Curry v. Pondera County Canal & Reservoir Co.

Curry v. Pondera County Canal & Reservoir Co., 2016 MT 77 (March 29, 2016) (Wheat, J.; Baker, J. concurring; McKinnon, J., dissenting) (6-1, aff’d & rev’d)

Issue: (1) Whether the water court erred in holding that the water rights of an entity developed under the Carey Land Act for the purpose of sale or rental are not limited by the stockholders’ actual historic water use; (2) whether the water court erred in granting Pondera a “service area” rather than a place of use based on historically irrigated land; (3) whether the water court erred by ruling Pondera’s storage rights were beneficially used on the Birch Creek Flats before 1973; (4) whether the water court improperly increased the flow rate for the Gray right and improperly reversed the water master’s dismissal of a claim it found was duplicative; and (5) whether the water court’s tabulation for the Curry claim and the Pondera claim without volume measurements was an abuse of discretion.

Short Answer: (1) No; (2) no; (3) yes; (4) no; and (5) no.

Affirmed (all issues except #3) and reversed (issue #3)

Facts: Curry and Pondera both own rights to divert water from Birch Creek, a tributary of the Marias River. The water rights are in the Marias River Basin, 41M, which has not yet been finally adjudicated. Subsequent to the filing of this appeal a preliminary decree was entered for the basin.

Pondera is a water supply company supplying water to Pondera County residents primarily for irrigation. In addition to its Birch Creek rights, it owns a complete distribution system, including canals, ditches, siphons and headgates. Pondera’s predecessors secured some of its water rights through the Carey Land Act, which provided for the passage of fee title to federal lands to state settlers if the state complied with certain prerequisites. States created Carey Land Boards to manage the process, which typically involved the federal government promising title to arid land upon reclamation and settlement of the land. The state would then contract for construction of an irrigation system, after which the state could request the patents of the land from the federal government. Upon approval by the Carey Land Board, the construction company could sell shares of stock in an operating company to settlers, and the state could sell the patented land to the stockholders-settlers. Once 90% of the total stock in an operating company was sold to settlers, ownership of the system was turned over to the company. Ultimately, the settler-shareholders owner the land and had ownership in the operating company but the company retained ownership of the water rights.

The current Pondera project is an extension of two systems created by the Conrad brothers in the late 1800s. In 1908, the Conrads sold their holdings and land to Cargill, who began efforts to irrigate under the Carey Land Act. Cargill formed a construction company and an operating company. The operating company eventually became Pondera. The project construction was completed in 1948, and the Montana Carey Land Board approved it in 1953, at which point Pondera took ownership from the construction company. Prior to the board’s final approval, the board and the federal government required an independent assessment of whether the project could properly supply water to its shareholders.

Generally, the water rights are appurtenant to the land described in share certificates issued by Pondera. Settler-shareholders did not receive individual water rights but rather the right to available water in common with other settler-shareholders, regardless of when they purchased their shares of why they initially irrigated their land. The state engineer concluded n his final evaluation that Ponders could service a maximum of 72,000 acres, with each share equivalent to one acre of irrigable land.

Curry is a private landowner with irrigation water rights at various locations in the Birch Creek Flats. Curry came into possession of his land and water rights beginning in 1988; some of his water rights are the oldest in the Basin 41M. Curry and Pondera have long disagreed over the priorities of each other’s rights. In 2005, Pondera locked Curry’s headgate, leaving him without water and leading to this dispute.

Curry filed a complaint in 2005 against Pondera, alleging interference with his water rights. The district court certified the case to the water court for determination of the water rights, and issued a preliminary injunction in 2006 enjoining Pondera from interfering with Curry’s diversion from Birch Creek.

Curry moved for partial summary judgment in the water court in 2008. The water master held a six-day hearing, and issued its findings and conclusions in April 2013. The master found that Pondera’s maximum irrigable acreage is 57,073 acres based on actual historic use before 1973, plus an amount to service the shareholder city of Conrad. In lieu of Pondera’s request for a service area for its place of us, the master found that the land described on share certificates with appurtenant water rights is the only land that can and should be irrigated by Pondera water. The master excluded Birch Creek Flats from Pondera’s service area, finding that the water used on the flats before 1973 was non-Pondera water.

Procedural Posture & Holding: The water court amended and partially adopted the master’s report. It found that the maximum acreage based on shares accurately reflects the acreage Pondera is allowed to irrigate, that there was no legal basis for the master’s conclusion that the land described in the share certificates as of July 1, 1973 was the place of use or service area, and that the 377,000+ acres Pondera originally claimed as its service area is appropriate. Finally, the water court found that Birch Creek Flats is within Pondera’s service area because Pondera had historically delivered direct flow along with stored water to the Flats for use by non-shareholders. Curry appeals, Pondera cross-appeals, and the Supreme Court affirms in part and reverses in part.

Reasoning: Regarding the standard of review, the water court must review the factual findings in the master’s report for clear error and the conclusions of law for correctness. This Court reviews the water court’s order to determine whether it correctly applied the appropriate standards of review.

(1) Bailey teaches that either the system’s capacity or the company’s needs will determine the extent of a water distribution company’s water right. If the needs are lebss than the capacity, then the needs cap the water right. A beneficial use is required for all appropriators; however, Bailey shows that beneficial use may be determined by the company’s actions, not those of the shareholders who actually use the water. Pondera’s water rights are determined by the actual shares it issued within a reasonable time after completing the Carey Land Act project in 1953, in the amount determined by Carey Land Board. The Court affirms the water court’s decision that the mast incorrectly determined Pondera’s rights were limited by actual acreage irrigated.

(2) The master determined that a service area is an incorrect means of defining the boundary of where Pondera can it its water to use. The water court disagreed and found a service area is allowed under Montana law. Here, the water rights owned by Pondera are tied to the issuance of stock by Pondera for use upon land as determined irrigable within the project. In the context of the Carey Land Act, individual stock certificates’ appurtenant land should not define the water right’s place of use. Because beneficial use occurs prior to the application of water on the land, the water right cannot be constrained by the actual use of the water or by the exact land upon which the water is put to ultimate use. For these reasons, a service area is the proper method of satisfying the place-of-use requirement for Carey land Act projects. For the purposes of the water court’s certification order, the water court did not err in finding that the service area is 377,255.5 acres, minus the Birch Creek Flats as discussed below.

(3) The master found that Pondera’s occasional release of water from its storage facilities for irrigators on the Flats did not amount to historical water use in the Flats. The water court disagreed, concluding the Flats should be within the service area. The court finds that Curry met his burden of proof regarding Pondera’s beneficial use of water on the Flats before 1973, and remands to remove the Flats from the service area.

(4) A water right’s flow rate is a factual determination. The water court reversed a flow rate finding made by the water master. The water court applied the proper standard of review to the Gray right flow rate, although it did not clearly state that in its decision. Additionally, the water court’s finding of 5.67 cfs for the Gray right is not clearly erroneous.

The Court agrees that Curry did not meet his burden of proof regarding the claim that was dismissed, and affirms the water court’s reversal of the master’s dismissal.

(5) The decision by the water court to limit a water right by volume is a matter of discretion. Although a volume determination might be helpful, the law does not require it. The water court’s tabulation without a volume determination is affirmed.

Justice Baker’s Concurrence (joined by Rice, J. and Cotter, J.): Appropriating water for sale is a beneficial use. The state engineer’s report and Carey Land Board’s approval of the project are sufficient evidence of Pondera’s bona fide intention to cap Pondera’s irrigated acreage at 72,000. However, a water service entity’s right may be lost by nonuse or abandonment. Curry and other objectors may still argue in the adjudication process that Pondera has lost its priority to the amount of water needed to irrigate 72,000 acres. For the purpose of determining Pondera’s right in the first instance, however, the water court correctly held that irrigators’ actual historical use was not the correct measure. Similarly, the use of a service area to define the limits of Pondera’s service area is proper at this stage of the process, but does not foreclose arguments in the adjudication process about the size of the service area.

Justice McKinnon’s Dissent: Justice McKinnon would reverse the water court’s opinion regarding Pondera’s annual irrigation and place of use, and would affirm the water master’s decision that Pondera’s place of use is limited to the approximately 85,000 acres described on the share certificates. She would also reinstate the water master’s order requiring Pondera to produce its share certificates to Curry. She concurs in the majority’s decision on issue 5, but would reverse on issue 4 regarding the Gray right flow rate.

Water law rules were intended to deal with individual appropriations, not collective rights. Additionally, the water court uses the term “service area” as if it is a term of art but fails to provide a definition for the term. It is not a recognizable term in Montana law or western water law.

Justice McKinnon does not read Bailey for the proposition that offering water for sale is a beneficial use for a public benefits corporation. “Such a view, if adopted, would fundamentally alter Montana water law.” ¶ 79. The annual acreage limitation on Pondera’s water right is not an element of an appropriative water right and no party explained why both the water court and water master used it as though it is.

The water court removed this case from the water master after the master issued its findings and conclusions, but before it issued its final order, as the master stayed its final determination pending the production of Pondera’s share certificates to Curry. As a result, the master’s final conclusions are necessarily incomplete.

The water court failed to state the standard of review it used on the annual acreage limitation and place of use. “Thus, rather than having the benefit of another court’s review prior to our own, we are essentially left with two standalone opinions.” ¶ 82.

In Bailey, this Court adopted principles consistent with the so-called “growing communities” doctrine, an infrequently invoked exception to the common law requirement of actual beneficial use for perfection of a water right. An appropriation under this doctrine is measured by the lesser of the appropriator’s bona fide intent at the time of appropriation, the reasonably anticipated needs of the appropriator, or the capacity of the diversion. Additionally the water must be actually applied to a beneficial use within a reasonable period of time, or the right is lost. Bailey.

Although this doctrine usually only applies to municipalities, Bailey adopted it for a public service corporation.

Applying this law to the case at hand, Justice McKinnon concludes that the record supports the water master’s determination that Pondera’s early predecessors did not contemplate irrigation under the Carey Land Act, and that the master did not err in limiting Pondera’s water rights to historical beneficial use. Similarly, the master did not err in delineating a place of use for Pondera that is approximately 85,000 acres, reflecting the share certificates’ acreage irrigated prior to 1973.

“The Court today allows an appropriator to claim an appropriation to irrigate 72,000 acres per year and permits the appropriator to irrigate a 377,000 acre area.” ¶ 131. “Worse yet, the Court holds that for those appropriators, who are engaged in the business of selling water, beneficial use does not require actual use, but instead is the availability of water for sale.” Id.