Hydro Resources Corp. v. Gray

• Decision Date: 09 November 2007
• Docket Number: No. 29,931.,29,931.
• Citation: Hydro Resources Corp. v. Gray, 173 P.3d 749, 2007 NMSC 61, 143 N.M. 142 (N.M. 2007)
• Parties: HYDRO RESOURCES CORPORATION, a New Mexico corporation, Plaintiff-Respondent, v. Harris GRAY and William J. Frost, Defendants-Petitioners.
• Court: New Mexico Supreme Court

173 P.3d 749

2007 NMSC 061

HYDRO RESOURCES CORPORATION, a New Mexico corporation, Plaintiff-Respondent, v.Harris GRAY and William J. Frost, Defendants-Petitioners.

No. 29,931.

Supreme Court of New Mexico.

November 9, 2007.

Law & Resource Planning Associates, P.C., Stephen Curtice, Charles Thomas DuMars, Christina Bruff DuMars, Tanya L. Scott, Albuquerque, NM, for Petitioners.

Law Offices of Nancy L. Simmons, P.C., Nancy L. Simmons, Modrall, Sperling, Roehl, Harris & Sisk, P.A., Timothy J. De Young, Stuart R. Butzier, L. Michael Messina, P.A., L. Michael Messina, Albuquerque, NM, for Respondent.

OPINION

BOSSON, Justice.

{1} This appeal involves a dispute over ownership of water rights developed by a mining lessee in connection with certain mining claims owned by the lessor.The district court granted summary judgment in favor of the lessor's successor in interest, quieting title in that party to the disputed water rights, and the Court of Appeals affirmed.We granted certiorari to clarify that under most circumstances, including mining, water rights are not considered appurtenant to land under a lease.We also reinstate the accepted principle that a mineral lessee is not considered an agent of the lessor for the purpose of acquiring water rights, unless stipulated in the lease.For the reasons that follow, we reverse the Court of Appeals and remand to the district court for further proceedings consistent with this opinion.

BACKGROUND

{2} In October of 1971, Inspiration Development Company("Inspiration") entered into a Mineral Lease with Option to Purchase with Josephine Patton("Patton Lease").The Patton Lease confirmed Patton's ownership of five patented mining claims¹ and granted Inspiration "the right to explore for, mine and remove the same [minerals], all water rights appurtenant thereto, [and] all improvements, easements, licenses, rights of way and other interests appurtenant thereto (including any after acquired title of Owner)."

{3} On July 15, 1974, Inspiration entered into a Mineral Lease with Corbin Robertson("Robertson Lease").In the Robertson Lease, Inspiration leased its own claims (including one patented claim and hundreds of unpatented claims) and subleased the five Patton claims to Robertson, "permitting Robertson to have the exclusive possession of and the right to mine" the claims.The Robertson Lease did not extend the option to purchase but reserved it to Inspiration.Further, unlike the Patton Lease, the Robertson Lease was silent on the subject of water rights.

{4} On June 9, 1980, Robertson, as lessee from Inspiration, assigned this lease to The Copper Flat Partnership("CFP").CFP had by this time drilled nine wells on the leased property, beginning in 1974, and drilled another well in December of 1980.The record does not disclose the nature of the relationship between CFP and either Inspiration or Robertson prior to assignment of the Robertson Lease in June of 1980.However, there is no indication in the record that the wells were dug without Inspiration's consent, and Hydro has not alleged that CFP acted improperly or without consent in drilling these wells.

{5} In December of 1975, a person identifying himself as "Agent" for Inspiration claimed the land where the wells were located as "Mill Sites" pursuant to federal law.The Mill Site Location Notices do not indicate that CFP was the "Agent" who claimed these mill sites.

{6} On February 17, 1984, after the wells were developed and put to use by CFP, CFP filed ten Declarations of Owner of Underground Water Rights with the Office of the State Engineer("OSE") for 6,462 acre-feet of water rights.²This amount was not the amount actually applied to beneficial use, but was based on the "projected peak capacity of [the] mill."³CFP claimed ownership of these water rights in the Declarations.The record does not indicate that anyone, including Inspiration, ever opposed CFP's claims of ownership of these water rights.

{7} At some point, CFP ceased mining the claim and the lease terminated, thereby returning the leasehold interest in the mine and physical improvements to the lessor, Inspiration.On April 7, 1987, about five months after the lease terminated, CFP, as owner of the water rights for which it had filed declarations with the OSE, conveyed those water rights to PetitionersHarris Gray and William Frost("Gray & Frost") by quitclaim deed, for which Gray & Frost paid $20,000.Gray & Frost filed a Change of Ownership of Water Right form with the OSE on April 2, 1987, and recorded the Quitclaim Deed with the County Clerk on July 17, 1987.

{8} On August 24, 1987, Hydro and Inspiration entered into a Mineral Lease with Option to Purchase ("Hydro Lease").The Hydro Lease gave Hydro "the right to use all water rights and all other appurtenances."In March of 1988, Hydro assigned the Hydro Lease, along with the option to purchase, to Cobb Resources Corporation("Cobb").On November 16, 1989, in a single closing, Inspiration quitclaimed any interest it had in the property to Hydro, who conveyed the property by special warranty deed to Cobb, which then conveyed it to Copper Flat Mining Company("CFMC")(no relation to CFP).CFMC sold the mining claims to Gold Express Corporation("Gold Express") on April 11, 1990.

{9} On January 4, 1991, Gold Express, although claiming to dispute Gray & Frost's water rights, entered into an agreement with Gray & Frost to lease the water rights, paying a total rental amount of $450,000 by August of 1999.In addition, Gold Express agreed to quitclaim and release any interest it might have in the water rights back to Gray & Frost if it ceased to pay for their use.On November 24, 1993 and June 14, 1994, Gold Express quitclaimed its mining claims and water rights to Alta Gold.Alta Gold went bankrupt and Gray & Frost filed claims in the bankruptcy proceeding disposing of Alta Gold's assets.On December 21, 2000, the bankruptcy trustee entered an order quitclaiming all of the water rights held by Alta Gold to Gray & Frost, and that order was approved by counsel for Hydro.However, five days later Hydro received a quitclaim deed to those same water rights.

{10} Hydro filed suit against Gray & Frost in New Mexico's Seventh Judicial District Court on January 8, 2001, seeking to quiet title to certain water rights allegedly associated with Hydro's mining claims.Gray & Frost counterclaimed, asserting their sole and exclusive fee simple interest in the water rights.The parties filed cross-motions for summary judgment and the district court, after denying Gray & Frost's request for a hearing, denied Gray & Frost's motion and granted Hydro's motion without an opinion or explanation.The district court decreed title in the subject water rights quieted in Hydro's name against any and all adverse claims.

{11} Gray & Frost appealed, and the Court of Appeals affirmed the district court's decision.SeeHydro Res. Corp. v. Gray,2006-NMCA-108, 140 N.M. 363, 142 P.3d 951.Purporting not to address Hydro's contention that the water rights are appurtenant to the mining claims and mill sites, the Court of Appeals based its holding on a finding that CFP (Gray & Frost's predecessor in interest) developed the water rights as the agent and on behalf of Inspiration (Hydro's predecessor in interest).Seeid.¶¶ 1, 14.For the reasons that follow, we hold that the Court of Appeals incorrectly applied agency principles to the mining lease and underestimated the effect of its opinion on the prior appropriation doctrine as it relates to claims of appurtenancy.Accordingly, for the reasons that follow, we reverse.

DISCUSSION

{12}We note at the outset that the dispute in this case can be distilled down to the relationship between Inspiration (the lessor) and CFP (the lessee) of the mining claims.The parties trace their ownership of the disputed water rights to these entities—Hydro to Inspiration and Gray & Frost to CFP.The essential question, then, is which entity owned the water rights when the lease between Inspiration and CFP terminated.If CFP owned the water rights, then it had the right to convey them to Gray & Frost; if Inspiration owned the water rights, it had the right to convey them to Hydro.Therefore, we do not focus on the convoluted transactional history and chains of title.

{13} Gray & Frost argue that the Court of Appeals opinion is contrary to settled principles of New Mexico law that (1) a lessee can acquire water rights on leased land by appropriating water and placing it to beneficial use, and (2) a lessee does not generally act as the agent of the lessor.Regarding the first argument, Hydro counters that when a mining lessee appropriates water for use in connection with a mining claim, the water rights become "necessarily linked" to the land and are thus appurtenant rights that pass back to the lessor when the lease terminates.Hydro also argues that the water rights are pre-basin Mendenhall rights that can only be developed further if they remain with the mining claim.SeeState ex rel. Reynolds v. Mendenhall,68 N.M. 467, 362 P.2d 998(1961).Regarding Gray & Frost's second argument, Hydro asserts that because the water rights were used in connection with a mill site owned by Inspiration, those rights were developed by CFP as Inspiration's agent.We address Gray & Frost's arguments in turn.Because the case can be decided on these issues alone, we do not address Gray & Frost's contention that they were entitled to rely on the declarations recorded with the OSE, and thus should be considered bona fide purchasers of the water rights.

Standard of Review

{14}We review the district court's decision to grant summary judgment de novo."Summary judgment is appropriate where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law."Self v. United Parcel Serv., Inc.,1998-NMSC-046, ¶ 6, 126 N.M. 396, 970 P.2d 582.Neither party contends that...