Erwin v. Gage Canal Co.

• Decision Date: 08 April 1964
• Citation: 226 Cal.App.2d 189,37 Cal.Rptr. 901
• Court: California Court of Appeals Court of Appeals
• Parties: Harry R. ERWIN, E. K. Fleming, Robert F. Irving and R. S. Malloch, Plaintiffs and Appellants, v. The GAGE CANAL COMPANY, Defendant and Respondent. Civ. 7353.

Page 901

37 Cal.Rptr. 901

226 Cal.App.2d 189

Harry R. ERWIN, E. K. Fleming, Robert F. Irving and R. S. Malloch, Plaintiffs and Appellants, v. The GAGE CANAL COMPANY, Defendant and Respondent.

Civ. 7353.

District Court of Appeal, Fourth District, California.

April 8, 1964.

Rehearing Denied April 29, 1964.

Hearing Denied June 3, 1964.

Walker, Sullivan, Hews, Brown & Yakutis and Alexander B. Yakutis, Riverside, for plaintiffs and appellants.

Redwine & Sherrill, Earl Redwine and Justin M. McCarthy, Riverside, for defendant and respondent.

STONE, Justice.*

This action by four shareholders of defendant corporation is the outgrowth of a prior action by the City of Riverside in eminent domain to condemn the assets of the defendant herein, a mutual water company. Defendant appeared in that action and by its answer alleged ownership of the water rights, diversion works, canals, pumping plants and other property used to deliver water to the company's shareholders. Thereafter the directors of defendant and a shareholders' committee worked out a proposed agreement to be used as the basis for a judgment in condemnation and thus obviate a trial. It appears that the proposed settlement agreement was approved by the number of shareholders required by the articles of incorporation and the by-laws of defendant.

Riverside's complaint in condemnation and the proposed agreement both recognize and guarantee the integrity of each shareholder's entitlement to water according to the terms appearing on each share certificate.

Plaintiffs, shareholders of defendant water company, dissatisfied with the proposed solution of the condemnation proceeding, filed two actions against defendant. By the first action plaintiffs sought to quiet title to the water rights in the shareholders, to secure an injunction restraining defendant from proceeding with the agreement and the settlement of the condemnation action, and for declaratory relief. By the second complaint plaintiffs sought to enjoin defendant's execution of the proposed agreement or to settle the condemnation action by a judgment pursuant to the agreement, upon the ground such acts are ultra vires. Despite the various kinds of relief sought by plaintiffs in the two actions, the matrix of each and every claim lies in plaintiffs' contention that the shareholders of the corporation hold title to the water rights and to all property utilized by defendant mutual water company to divert and deliver water. In short, plaintiffs argue that defendant holds title to all of its property, including water rights, as trustee or agent for the shareholders.

The trial court entered judgment for defendant in each action, and the shareholders are here on appeal.

Plaintiffs base their contention that title to The Gage Canal Company water rights is vested in the shareholders, upon cases holding that a water right which is appurtenant to specific land is real property, and that it possesses the characteristics of an easement. Therefore, argue plaintiffs, the canals, ditches, pumps and flowage rights used to transport water pursuant to the water rights, constitute the servient tenement.

The argument begs the question because it presupposes that it is the water right itself, the basic property right from which emanates all other property rights or interests here in issue, that is appurtenant to the land of each shareholder. The primordial question is whether it is the water right or simply the right to receive water, that is appurtenant to the land. The answer depends upon whether at the time defendant acquired the water rights it became the owner thereof, or whether ownership remained in the landowners-grantors, so that defendant now holds the water rights as a mere trustee or agent.

Likewise, the argument of some of the plaintiffs that they own the actual water rights since they can trace their titles to predecessors in interest who conveyed water rights to defendant, is a non sequitur, because this argument, too, ignores the pivotal question of whether each predecessor conveyed title to the water rights to defendant or whether each simply designated the water company his trustee or agent to hold the water rights in trust for him.

One of the earliest cases making the distinction is Hildreth v. Montecito Creek Water Co., 139 Cal. 22, 72 P. 395, a case decided in 1903. The following language pertinent to the question here, appears at page 29 of 139 Cal., page 398 of 72 P.:

'If the persons owning such rights see fit to form a corporation, and delegate to such corporation the work of making the diversion and distribution and of constructing and keeping in repair the dams and conduits, reserving to themselves their rights in the water, as was done in this case, they do not thereby dedicate or appropriate to public use the water thus reserved and used by them. The corporation becomes merely their agent for the purpose of serving their several interests, so far as they may be served by a common system of works, the water remaining the subject of individual ownership and private use as before.'

A later case, City of Glendale v. Crescenta etc. Water Co., 135 Cal.App.2d 784, at page 801, 288 P.2d 105, at page 116, decided in 1955, puts the distinction in a nutshell:

'Respondent's counsel assert that the water belongs to the shareholders, that they pay nothing for it when delivered, that the only charge paid is for production and distribution, and hence there is no purchase or sale. Reliance is placed upon Stratton v. Railroad Commission, 186 Cal. 119, 198 P. 1051; Frazee v. Railroad Commission, 185 Cal. 690, 201 P. 921; Hildreth v. Montecito Creek Co., 139 Cal. 22, 72 P. 395. Those decisions hold that in the case of shareholders who own and pool water rights their mutual water company becomes merely their agent in producing and delivering to them their own water. But that is not true of water which is owned by the mutual company and delivered by it to its shareholders even though their stock is appurtenant to their respective lands. See Consolidated People Ditch Co. v. Foothill Ditch Co., 205 Cal. 54, 63-64, 269 P. 915.'

Obviously the issue is one of fact to be determined from the circumstances surrounding the conveyances to The Gage Canal Company of water rights and other property that it now holds, and the manner in which it has exercised control thereof. The history of the Company, particularly its acquisition of water rights, its acquisition of other property, its development of water and water rights, and its relations with its shareholders over the years, must be considered in determining the issue.

Since the history of defendant covers more than 60 years, we have not burdened this opinion by setting it forth in full. We have, however, appended to this opinion plaintiffs' condensation of the history related in their opening brief, so that these facts are available to anyone interested. We merely note here that the history of The Gage Canal Company reflects no reservation of title by the owners who conveyed the various water rights to Gage, nor does it reflect a pooling of water rights by property owners as a more convenient and economical means of getting water to the land to which the water rights are appurtenant.

The Gage Canal Company's operations over the years reflect a corporate organization and operation in the conventional sense. The relations between defendant and its shareholders were, from the beginning, carried on in a manner usual for a corporation acting not as a trustee or agent but as an independent corporate entity, that is, as a principal. The trial court found that defendant obtained its water rights from different sources. Some were obtained by deed, some by purchasing stock in other water companies, others by exchanging water rights and privileges. Defendant also obtained water by digging wells. Significantly, the record bears out the finding of the trial court that of the 2,300 inches of water now owned and controlled by defendant, over 1,000 inches were developed after 1900 and were never owned by plaintiffs' predecessors in interest. The trial court also found that all of the water rights obtained by defendant were conveyed or transferred to it for a valuable consideration, a persuasive finding which is incompatible with plaintiffs' contention that the grantors of the water rights conveyed no title to defendant but that each merely exchanged muniments of his own title.

We conclude that the shareholders of defendant do not own the water rights and the facilities of the corporation but, rather, that they own a right to have water delivered to their properties, a right that is appurtenant to the land. Therefore the trial court correctly decided against plaintiffs in their action to quiet title to a portion of defendant's property, including water rights.

It follows that the trial court also properly denied plaintiffs' request for an injunction prohibiting defendant from entering into negotiations to settle the pending action by which the City of Riverside is condemning defendant's property. The trial court's denial of an injunction is given additional support by the fact that plaintiffs' right to receive water from any successor of defendant is not threatened. Plaintiffs concede this to be the fact, since in their opening brief they state:

'The established rule is that a successor operator of a water company takes the system subject to all existing burdens. This is true whether the transfer is voluntary or by way of condemnation; whether pre-existing water service is under private rights or under the law of public service; and whether the successor is a private entity, public utility, or governmental agency [citations].'

We agree with this assertion of plaintiffs, which they support by eleven citations of authority.

Turning to plaintiffs' cause of action for declaratory relief, two questions confront us: first, what is the status of a shareholder of a mutual...