Davis v. Agua Sierra Resources, L.L.C.

• Decision Date: 15 January 2008
• Docket Number: No. 1 CA-CV 06-0806.,1 CA-CV 06-0806.
• Citation: 174 P.3d 298,217 Ariz. 386
• 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: Arizona Court of Appeals

174 P.3d 298

217 Ariz. 386

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.

No. 1 CA-CV 06-0806.

Court of Appeals of Arizona, Division 1, Department D.

January 15, 2008.

Robert S. Lynch & Associates By Robert S. Lynch, Andrea L. Gonzales, Phoenix, Attorneys for Appellees.

Anna Young, P.L.L.C. By Anna Young, Prescott, Co-Counsel for Appellees.

Gallagher & Kennedy, P.A. By Michael R. Ross, Jennifer Ratcliff, Phoenix, Attorneys for Appellants.

Meyer Hendricks PLLC By Tom Galbraith, Phoenix, Co-Counsel for Appellants.

JOHNSEN, Judge.

¶ 1 Arizona law imposes certain restrictions on a property owner's right to extract "percolating" groundwater and transport it for use elsewhere. Our issue is whether the law permits an owner that conveys real property to another to reserve for itself whatever commercial groundwater rights might be associated with the property. We hold the law permits such a reservation and reverse the superior court's order to the contrary.

FACTUAL AND PROCEDURAL HISTORY

¶ 2 The reservation we review encompasses commercial water rights associated with a portion of the CF Ranch ("CF Ranch"), located in the Big Chino groundwater sub-basin in Yavapai County. We start by setting out in some detail a string of transactions by which interests in or relating to the ranch were conveyed. The significant fact, however, is that each transaction provided that "commercial water rights" would be reserved and not conveyed.

¶ 3 On February 11, 1981, Chino Ranch, Inc. ("Chino Ranch") conveyed "certain real property included in and commonly referred to as the CF Ranch" to Red Deer Cattle, Inc. ("Red Deer") by warranty deed (the "1981 Deed"). The 1981 Deed excluded from the conveyance all commercial water rights associated with the property.¹

¶ 4 By warranty deed dated April 2, 1984 (the "1984 Deed"), Red Deer in turn conveyed the CF Ranch to Merwyn C. Davis, Trustee under the Merwyn C. Davis Trust dated July 27, 1981 ("Davis"), who paid $1,421,000 for the property. In the conveyance, Red Deer reserved to itself the commercial water rights associated with the ranch. The 1984 Deed expressly encompassed:

[a]ll right, title and interest of [Red Deer] in and to [the CF Ranch] . . . excluding therefrom and reserving to [Red Deer] all gas, oil and mineral rights and all commercial water rights and waters incident and appurtenant to and within the real property as reserved and as conveyed hereby to [Davis], together with the rights to develop such minerals and waters and market and transport the same from the premises hereby conveyed; PROVIDED HOWEVER, such exclusion and reservation of commercial water rights shall not preclude [Davis], and those claiming under [Davis], from obtaining and using water for ranch, livestock and domestic and agriculturally related purposes.

¶ 5 Chino Ranch later merged into Red Deer, which, on October 30, 1997, conveyed to the Seibert Family Limited Partnership "an undivided one-half . . . ownership interest in and to all previously reserved `commercial water rights' owned by Grantor," including the commercial water rights associated with the CF Ranch.

¶ 6 The Seibert Family Limited Partnership then conveyed to CJ Partners "an undivided one-half . . . ownership interest" in those commercial water rights. Finally, in May 1998, Red Deer and CJ Partners, the two members of Agua Sierra Resources, L.L.C. ("Agua Sierra"), each conveyed to Agua Sierra its respective one-half interest in the water rights.²

¶ 7 Prior to any of the conveyances described above, the City of Prescott ("City") was looking to tap groundwater in the area to serve the City's increasing population. According to City Council minutes, the City had expressed interest as early as 1976 in acquiring groundwater from the Big Chino Valley to supplement its municipal water supply. In 1988, Davis, by then the owner of the CF Ranch, granted the City an option to purchase property that included the CF Ranch and all appurtenant water rights. The option price was $3,000; the price to exercise the option was to be $15 million. The City, however, did not exercise the option, and it expired in 1992.

¶ 8 On April 22, 2003, Davis granted the City a second option to purchase property including the CF Ranch and all water rights appurtenant to it. An addendum to the option agreement expressly recognized that "Davis is unsure of the status of the water rights located on" the optioned property and that his "ownership interest in said water rights may be unclear, incomplete, inappropriately described, or subject to challenge."

¶ 9 The price of the second option was $250,000; the purchase price of the property and associated water rights was set at $30 million. The bulk of the property's value lay in its associated groundwater rights. An appraisal estimated the market value of the property to be $23 million. The appraiser noted that the "most probable current and future use of the water resources present on the subject property" was "for transportation to the City of Prescott." Assuming that 12,000 acre/feet of groundwater a year could be transported from the property for use by the City, the appraiser concluded that $18 million to $21 million of the total value of the property was attributable to its water resources.

¶ 10 Recognizing that the reservations of commercial water rights recounted above clouded the ownership of water rights associated with the CF Ranch, the City, by letter dated March 5, 2004, asked Davis to seek to purchase those rights so the City could acquire them when it exercised its option to purchase the property. Accordingly, by letter dated April 29, 2004, Davis offered to pay Agua Sierra $300,000 for the commercial water rights associated with the CF Ranch. Agua Sierra declined Davis's offer, and the City permitted its purchase option to expire.

¶ 11 Unable to negotiate an agreement, on August 24, 2004, Davis filed a complaint against Agua Sierra, Red Deer, CJ Partners and the Seibert Family Limited Partnership (collectively, "Appellants"), seeking a judgment invalidating the commercial water rights reservations associated with the CF Ranch. Appellants answered the complaint and asserted several affirmative defenses. Agua Sierra also filed a counterclaim seeking a judgment declaring its commercial water rights reservation to be valid and a judgment quieting title in its favor to all commercial water rights associated with the CF Ranch. Alternatively, Agua Sierra sought rescission of the 1984 conveyance of the CF Ranch to Davis.³

¶ 12 Davis filed a motion for summary judgment, contending that Arizona law "does not permit the creation of a future water right," "does not permit a water right to be severed from land," and "does not recognize a water right for `commercial purposes.'" Appellants responded and filed a cross-motion for summary judgment, arguing that the reservation was valid and that the court should enter a declaratory judgment and an order quieting title in Agua Sierra's favor.

¶ 13 After hearing oral argument, the superior court granted summary judgment in favor of Davis. In finding the reservation invalid, the court relied in large part on cases that hold groundwater is not appropriable but is instead subject to the doctrine of reasonable use. See In re the Gen. Adjudication of All Rights to Use Water in the Gila River Sys. & Source, 198 Ariz. 330, 9 P.3d 1069 (2000) ("Gila River IV"); Bristor v. Cheatham, 75 Ariz. 227, 255 P.2d 173 (1953). The superior court concluded, "as a matter of law . . . Arizona does not recognize the reservation of commercial water rights or the right to develop commercial water rights as reserved in the deeds to the property in this case." The court also ruled that because "the case law underlying that legal determination has been in existence since 1953 when Bristor was determined," Agua Sierra was not entitled to a rescission of the 1984 Deed. Appellants timely appealed the judgment.⁴

DISCUSSION

A. Standard of Review.

¶ 14 In reviewing summary judgment, we determine de novo whether genuine issues of material fact exist and whether the trial court correctly applied the law. United Dairymen of Ariz. v. Schugg, 212 Ariz. 133, 140, ¶ 26, 128 P.3d 756, 763 (App.2006). "[W]e view the facts and evidence in a light most favorable to the party against whom summary judgment was granted and draw all reasonable inferences in favor of that party." AROK Constr. Co. v. Indian Constr. Servs., 174 Ariz. 291, 293, 848 P.2d 870, 872 (App. 1993). Summary judgment is appropriate "if the facts produced in support of the claim or defense have so little probative value, given the quantum of evidence required, that reasonable people could not agree with the conclusion advanced by the proponent of the claim or defense." Orme Sch. v. Reeves, 166 Ariz. 301, 309, 802 P.2d 1000, 1008 (1990).

B. A Summary of Water Rights in Arizona.

¶ 15 We begin by observing that Arizona's "bifurcated system of allocating water rights differentiates groundwater users from surface water users." Gila River IV, 198 Ariz. at 334, ¶ 3, 9 P.3d at 1073. Surface water is defined as "[t]he waters of all sources, flowing in streams, canyons, ravines or other natural channels, or in definite underground channels, whether perennial or intermittent, flood, waste or surplus water, and of lakes, ponds and springs on the surface." Ariz.Rev.Stat. ("A.R.S.") § 45-141(A) (2003).⁵ As might be supposed from the general nature of this definition, "[t]he boundary between surface water and groundwater is not...