Madera Irr. Dist. v. Hancock

• Decision Date: 08 March 1993
• Docket Number: No. 91-16013,91-16013
• Citation: 985 F.2d 1397
• Parties: 23 Envtl. L. Rep. 20,579 MADERA IRRIGATION DISTRICT, Plaintiff-Appellant, Natural Resources Defense Council, et al., Intervenors-Appellees, and Chowchilla Water District, Plaintiff, v. Lawrence F. HANCOCK, as Regional Director of the Mid-Pacific Region of the United States Bureau of Reclamation; Dennis Underwood, as Commissioner of Reclamation, United States Department of the Interior, and; Manuel Lujan, Jr., as Secretary of the Interior of the United States of America, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1397

985 F.2d 1397

23 Envtl. L. Rep. 20,579

MADERA IRRIGATION DISTRICT, Plaintiff-Appellant Natural Resources Defense Council, et al., Intervenors-Appellees and Chowchilla Water District, Plaintiff, v. Lawrence F. HANCOCK, as Regional Director of the Mid-Pacific Region of the United States Bureau of Reclamation; Dennis Underwood, as Commissioner of Reclamation, United States Department of the Interior, and; Manuel Lujan, Jr., as Secretary of the Interior of the United States of America Defendants-Appellees.

No. 91-16013.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 8, 1992.

Decided Feb. 2, 1993.

As Amended March 8, 1993.

Denslow Green, Green, Green and Rigby, Madera, CA, for plaintiff-appellant Madera Irr. Dist.

Robert L. Klarquist, U.S. Dept. of Justice, Washington, DC, for defendants-appellees Lawrence F. Hancock, et al.

Brian E. Gray, San Francisco, CA, for intervenors-appellees Natural Resources Defense Council, et al.

Appeal from the United States District Court for the Eastern District of California.

Before: ALARCON, HALL, and KLEINFELD, Circuit Judges.

KLEINFELD, Circuit Judge:

Madera Irrigation District sued for a declaratory judgment and injunction, to prevent the United States from changing the terms of its water purchases when Madera renewed its contract. The district court dismissed for failure to state a claim. We conclude that the government has the power to impose the particular requirements at issue, and affirm.

I. Facts.

In 1939, Madera Irrigation District sold land and San Joaquin River water rights to the United States. As part of the consideration, the United States promised to build the Friant Dam and the Madera Canal and enter into contracts, when the project was completed, to sell Madera a permanent supply of 270,000 acre feet of water annually. The parties agreed that "it is not possible at this time to fix a price to be paid by the District for said water, but the United States agrees that the cost of said water to the District shall not exceed charges made to others than the District for the same class of water and service from the said Friant Dam and Reservoir." Contract for Purchase of Property and Water Rights at 13 (May 24, 1939) [hereinafter the "1939 Contract"].

In 1951, when construction was done, Madera and the government entered into a forty year contract for purchase and sale of water. They agreed upon a "permanent" supply, but a contract term of forty years. Prices were limited to no more than $3.50 per acre-foot for "class one water," a dependable supply out of the first 800,000 acre feet from the project, and $1.50 for "class two water," a residue to be supplied if available but which was not expected to be as dependable. Under the 1951 contract and "under succeeding contracts the rates to be charged the District for water service shall not exceed charges made to others than the District for the same class of water and service from Friant Dam and Reservoir." Contract Between the United States and the Madera Irrigation District for Water Service and Construction of a Distribution System at 9 (May 14, 1951) [hereinafter the "1951 Contract"]. The 1951 Contract provided that "[t]he executory portions of the 1939 contract ... shall remain in full force and effect." Id. at 8.

As the end of the forty year term approached, the parties began negotiation of the renewals. The irrigation district claims that two provisions in the proposed new contract violate its rights under the previous contracts. First, the government insists upon an addition to the rate in the renewal contract of an amount which would recoup the excess of operation and maintenance costs under the 1951 contract over the rates charged during that forty year term. Second, the government insists upon a term in the renewal contract which might require an environmental impact statement and Endangered Species Act consultation, with possible subsequent modifications to the contract.

The dates illuminate the issues. When Madera transferred its land and its water rights to the federal government, federal policy favored reclaiming desert land for agriculture by subsidizing irrigation water, to settle the West and create a class of independent family farmers. See Peterson v. U.S. Dep't. Interior, 899 F.2d 799, 802-807 (9th Cir.), cert. denied, 498 U.S. 1003, 111 S.Ct. 567, 112 L.Ed.2d 574 (1990); Barcellos and Wolfsen v. Westlands Water Dist., 899 F.2d 814 (9th Cir.), cert. denied, 498 U.S. 998, 111 S.Ct. 555, 112 L.Ed.2d 562 (1990); United States v. Tulare Lake Canal Co., 535 F.2d 1093, 1119 (9th Cir.1976), cert. denied 429 U.S. 1121, 97 S.Ct. 1156, 51 L.Ed.2d 571 (1977). As the Great Depression lingered in the late 1930's, Congress and the President may have been more concerned with expanding economic opportunity than avoiding subsidy. Nothing like the National Environmental Policy Act or Endangered Species Act were in the law in 1902 when the Reclamation Act became the law, or 1939 when Madera traded its land and water rights for government promises.

Congress can change federal policy, but it cannot write on a blank slate. The old policies deposit a moraine of contracts, conveyances, expectations and investments. Lives, families, businesses, and towns are built on the basis of the old policies. When Congress changes course, its flexibility is limited by those interests created under the old policies which enjoy legal protection. Fairness toward those who relied on continuation of past policies cuts toward protection. Flexibility, so that government can adapt to changing conditions and changing majority preferences, cuts against. Expectations reasonably based upon constitutionally protected property rights are protected against policy changes by the Fifth Amendment. Those based only on economic and political predictions, not property rights, are not protected. Our task is to determine whether the renewal provisions insisted upon by the government violated Madera's Fifth Amendment property rights.

We review de novo dismissal of an action for failure to state a claim, treating the averments of the complaint as though they were established to test whether, if true, the claim would entitle the plaintiff to relief. Abbott Bldg. Corp. v. United States, 951 F.2d 191, 195 n. 8 (9th Cir.1991).

II. Operation and Maintenance Costs.

The irrigation districts claim that the change in the price term, to recover maintenance and operation costs which were not charged in the 1951-1991 period, is improperly retroactive. The government insists upon a provision in the renewal contract which would recover with interest the subsidy in operations and maintenance costs accumulated during the old forty year contract. In so doing, the executive branch is carrying out a policy enunciated by Congress. Congress passed a statute requiring the recoupment for Central Valley Project irrigation districts such as Madera:

The Secretary of the Interior shall include in each new or amended contract for the delivery of water from the Central Valley Project provisions ensuring that any annual deficit (outstanding or hereafter arising) incurred by a Central Valley Project water contractor in the payment of operation and maintenance costs of the Central Valley Project is repaid by such contractor under the terms of such new or amended contract together with interest on any such deficit which arises on or after October 1, 1985....

Water Resource and Small Reclamation Projects Act. Pub.L. No. 99-546, § 106, 100 Stat. 3050, 3052 (1986).

Madera was entitled to buy water for a maximum of $3.50 and $1.50 per acre-foot under its 1951 contract. The government conditions renewal on payment during the renewal contract of millions of dollars for operation and maintenance costs incurred during the 1951 contract term. The effect, as Madera sees it, is that it will be paying more than the $3.50 and $1.50 price ceilings for its water purchased under the 1951 contract.

Madera argues that the charges cannot be imposed, for two reasons. First, it had and has a contractual right to pay no more than $3.50 and $1.50 per acre-foot for water under the 1951 contract, and the charges retroactively require it to pay more. Second, it has a contractual right to pay no more for water than other districts, and the charges would cause its price to be higher than that charged to other districts. Madera does not dispute that Congress has adopted a policy which requires recovery of operations and maintenance costs with interest, and does not urge any construction of the Central Valley Project statute which would exclude Madera's renewal contract from its operation.

We accept Madera's general proposition that a valid contract right of an irrigation district against the United States is property protected by the Fifth Amendment. Lynch v. United States, 292 U.S. 571, 579, 54 S.Ct. 840, 843, 78 L.Ed. 1434 (1934); See Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1003, 104 S.Ct. 2862, 2873, 81 L.Ed.2d 815 (1984). Rights against the United States arising out of a contract are property rights protected from deprivation or impairment by the Fifth Amendment. Barcellos and Wolfsen, Inc. v. Westlands Water District, 899 F.2d 814, 821 (9th Cir.1990). The Due Process Clause limits the exercise of sovereign power which would impair obligations under government contracts. Alpine Ridge Group v. Kemp, 955 F.2d 1382, 1387 (9th Cir.), cert. granted, --- U.S. ----, 113 S.Ct. 490, 121 L.Ed.2d 429 (1992). To demonstrate a wrongful taking or impairment, Madera must establish that it has cognizable property rights arising out of its contracts with the government, and that the government has abrogated its contractual rights. National Railroad Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Corp., 470 U.S. 451, 472, 105 S.Ct. 1441, 1455, 84 L.Ed.2d 432 (1985); Barcellos and Wolfsen, 899 F.2d at 821.

Two general principles constrain our interpretation. First, ...