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Eagle Creek Irrigation Company, Inc. v. A.C. & C.E. Investments, Inc.

Supreme Court of Idaho

August 27, 2019

EAGLE CREEK IRRIGATION COMPANY, INC., an Idaho corporation, Plaintiff-Counterdefendant-Appellant,
v.
A.C. & C.E. INVESTMENTS, INC., a California corporation, Defendant-Respondent, and LEE P. ENRIGHT and NANCY K. ENRIGHT, Husband and Wife, Defendants.

          Appeal from the District Court of the Fifth Judicial District, State of Idaho, Blaine County. Jonathan P. Brody, District Judge.

         District Court Judgment, vacated in part.

          Lawson, Laski Clark & Pogue, PLLC, Ketchum, for appellant.

          Edward A. Lawson argued.

          McHugh Bromley, PLLC, and Cosho Humphrey, LLP, Boise, for respondent.

          Christopher M. Bromley argued.

          BURDICK, CHIEF JUSTICE

         Eagle Creek Irrigation Company ("Eagle Creek") appeals the Blaine County District Court's award of summary judgment in favor of A.C. & C.E. Investments, Inc. ("AC&CE Investments"). The dispute centers on 15 shares of Eagle Creek stock which authorize the holder to divert 30 cfs of water (or 15 miner's inches) of Eagle Creek's water right. AC&CE Investments purchased 15 acres ("the Property") located within Eagle Creek's boundaries. The prior property owners also owned 15 shares in Eagle Creek stock. The question presented on appeal is whether the 15 shares passed as an appurtenance to the Property. The district court ruled that AC&CE Investments acquired 15 shares in Eagle Creek when it acquired title to the Property because the shares passed as an appurtenance to the Property. Eagle Creek timely appeals.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         In 2011, the Snake River Basin Adjudication ("SRBA") court declared Eagle Creek the owner of Water Right No. 37-00863E (the "SRBA Water Right"). The SRBA Water Right granted Eagle Creek the right to divert 4.56 cfs (228 miner's inches) of water and carried a priority date of 1902. Eagle Creek also received a water right for .04 cfs for aesthetic and recreation purposes under a separate water right (Water Right No. 37-00863F) for a total of 4.6 cfs (230 inches). The SRBA Water Right declares Eagle Creek's permissible place of use as 143.9 acres within its water-delivery system. Eagle Creek has a serviceable area of 189 acres. This area is informally referred to as "the Eagle Creek subdivision." The subdivision sits in a valley north of Ketchum, Idaho along Highway 75. The Property is the most northeastern lot in the subdivision.

         The SRBA Water Right dates to a 1923 Blaine County District Court decision (the "Original Water Right"). The Original Water Right authorized the diversion of 4.6 cfs of water (230 miner's inches) and applied to roughly the same area as the Eagle Creek subdivision. Since the Original Water Right was first decreed, the property in the area has been divided and has changed hands numerous times.

         Before Eagle Creek formed in 1973, John and Gladys Feldhusen owned the Original Water Right, the Property, and other property in the area. The Property was subdivided into three five-acre lots, referred to by separate deeds as Lot 17, Lot 18, and Lot 19. In 1970, the Feldhusens conveyed those lots by separate deeds, "with their appurtenances," to William and Patricia Woolway.

         In 1973, Eagle Creek was formed as a nonprofit mutual irrigation corporation to hold water rights, in trust, for the benefit of its shareholders. As the corpus of its trust, Eagle Creek purchased 90% of the Original Water Right from the Feldhusens. This amounted to 207 miner's inches of water (4.14 of 4.6 cfs, or 207 of 230 miner's inches). Eagle Creek's articles of incorporation ("Articles") declared its purpose as constructing, maintaining, and operating a system of water delivery for its shareholders. For admitting shareholders, Eagle Creek stated in both the Articles and Bylaws:

[T]his corporation shall admit as stockholders only such persons, groups of persons, organizations or corporations who own property in the immediate vicinity of the irrigation system and to which property the corporation can make delivery of water for domestic or irrigation purposes under the contemplated distribution system of the corporation.

         Those who met these conditions were "entitled to subscribe to and purchase shares of stock . . . as provided in the corporation's By-Laws." Under the Articles and Bylaws, Eagle Creek would issue either 207 or 230 shares on a one-share-per-irrigable-acre basis.[1] For water rights, the Articles stated:

The corporation will hold all water rights acquired in Trust, and operate the system for the distribution of water primarily for the benefit of the lands to which said water rights are to be appurtenant. The shareholders of the corporation shall be entitled to the appropriate share of the water annually available by virtue of their proportionate stock interest in this corporation.

         Eagle Creek shares could not be transferred without Board approval, which was granted "under such criteria as the By-laws may prescribe." A share could be transferred only by its holder or its holder's legal representative "by the surrender and delivery of the said certificate and assignment of said certificate and the shares of stock represented thereby in writing." Old stock certificates were to be "surrendered and cancelled before new certificates in lieu thereof shall be issued."

         In 1974, Eagle Creek sent "form letters to all prospective and interested buyers." Included among those "interested buyers" were the Woolways. It appears the Woolways acquired some quantity of shares because, in October 1974, the Woolways conveyed the Property to Glenn and Carolyn Olbum by three separate deeds. Two deeds specifically conveyed the properties "together with 5 shares in the Eagle Creek Irrigation Company," but the third was silent on whether Eagle Creek shares were included.

         In 1981, the Olbums conveyed the lots by warranty deed "together with their appurtenances," but the deed made no mention of Eagle Creek shares. A similar conveyance occurred seven years later when the lots were conveyed to Harold and Flora Jonassen "together with their appurtenances," with no mention of Eagle Creek shares.

         Around 1990, with the SRBA looming, the Jonassens hired lawyers to investigate their water rights. The investigation resulted in the Jonassens filing two claims for water rights in the SRBA. Around this time, Lee and Nancy Enright became interested in purchasing the Property. In a letter, the Jonassens's lawyer told the Enrights that a portion of the Original Water Right was "apparently thereafter transferred" to Eagle Creek. The letter further explained that because Eagle Creek had not yet filed a claim in the SRBA, the lawyer had filed claims for the Jonassens. Eagle Creek would eventually file a claim with the SRBA. Later in the same year, the Jonassens conveyed the lots to the Enrights "together with their appurtenances." A year later, the Enrights filed for a change of ownership in the SRBA claim. The filing was accepted.

         In 1991, the Eagle Creek board of directors added a provision to the Bylaws declaring that if a shareholder wished to sell the real property to which Eagle Creek was delivering water, the shareholder must apply for a transfer of shares within sixty days of selling the property. Failure to comply would result in Eagle Creek deeming the stock cancelled and converted to treasury stock. However, if the shareholder sold the property and "provide[d] for an assignment of the stock in a contract or sale agreement with the new purchaser," then Eagle Creek would "consider such reference as an application to transfer the shares of stock previously held by the selling stockholder."

         In 1992, the Enrights entered into an agreement with Eagle Creek to change their point of diversion further upstream subject to Idaho Department of Water Resources approval. At the time, the Enrights owned 15 shares of Eagle Creek stock. Their stock certificates made no specific mention of where the water was to be used, but stated that "each share entitles the owner to receive .02 of a cubic foot of water per second of time per acre or one Miner's inch when available from the waters of Eagle Creek."

         In a memorandum decision approving the Enright's application, the Department wrote that the Enrights sought to change the diversion point for .30 cfs of water (15 miner's inches) "represented by fifteen (15) shares of stock" in Eagle Creek. The Department made the following conclusions regarding ownership of the water right:

6. The water sought in the transfer is represented by shares of stock in ECIC and is a portion of the company's water right.
. . .
8. The only right to divert and use the waters of [the Eagle Creek stream] is vested with and is controlled by [Eagle Creek] which distributes water to its shareholders.
. . .
16. The proposed change has been approved by [Eagle Creek], the holder of the water right and is in the local public interest.

         The Department also commented on questions over the scope of Eagle Creek's water right:

There appears to be conflicting information concerning the total number of shares of capital stock of [Eagle Creek], i.e. 207 shares v. 230 shares. The difference, however, is not of particular significance to the holding in this decision but probably should be cleared up by [Eagle Creek] for its own purposes.

         In 2005, Eagle Creek provided the Enrights with a quitclaim deed so they could "convey any ownership interest [they] may have in the Eagle Creek water right back to the company." Eagle Creek wrote that this was "necessary" because the Department "transferred ownership of a portion of the original water right from the company to [the Enrights] on its records when it approved your water right transfer." Eagle Creek reassured the Enrights, explaining: "You will, of course, continue to rely on your 15 shares of stock in the Company to receive water out of Eagle Creek to irrigate your property." The Enrights obliged and quitclaimed to Eagle Creek "all their right, title and interest in and to Water Right No. 37-863B."

         In 2006, Lee and Nancy Enright executed a deed of trust with the Bank of America. The deed of trust gave the bank a security in the Property "together with . . . all easements, appurtenances, and fixtures now or hereafter a part of the property." A separate deed of trust gave the Bank's trustee the property "together with all . . . appurtenances now or later in any way appertaining to the Property."

         In 2009, in preparation for the foreclosure sale, emails were exchanged between the title company, the auction company, the Enrights, and Eagle Creek's attorney. In an email to the title company, the auction company inquired about the status of water rights on the Property:

There are surface water rights that are to be conveyed with the property. Do these have to be transferred with a separate deed? If so, what type of deed? Or will it be included in the warranty deed transferring the real estate?

         In response, the title company stated that it had spoken with the Department; "[t]he individual water rights for Eagle Creek Subdivision have been disallowed and now are decreed in the name of Eagle Creek Irrigation Company" and "[e]ach owner in the subdivision have [sic] shares in the irrigation company." The auction company then asked the Enrights for information on their shares so they could better advertise them. The Enrights responded: "We have one inch water rights per acre for total of 15 inches (15 shares). The water rights go with the land. (One inch per acre). I have the certificates which document that." The auction company forwarded the Enrights' response to the title company. It told the title company that it would set up the purchase contract to convey the water rights with the deed and then the purchaser could change the Department's records. The title company reached out to Eagle Creek's attorney for confirmation of the Enrights' description of their water rights because the description "didn't jive" with what it had been told. Eagle Creek's attorney replied: ...


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