SUPREME COURT OF ARIZONA
En Banc
MERWYN C. DAVIS, Trustee under ) Arizona Supreme Court
the Merwyn C. Davis Trust dated ) No. CV-08-0163-PR
July 27, 1981, )
) Court of Appeals
Plaintiff/Counter-Defendant/ ) Division One
Appellee, ) No. 1 CA-CV 06-0806
)
and )
) Yavapai County
CHINO GRANDE, L.L.C., ) Superior Court
) No. CV 20040716
Plaintiff/Intervenor/Counter- )
Defendant/Appellee, )
)
v. ) O P I N I O N
)
AGUA SIERRA RESOURCES, L.L.C., a )
Texas limited liability company, )
)
Defendant/Counter-Claimant/ )
Appellant, )
)
and )
)
RED DEER CATTLE, INC., a Texas )
corporation; CJ PARTNERS, a )
Nevada limited partnership; and )
SEIBERT FAMILY LIMITED )
PARTNERSHIP, a Nevada limited )
partnership, )
)
Defendants/Appellants. )
__________________________________)
Appeal from the Superior Court in Yavapai County
The Honorable David L. Mackey, Judge
________________________________________________________________
Opinion of the Court of Appeals, Division One
217 Ariz. 386, 174 P.3d 298 (App. 2008)
VACATED AND REMANDED
________________________________________________________________
ROBERT S. LYNCH & ASSOCIATES Phoenix
By Robert S. Lynch
And
ANNA YOUNG PLLC Prescott
By Anna C. Young
Attorneys for Merwyn C. Davis
LEWIS AND ROCA LLP Phoenix
By Dale Danneman
Michael F. McNulty
Robert G. Schaffer
Attorneys for Chino Grande, L.L.C.
GALLAGHER & KENNEDY, P.A. Phoenix
By Michael R. Ross
Cober C. Plucker
And
TOM GALBRAITH ATTORNEY AT LAW Phoenix
By Tom Galbraith
Attorneys for Agua Sierra Resources, L.L.C, Red Deer
Cattle, Inc., CJ Partners, and Seibert Family Limited
Partnership
MAGUIRE & PEARCE, PLLC Phoenix
By Michael J. Pearce
Rita P. Maguire
Attorneys for Amicus Curiae Town of Prescott Valley
ARIZONA DEPARTMENT OF WATER RESOURCES Phoenix
By W. Patrick Schiffer, Chief Counsel
Kenneth C. Slowinski
Scott M. Deeny
Attorneys for Amicus Curiae Arizona Department of Water
Resources
RYLEY CARLOCK & APPLEWHITE Phoenix
By Cynthia M. Chandley
L. William Staudenmaier
Jenny J. Pelton
Attorneys for Amici Curiae Freeport-McMoRan Copper and
Gold, Inc., Roosevelt Water Conservation District, and
the Town of Chino Valley
2
SALMON, LEWIS & WELDON, P.L.C. Phoenix
By M. Byron Lewis
John B. Weldon, Jr.
Mark A. McGinnis
Attorneys for Amicus Curiae Salt River Project
Agricultural Improvement & Power District
________________________________________________________________
B A L E S, Justice
¶ 1 Arizona law allows landowners, outside of Active
Management Areas, to make reasonable and beneficial use of
groundwater underlying their land. This case involves deeds
that purported to reserve to the grantor, and to sever from the
surface estate, rights to the potential future use of
groundwater. Because a landowner has no real property interest
in the future use of groundwater, we hold that the attempted
reservation is invalid.
FACTS AND PROCEDURAL HISTORY
¶ 2 This case concerns land in the Chino Valley in Yavapai
County that is commonly referred to as the CF Ranch. In 1981,
Red Deer Cattle, Inc. (“Red Deer”) bought this land from Chino
Ranch, Inc. (“Chino Ranch”). In its 1981 deed to Red Deer,
Chino Ranch reserved all mineral rights and “commercial water
rights” but did not otherwise retain any ownership interest in
the land. In 1984, Red Deer conveyed the CF Ranch to Merwyn C.
Davis, acting as a trustee for a trust bearing his name.
Similar to the 1981 deed, this deed purported to reserve to the
grantor “all commercial water rights and waters incident and
3
appurtenant to and within the real property,” but provided that
Davis could use water for “ranch, livestock and domestic and
agriculturally related purposes.”
¶ 3 Chino Ranch merged with Red Deer in 1989, thereby
consolidating their respective claims to the commercial water
rights associated with the CF Ranch. Following a series of
conveyances involving third parties, in May 1998, Red Deer and
CJ Partners each conveyed a one-half interest in the commercial
water rights for the CF Ranch to Agua Sierra Resources L.L.C.
(“Agua Sierra”).
¶ 4 In April 2003, Davis granted the City of Prescott an
option to purchase the CF Ranch and the adjacent CV Ranch, as
well as the water rights appurtenant to the two properties, for
$30 million. The option agreement included an addendum stating
that Davis was uncertain about the water rights on the
properties and that his interest “in said water rights may be
unclear, incomplete, inappropriately described, or subject to
challenge.” At the time of the option contract, the properties
appraised at $23 million, of which $18 to $21 million was
attributable to the associated water rights. Accordingly, the
City asked Davis to purchase the water rights so that the City
could acquire them. Because Davis was unable to purchase the
water rights from Agua Sierra, the City allowed the option to
expire.
4
¶ 5 Four months later, Davis filed a complaint against
Agua Sierra, Red Deer, CJ Partners, and the Seibert Family
Limited Partnership (collectively, the “Agua Sierra parties”),
seeking to invalidate the commercial water rights reservations
associated with the CF Ranch. The Agua Sierra parties filed an
answer raising several affirmative defenses. Agua Sierra
separately filed a counterclaim seeking a judgment declaring the
water rights reservation to be valid and quieting title to all
commercial water rights on the CF Ranch. In the alternative,
Agua Sierra sought to rescind the 1984 conveyance to Davis.
¶ 6 On cross-motions for summary judgment, the trial court
held the reservation invalid and entered judgment for Davis. In
doing so, the trial court relied on opinions of this Court
stating that “there is no right of ownership of groundwater in
Arizona prior to its capture and withdrawal,” Town of Chino
Valley v. City of Prescott (“Chino Valley II”), 131 Ariz. 78,
82, 638 P.2d 1324, 1328 (1981), and that “water rights cannot be
established or reserved for some potential future use,” In re
the Rights to the Use of the Gila River Sys. (“Gila River I”),
171 Ariz. 230, 239, 830 P.2d 442, 451 (1992). After entering
judgment, the trial court added Chino Grande, L.L.C. (“Chino
Grande”) as a party because it had bought the CF Ranch from
Davis. The Agua Sierra parties timely appealed.
¶ 7 The court of appeals vacated the trial court’s
5
judgment, holding that Arizona law allows a grantor to reserve
rights to the prospective commercial use of percolating
groundwater beneath the land conveyed. Davis v. Agua Sierra
Res., L.L.C., 217 Ariz. 386, 392-97 ¶¶ 21-42, 174 P.3d 298, 304-
09 (App. 2008). Without addressing other arguments by the Agua
Sierra parties challenging the judgment for Davis, the court of
appeals remanded for the trial court to determine whether the
commercial water rights at issue are limited to percolating
groundwater or also include surface-water rights. Id. at 397 ¶
45, 174 P.3d at 309.
¶ 8 We accepted review because this case presents an issue
of first impression and statewide importance. Our jurisdiction
is based on Article 6, Section 5(3) of the Arizona Constitution
and Arizona Revised Statutes (“A.R.S.”) section 12-120.24
(2003).
DISCUSSION
A. Arizona Groundwater Law
¶ 9 The 1981 and 1984 deeds for the CF Ranch purport to
reserve to the grantor, and thus to sever from the surface
estate, all “commercial water rights.” The parties agree that
there has not been any historical use of such water rights on
the CF Ranch and that there is no issue before the Court
regarding appropriable waters. This case instead involves the
potential future use of groundwater that has never been captured
6
and put to reasonable use.
¶ 10 Arizona law distinguishes groundwater from surface
water, even though such waters may be hydrologically connected.
John D. Leshy & James Belanger, Arizona Law Where Ground and
Surface Water Meet, 20 Ariz. St. L.J. 657, 659 (1988). Surface
water is subject to the doctrine of prior appropriation. In re
the Gen. Adjudication of All Rights to Use Water in the Gila
River Sys. & Source (“Gila River IV”), 198 Ariz. 330, 334 ¶ 3, 9
P.3d 1069, 1073 (2000). In contrast, under Arizona’s common
law, groundwater “is not appropriable and may be pumped by the
overlying landowner, subject to the doctrine of reasonable use.”
Id.
¶ 11 Because others have detailed the history of Arizona
groundwater law, see Cherry v. Steiner, 543 F. Supp. 1270, 1273-
76 (D. Ariz. 1982), aff’d, 716 F.2d 687 (9th Cir. 1983); Leshy &
Belanger, supra, at 666-700, we present only a brief overview
here. Arizona’s common law evolved from the territorial-day
view that a landowner has a property interest in groundwater
underlying the surface estate. E.g., Howard v. Perrin, 8 Ariz.
347, 353, 76 P. 460, 462 (1904) (“Throughout the Pacific Coast,
where the doctrine of appropriation obtains, the decisions are
uniform to the effect that waters percolating generally through
the soil beneath the surface are the property of the owner of
the soil . . . .”). Later decisions clarified that land
7
ownership does not include ownership of the groundwater itself,
but instead may afford a qualified right to extract and use the
groundwater for the benefit of the land. Chino Valley II, 131
Ariz. at 82, 638 P.2d at 1328.
¶ 12 Recognizing that groundwater is vital to our state,
Arizona’s legislature in 1980 established a comprehensive
regulatory framework by enacting the Groundwater Management Act
(the “GMA”). 1980 Ariz. Sess. Laws, ch. 1, § 86 (4th Spec.
Sess.) (codified as amended at A.R.S. §§ 45-401 to -704 (2003 &
Supp. 2008)). With the goal of reducing the state’s overdraft
of groundwater, the GMA created a system of groundwater rights
and conservation requirements. Id. § 45-401.
¶ 13 The GMA divided the state into three categories:
Active Management Areas (“AMAs”), id. § 45-411, Irrigation Non-
Expansion Areas (“INAs”), id. § 45-431, and areas outside a
designated AMA, id. § 45-453. AMAs are “geographical areas
where groundwater supplies are imperiled.” Chino Valley II, 131
Ariz. at 79 n.*, 638 P.2d at 1325 n.*. In such areas, a person
may withdraw and use groundwater only in accordance with the
GMA’s detailed regulations. A.R.S. § 45-451(A)(1).
¶ 14 The CF Ranch, located within the Big Chino sub-basin,
is not within an AMA and thus is not subject to the extraction
and use limits applicable to AMAs. The GMA, however, does
govern the withdrawal of groundwater on land outside an AMA if
8
the water is to be transported to an established AMA. Id. § 45-
551.
¶ 15 The Prescott Active Management Area includes the City
of Prescott. Id. § 45-411(A)(3). The GMA thus regulates any
withdrawal and transportation of groundwater from the CF Ranch
to the City of Prescott. In general, the GMA provides that
“[i]n areas outside of active management areas, a person may:
1. Withdraw and use groundwater for reasonable and beneficial
use, except as provided in article 8.1 of this chapter. 2.
Transport groundwater pursuant to articles 8 and 8.1 of this
chapter.” Id. § 45-453. Article 8.1 further provides that in
the case of the Big Chino sub-basin,
[a] city or town that owns land consisting
of historically irrigated acres in the Big
Chino sub-basin of the Verde River
groundwater basin, as designated by order of
the director dated June 21, 1984, or a city
or town with the consent of the landowner,
may withdraw from the land for
transportation to an adjacent initial active
management area an amount of groundwater
determined pursuant to this section.
Id. § 45-555(A). The GMA limits the annual transportation
allotment based on the historically irrigated acres retired from
irrigation. Id. § 45-555(B).
¶ 16 Although the Agua Sierra parties claim they own the
“commercial water rights” reserved by the prior owners of the CF
Ranch, the GMA does not recognize the existence of anything
9
called a “commercial water right” to groundwater.
B. Future Rights to Groundwater
¶ 17 The court of appeals held that a grantor may reserve
rights to the commercial use of percolating groundwater beneath
land that the grantor no longer owns. Davis, 217 Ariz. at 396
¶ 43, 174 P.3d at 308. In so holding, the court reasoned that a
landowner has a property right to the “usufruct” of underlying
groundwater and that this right is subject to the general common
law rule that “[a] grantor has the right to make a reservation
of an interest in real property.” Id. at 393 ¶ 23, 174 P.3d at
305 (quoting Phoenix Title & Trust Co. v. Smith, 101 Ariz. 101,
106-07, 416 P.2d 425, 430-31 (1966)). Supporting this
conclusion, the Agua Sierra parties argue that the right to
prospectively use groundwater is one of the “sticks” in the
bundle of a landowner’s property rights, and the landowner can
reserve this stick when conveying the surface estate to another.
¶ 18 For a deed reservation of commercial groundwater
rights to be valid, however, the grantor must in fact have a
real property interest in such rights. Thus, we first consider
whether Arizona law recognizes a real property right to the
potential future use of groundwater.
¶ 19 This Court has noted that “Arizona law recognized no
right to reserve water for some potential future use.” Gila
River I, 171 Ariz. at 239, 830 P.2d at 451. The court of
10
appeals dismissed this language as irrelevant to the validity of
Agua Sierra’s reservation of commercial water rights, stating
that Gila River I concerned only appropriable surface waters
(which include surface-stream subflows) and not percolating
groundwater. Davis, 217 Ariz. at 395 ¶ 37, 174 P.3d at 307.
Gila River I, however, cannot be read so narrowly.
¶ 20 Gila River I concerned both real property owners who
claimed rights to appropriable subflows and other land owners
who claimed that their interests would be impacted by any legal
determination of “when underground water is appropriable.” 171
Ariz. at 239, 830 P.2d at 451. The second group, who were not
then using groundwater, claimed that they had a property right
to use groundwater in the future, and thus were entitled to
constitutionally adequate notice in the Gila adjudication. Id.
The Court squarely rejected this argument: “Having no legally
recognized property right in potential, future groundwater use,
they have no due process rights of which they could be
deprived.” Id.
¶ 21 The Court in Gila River I also cited its earlier
decision Chino Valley II, which addressed groundwater rights
under the GMA, not appropriable water rights. Gila River I, 171
Ariz. at 239, 830 P.2d at 452 (citing Chino Valley II, 131 Ariz.
at 82, 638 P.2d at 1328). In Chino Valley II, we stated that
“[i]n the absolute sense, there can be no ownership in seeping
11
and percolating waters until they are reduced to actual
possession and control by the person claiming them because of
their migratory character. Like wild animals free to roam as
they please, they are the property of no one.” 171 Ariz. at 82,
638 P.3d at 1328. Thus, we held that “there is no right of
ownership of groundwater in Arizona prior to its capture and
withdrawal from the common supply and that the right of the
owner of the overlying land is simply to the usufruct of the
water.” Id.
¶ 22 Chino Valley II used the term “usufruct” to describe
the rights of landowners with respect to underlying groundwater.
But Chino Valley II’s use of that term does not mean that
landowners have some vested real property right in the potential
use of groundwater. See Gila River IV, 198 Ariz. at 344, 9 P.3d
at 1083 (citing Chino Valley II and Gila River I to reject
landowners’ claim that an expansive definition of “subflow”
resulted in a taking of private property rights to future
groundwater use). Rather, as Chino Valley II makes clear, the
landowner’s right is perhaps better described as an unvested
expectancy insofar as it concerns the potential future use of
groundwater that has never been captured or applied. This is
why this Court concluded in Chino Valley II, and the federal
courts concluded in Cherry, that the restrictions on groundwater
use under the GMA did not unconstitutionally infringe the rights
12
of landowners.
¶ 23 Recognizing that Arizona’s groundwater is a critical
public resource, the legislature has granted landowners outside
of AMAs a limited right, essentially an opportunity, to pump
groundwater for reasonable and beneficial uses as permitted by
the GMA. See A.R.S. §§ 45-453, -541 to -554; see also Leshy &
Belanger, supra, at 715-16 (discussing GMA’s impact on
reasonable use doctrine). The legislature is free to choose
between competing uses of groundwater and to modify such rights
in the public interest as an exercise of its police power.
Chino Valley II, 131 Ariz. at 83-84, 639 P.2d at 1329-30; Sw.
Eng’g Co. v. Ernst, 79 Ariz. 403, 409-10, 291 P.2d 764, 768-69
(1955).
¶ 24 Agua Sierra and its predecessors have not identified
any pre-existing or current use of the groundwater underlying
the CF Ranch that is embraced by the reservation of commercial
water rights. Arizona law does not recognize a real property
interest in the potential future use of groundwater that has
never been captured and applied to reasonable use.1
C. Severability of Right to Potential Use of Groundwater
¶ 25 The Agua Sierra parties also argue that the deed
1
We do not here address the circumstances in which the owner of
the surface estate may, consistent with the GMA, grant others
contractual rights to withdraw, use, or transport groundwater
from beneath the owner’s land.
13
reservations were at least effective to sever and reserve to the
grantor whatever “rights” a surface owner would otherwise have
to the future use of groundwater. We therefore consider whether
a landowner’s qualified “right” or expectancy to the potential
use of groundwater is an interest that can be severed from the
surface estate.
¶ 26 The court of appeals observed that “Arizona law
generally permits the severance and transfer of water rights
from the associated real property.” Davis, 217 Ariz. at 392
¶ 21, 174 P.3d at 304 (citing W. Maricopa Combine, Inc. v. Ariz.
Dep’t of Water Res., 200 Ariz. 400, 407 ¶ 35, 26 P.3d 1171, 1178
(App. 2001)). The court further noted that the right to use
groundwater is a property right, id. at ¶ 22 (citing Paloma Inv.
Ltd. P’ship v. Jenkins, 194 Ariz. 133, 138 ¶ 22, 978 P.2d 110,
115 (App. 1998)), and that because this right is a hereditament,
it must be conveyed by deed, id. (citing Neal v. Hunt, 112 Ariz.
307, 310-11, 541 P.2d 559, 562-63 (1975)).
¶ 27 The cases cited by the court of appeals, however, do
not establish a severable right to the potential future use of
groundwater. West Maricopa Combine involved the transfer of
Central Arizona Project water via the Hassayampa riverbed. 200
Ariz. at 402 ¶ 1, 26 P.3d at 1173. In rejecting arguments by
landowners that they could prohibit such transfers through their
property, the court of appeals discussed how Arizona law
14
distinguishes water rights from real property rights. Id. at
407-08 ¶¶ 35-40, 26 P.3d at 1178-79. In this context, the court
cited its earlier decision in Paloma for the proposition that
water rights can be bought and sold distinct from land. W.
Maricopa Combine, 200 Ariz. at 407 ¶ 35, 26 P.3d at 1178.
¶ 28 Paloma, however, did not involve the severance of a
right to the potential future use of groundwater. Instead,
Paloma concerned a water rights agreement giving one party a
share of the proceeds from future sales of water from the land
by the fee owner. See 194 Ariz. at 138 ¶ 24, 978 P.2d at 115
(“We recognize that [the] interest is not to use the water
itself, the ordinary form of water rights.”). The court of
appeals characterized this right as a “royalty interest” that,
as a real property interest, bound successor landowners. Id. at
¶ 25-26. Thus, even if we assume arguendo that it was correctly
decided, Paloma does not establish the right of a grantor to
sell groundwater from land that it no longer owns.
¶ 29 Nor did this Court in Neal decide whether the
potential use of groundwater is a property right severable from
the overlying land. In that case, the grantor reserved certain
water rights to a ranch he had sold. 112 Ariz. at 309, 541 P.2d
at 561. Citing George v. Gist, 33 Ariz. 93, 263 P. 10 (1928),
the Court stated that water rights in land must be conveyed by
deed and that conveyances of groundwater, a hereditament, are
15
subject to the recording statute. Neal, 112 Ariz. at 310-11,
541 P.2d at 562-63. We did not address the validity of such a
reservation in Neal, but rather held only that if not recorded,
a reservation cannot be effective against a subsequent bona fide
purchaser who lacks notice. 112 Ariz. at 311, 542 P.2d at 563.
¶ 30 Neal preceded this Court’s decision in Chino Valley
II, which rejected as dicta language in prior decisions,
including Howard, suggesting that a landowner may have a
property interest in groundwater. See Chino Valley II, 131
Ariz. at 81, 638 P.2d at 1327. Given Chino Valley II, our
holding in Neal cannot be understood as holding that rights to
the potential future use of such water may be severed from the
overlying land by a deed reservation.
¶ 31 On the issue of severability, more pertinent is the
language of the GMA itself, which provides that the landowner
must consent to the transportation of water off the property:
A city or town that owns land consisting of
historically irrigated acres in the Big
Chino sub-basin of the Verde River
groundwater basin . . . or a city or town
with the consent of the landowner, may
withdraw from the land for transportation to
an adjacent initial active management area
an amount of groundwater determined pursuant
to this section.
A.R.S. § 45-555(A)(emphasis added).
¶ 32 Section 45-555(A) presumes that a landowner has
authority to consent to a city or town’s withdrawing water from
16
the land for transportation. But a landowner would not be able
to grant such consent if a prior owner could reserve and sever
from the land the rights to the potential future use of
groundwater. If the legislature had contemplated that such
rights exist and are transferable apart from the land, we do not
believe the legislature would have required the consent of the
landowner for the withdrawals contemplated by § 45-555(A).
¶ 33 We recognize that there are many policy arguments for
or against allowing the transfer, outside of AMAs, of rights to
prospectively use groundwater, but those arguments should be
weighed by the legislature if it thinks it desirable to amend
this aspect of the GMA. See Chino Valley II, 131 Ariz. at 81,
83, 638 P.2d at 1327, 1329 (”[I]f any change in the law is
necessary, it should be made by the Legislature.”).
CONCLUSION
¶ 34 For the reasons stated, we hold that landowners
outside of AMAs do not have a real property interest in the
potential future use of groundwater that may be severed from the
overlying land. Accordingly, we vacate the opinion of the court
of appeals and remand so that court may consider other properly
preserved arguments by the Agua Sierra parties challenging the
trial court’s judgment for Davis.
_______________________________________
W. Scott Bales, Justice
17
CONCURRING:
_______________________________________
Ruth V. McGregor, Chief Justice
_______________________________________
Rebecca White Berch, Vice Chief Justice
_______________________________________
Michael D. Ryan, Justice
_______________________________________
Andrew D. Hurwitz, Justice
18