East Jordan Irrigation Co. v. Morgan

860 P.2d 310, 218 Utah Adv. Rep. 62, 1993 Utah LEXIS 108, 1993 WL 300942

• Court: Utah Supreme Court
• Decided: August 5, 1993
• Docket: 920125
• Status: Published

Opinions

HALL, Chief Justice:

Plaintiff East Jordan Irrigation Company (“East Jordan”) appeals from a grant of summary judgment upholding the state engineer’s decision allowing defendant Pay-son City Corporation (“Payson”), a shareholder in East Jordan, to change the point of diversion of a portion of East Jordan’s water without the company’s consent. We reverse.

East Jordan is a nonprofit mutual water corporation¹ owning legal title to certain water rights in Utah Lake and the Jordan River. The corporation diverts water from the river and the lake into a canal and delivers it to its 650 shareholders to be used primarily for irrigation in Salt Lake County. Each of the 10,000 shares entitles the shareholder to receive a pro rata share of the company’s water through the canal.

Payson bought 38.5 shares of East Jordan’s stock (representing 186.34 acre-feet of water) in 1987. Soon after, it filed an application with the state engineer to change the point of diversion of the water to a city-owned well that draws water from a basin flowing into Utah Lake. Payson sought to use this water for year-round municipal purpose's.

East Jordan, Salt Lake City Corporation, and the Provo River Water Users’ Association protested the proposed change.² They argued, inter alia, that (1) the change application should have been filed by East Jordan as owner of the water right, and (2) the proposed change would impair their vested rights to water in Utah Lake. The state engineer held two informal hearings and approved the change.³ He concluded that Payson had a vested water right by virtue of its ownership of East Jordan stock and therefore could file a change application in its own name. The engineer considered a number of factors, including the amount of water consumed by irrigation, the amount of water that would be returned to Utah Lake from municipal use, and the seasonal variation in water use. He then ordered that Payson be allowed to divert 144 acre-feet between April 15 and October 31 and 38 acre-feet the rest of the year and that East Jordan reduce the diversion into its canal by 186.34 acre-feet per year. Finally, the order required that Payson install a meter on its diversion well to be available for inspection by East Jordan and that Pay-son remain liable for assessments and “any other obligations it may incur as a shareholder in the Company.”

East Jordan brought this action in the fourth district court, seeking to overturn the engineer's decision. The parties filed cross-motions for summary judgment on a stipulated statement of facts on the issues of (1) whether Payson as a shareholder in the corporation had the legal right to file a change application in its own name without consent of East Jordan, and (2) whether the state engineer had jurisdiction to consider such an application. The trial court denied East Jordan’s motion, granted Payson’s cross-motion, and subsequently entered judgment in favor of Payson.⁴ East Jordan appeals from that judgment.

On appeal, East Jordan argues that the trial court erred in concluding (1) that in the absence of a specific restriction in the articles of incorporation or bylaws, a shareholder in a mutual water corporation has the legal right to file a change application in its own name even where the company opposes the change, and (2) that the state engineer has jurisdiction to approve the application. Its primary argument is that since the corporation is the legal owner of the water rights, only the corporation may • change the point of diversion. Allowing shareholders to file change applications in their own names ignores the corporate structure and would render these corporations unmanageable.

East Jordan also argues that its articles of incorporation and company policies constitute a “specific restriction” preventing a shareholder from filing a change application without its consent. Moreover, it asserts that the change in fact impairs the vested rights of the company and its other shareholders, and that the state engineer’s ruling in effect wrongfully partitions the company’s title to its water rights. Finally, East Jordan contends that the state engineer lacks jurisdiction to approve a change application in such a situation because he fulfills an administrative function and lacks the authority and training to adjudicate the legal rights of the parties.

Payson responds that mutual water companies are fundamentally different from other types of corporations, that shareholders in such corporations have direct interests in the water rights held by the corporation, and that among these rights is the right to change the place of diversion. Payson contends that while East Jordan may have legal title to the water rights, the shareholders have equitable title. Payson also disputes East Jordan’s other claims.

We first state the standard of review. This matter arose in the district court under Utah Code Ann. §§ 73-3-14 (1989) and 63-46b-15 (1989) as a de novo review of the state engineer’s decisions approving Payson’s change application. In determining whether the district court properly granted summary judgment as a matter of law, this court gives no deference to the trial court’s legal conclusions and reviews those conclusions for correctness.⁵

We first address the issue of whether Payson has the legal right to file a change application in its own name without the consent of East Jordan. We conclude that Payson, as a shareholder in a mutual water corporation, has no such right. We base this decision on the statutory scheme governing the appropriation of public waters, the principles of corporate law bearing on the function and power of boards of directors to manage corporate affairs in the interest of shareholders as a whole, and the dictates of sound public policy.

The right to change a point of diversion, place, or purpose of water is governed by Utah Code Ann. § 73-3-3(2) (1989), which provides:

(a) Any person entitled to the use of water may make:

(i) permanent or temporary changes in the place of diversion;

(ii) permanent or temporary changes in the place of use; and

(iii) permanent or temporary changes in the purpose of use for which the water was originally appropriated.

(b) No change may be made if it impairs any vested right without just compensation.

This case ultimately turns on whether a shareholder in a mutual water corporation is “a person entitled to the use of water” under the statute. Payson narrowly focuses on the language of this section to support its position that it has the right to change its point of diversion over East Jordan’s objection. However, section 73-3-3(2)(a) must be read in light of the entire statutory scheme. Payson fails to consider whether it is “entitled to the use of water” in the same manner proposed by a change application.

Utah Code Ann. § 73-3-1 directs how one becomes legally “entitled” to the use of water:

Rights to the use of unappropriated waters of this state may be acquired only as provided in this title. No appropriation of water may be made and no rights to the use thereof initiated and no notice of intent to appropriate shall be recognized except application for such appropriation first be made to the state engineer in the manner hereinafter provided, and not otherwise.

(Emphasis added.)

Rights to the use of water may be obtained by two methods under Utah’s appropriation scheme. The first is commonly known as a diligence claim. Prior to 1903, the law allowed a person to appropriate public water by merely turning or diverting water from its natural channel and putting it to beneficial use.⁶ This method of appropriation has been preserved by statute. Utah Code Ann. § 73-5-13 recognizes diligence rights to the use of water not represented by a certificate of appropriation issued by the state engineer.

As of March 12, 1903,⁷ the waters of this state were recognized to be the property of the public, and a procedure was formalized for the acquisition of rights to the use thereof in Utah Code Ann. § 73-3-1. Under this method of appropriation, Utah Code Ann. § 73-3-2 requires any person seeking to appropriate water to do so by written application to the state engineer. The application must set forth the name of the person, corporation, or association making the application, the nature of the proposed use, the quantity thereof, and the source from which the water is to be diverted, together with all other pertinent information. Additionally, Utah Code Ann. § 73-3-3(5)(a) provides that a change in point of diversion, place, or use can be accomplished only upon application and approval of the state engineer following the same procedures governing applications to appropriate water.

Payson has not filed an application to become an appropriator of public waters. To the contrary, title to company water rights was judicially confirmed in East Jordan under the Morse and Booth Decrees.⁸ Payson’s ownership of shares in East Jordan does not afford it a right conferred by the state to “the use of water” as contemplated by section 73-3-3(2). It necessarily follows that any change in point of diversion can be initiated only by East Jordan itself since it alone owns the right as an appropriator to the use of public waters.⁹ Therefore, Payson does not have standing before the state engineer to seek a change in the point of diversion.

Payson claims to be an “equitable owner” of its shares of East Jordan’s water rights. However, its equitable ownership remains subject to the general rule governing corporations that directors, rather than shareholders, control the affairs of the corporation. East Jordan was organized under the territorial laws in 1878 and currently is governed by the Utah Nonprofit Corporation and Co-operative Association Act.¹⁰ Section 16-6-34 provides that “the affairs of a nonprofit corporation shall be managed by a governing board.” ¹¹ Article VII of East Jordan’s articles of incorporation ¹² provides, “The Board of Directors shall have the general supervision, management, direction & control of all the business and affairs of the company, of whatever kind.” A change in point of diversion certainly implicates management of the water supply as a whole. It necessarily follows that any change in the point of diversion of water from a source other than East Jordan’s canal can be initiated only by East Jordan itself since it alone is empowered with the right to manage and control the affairs of the company.

. What Payson did gain by its purchase of East Jordan shares is the right to receive a proportionate share of the water distributed by East Jordan out of its system in the same manner as all other shareholders.¹³ East Jordan’s articles of incorporation, as amended, set forth the objective, powers, and purposes of the water company. Article III thereof reads in pertinent part:

The pursuit or business of this association is, and shall be the construction, operation and maintenance of a canal— said canal to extend from a point in the Jordan River ... to ... Salt Lake city, ... the purpose of said canal being to direct a portion of the waters of the said Jordan River, to be appropriated, used, and disposed of, sold and distributed by said association, for agricultural, manufacturing, domestic or ornamental purposes ... and to do and perform such work and acts, and use such mechanical or other means and appliances as may be necessary to maintain or increase the flow of water in the said Jordan River.

Payson’s rights as a shareholder and its relationship with East Jordan are dependent on and limited by the scope of East Jordan’s articles of incorporation, which Payson agreed to by virtue of its purchase of shares. Here, Payson is seeking a point of diversion, place of use, and nature of use that are substantially different from those of the .other shareholders and those anticipated in East Jordan’s articles of incorporation. Payson purports to divert its share of the water before it enters East Jordan’s delivery system, to transport the water outside of East Jordan’s service, and to use it for municipal purposes.

The agreement between East Jordan and its shareholders imposes the duty on the association to manage its affairs in the interest of its shareholders as a whole.¹⁴ That duty is not to be infringed upon by the state engineer. Rather, any dispute that should arise out of the agreement is to be resolved by a court of competent jurisdiction. Under these circumstances, East Jordan clearly has an interest in reviewing the application to determine whether it is in the best interests of the company and its shareholders.

Three other states have addressed this issue. Payson argues that we should follow the Colorado rule set forth in Wads-worth Ditch Co. v. Brown.15 The court in Wadsworth essentially held that a shareholder has the right to change a point of diversion over the objection of the company. Wadsworth involved a shareholder who could no longer beneficially use his water at the original diversion point and therefore petitioned the water court to change the diversion point. The trial court approved the change provided that Brown’s stock remained liable for assessment to maintain the company ditch. The Colorado Supreme Court concluded that the right to change the diversion point was a property right belonging to the stockholder in a mutual ditch company.¹⁶

Unlike Utah law, under the Colorado appropriation scheme, the change process is commenced in a court of competent jurisdiction rather than with an application to an administrative agency.¹⁷ A court is better suited to construe a company’s articles of incorporation and bylaws than the state engineer, who merely performs an administrative function. Therefore, the Wads-worth case is inapposite.

Further, we are more persuaded by California authority that has established through ease law what Utah has established by statute. In Consolidated People’s Ditch Co. v. Foothill Ditch Co.,18 the California court held that a shareholder does not have the right to change its point of diversion over the objection of the company. In Consolidated People’s Ditch Co., the defendant bought stock in a number of different mutual water corporations along a river and started to enlarge a canal upstream to divert the water represented by this stock. ; The trial court enjoined construction of the canal, and the supreme court affirmed. The court noted that shareholders in mutual water corporations are entitled to proportionate distribution of the water of the corporation, but no more:

Such stockholders are in that sense and to that extent, but to none other, owners of the water and water rights which the corporation possesses, and over the distribution of which it exercises under general laws and under its particular bylaws full and exclusive control.¹⁹

The court also noted that the term “mutual water company” had no legal meaning that would differentiate such companies from other corporations administering property for the benefit of their stockholders.²⁰ The court stated that “it would seem to be too clear for argument that neither one nor any number of such stockholders would or could possess the legal right to take or to receive the amount of water to which [they] may be entitled by another manner or means than those supplied by the corporation itself.”²¹ To recognize such a right

would necessarily be to admit the possession of similar rights in each and every stockholder in each of said corporations to go and do likewise, and it is too plain for argument that such an admission would result in a state of inextricable discord and confusion among the owners of water rights of various sorts [all over California]. The creation or threatened danger of such a consequence would of itself supply a sufficient reason for the use of the injunctive processes of the court in the way of its prevention.²²

Payson argues that California water law is a “mixed bag” of appropriative and riparian concepts and that Utah has always followed the “Colorado doctrine” of appropriation. Both of these arguments may be correct, but they are irrelevant. The cases supporting both the Colorado and the California positions are completely unrelated to whether the underlying water rights were appropriative or riparian.

More important, we are persuaded by the reasoning of the California court in Consolidated People’s Ditch Co. that allowing the shareholder this right would ultimately lead to “a state of inextricable discord and confusion among the owners of water rights.”²³ This would certainly apply in this situation, where East Jordan has 650 shareholders. We fear the havoc that would invariably ensue if every shareholder in the corporation were to attempt to govern the corporate affairs as they relate to the appropriation of waters. Indeed, water companies could well be destroyed by complete changes of use of water. In addition, some rivers in Utah, for example, the Sevier River, are extremely long. It would be impossible to manage the appropriation if each individual water user were allowed to take water from anywhere along the river.

It should be observed that our ruling today does not leave the shareholder without a remedy. The rights that Payson or any other shareholder has to the use of water and the points of service within East Jordan’s system can be readily determined by seeking appropriate relief in the court system. Payson’s proper course of action in this matter was to bring its request for change application to the East Jordan board of directors. In the event that its request for change was unreasonably refused after consideration by the board, the shareholder could have sought judicial relief wherein Payson’s arguments concerning the appropriateness of board policy regarding change applications and the regulation of the shareholder’s rights could have been fully explored.²⁴

We need not reach East Jordan’s contention that the state engineer lacked jurisdiction to approve a shareholder’s change application because we hold that the shareholder in a mutual water corporation does not have standing to change its point of diversion absent the consent of the corporation. We reverse.

HOWE, Associate C.J., and ZIMMERMAN, J., concur. STEWART, Justice, concurs in the result.

1 . A mutual water corporation is a nonprofit corporation formed to supply water only to its shareholders. 3 Clesson S. Kinney, Kinney on the Law of Irrigation and Water Rights, § 1480, at 2659 (2d ed. 1912) [hereinafter Kinney]. Water is delivered to shareholders in proportion to the amount of stock owned by each. Id. § 1483, at 2665. Water shortages are shared proportionally by the shareholders, and operating costs are paid by assessment on the stock. See generally Jacobucci v. District Court, 189 Colo. 380, 541 P.2d 667, 670-72 (1975); Kinney, §§ 1464-89. Such a corporation is distinct from a "carrier ditch company," which exists to furnish water for profit or hire to persons who may or may not be shareholders. We use the terms "mutual water corporation” and "mutual water company” interchangeably.

2 .Salt Lake City Corporation owns 2,067 shares of stock in East Jordan (20.67%). The Provo River Water Users’ Association apparently does not own any stock, but it alleges that it owns rights in the Provo River that depend in part on an exchange for waters stored in Utah Lake. See generally Provo River Water Users' Ass’n v. Morgan, 857 P.2d 927, 929-930 (1993). These protestants are also plaintiffs and appellants in this action, but for simplicity we refer only to East Jordan.

3 . The engineer issued a decision after the first hearing, in which he approved a diversion of 89.82 acre-feet. Both sides petitioned for reconsideration, and the engineer held another hearing, resulting in the final order discussed in the text.

4 . East Jordan’s complaint also alleged that the proposed change would impair the vested water rights of the company. Salt Lake City Corporation, and the Provo River Water Users’ Association. But after the trial court granted Payson’s cross-motion, plaintiffs amended the complaint and deleted those allegations so that the court’s ruling disposed of all issues in the case.

5 . Bonham v. Morgan, 788 P.2d 497, 499 (Utah 1989) (per curiam).

6 . Bishop v. Duck Creek Irr. Co., 121 Utah 290, 293, 241 P.2d 162, 164 (1952).

7 . See 1903 Utah Laws ch. 100, § 47.

8 . See Salt Lake City v. James A. Gardner, Fourth District Court, Utah County, June 5, 1909 ("Booth Decree"); Salt Lake City v. Salt Lake City Water & Elec. Power Co., Third District Court, Salt Lake County, Civil Nos. 2861, 3449, 3459, July 15, 1901 ("Morse Decree”).

9 . We also note that water rights are transferred by deed in substantially the same manner as real estate. In contrast, a shareholder’s interest in a water company is personal property and is transferred as such. Utah Code Ann. § 73-1-10 (1989).

10 . Utah Code Ann. §§ 16-6-18 to-112. Section 16-6-20(l)(c) provides that the act applies to “mutual irrigation, canal, ditch, reservoir and water companies and water users’ associations organized and existing under the laws of this state on the effective date of this act.”

11 . See Anderson v. Grantsville N. Willow Irr. Co., 51 Utah 137, 141-42, 169 P. 168, 169 (1917) (noting that where stockholders directed president of mutual water corporation to issue certain stock but directors refused to approve it, issuance of stock was void).

12 . Although we refer to the "articles of incorporation,” we note that the documents submitted by the parties bear the label "Articles of Association.” Because the documents are indeed articles of incorporation, we refer to them as such.

13 . See Park v. Alta Ditch & Canal Co., 23 Utah 2d 86, 90, 458 P.2d 625, 627 (1969).

14 . See Summit Range & Livestock Co. v. Rees, 1 Utah 2d 195, 197, 265 P.2d 381, 382 (1953).

15 . 39 Colo. 57, 88 P. 1060 (Colo.1907).

16 . Id. at 1061. We note that Idaho followed Colorado for some time but changed its position by statute in 1943 to provide explicitly what the Utah statute provides for implicitly, namely, that a shareholder may not change its point of diversion without the consent of the corporation.

17 .See Colo.Rev.Stat. §§ 37-92-201 to -307.

18 . 205 Cal. 54, 269 P. 915 (1928).

19 . Id. 269 P. at 920 (emphasis added).

20 . Id.

21 .Id.

22 . Id. at 921.

²³

24 . See Syrett v. Tropic & E. Fork Irr. Co., 97 Utah 56, 89 P.2d 474 (1939); Baird v. Upper Canal Irr. Co., 70 Utah 57, 257 P. 1060 (1927).