First Security Corp. v. Belle Ranch, LLC

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

         The judgment of the district court is affirmed.

          McHugh Bromley, PLLC, Boise, for appellants First Security Corporation and Richard D. Fosbury. Christopher M. Bromley argued

          Barker, Rosholt & Simpson, Boise, for respondents Belle Ranch, LLC, Justin Flood Stevenson, and Elizabeth Bret Stevenson. Albert P. Barker argued.

          Ray Quinney & Nebeker, Salt Lake City, UT, for respondent Rabo Agrifinance, Inc. Michael D. Mayfield argued.

          Lukins & Annis, Coeur d'Alene, for respondents Mountain West Bank and GBCI.

          STEGNER, JUSTICE

         This is a consolidated appeal involving contested water rights. The cases involve three separate actions: one brought by First Security Corporation and two others brought by Richard Fosbury to quiet title to their purported ownership of irrigation water rights to land owned by Belle Ranch, LLC.^[1] It is agreed by all parties that partial decrees for the water rights were issued in the Snake River Basin Adjudication (SRBA) in the name of South County Estates, LLC. As South County's successors in interest, First Security and Fosbury argue that their interests in the water rights are senior and therefore superior to the interest of Belle Ranch, LLC. Notwithstanding these claims, the district court quieted title to the water rights in question to Belle Ranch, LLC. First Security and Fosbury appeal. For the reasons set out, we affirm.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         The facts of this appeal are lengthy and complex. The opinion will initially outline the chain of title for all of the parties in this appeal. Next, it will detail the proceedings and documents filed with the Idaho Department of Water Resources. Finally, it will discuss the course of proceedings in the case.

         A. The Belle Ranch property.

         The real property to which the water rights in dispute are appurtenant (the Belle Ranch property) is located in Blaine County, Idaho. The property consists of 289 acres and has appurtenant water rights to irrigate those acres.^[2] These water rights are discussed as fractions of the entire 289 acres. For example, 1/289^ths of the water right would correspond to the irrigation rights associated with one acre out of the total 289 acres of the Belle Ranch property.

         B. South County, Mountain West Bank, GBCI, and Belle Ranch, LLC.

         South County Estates, LLC, was formed in 2003 and administratively dissolved in 2011. John Scherer was the managing member of the LLC, and Fosbury and Charles Holt were members of the LLC. In 2003, South County acquired what is now the Belle Ranch property along with the appurtenant water rights. It then filed a notice of change in water right ownership with the Department in the name of South County. On October 14, 2005, South County executed a mortgage (First Mortgage) encumbering the Belle Ranch property and appurtenant water rights. Mountain West Bank (MWB) was the holder of the mortgages.^[3] That mortgage was subsequently modified in December 2006. Later, on June 13, 2008, South County executed another mortgage (Second Mortgage) with MWB encumbering the Belle Ranch property and the appurtenant water rights. On October 17, 2008, South County executed another mortgage (Third Mortgage), also with MWB, further encumbering the Belle Ranch property and its appurtenant water rights.

         In 2010, South County defaulted on its mortgages with MWB. South County executed a deed in lieu of foreclosure to MWB on June 17, 2010. The deed in lieu provided that the conveyance included all appurtenances, including "all water, water rights, watercourses and ditch rights (including stock in utilities with ditch or Irrigation rights)[.]" In conjunction with the deed in lieu, South County executed an Estoppel Certificate, which likewise stated that all water rights were included in the conveyance.

         On the same day, MWB transferred the Belle Ranch property to GBCI Other Real Estate, LLC (GBCI).^[4] GBCI executed a special warranty deed and MWB executed a quitclaim deed, conveying the Belle Ranch property and its appurtenant water rights to Belle Ranch, LLC. Belle Ranch, LLC, used loan proceeds from Rabo Agrifinance, Inc. (Rabo), to purchase the Belle Ranch property.

         Ever since the conveyance to Belle Ranch, LLC, the LLC has been the owner of record of the Belle Ranch property, paid the assessments on the water rights, and diverted and continuously put the water to beneficial use.

         C. South County's successors in interest.

         During the pendency of the SRBA, South County made seven conveyances of fractional portions of water rights to its managers or members and their affiliated entities, accounts, or holdings. Those conveyances are discussed below.

         1. Big Stick, LLC.

         On December 7, 2007, South County executed a quitclaim deed to Big Stick, LLC, conveying 2.8/289^ths of the water rights. Scherer was the managing member of both Big Stick and South County. On October 14, 2009, a Partial Release of Lien was executed from MWB to Big Stick. Big Stick later assigned its interest to Fosbury.^[5]

         2. Charles Holt and his Individual Retirement Accounts (IRAs).

         South County executed three separate quitclaim deeds in which it conveyed a total of 3/289^ths of the appurtenant water rights to two different Holt IRAs (Holt IRA #H01NH and Holt IRA #H01NV). These conveyances were dated April 28, 2008, August 8, 2008, and April 8, 2009. However, the deeds were not recorded until March 1, 2010.^[6] On November 28, 2016, the Holt IRAs conveyed 3/289^ths of the water rights via quitclaim deeds to Charles Holt. Holt then assigned his interest to Fosbury.

         3. Richard Fosbury and his IRA.

         On March 17, 2008, South County executed a quitclaim deed conveying 1/289^ths of the water rights to Fosbury's IRA. The deed was not recorded until March 1, 2010. On October 14, 2009, a Partial Release of Lien for the First Mortgage was executed by MWB's representative to the Fosbury IRA. There was no mention of either the Second or Third Mortgages being released by MWB. On September 28, 2008, South County executed another quitclaim deed to the Fosbury IRA conveying another 1/289^ths of the water rights. This conveyance was also recorded on March 1, 2010. MWB also executed a partial release of that additional conveyance. Again, the release was only in relation to the First Mortgage and made no mention of either the Second or Third Mortgages. After these transfers, the Fosbury IRA purportedly owned 2/289^ths of the water rights.

         On November 11, 2016, the Fosbury IRA conveyed to Richard Fosbury 2/289^ths of the water rights via quitclaim deeds. The deeds expressly conveyed the fractional water rights previously conveyed to the Fosbury IRA. After Big Stick and Holt assigned their interests to Fosbury, Fosbury purportedly owned 7.8/289^ths of the water rights.

         4. First Security Corporation.

         On June 25, 2009, South County executed and recorded a quitclaim deed to Scherer and Holt conveying 7.5/289^ths of the total water rights. A Partial Release of Lien was issued by MWB on June 25, 2009. On June 10, 2009, fifteen days before the water right was conveyed to them, Scherer and Holt executed a mortgage in favor of IIB for 7.5/289^ths interest in the total water rights.^[7] The partial release that was previously issued by MWB was recorded by IIB on June 25, 2009.^[8]

         After defaulting on their loan with IIB, Scherer and Holt executed a Non-Merger Deed in Lieu of Foreclosure conveying ownership of 7.5/289^ths of the water rights to IIB on September 2, 2014. On October 15, 2014, IIB executed a warranty deed conveying the same 7.5/289^ths of the water rights to First Security.

         5. Summary of the water rights at the time of this appeal.

         After all of the conveyances, the claimed water rights were as follows: Fosbury purportedly owned 7.8/289^ths of the total water rights. First Security purportedly owned 7.5/289^ths of the total water rights. Fosbury and First Security concede that Belle Ranch, LLC, owns no less than 273.7/289^ths of the total water rights. As a result, only 15.3/289^ths of the total water rights are at issue in these appeals.

         D. The SRBA and the Department's filings and proceedings.

         1. Notices of ownership and Partial and Final Decrees by the SRBA court.

         In 1988, G. Chapman Petersen filed notices of claims in the SRBA for the five water rights appurtenant to the Belle Ranch property. After the Belle Ranch property was conveyed to South County, South County filed a change of ownership in the water rights appurtenant to the property with the Department, changing the name of the owner of record to South County.

         In early 2007, the Director of the Department issued recommendations in the SRBA, recommending that the water rights be decreed authorizing 289 acres of irrigation for beneficial use on the Belle Ranch property. South County was listed as the claimant of those water rights. On June 28, 2010, the Special Master of the SRBA issued a Special Master's Report and Recommendation, recommending that the water rights be decreed to South County. On July 9, 2010, an amended report recommended the same finding.

         On August 31, 2010, the district court in the SRBA issued partial decrees for the water rights, decreeing all five of the water rights in the name of South County. The partial decrees were served on South County and included a Rule 54(b) certificate, meaning they were final adjudications and consequently appealable decisions. Despite the decrees being issued after the conveyances to Scherer, Holt, and Fosbury, the partial decrees were never challenged by them.

         After acquiring the property in June of 2010, MWB filed a notice of change in water right ownership with the Department on July 27, 2011. On September 13, 2011, the Department acknowledged the change in ownership and modified its records to note MWB as the owner of record. On February 28, 2012, Belle Ranch, LLC, submitted a notice of change in water right ownership with the Department to reflect that Belle Ranch, LLC, now owned ...