Tuesday, March 24, 2009

Arizona Supreme Court Rules on Severability of Groundwater Rights from Property

This is a follow-up to a previous post regarding a recent legal case in Arizona that considered whether rights to groundwater associated with a parcel of land can be held separately from ownership of the land.

The Arizona Supreme Court obviously felt it was an important case because they accepted it for review near the end of 2008, then scheduled it for oral argument in early Jan. 2009, and published their opinion late last week.

If you read my earlier post you will notice that I half-heartedly endorsed the Court of Appeals decision and thought the Supreme Court would affirm. On further consideration I changed my mind because the property rights to groundwater created by the Appeals court reading of the cases would be incomplete and do nothing to encourage efficient use of groundwater. I also began to see the illogic in their reading of the cases on which the decision hinged. It turns out I was right the second time. The Supreme Court went with what I would call a much more straightforward reading of the law (and the nature of property rights in groundwater) and held that, because there can be no future right to groundwater in Arizona (outside of an AMA), a property owner cannot reserve the right to pump groundwater from property after conveyance of the property.

The ruling appeared to hinge on the way the appeals court interpreted a few earlier cases they thought meant that a real property interest in future groundwater use could exist. But the Supreme Court differed in their interpretation of those cases and relied primarily on the Arizona case Town of Chino Valley v. City of Prescott and the U.S. District Court case Cherry v. Steiner to support the notion that rights to groundwater are perfected only by pumping the water to the surface (usufructory rights), therefore land ownership vests no rights to groundwater prior to pumping, so the previous owners who tried to reserve rights to groundwater had no actual property rights to reserve.

This reading of the law is in agreement with traditional economic notions of property rights to fugitive resources - something not all courts seem to grasp. In Texas, by contrast, their courts have interpreted the rule of absolute ownership as creating actual property rights in groundwater in situ (also the original common law view in Arizona until changed by the courts), permitting the reservation of rights to groundwater when property is conveyed. I looked at a couple of cases decided by their appellate courts recently affirming this view. One thing I found very interesting in the Texas cases was the statement that the rule of absolute ownership is distinct from the rule of capture. They claimed the rule of capture is simply a rule of tort liability (non-liability really) but the rule of absolute ownership is a property rights rule. That is a legal interpretation so it does not have to relate in any way to economic realities - but I think they would be better off if it did.


Anonymous said...

I have only skimmed the Supreme Court case, but I attended the oral arguments.

At one point during the oral arguments, Justice Hurwitz said to the attorney for appellee: As I read your brief, I thought your argument was that this was strictly between A and B, now it appears that you are arguing for a more expansive interpretation than that. The attorney did not give a clear answer (as I understood him) but it did appear that he was asking for a more expansive rule.

For what it is worth, attorney for appellees did not write the briefs and, as I understand it, is actually kind of an old-time water lawyer who is semi-retired.

In essence, Justice Hurwitz’s question summed up my understanding of the Court of Appeals case: I thought that it was limited to A and B.

A could sell his land to B without selling the commercial water rights, but that did not mean A actually had anything, and yet B was clearly prohibited from doing something. For example A could not stop the neighbor from pumping (under the rule of capture), but by contract/deed B could not pump and make a commercial use of the water. To me, for B, this is akin to buying land and agreeing, say, not to build a bar on it or to keep part of it as open space (B bought the land and agreed that he had no commercial water rights).

I thought the Court of Appeals case made sense (but that was based on my understanding as set out above.) Do you know what the water lawyers are saying about the Supreme Court’s decision?

Chris Brooks said...

I wish I had been able to attend the oral arguments, but I'm working on getting copies of the briefs filed in the case to round out my understanding of the arguments. One attorney I have talked to also thought the Court of Appeals had incorrectly ruled. He did, however, believe it was possible to sever GW rights from land - just felt that the parties in this case had not done it correctly. I'm hoping to talk to Bob Lynch (attorney for appellees) to get his take on it. My understanding, though, was that the state Supreme Court took on the appeal in order to create a more expansive rule and it seemed to me that they clarified things pretty well. Mind you, they didn't make it impossible to sell groundwater from your land - they acknowledged that could still be done by essentially granting a license to someone to pump from your property. But rights to groundwater cannot be severed from rights to land in Arizona as I understand the ruling.
Your interpretation of the court of appeals case (as a form of negative easement on the property - buyer prohibited from commercial use of GW) is an interesting way to look at it. I thought of it as a form of profit a prendre, which would be a limited property interest in the land. I was surprised that option was never mentioned.