compute the tax by finding the aggregate acreage receiving water from the system including lands, like those of respondent, outside the district but receiving the equivalents of their pre-existing rights under contracts. He is to assess a prorata share of the total expense against the lands of respondent and others similarly circumstanced. The Act, as is admitted, was aimed only at those who, like respondent, had contracted for the receipt of water in lieu of that to which they were of right entitled and whose lands were not a part of the irrigation district.

Action was instituted by petitioner in an insular court for the recovery of several years taxes so imposed.⁶ The cause was removed to the United States District Court, where a motion to remand was denied and a judgment entered for the respondent on the merits. The judgment was affirmed by the Circuit Court of Appeals for the First Circuit,⁷ but was reversed by this court for want of diversity of citizenship on which jurisdiction of the federal courts depended.⁸

After remand, the case was tried in the insular district court and the complaint was dismissed on the merits, on the ground that Act No. 49 of 1921, was an invalid impairment of the obligation of the 1914 contracts. The Supreme Court of Puerto Rico reversed and rendered judgment for the petitioner.⁹ The Circuit Court of Appeals in turn reversed and reinstated the judgment of the insular district court.¹⁰ We granted certiorari as the case presents an important question arising under the Insular Organic Act. 314 U.S. 589, 62 S.Ct. 61, 86 L.Ed. —-. We hold that the judgment of the Circuit Court of Appeals was right.

By the Act of 1908,¹¹ the people of Puerto Rico undertook the construction of a public irrigation system. This necessitated the erection of a dam for impounding and storage of part of the waters of the Jacaguas River above the respondent's intakes, and the creation of an irrigation district. The statute recognized the necessity of providing a method for the acquisition of the rights of riparian owners whose land lay below the dam. Section 12 authorized the condemnation of existing water rights and the payment of their fair value to the owners. By the amendatory Act of 1913, the owners of lands which fell within the irrigation district court release their preexisting rights, have them valued, and be paid the value by credits against their proportionate share of the expense of the construction and operation of the system.¹² By Section 13 owners of lands having water rights, whose source of supply would be destroyed or impaired by the construction or operation of the system, who had not surrendered or relinquished their rights, were declared entitled to receive from the irrigation system an amount of water which would be the reasonable equivalent in value of the right or concession so destroyed or impaired. The Commissioner was authorized to negotiate contracts to this end with such owners.

It is evident that it was thought that lands such as those of the respondent could not be included within the proposed district. It is idle to speculate concerning the reasons for this decision, though it is clear that in order to realize the Government's purpose it was deemed necessary to reach an accommodation concerning preexisting valid water rights of land owners whose lands could not or should not be included in the irrigation district. In the case of such persons the purpose was to substitute a fair equivalent for the rights theretofore exercised. Such an arrangement offered mutual advantages to Puerto Rico and to the owners. Whereas Fortuna had, prior to the erection of the dam, the right to take over 12,000 acre-feet of water per year for irrigation, a proportation of surplus waters, and certain torrential waters, the supply was uneven and uncertain due to the irregularity of rainfall. It was, therefore, an advantage to the respondent's predecessor to surrender its maximum rights in consideration of an agreement that there should be delivered to it, equally and evenly throughout the year, something less than the maximum it was entitled to take under preexisting conditions. On the other hand, it was an advantage to the irrigation system that it should not be obliged at any time to deplete its storage waters by furnishing the respondent the maximum amount which, if the water were available, it was entitled to receive.

The Insular Supreme Court held that the exaction is not precluded by the contracts and works no impairment of their obligation. It held the exaction is a tax; that the rights which the respondent owned prior to the construction of the irrigation system were taxable, and that the privileges it enjoys under the contract are equally so; that the contract contains no covenant not to tax these rights or privileges and, if it did, it would be beyond the power of the Commissioner. We cannot agree.

The assessment contemplated by Act No. 49 of 1921 is not a general tax laid for the support of government upon a property right or a franchise. This is expressly admitted by the petitioner in brief and in oral argument. In the brief it is said: 'The special taxes or assessments here in question, if and when collected, will simply accrue to the special fund for the current operation and maintenance of the...