Bayou Land Co. v. Talley

• Decision Date: 23 September 1996
• Docket Number: No. 95SC358,95SC358
• Parties: BAYOU LAND COMPANY, a Colorado limited partnership, Petitioner, v. Barry L. TALLEY; Barry Talley, Trustee, a Colorado general partnership; American Property Equities 1985-C, Ltd., a Colorado limited partnership; Bayou Gulch General Partnership, a Colorado general partnership; Megabank of Arapahoe, N.A., a federally chartered bank; and Marilyn Green, in her capacity as the Public Trustee for Douglas County, Colorado, Respondents.
• Court: Colorado Supreme Court

Page 136

924 P.2d 136

BAYOU LAND COMPANY, a Colorado limited partnership, Petitioner, v. Barry L. TALLEY; Barry Talley, Trustee, a Colorado general

partnership; American Property Equities 1985-C, Ltd., a

Colorado limited partnership; Bayou Gulch General

Partnership, a Colorado general partnership; Megabank of

Arapahoe, N.A., a federally chartered bank; and Marilyn

Green, in her capacity as the Public Trustee for Douglas

County, Colorado, Respondents.

No. 95SC358.

Supreme Court of Colorado,

En Banc.

Sept. 23, 1996.

Clayton and Stone, L.L.C., F. Brittin Clayton, III, Boulder, Bearman, Talesnick & Clowdus, P.C., W. Michael Clowdus, Denver, for Petitioner.

Nichols & Hecht, LLC, Charles B. Hecht, Denver, Holly I. Holder, P.C., Holly I. Holder, Denver, for Barry L. Talley; Barry Talley, Trustee; and Bayou Gulch General Partnership.

Justice KOURLIS delivered the Opinion of the Court.

In this case we granted petitions for certiorari prior to judgment by the court of appeals primarily to determine the nature of an overlying landowner's interest in unadjudicated nontributary ground water. We now conclude that landowners do have a right to withdraw nontributary ground water underlying their land even in the absence of formal water court adjudication. This right is defined by statute and is presumed to be conveyed by a deed for the land unless excepted from that deed by express reservation.

This case concerns a series of land transactions involving the plaintiff, Bayou Land Company (BLC), and the defendants, Barry L. Talley; Barry Talley, Trustee, a general partnership (Talley Partnership); ¹ American Property Equities 1985-C, Ltd. (APE); Bayou Gulch, a Colorado General Partnership (Bayou Gulch); and Megabank of Arapahoe, N.A. ² BLC held a deed of trust encumbering land purchased by the defendants through a series of intermediary owners. BLC foreclosed on the property and brought the present lawsuit to determine whether the nontributary ground water under the land was included in the foreclosure, as well as to determine the relative recourse liabilities of the defendants under the promissory note secured by the deed of trust. Bayou Gulch counterclaimed to quiet title to the nontributary ground water. In addition, Bayou Gulch along with the Talley Partnership counterclaimed that BLC had breached the implied covenant of good faith and fair dealing by bringing suit against them. On summary judgment, the district court found that neither Bayou Gulch nor APE had any recourse liability under the promissory note secured by the deed of trust. The court also dismissed the bad faith and quiet title claims of Bayou Gulch and the Talley Partnership. After trial, the court found that the nontributary ground water rights were not encumbered by the deed of trust and thus were not subject to foreclosure, based upon the conclusion that a landowner does not have any rights to nontributary ground water prior to water court adjudication of those rights. The court also found that the Talley Partnership owned ninety percent of the nontributary ground water rights as a result of a water court decree and that BLC acquired the remaining ten percent in settlement negotiations with a former party to this lawsuit who received those rights through the same water court decree. Finally, the district court found that the Talley Partnership was not personally liable under the note. BLC appealed the district court's rulings to the court of appeals and Bayou Gulch cross-appealed. Prior to the court of appeals rendering judgment, BLC petitioned for certiorari and Bayou Gulch cross-petitioned for certiorari pursuant to C.A.R. 50.

We granted the petitions for certiorari prior to judgment by the court of appeals to consider (1) whether a deed of trust may encumber unadjudicated nontributary ground water which is not part of a designated basin; (2) who owns the rights to the nontributary ground water at issue; (3) whether the district court erred in granting summary judgment as to the recourse liability of defendants, Bayou Gulch and APE, under the deed of trust; and (4) whether the district court erred in dismissing the counterclaims of Bayou Gulch and the Talley Partnership regarding BLC's alleged bad faith. We reverse the district court's ruling regarding issues one and two and remand for further proceedings consistent with this opinion. We also reverse the district court's grant of summary judgment for Bayou Gulch regarding issue three. We affirm the district court's resolution of issue four.

I.

On January 23, 1984, BLC sold Dr. Ralph Warren 932 acres of property in Douglas County. The deed to this property expressly included three irrigation wells, and "[a]ny and all water or water rights, ditch or ditch rights, reservoir or reservoir and storage rights appertaining to the property." At the time of this transfer, BLC had conducted two water studies and was aware that a substantial amount of nontributary ground water existed beneath the property. In consideration for the land transfer, Warren paid BLC some cash and executed a promissory note for $953,100.

The promissory note contained a recourse provision subjecting Warren to recourse liability for any principal balance plus accrued interest exceeding $853,100. Since the total debt amounted to $953,100, Warren's recourse liability amounted to $100,000. The note expressly released the maker and any and all successors in interest from personal liability up to $853,100.

Warren secured the promissory note with a deed of trust encumbering 572 of the 932 acres of the property. ³ The deed of trust did not include any specific reference to "water rights"; however, Warren testified at the trial on this matter that he assumed the deed of trust covered everything he had received from BLC in the transfer of the 572 acres.

In February 1984, Warren sold the 572 acres encumbered by the deed of trust to Albert and Fred Blum (collectively, "the Blums"). ⁴ The deed conveying the property to the Blums included "[a]ll water and ditch rights appurtenant to that real property ...." As part of the agreement, the Blums assumed the $953,100 note held by BLC. The Blums further agreed to indemnify and hold Warren harmless from any personal liability under the BLC note up to $100,000 plus interest, at the rate of twelve percent per annum from the date of default, plus costs and attorney's fees.

The Blums then entered into a series of three transactions with the Talley Partnership, in which they cumulatively conveyed eighty percent of their interest in the property. ⁵ In the first transaction the Blums transferred fifteen percent of their interest in the land by special warranty deed on February 10, 1984. The deed did not refer to "water rights." In addition, the Blums entered into a cotenancy agreement with the Talley Partnership. The Talley Partnership contributed cash for a down payment and closing costs on the property. The Blums agreed to assume all liability on two promissory notes, including the Warren note, secured by the property. In addition, the agreement provided that all other costs on the property would be divided according to each party's ownership interest.

On September 13, 1984, the Blums transferred an additional thirty percent interest in the property to the Talley Partnership by special warranty deed. Again, the deed did not specifically refer to "water rights." The Talley Partnership and the Blums amended the cotenancy agreement to provide that: "[The] Talley [Partnership] shall assume liability on $391,000 of that 1st trust deed indebtedness of $953,100 for the use and benefit of Bayou [L]and Company. Blum shall continue liability on the remaining $562,100 of indebtedness." Thus, the new cotenancy agreement altered the Blums' and Talley Partnership's liability for the debt payments in proportion to their respective ownership shares in the property.

In the final transaction, the Blums transferred an additional thirty-five percent interest in the property to the Talley Partnership by special warranty deed on January 15, 1985. The deed did not specifically refer to any water rights. The Talley Partnership and the Blums amended the cotenancy agreement to reflect that the Talley Partnership now owned an eighty percent share of the property. The new cotenancy agreement also provided that the Blums and the Talley Partnership would share liability on the existing combined indebtedness of $1,138,100 in accordance with their pro rata ownership interests.

On June 12, 1984, prior to the latter two land transfers to the Talley Partnership, the Blums and the Talley Partnership filed an application for conditional underground water rights from nontributary sources with the water court for water division 1 (water court). On February 27, 1986, after the final two land transfers to the Talley Partnership were complete, the water court issued a water rights decree adjudicating 841 acre feet of nontributary ground water per year to the Blums and the Talley Partnership. ⁶

The Blums, the Talley Partnership, and APE formed Bayou Gulch on January 1, 1986. On January 14, 1986, the Talley Partnership transferred to APE a forty percent share of the property in exchange for some cash and a note which offset payments on its remaining forty percent share under the original Warren note. APE, the Talley Partnership, and the Blums all subsequently quitclaimed their shares in the property to Bayou Gulch. ⁷ These deeds all referred to any and all water rights appurtenant to the land, but each transaction preceded the water court decree regarding the nontributary water underneath the property. ⁸ The partners agreed to make capital contributions to satisfy the debt encumbering the property in proportion to their ownership interests in the partnership.

Bayou Gulch continued to make payments on the original Warren note encumbering the property until 1989. On September 25, 1989, BLC and Bayou Gulch entered into the first of...