Valley Canal Co v. Brown, PORTNEUF-MARSH

• Decision Date: 31 May 1927
• Docket Number: No. 252,PORTNEUF-MARSH,252
• Citation: 47 S.Ct. 692,274 U.S. 630,71 L.Ed. 1293
• Parties: VALLEY CANAL CO. v. BROWN et al
• Court: U.S. Supreme Court

274 U.S. 630

47 S.Ct. 692

71 L.Ed. 1293

PORTNEUF-MARSH VALLEY CANAL CO.

v BROWN et al.

No. 252.

Argued March 18, 1927.

Decided May 31, 1927.

Messrs. T. C. Coffin, J. H. Peterson, and D. C. McDougall, all of Pocatello, Idaho, for petitioner.

Mr. Edwin Snow, of Boise, Idaho, for respondents.

[Argument of Counsel from page 631 intentionally omitted] Mr. Justice STONE delivered the opinion of the Court.

The question presented by this record is one of priority of liens upon shares of stock representing water rights in an irrigation project organized and created under the Act of Congress known as the Carey Act, Act Aug. 18, 1894, c. 301, § 4, 28 Stat. 372, 422 (Comp. St. § 4685), as amended June 11, 1896, (29 Stat. 413, 434, c. 420 (Comp. St. § 4686)), and under concurrent legislation of the state of Idaho (Comp. St. Idaho 1919, tit. 26, c. 136, § 2996 et seq.). The present suit was begun in the District Court for Idaho by respondents, citizens of Massachusetts, for the foreclosure of a deed of trust, of which they are trustees. The defendants are two Idaho corporations, the Portneuf-Marsh Valley Irrigation Company and the Portneuf-Marsh Valley Canal Company, the petitioner here, referred to respectively in this opinion as the construction company and the operating company. The District Court entered a decree for the defendants on the issues now presented (299 F. 338), which was reversed by the Circuit Court of Appeals for the Ninth Circuit. (5 F.(2d) 895). This court granted certiorari. 270 U. S. 637, 46 S. Ct. 204, 70 L. Ed. 773.

Proceeding under the applicable legislation, the construction company entered into a contract on June 3, 1908, with the state of Idaho for the construction of an irrigation system to supply water to certain arid lands within the state, set apart for that purpose by the federal government under the provisions of the Carey Act. The contract provided that the construction company should sell water rights in the irrigation system to such settlers as should receive from the state allotments of the designated lands and fixed maximum rates and terms of sale. A water right was defined as the right to receive sufficient water from the system to irrigate one acre of land, and represented a proportionate interest in the irrigation works. The contract contemplated vesting the control of the irrigation system in the settlers through the me- dium of an operating company, to be organized by the construction company as soon as the lands were thrown open to settlement. It provided that the operating company should issue one share of stock for each water right sold to settlers and that the remainder should be issued to the construction company pending further sale of water rights, and that the irrigation system when completed should be transferred to the operating company in return for its capital stock so issued. The contract stipulated also that the interest of the construction company in the irrigation system and the lands within the project might be mortgaged in accordance with the Carey Act and the statutes of Idaho, and these laws were specifically made a part of the contract.

Pursuant to the statutes and the contract with the state, the construction company sold water rights to settlers, undertaking to deliver to them a like number of shares of stock in the operating company. The purchasers agreed that their interest in the lands to be acquired from the state, to which the water rights were to be appurtenant, and the shares of stock should be security for the deferred installment payments, and default in payment of any installment was to accelerate the maturity of the purchase price. Appropriate mortgages and assignments to be first liens upon the land were to be given for that purpose. The agreement also provided that the operating company should have power to levy all necessary tolls, charges, and assessments, which the purchasers of the water rights, represented by the stock, agreed to pay, and that the contracts for the sale of water rights might be assigned by the construction company.

To finance the project, the construction company authorized a bond issue secured by the present mortgage of the irrigation system then being constructed. The deed provided that until default the construction company might sell water rights to entrymen and required that before bonds were issued, the construction company deposit with the trustees as further security the contracts for the sale of water rights, as described, and other security obtained from the purchasers.

In compliance with the statutes and contracts, steps necessary to launch the system were taken. Water rights were sold, the designated lands were allotted to entrymen, their contracts of purchase were pledged by the construction company under its mortgage and the irrigation system was conveyed to the operating company, subject to the mortgage.

The project did not flourish. Some of the settlers having failed to make payment of installments due on the contracts of purchase, respondents acquired their land, water rights, and stock, in some cases by foreclosure and in others by quitclaim deeds. The construction company defaulted in payment of interest on its bonds. The present suit was brought by respondents to foreclose the mortgage on the irrigation system and to foreclose any claims that the two companies might make to the land, water rights, and stock acquired by respondents in the enforcement of their rights against the entrymen under the contracts of purchase. The construction company, being insolvent, made no defense and the case was disposed of below on the theory that the trustees, as against the operating company, so far as the water rights and stock were concerned, stood in the position of the construction company. The operating company as a defense set up by answer its ownership of some of the stock in controversy acquired under a lien alleged to be superior to that of respondents. This contention was based upon the following facts:

The certificate of incorporation of the operating company authorizes it to levy and collect tolls, charges, and assessments to defray the expense of maintenance and operation of the irrigation system, and its by-laws, con- cededly in accordance with the contracts and applicable statutes, require the certificates of stock to describe the lands to which the shares and water rights relate, and declare that they shall be appurtenant to such lands, unless forfeited for nonpayment of assessments. In the event of default in payment of assessments by stockholders, the operating company under local statutes may sell the stock at public auction. In the case of the stock in question the assessments had not been paid by the entrymen. The stock was sold at public auction, the operating company becoming the purchaser.

By stipulation the decree of foreclosure was limited to the stock in the operating company, acquired by it in the manner already described, and as to that stock the decree gave priority to the maintenance liens.

It will be observed that out of the complicated transactions by which the irrigation system was created and made appurtenant to lands set apart by the government for that purpose, two distinct classes of liens were created with respect to the stock and water rights, in addition to the general mortgage lien on the irrigation system as a whole. There were (a) the liens for maintenance...