Jon Schutz and David Wright
In Sanpete America, LLC v. Willardsen, 2011 UT 48 (issued August 16, 2011), the Utah Supreme Court defined when water shares may be appurtenant to land and pass with land conveyances.
Sanpete involved 110 acres of farmland (the “Land”) owned by Willardsen. In June 1999, Sanpete Americas and Willardsen executed an option contract for the Land and water rights. Sanpete America was made up of four individuals, including Robert Clyde and Paul Hamilton. Mr. Neeley, the escrow agent and Willardsen’s attorney, stated that he did not know anything about water rights and did not guarantee the conveyance of Willardsen’s water rights. Mr. Hamilton agreed to take care of the legal description of the water rights to be conveyed and of determining what water rights Willardsen owned. Paul Hamilton investigated the water right and concluded that water right 65-920 (WR920) attached to the land and was sufficient to irrigate 200 acres, for a total of 600 acre-feet (af) of water. Sanpete America believed the water was worth about $3,000 to $4,000 an af, or $1.8 to $2.4 million. Sanpete America intended to purchase the Land and WR920 and sell 100 af of water to pay for the $328,350 purchase price of the Land. In researching WR920, Hamilton discovered a reference to 80 shares of stock in South Fork of Ditch 28 Pumping Company (South Fork).
Sanpete and Willardsen executed a Land Purchase Agreement for 109.45 acres, WR920 for a flow of 1.1783 cfs and irrigation of 200 acres, a culinary water well, an irrigation pond, and all other water that was part of the property. Willardsen executed a warranty deed on August 7, 1999, but did not immediately deliver it to Sanpete because it lacked a description of water right 65-918 (WR918) for a smaller culinary well on the Land. Hamilton provided Neeley’s office with a description of WR918, but instead of adding the description of WR918, Neeley’s office replaced the description of WR920 with the description of WR918 . Neeley’s office recorded the warranty deed with only a description of WR918. The warranty deed included a transfer of all appurtenant water. Later, Neeley’s office prepared a deed titled a Warranty Deed, but the language of the deed quitclaimed Willardsen’s interest in WR920 to Sanpete . Neeley sent of copy of this deed to the Division of Water Rights to update its ownership records.
The Division responded by saying WR920 was owned by South Fork, which had issued shares to various individuals. The Division did recognize Sanpete as the owner of sufficient water to irrigate 68.46 acres. South Fork had issued 144 shares. Willardsen’s predecessor in interest owned 80 shares, which he transferred to Willardsen along with the Land by deed. The only other shareholder was Ms. Graser, who held 37 shares. South Fork had functioned as a corporation for decades.
Sanpete borrowed the funds to pay Willardsen and sold portions of the land and WR920 to service that loan.
Sanpete sued Graser, Willardsen, and Neeley. It sought to quiet title against Graser. It sued Willardsen for misrepresentations, breach of the Land Purchase Agreement, and unjust enrichment. It sued Neeley for breach of the escrow contract, professional negligence, and breach of fiduciary duties as escrow agent for not following the escrow instructions. Sanpete reached a stipulated settlement with Graser. This blog post will address only the claims against Willardsen.
Trial Court Decisions
Judge Mower of the trial court dismissed Sanpete’s claims. He ruled that WR920 did not pass by appurtenance. He found that Hamilton had undertaken the responsibility to describe the water rights and Willardsen had relied on Hamilton’s efforts. Judge Mower did rule that Willardsen breached the Land Purchase Agreement by not conveying WR920 by warranty deed, but determined that this did not harm Sanpete.
All the parties filed motions to amend Judge Mower’s findings and conclusions of law. Judge Mower retired and Judge Bagley assumed the case. Judge Bagley granted Willardsen and Neeley’s motion and denied Sanpete’s motion. Judge Bagley determined, among other things, that WR920 was appurtenant to the Land, WR920 was conveyed by appurtenance in the August 7, 1999 warranty deed, Willardsen conveyed clear title on August 7, 1999, Willardsen did not breach the Land Purchase Contract, and Sanpete was not entitled to damages or attorney fees.
Utah Supreme Court Decision
The Supreme Court focused on two issues regarding WR920: (1) whether Willardsen conveyed his portion of WR920 under the warranty deed and, if so, (2) whether Willardsen breached his covenant of warranty by not defending Sanpete ’s title to WR920 in its suit against Ms. Graser. The Court held that Willardsen conveyed his portion of WR920 under the warranty deed and that he did not breach his covenant of warranty. In short, it determined that Sanpete received all of Willardsen’s water rights for the Land and was not harmed, even if it was less water than what it had mistakenly calculated. The Court affirmed on all issues.
The Court held that WR920 was appurtenant to the Land. The Court relied on Utah Code section 73-3-11, which states that a right to use water based on shares is not appurtenant to land. It also stated that this statute creates a rebuttable presumption that a water right represented by shares of stock does not automatically pass to a grantee as an appurtenance. This presumption may be rebutted with clear and convincing evidence that the water right is appurtenant and that the grantor intended the water right to transfer with the land, even though it is not mentioned in the deed. Therefore, the issue for the Court was whether WR920 was appurtenant to the Land and whether Willardsen intended that WR920 be conveyed by the warranty deed.
The Court articulated a test for determining when shares are appurtenant to land: (1) whether the use of the water right on the land greatly increased the land’s value; (2) the length of use upon the land, particularly, the length of use beyond the grantor’s ownership; and (3) the extent of use upon the land. The Court determined that WR920 met each of these criteria and was appurtenant to the Land because (1) the water right had been used on the Land for decades: the well for WR920 was drilled in 1934, and Willardsen acquired the water right in 1967 and used it continually since that time; (2) WR920 was used on all of Willardsen’s 109 acres; and (3) it was implicit that the value of the Land was very little without WR920. The Court determined that Willardsen intended to transfer WR920 Sanpete because both parties conceded this point. Also, the documents at issue, the warranty deed and quit claim deed, show the parties’ intention that WR920 be transferred to Sanpete . Combining its determination that WR920 was appurtenant to the Land and that Willardsen intended to transfer WR920 to Sanpete , the Court held there was clear and convincing evidence to rebut the presumption that WR920 was not appurtenant to the Land.
The Court found that the exceptions to the conveyance of water rights by appurtenance found at Utah Code section 73-1-11 were not applicable. The Court also found that Willardsen did not breach the covenant of warranty.
Sanpete is significant because it establishes that one may rebut the presumption that a water right represented by shares of stock does not automatically pass to a grantee as an appurtenance. The presumption is rebutted with clear and convincing evidence that the water right is appurtenant and the grantor intended the water right to transfer with the land. Sanpete also sets forth the criteria for determining when a water right represented by shares is appurtenant to land.