DEPT OF STATE LANDS v PETTIBONE

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No. 83-281 I N THE SUPREME COURT OF THE STATE O F MONTANA 1985 I N THE MATTER O F THE ADJUDICATION OF THE E X I S T I N G RIGHTS TO THE USE OF ALL THE WATER, BOTH SURFACE AND UNDERGROUND, WITHIN THE POWDER R I V E R DRAINAGE AREA, INCLUDING ALL TRIBUT A R I E S O F THE POWDER R I V E R I N CARTER, CUSTER, FALLON, P R A I R I E , and POWDER R I V E R COUNTIES, MONTANA, DEPARTMENT O F STATE LANDS, O b j e c t o r and A p p e l l a n t , -vsWALTER P E T T I B O N E , DAVID and MELINDA B L I S S , ERNEST and PEGGY TOOKE, GIACOMETTE RANCH, P J. RANCH, ELMER OEDEKOVEN, E . MIORY HUBBARD, CINCH BUCKLE RANCH, MALLET CATTLE COMPANY, ROBERT F . HARDY TRUST, ALVIN and HELEN I R I O N , HARDY LAND & LIVESTOCK COMPANY, and BALES RAPJCH, . C l a i m a n t s and R e s p o n d e n t s . APPEAL FROM: T h e Water C o u r t s of t h e S t a t e of Montana, The Yellowstone Division-Powder River Basin, T h e H o n o r a b l e W.W. L e s s l e y , C h i e f Judge. COUlJSEL OF RECORD: For A p p e l l a n t : L y l e M a n l e y argued, D e p t . Montana; J o h n F . N o r t h , of S t a t e L a n d s , I i e l e n a , D e p t . of S t a t e L a n d s F o r Respondents: J o h n C a r r argued f o r B l i s s Montana & B a l e s Ranch, Miles City, F o r Amicus Curiae: A l b e r t W. S t o n e , U of M L a w S c h o o l , M i s s o u l a , M o n t a n a G o u g h , Shanahan, Johnson & W a t e r m a n ; R o n a l d F . W a t e r m a n argued f o r M o n t a n a S t o c k g r o w e r s A s s o c . , H e l e n a , Montana Submitted: Decided: Filed: -1UM 1 : 1985 Clerk February 21, 1985 June 1 8 , 1985 M r . J u s t i c e L. Court. The Final State Decree Gulbrandson d e l i v e r e d C. of Montana title holding vested i n respondents. The objected to the that Decree of State above-named to from place of the Powder River water certain Montana, rights to of title respondents, Department the of all d i v e r s i o n and p l a c e certain State River water lessees o f of of Powder A l l of the factual disputes, lands. the be We reverse. portion awarded appeals t h e Opinion o f Lands, Preliminary to rights S t a t e school a s t o flow, the trust s o u r c e and use w e r e resolved p r i o r t o t h e h e a r i n g on t h e S t a t e o b j e c t i o n h e l d November 24, 1982. The h e a r i n g w a s c o n f i n e d s o l e l y t o t h e f o l l o w i n g q u e s t i o n o f law: Does t i t l e t o t h e w a t e r r i g h t v e s t i n t h e l e s s e e o r t h e S t a t e o f Montana a s owner o f t h e l a n d where t h e w a t e r i s d i v e r t e d ? On A p r i l 4 , 1 9 8 3 , The W a t e r C o u r t s Judgment--The R i v e r F i n a l Decree, was i s s u e d . Powder It h e l d t h a t t h e t i t l e t o t h e w a t e r s d i v e r t e d on S t a t e s c h o o l t r u s t l a n d s v e s t s i n t h e lessee, and n o t t h e S t a t e . The S t a t e appealed t h i s portion of t h e F i n a l Decree. The a p p e a l was f i r s t h e a r d b y t h i s C o u r t on J a n u a r y 1 3 , 1 9 8 4 . Subsequently, parties to questions. by Order rebrief of the March 26, case, Because o f t h e broad and 1984, w e d i r e c t e d to address several amici, submitted certain significance of t h i s case, we a l s o s o l i c i t e d amicus c u r i a e p a r t i c i p a t i o n . and the supplemental The p a r t i e s , briefs, and the m a t t e r was a g a i n h e a r d on J a n u a r y 2 5 , 1 9 8 5 . There a p p e a 1. a r e twenty-three They generally water fa11 rights into one involved of the categories: 1) G r o u n d w a t e r W e l l s : Four r i g h t s from g r o u n d w a t e r w e l l s . Three o f are the in this following w e l l s a r e on s c h o o l t r u s t l a n d s , a n d u s e d wholly thereon. One s t r a d d l e s t h e b o r d e r between a state-owned and p r i v a t e l y - o w n e d s e c t i o n , a n d i s u s e d on b o t h . 2) Developed S p r i n g s : Three r i g h t s a r e i n developed s p r i n g s f o r s t o c k watering. The s p r i n g s , a n d t h e i r u s e s , a r e c o n f i n e d t o the school t r u s t lands. 3) Diversions o f T r i b u t a r i e s : Fifteen r i s h t s a r i s e f r o m d i v e r t i n s named o r unnamed t r i b u t a r i e s o f l a r g e r - c r e e k s . In most, t h e a p p r o p r i a t o r has c o n s t r u c t e d a s m a l l dam on t h e t r i b u t a r y c r e a t i n g a small reservoir f o r stock watering. In some i n s t a n c e s , w a t e r c o n t i n u e s t o f l o w from t h e r e s e r v o i r s t o t h e l a r g e r c r e e k . One of t h e r i g h t s i n v o l v e s a d r a w o f w a t e r f r o m t h e Powder R i v e r d e v o t e d t o i r r i g a t i o n , not stockwatering. Thirteen o f t h e s e d i v e r s i o n s occur wholly on s c h o o l trust lands with the use confined thereon. One r i g h t i s i n a r e s e r v o i r on s t a t e l a n d t h a t s e r v e s b o t h t h e s t a t e s e c t i o n and an a d j a c e n t p r i v a t e section. The l a s t o f t h e s e r i g h t s i s a n a p p r o p r i a t i o n used f o r i r r i g a t i o n . In t h a t c a s e , t h e d i v e r s i o n i s on s t a t e l a n d , a n d t h e u s e i s on b o t h s t a t e and p r i v a t e land. 4 ) Direct U s e : One right is in an undevelosed sprins and its drainaqe a d j a c e n t - t o a -creek i n t h e Powder ~ i v e r drainage. The s p r i n g , a n d i t s u s e , i s confined t o t h e school t r u s t land. This r i g h t h a s t h e o l d e s t p r i o r i t y d a t e o f any a t i s s u e h e r e , O c t o b e r 1, 1 8 8 3 . According t o t h e d e c r e e s a s s o c i a t e d w i t h t h e s e r i g h t s , each i s e x e r c i s e d year-round; a l t h o u g h i n t i m e s of d r o u g h t , t h i s may n o t b e p o s s i - b l e . The l a n d s upon w h i c h t h e s e w a t e r r i g h t s l i e a r e t h o s e that were granted to the State of Montana Government i n t h e Montana E n a b l i n g A c t . 1889, ch. 180, 25 S t a t . 676. by 1864, ch. Federal A c t of February 22, Originally, these lands were s e t a s i d e i n t h e Montana T e r r i t o r y O r g a n i c A c t , 26, the A c t of May 95, 13 S t a t . 8 5 , which provided t h a t s a i d l a n d s w e r e "reserved f o r t h e purpose of being applied t o schools" ch. 95, section 14, 13 S t a t . 9 1 i n t h e Montana Territory. The E n a b l i n g Act granted these lands to the state on the following t e r m s : " S e c t i o n 1 0 . T h a t upon t h e a d m i s s i o n o f each o f s a i d S t a t e s i n t o t h e Union s e c t i o n s numbered s i x t e e n and t h i r t y - s i x in every township of said proposed S t a t e s , and where s u c h s e c t i o n s , o r any parts thereof, have been sold or o t h e r w i s e d i s p o s e d o f by o r u n d e r t h e a u t h o r i t y o f any a c t o f C o n g r e s s , o t h e r lands equivalent thereto, in legal s u b d i v i s i o n s o f n o t less t h a n o n e - q u a r t e r s e c t i o n , and a s c o n t i g u o u s a s may b e t o t h e s e c t i o n i n l i e u o f which t h e same i s taken, a r e hereby granted t o s a i d S t a t e s f o r t h e s u p p o r t o f common s c h o o l s . all lands herein " S e c t i o n 11. T h a t granted f o r e d u c a t i o n a l purposes s h a l l be d i s p o s e d o f o n l y a t p u b l i c s a l e , and a t a p r i c e n o t less t h a n t e n d o l l a r s p e r a c r e , t h e p r o c e e d s t o c o n s t i t u t e a permanent s c h o o l f u n d , t h e i n t e r e s t o f which o n l y s h a l l b e expended i n t h e s u p p o r t o f s a i d schools. But s a i d l a n d s may, u n d e r s u c h regulations a s the legislatures shall " c h . 1 8 0 , 25 prescribe, be leased s t a t . 679. ... The 1889 Montana C o n s t i t u t i o n a c c e p t e d t h e s e l a n d s and p r o v i d e d t h a t t h e y would be h e l d i n t r u s t c o n s o n a n t w i t h t h e t e r m s o f t h e E n a b l i n g A c t , Montana C o n s t i t u t i o n o f 1 8 8 9 , a r t . XVII, sec. 1. The 1972 Montana C o n s t i t u t i o n c o n t i n u e d t h e s e t e r m s , Mont. C o n s t . a r t . X , sec. 11, c h . 77-1-202, MCA education) 1. See a l s o s e c t i o n . (school lands held i n t r u s t f o r t h e support of The d u t y o f administering t h e school trust lands p l a c e d upon t h e Board o f Land Commissioners ( B o a r d ) . 77-1-202(l), MCA p r o v i d e s t h i s t r u s t t o secure the that "The b o a r d shall l a r g e s t measure o f is Section administer l e g i t i m a t e and reasonable advantage t o t h e S t a t e . " Pursuant t o 77-1-301(1), MCA, t h e Department o f S t a t e Lands, (DSL) u n d e r t h e d i r e c t i o n of t h e B o a r d , classification, " . . . has appraisal, other disposition of charge o f t h e s e l e c t i n g , exchange, leasing, s t a t e lands" management, sale, The Department o f or State Lands has also management, promulgated sale or lease regulations of school governing the lands. See trust g e n e r a l l y T i t l e 2 6 , A.R.M. Each of the sections of sections is a respondents school 77-6-115 trust and r e g u l a t i o n S26-3.123, lessee lands. The 77-6-301 and DSL, -302, one o r more by of statute, MCA, and by a l l o w s lessees t o d i v e r t w a t e r s A.R.M., on t h e l e a s e h o l d , d e v e l o p t h e m , a n d p u t t h e m t o u s e on o r o f f that land. perfected pursuant regulations. rights," t h e r i g h t s a t i s s u e i n t h i s case w e r e None o f to Rather, a b o v ~ mentioned the statutes or t h e l e s s e e s claim t h e s e r i g h t s a s "use which have l o n g been recognized i n t h i s S t a t e , M u r r a y v. T i n g l e y ( 1 8 9 7 ) , 20 Mont. 2 6 0 , 5 0 P. Montana W a t e r Law f o r t h e 1 9 8 0 1 s , p . 3, see 723, and S t o n e , (1981 ed.) These r i g h t s a r e a t i s s u e because of t h e g e n e r a l w a t e r r i g h t s a d j u d i c a t i o n underway i n Montana. T h i s p r o c e s s began with t h e p a s s a g e o f t h e Montana W a t e r U s e A c t o f 452, L. Stone, The l e g i s l a t u r e e n a c t e d t h e Water U s e A c t i n 1973. response to the The chaos o f Long p r e v i o u s Montana Count on Dempsey: i n Water R i g h t s A d j u d i c a t i o n , water No - law. Final See Decision 1 (1969); Stone, 3 1 Mont.L.Rev. A r e T h e r e Any A d j u d i c a t e d S t r e a m s - M o n t a n a ? in 19 ( 1 9 5 7 ) . 1973, ch. 1 9 Mont.L.Rev. I t set up a system o f g e n e r a l s t r e a m a d j u d i c a t i o n administered by Conservation (DNRC) the Department and of Natura 1 a l s o provided, from Resources and time on, that t h a t t h e s t a t u t o r y m e t h o d w a s t h e e x c l u s i v e way t o a c q u i r e a water right. Prior to 1973, there perfecting a water right. by statute; notice with through 10; were two possible ways of F i r s t was t h e method p r o v i d e d f o r p o s t i n g a t t h e p o i n t o f d i v e r s i o n and f i l i n g a the R.C.M. county clerk, (1947), 89-810 Mont. Laws 1885, t h r o u g h 814. secs. 6 Second was simply by putting the water to use, Murray v. Tingley, supra. The 1885 Act did not provide for any general adjudication of streams. Nor did it provide any mechanism by which actual uses, as opposed to claimed uses, could be ascertained. As Professor Stone, in Montana Water - - - 1980's states, Law for the the problems the legislature addressed in 1973 were many: "It [the old water rights system under the 1885 Act] merely provided for isolated lawsuits between particular water users over their individual rights in isolated parts of streams. The statute resulted only in piecemeal litigation, often repetitive and among the same neighbors, over and over again disputing one another's claims. [Citations omitted.] It did not lead to security in one's property rights nor to finality in determining the fair and legal distribution of water among neighboring claimants. "But not only were the individual water users ill-served by this failure to establish water rights; the public interest also required an inventory of the state's water needs so that future negotiations or dealings with downstream states could allocate the waters of our interstate rivers." Stone, supra at p. 4. The system of adjudication established by the 1973 Act soon encountered difficulties. First, it required the DNRC to physically inspect or discover all water rights. It soon became evident that this process would take a very long time. Six years after the 1973 Act was passed, the inspection and adjudication of the Powder River Basin, one of the smallest and relatively initial stages. adjudication of simplest in the State, was still in its Second, the 1973 Act did not provide for the federally reserved rights--presenting the spectre of concurrent, wasteful and possibly inconsistent litigation in the Federal Courts. Responding to the shortcomings of the 1973 Act, the 1979 Montana Legislature enacted Senate Bill 76, ch. 697 L. 1979. It established a system of water courts and put upon a p p r o p r i a t o r s and u s e r s t h e b u r d e n o f f i l i n g c l a i m s f o r t h e i r I t a l s o p r o v i d e d f o r r e s e r v e d w a t e r r i g h t s and s e t rights. up a Compact Commission t o n e g o t i a t e t h e f e d e r a l and I n d i a n reserved rights. The Water Ch. 697, s e c . Court and preliminary appropriators, decrees is system adjudication of water r i g h t s . users 27, I. , charged the court cataloging a t that time, with the final Rased upon t h e c l a i m s f i l e d by the p r i o r i t i e s i n the respective basin. p a r t i e s have, 1979. issues temporary various All rights and named o r a f f e c t e d an o p p o r t u n i t y t o o b j e c t t o t h e temporary p r e l i m i n a r y decree. I f no o b j e c t i o n s a r e r a i s e d , t h e t e m p o r a r y d e c r e e i s made f i n a l . O b j e c t i o n s a r e h e a r d and a d j u d g e d by t h e Water C o u r t , w i t h t h e r i g h t o f a p p e a l t o t h i s Court. T h i s i s t h e f i r s t a p p e a l we h a v e been c a l l e d on t o h e a r from a f i n a l d e c r e e o f t h e Water C o u r t . and subsequent final decrees, we will I n reviewing t h i s , apply the same s t a n d a r d s o f r e v i e w a s any o t h e r a p p e a l from a D i s t r i c t C o u r t order. The q u e s t i o n w e c o n s i d e r i s : Who i s t h e owner o f w a t e r r i g h t d i v e r t e d o r d e v e l o p e d on s c h o o l t r u s t l a n d ; a the State o r the lessee? W hold t h a t t i t l e t o t h e s e water r i g h t s v e s t s i n t h e e State. The lessee, in making appropriations on and for s c h o o l t r u s t s e c t i o n s , i s a c t i n g on b e h a l f o f t h e S t a t e . It i s o n l y t h r o u g h s t a t e a c t i o n t h a t t h e lessee i s on t h e l a n d , and Montana law e x p r e s s l y p r o v i d e s t h a t t h e lessee s h a l l b e r e i m b u r s e d f o r a l l c a p i t a l e x p e n d i t u r e s made i n p u t t i n g t h e water t o b e n e f i c i a l use. lease, The l e s s e e , u n d e r t h e t e r m s o f t h e i s simply e n t i t l e d t o t h e - o f water appurtenant t o use t h e school t r u s t land. The S t a t e i s t h e b e n e f i c i a l u s e r o f t h e w a t e r , and i t s d u t y a s t r u s t e e o f t h e s c h o o l t r u s t l a n d s p r o h i b i t s it f r o m a l i e n a t i n g a n y i n t e r e s t i n t h e l a n d , such as full the appurtenant water right, without receiving compensation t h e r e f o r . The school trust lands endowments by are the United S t a t e s t o t h e S t a t e o f Montana f o r t h e b e n e f i t of t h e common schools. major A policy of the fledgling f o s t e r p u b l i c e d u c a t i o n by g r a n t s o f s t a t e s f o r t h a t purpose. nation was to l a n d t o newly a d m i t t e d Each o f t h e t h i r t y s t a t e s c a r v e d o u t o f t h e p u b l i c domain r e c e i v e d s u c h g r a n t s , v a r y i n g i n t h e and t e r m s o f t h e g r a n t , a s n a t i o n a l p o l i c y quantity granted, and political winds dictated. See g e n e r a l l y Woodgerd S t a t e School T r u s t s - - - - Royalty Rates, and O i l a n d Gas McCarthy, 3 Pub.Land L.Rev. 1 (1982). Montana was a d m i t t e d t o t h e Union Washington, North Enabling A c t , as Dakota, and South in 1889 a l o n g w i t h Dakota. The Omnibus supra, r e f l e c t s t h e g e n e r a l p o l i c y o f Congress s e t o u t above. genera1 and Even principles, before evolving Montana from the joined the judicial Union, review of e a r l i e r enabling a c t s , governing t h e school land g r a n t t r u s t s were well settled. U n i v e r s i t y v. I n two c a s e s , S t a t e of Indiana t h e T r u s t e e s o f Vincennes ( 1 8 5 2 ) , 55 U.S. 268, 1 4 L.Ed. 2 6 7 , a n d S p r i n g f i e l d T o w n s h i p v. Q u i c k ( 1 8 5 9 ) , 63 U.S. L.Ed. 256, the United States Supreme Court set 56, 1 6 out three lands: 1) t h a t to a private c h a r i t a b l e t r u s t which t h e s t a t e c o u l d n o t a b r i d g e ; 2) t h a t important p r i n c i p l e s governing school t r u s t the enabling acts created trusts similar t h e enabling a c t s w e r e t o be s t r i c t l y construed according t o f i d u c i a r y p r i n c i p l e s , and; 3) t h a t t h e e n a b l i n g a c t s preempt s t a t e laws o r c o n s t i t u t i o n s . 446 U.S. L.Ed.2d 500, 458, reaffirmed 520, 472, those 523, S e e a l s o Andrus v . Utah 100 S.Ct. 1803, 1814, (1980), 1815, 64 4 7 4 , w h e r e t h e U n i t e d S t a t e s Supreme C o u r t principles, holding that Congress imposed upon t h e s t a t e s a b i n d i n g a n d p e r p e t u a l o b l i g a t i o n t o u s e t h e granted lands f o r public education. The courts have been very protective of the trust c o n c e p t , and emphatic a b o u t t h e need t o p r e s e r v e t h e v a l u e o f t h e t r u s t corpus-the i s Lassen v. regard 584, school lands. 1 7 IJ.Ed.2d Arizona 515. The s e m i n a l c a s e i n t h i s ( 1 9 6 7 ) , 385 U.S. In Lassen, 458, 87 S . C t . t h e U n i t e d S t a t e s Supreme C o u r t h e l d t h a t t h e A r i z o n a Highway D e p a r t m e n t was r e q u i r e d t o f u l l y c o m p e n s a t e t h e S t a t e Land D e p a r t m e n t (administrator of t h e s c h o o l l a n d s ) f o r t h e v a l u e o f e a s e m e n t s t a k e n a c r o s s school lands. The C o u r t h e l d t h a t t h e A r i z o n a E n a b l i n g A c t , ch. Stat. 310, 36 557 (1910) "contain[ed] 'a specific enumeration o f t h e purposes f o r which t h e l a n d s w e r e g r a n t e d and the purpose'" L a s s e n a t 4 6 7 , 87 S . C t . (quoting Ervien v. S.Ct. is necessarily enumeration exclusive of a t 5 8 9 , 1 7 L.Ed.2d U n i t e d S t a t e s ( 1 9 2 8 ) , 2 5 1 U.S. 7 5 , 7 6 , 64 L.Ed. any 41, other a t 522 47, 40 128, 130). I n S t a t e o f U t a h v . Andrus (D. U t a h 1 9 7 9 ) , 486 F.Supp. 9 9 5 , t h e f e d e r a l d i s t r i c t c o u r t c o n c l u d e d t h a t t h e lessees o f state school l a n d s had a n i m p l i e d r i g h t of leasehold across adjacent federal lands. if it h e l d o t h e r w i s e , access t o t h e i r The c o u r t f e l t t h a t "the very purpose of t h e school t r u s t l a n d s would f a i l . Without a c c e s s t h e s t a t e could n o t develop the in trust lands any e c o n o m i c a l l y w o r t h 1 ess. F.Supp. a t 1002. fashion and they would become T h i s Congress d i d n o t i n t e n d . The C o u r t i n U t a h v . I' 486 A n d r u s made it c l e a r t h a t a n y r e s t r i c t i o n on t h e u s e ( i . e . a c c e s s ) o f s c h o o l t r u s t land t h a t e f f e c t i v e l y devalues it cannot b e s u s t a i n e d . T h i s Court h a s l i k e w i s e been emphatic i n p r o t e c t i n g t h e school t r u s t . P.2d land. 261, we I n Rider v. first held Cooney that a ( 1 9 3 3 ) , 94 Mont. lease 295, 23 is an "interest" i n Then, a p p l y i n g t h e r u l e t h a t i n t e r e s t s i n s c h o o l t r u s t l a n d s c a n n o t b e a l i e n a t e d f o r less t h a n f u l l v a l u e , w e h e l d that the S t a t e musts thereof. obtain See a l s o S t a t e e x rel. 42 Plont. 1981), also 1 0 5 , 1 1 2 P. 633 P.2d 706; 325; full Galen v. Gladden Farms, Arizona State S u p e r i o r C o u r t (Az. 1 9 8 1 ) , 633 P.2d v. B a b b i t t (Az. 1 9 8 1 ) , 6 3 3 P.2d (Ak. 1 9 8 1 ) , 624 P.2d Alaska I n J e r k e v. for Dist. Inc. Land a (1910), Ct. v. lease State (Az. Department v. 330; C i t y o f S i e r r a V i s t a S t a t e v. 333; University of 807. S t a t e Dept. o f Lands ( 1 9 7 9 ) , 182 Mont. 294, 49, w e addressed a s i t u a t i o n analogous t o t h e one a t 597 P.2d bar. value The g e n e r a l q u e s t i o n p r e s e n t e d w a s how f a r t h e S t a t e could surrender i t s managerial prerogatives over school lands without violating districts to the trust. manage jurisdiction. This and Montana allocate lands within r i g h t s t o members i n t h e r e - l e a s i n g of school lands t h a t a r e The p l a i n t i f f i n J e r k e contended t h a t t h e preference r i g h t unconstitutionally prevented from r e c e i v i n g f u l l the their t h e power t o g r a n t p r e f e r e n c e includes within the d i s t r i c t . l a w empowers g r a z i n g f a i r market v a l u e the State f o r t h e land. Since e x i s t i n g lessee who e x e r c i s e d t h e p r e f e r e n c e r i g h t w a s not using the land (and thus not "follow[ing] good a g r i c u l t u r a l p r a c t i c e s and mak[ing] improvements on t h e l a n d " a t right unconstitutional was 297, 597 P.2d 1 8 2 Mont. a t 51), we held as applied. the preference T h i s was because: "To a l l o w t h e p r e f e r e n c e r i g h t t o b e to exercised in this case would be install the Grazing D i s t r i c t a s t h e It, r a t h e r than t h e t r u s t e e of t h e land. Department o f S t a t e Lands, would d e c i d e who w i l l o c c u p y t h e l a n d b u t it w o u l d n o t b e bound by a c o n s t i t u t i o n a l o r f i d u c i a r y duty." 1 8 2 Mont. a t 297, 597 P.2d a t 51. S e e a l s o S t a t e e x r e l . Thompson v . 46, 409 P.2d 808 Babcock ( 1 9 6 6 ) , 1 4 7 Mont. (upholding t h e Commissioner's d i s c r e t i o n a r y a u t h o r i t y t o a c c e p t l e a s e terms l e s s t h a n t h e h i g h e s t b i d i n o r d e r t o e f f e c t u a t e s u s t a i n e d y i e l d c o n c e p t s and i n s u r e t h e long-term s t r e n g t h o f t h e t r u s t c o r p u s ) ; I n R e Montana T r u s t ( 1 9 6 4 ) , 143 Mont. and Legacy Fund 388 P.2d 366. The Supreme C o u r t i n Oklahoma E d u c a t i o n A s s o c i a t i o n v. Oklahoma Nigh 218, (Ok. 1 9 8 2 ) , 642 P.2d 230 h a s a l s o a d d r e s s e d t h e same question a s t h i s Court did i n Jerke. The Oklahoma c o u r t went f u r t h e r and found s e v e r a l s t a t e s t a t u t e s l i m i t i n g t h e amount o f i n t e r e s t t h a t t h e s t a t e c o u l d receive on s c h o o l l a n d s , and c r e a t i n g p r e f e r e n c e s i n t h e r e - l e a s i n g o f s c h o o l l a n d s , t o be unconstitutional. Most r e c e n t l y , t h e Washington Supreme C o u r t u p h e l d t h e federal land Products grant trust Industry 79.01.1331-.1339, i n h o l d i n g t h e Washington Recovery of Act unconstitutional. 1982, Forest R.C.W. The A c t was p a s s e d i n response t o t h e d e c l i n e of t h e p r i c e s i n t h e f o r e s t products industry a t the t i m e . I t a l l o w e d t h e Washington Department o f S t a t e Lands t o r e l e a s e c o n t r a c t s p r e v i o u s l y e n t e r e d i n t o with loggers and other forest products industry stood t o lose a g r e a t deal, prices, the if Supreme C o u r t , 685 P.2d were contracts users because the due t o t h e d e c l i n e i n enforced. i n Skamania County v . The Washington Washington (Wa. 1984) , 576, d e a l t w i t h t h e c o n t r a c t s on s c h o o l t r u s t l a n d . Premising its considered argument this enforceable issue trusts by stating: has that "Every court that that these are real the state the same concluded impose upon has f i d u c i a r y d u t i e s a p p l i c a b l e t o p r i v a t e t r u s t e e s , " 685 P.2d a t 580, the court found the act transferring t r u s t assets--the their 583. f u l l v a l u e and h e l d See Washington: also --A Case Torve had violated the contract rights--for it u n c o n s t i t u t i o n a l . and Handy, Fall by less t h a n 685 P.2d Skamania o f Divided L o y a l t i e s , trust at County v. 1984, Western N a t u r a l R e s o u r c e s L i t i g a t i o n D i g e s t Commentary 7 . The above cases establish two main points i m p o r t a n t when c o n s i d e r i n g e i t h e r minor p r e m i s e our decision. First, an i n t e r e s t i n school that are 1-eading t o l a n d c a n n o t be a l i e n a t e d u n l e s s t h e t r u s t r e c e i v e s adequate compensation f o r Water t h a t i s a p p u r t e n a n t t o t h e s c h o o l l a n d s that interest. i s an i n t e r e s t f o r which t h e t r u s t must r e c e i v e c o m p e n s a t i o n . Second, any law managerial or policy prerogatives that over infringes on school lands the t o l e r a t e d i f it reduces t h e value o f t h e land. the state's cannot be In t h i s case, t h e DSL c o n t e n d s t h a t t o a l l o w l e s s e e s t o d e v e l o p p r i v a t e , personal the rights DSL's on ability school l a n d s would t o manage t h e s e impermissibly lands reduce f o r t h e i r highest value. S e c t i o n 70-15-105, MCA s t a t e s t h a t : "A t h i n g i s deemed t o b e i n c i d e n t a l o r a p p u r t e n a n t t o l a n d when i t i s by r i g h t used w i t h t h e land f o r i t s b e n e f i t , a s i n t h e c a s e o f a way o r w a t e r c o u r s e o r o f a p a s s a g e f o r l i g h t , a i r o r h e a t from o r a c r o s s t h e land of another." Further, P r o f e s s o r W e l l s A. Hutchins, i n h i s t r e a t i s e Water R i h t s Laws i n t h L - - -e N i n e t e e n Western S t a t e s Dept. (U.S. application right of Agriculture, states: at I "Of 455 general i s t h e r u l e t h a t an a p p r o p r i a t i v e i n t h e West becomes 1971) Vol. appurtenant to the land for the benefit of water is which t h e w a t e r i s a p p l i e d . " In Montana, the determination whether of a p p u r t e n a n t t o t h e l a n d i s one o f f a c t . Co. v. A s s o c i a t e d Mortgage I n v e s t o r s , 73, 290 P. 255; see a l s o H u t c h i n s , Yellowstone Valley Inc. supra ( 1 9 3 0 ) , 8 8 Mont. a t 459. Here, by s t i p u l a t e d f a c t s , it appears t h a t a l l o f t h e water r i g h t s a t issue are lands. used Additionally, classified MCA, either and grazing the i n whole all lands water of under or the in lands sections appropriated part on in on school question 77-1-401 them the is to used are -404, for stockwatering or other agricultural purposes. The water r i g h t s i n question a r e appurtenant. This is conclusion consistent with the general t h a t when t i t l e t o i r r i g a t e d p r o p e r t y i s p a s s e d , rule t h e water r i g h t s pass a s an appurtenance u n l e s s s p e c i f i c a l l y excepted. Section 85-2-403, 642 P.2d Mont. 41, C a s t i l l o v. MCA; 1019, 39 St.Rep. 511, 515 89. (Mont. 460; Adams v. C h i l c o t t 1140; Schwend v. 597 P.2d P.2d Kunnemann Jones Respondents point 1982), ( 1 9 7 9 ) , 182 ( 1 9 7 3 ) , 163 Mont. to no authority e x p l a i n i n g why t h e r u l e i n r e g a r d t o l e a s e s o f l a n d s h o u l d b e W e b e l i e v e it s h o u l d d i f f e r e n t than with t h e s a l e of land. be the same--the parties to any such transaction may s p e c i f i c a l l y e f f e c t a severance, b u t absent such, t h e water r i g h t remains appurtenant, following t i t l e . I t d o e s n o t make s e n s e f o r e a c h s u c c e e d i n g t e n a n t t o walk o f f w i t h one w a t e r r i g h t a f t e r another. cite Respondents articulate a contrary ( 1 9 0 0 ) , 24 Mont. 20, several rule. 60 P. cases The 398, that first, appear Smith v . to Denniff is distinguishable i n the f a c t t h a t it c o n c e r n e d w a t e r a p p r o p r i a t i o n s made by s q u a t t e r s on t h e f e d e r a l l a n d s who d i v e r t e d w a t e r f o r u s e on t h e p u b l i c doma i n . The school trust lands were withdrawn from the p u b l i c domain by t h e Montana T e r r i t o r y O r g a n i c A c t , s u p r a , i n 1866, and none of developed before lands subject are public lands. the then. to rights As a at issue discussed different in this above, set of case were school rules than trust other S e c o n d l y t h e y c i t e Hayes v. Buzzard ( 1 9 0 4 ) , 3 1 Mont. 74, 77 P. 423 f o r t h e r u l e t h a t t h e q u e s t i o n o f w h e t h e r w a t e r i s a p p u r t e n a n t t o t h e u n d e r l y i n g l a n d t u r n s upon i n t e n t i o n of t h e appropriator. domain land, not that distinction: school t r u s t the A g a i n , Hayes a r o s e on p u b l i c land. This Court recognized "The l e g a l t i t l e t o t h e l a n d upon which a w a t e r r i g h t a c q u i r e d by a - - r o-p r i a t i o n pp made - -on t h e p u b l i c doiain [emphasis added] i s u s e d o r i n t e n d e d t o b e u s e d i n no w i s e a f f e c t s t h e a p p r o p r i a t o r s t i t l e t o t h e water r i g h t , f o r t h e - bona f i d e [ e m p h a s i s i n o r i g i n a l ] i n t e n t i o n which i s r e q u i r e d o f an a p p r o p r i a t o r t o a p p l y t h e water to some useful purpose may comprehend a use upon lands and possessions other than those of the a p p r o p r i a t o r , o r a use f o r purposes o t h e r than those f o r which t h e r i g h t was 3 1 Mont. a t 8 1 o r i g i n a l l y appropriated." 7 7 P.2d a t 425, q u o t i n g Smith v . D e n i f f , supra. (See a l s o Ervien, that the [school t r u s t ] collectively ordinary state's constitute public .. people. at "Congress d i d n o t intend l a n d s g r a n t e d and c o n f i r m e d should 246 F. lands a genera1 held Respondents' ") concern with 280: resource broadly argument meeting its or in does trust asset like for the answer the trust not responsibilities. S i n c e a n a p p u r t e n a n t w a t e r r i g h t i s an i n t e r e s t i n t h e land (see a l s o Asso. Mtg. section Investors, 70-1-106, MCA; Yellowstone lessees alleged v. s u p r a ) i t c a n n o t b e s u r r e n d e r e d by t h e S t a t e without t h e t r u s t r e c e i v i n g f a i r market value. the Co. payment of consideration to None o f the State a p a r t from t h a t r e q u i r e d by t h e l e a s e , and t h u s w e c o n c l u d e t h a t t h e w a t e r r i g h t s a p p u r t e n a n t t o such l a n d s belong t o t h e State. The S t a t e a r g u e s t h a t v e s t i n g t i t l e i n lessees would v i o l a t e t h e t r u s t f o r another reason. lease, but retained I f a lessee l o s t h i s t h e water r i g h t , that lessee would e f f e c t be a b l e t o c o n t r o l t h e use o f t h e land. in this control semi-arid of the land area, the itself. control of Conceivably, in I n many c a s e s water the means DSL, the in a d e s i r e t o i n s u r e t h a t t h e l a n d had w a t e r , c o u l d f i n d i t s e l f i n t h e awkward p o s i t j - o n o f n e g o t i a t i n g w i t h a f o r m e r l e s s e e , who m i g h t b e i n c l i n e d t o r e l e a s e h i s r i g h t o n l y t o f a m i l y o r friends--thus assuring h i s re-entry. The f o r m e r l e s s e e c o u l d " c h i l l " t h e b i d d i n g p r o c e s s by l e t t i n g it b e known t h a t h e would o n l y r e l e a s e h i s r i g h t a t a n i n f l a t e d p r i c e . Finally, t h e former l e s s e e could conceivably d i c t a t e p o s s i b l e u s e s o f t h e land i n r e t u r n f o r t h e water. This s i t u a t i o n i s c l e a r l y repugnant t o school t r u s t p r i n c i p l e s . v. S t a t e Department o f L a n d s , supra, This Court, i n Jerke and o t h e r c o u r t s , see Oklahoma E d u c a t i o n Assoc. v. Nigh, s u p r a and S t a t e o f Utah v. Andrus, supra, on use the have c o n s i s t e n t l y h e l d t h a t any i n f r i n g e m e n t or management prerogatives of the State e f f e c t i v e l y devalue school lands i s impermissible. that W e agree, and f i n d t h i s t o b e a n a l t e r n a t i v e ground f o r o u r d e c i s i o n . Respondents point to section 77-6-115, MCA, which states in pertinent part that: " (1) The lessee o f s t a t e l a n d s may a t any time prior to 1 year before the e x p i r a t i o n o f h i s l e a s e make a p p l i c a t i o n t o t h e board f o r permission t o secure a water right to the land under his If t h e proposed p l a n meets lease. with the approval of the board, p e r m i s s i o n s h a l l b e g r a n t e d t h e lessee t o secure t h e desired water r i g h t f o r t h e land and to place the same under irrigation. .. " ( 2 ) I f s u c h w a t e r r i g h t becomes a permanent and v a l u a b l e improvement, t h e n i n case of t h e s a l e o r l e a s e of t h e lands t o o t h e r p a r t i e s , t h e f o r m e r lessee s h a l l be e n t i t l e d t o r e c e i v e compensation i n the amount of the reasonable value thereof, as in the case of other improvements, from t h e new l e s s e e o r t h e purchaser. " ( 3 ) These p r o v i s i o n s s h a l l n o t b e s o c o n s t r u e d a s t o make t h e s t a t e l i a b l e t o t h e l e s s e e f o r t h e payment o f t h e c o s t o r v a l u e o f s u c h i r r i g a t i o n improvements." They c o n t e n d t h a t t h i s s t a t u t e , i n e f f e c t , property interest further, that in of the lessee subsection (3) in the the acknowledges t h e water State right, and denounces any i n t e r e s t i n t h e w a t e r by r e l e a s i n g i t s e l f from l i a b i l i t y f o r t h e c o s t o f i r r i g a t i o n improvements. to 526.3.123, A.R.M., which p r o v i d e s Respondents a l s o p o i n t that the State shall r e i m b u r s e d e p a r t i n g l e s s e e s f o r t h e r e a s o n a b l e v a l u e of t h e improvements that, made (as "[alny water per 77-6-115(2), section rights hereafter secured by MCA), lessee the s h a l l b e s e c u r e d i n t h e name o f t h e s t a t e o f Montana." a r g u e t h a t s i n c e 526-3.123 and They was n o t a d o p t e d u n t i l 1 9 7 9 , A.R.M. it d o e s n o t a p p l y t o t h e w a t e r r i g h t s i n t h i s c a s e b e c a u s e them p r e d a t e it. a l l of lends i t s e l f acquiesced Both o f They a l s o a r g u e t h a t t h e p r o v i s i o n t o supporting t h e position i n r e c o g n i z i n g pre-1979 t h a t t h e S t a t e had w a t e r r i g h t s i n lessees. t h e s e arguments a r e unfounded. F i r s t , none o f the alleged r i g h t s a t issue i n t h i s case w e r e perfected pursuant to section provision 77-6-115, can be or MCA used as 526-3.123, direct Neither A.R.M. a u t h o r i t y by respondents. F o r t h a t r e a s o n w e a r e n o t c a l l e d upon t o c o n s t r u e s e c t i o n 77-6-115, MCA. interpretations: respondents other first, argue; improvements, it i s capable o f n o t e though t h a t We such as applying secondly, as ditches, capital projects, to as water rights as only to headgates, and o r attached "to" applying reservoirs, constructed "for" two t h e l a n d and n o t s u b j e c t t o b e i n g r e t a i n e d by t h e l e s s e e upon payment by other a improvements possible v. is Clark 171; (1984 e d . ) . Nigh, the interpretations interpretation L.Ed.2d to leasehold, as contended by the The g e n e r a l r u l e i s t h a t whenever t h e r e a r e d i f f e r i n g State. States a s i s t h e case with lessee o r p u r c h a s e r , new favored (1980), Sutherland In decisions of over 445 on t h i s regard, holding statute, one U.S. a that 23, Statutory is 100 constitutional not. S.Ct. Construction United 895, 545.11 we p o i n t t o t h e Skamania statutes unconstitutional 63 and because t h e y v i o l a t e d t h e s c h o o l t r u s t p r i n c i p l e s e s t a b l i s h e d by t h a t s t a t e ' s Enabling A c t . In the 77-6-115, alternative, respondents f o r t h i n s e c t i o n 85-2-101, doctrine, rise give implied severance of water estopped to deny these from and t h a t t h e S t a t e i s land i n t h e school t r u s t land leases, now section and t h e p r i o r a p p r o p r i a t i o n MCA, t o an that t h e Water U s e A c t s e t and t h e p r i n c i p l e s o f MCA, argue rights because of the l o n g - s t a n d i n g a n d d e t r i m e n t a l r e l i a n c e b y t h e lessees. we As discussed above, s u b j e c t t o t h e school t r u s t . property is held i n t r u s t , that a n y o n e who the State holds these lands The e s s e n c e o f a f i n d i n g t h a t school, public, acquires interests in o r otherwise, is s u c h p r o p e r t y do s o " s u b j e c t t o t h e t r u s t " N a t . Audubon S o c i e t y v. S u p e r i o r C o u r t (Cal. 1 9 8 3 ) , 658 P.2d Railroad v. Illinois L.Ed. (a 1018 709, 723. See a l s o I l l i n o i s C e n t r a l ( 1 8 9 2 ) , 146 U.S. s t a t e may not abdicate p r o p e r t y ) ; a n d Thompson v. Babcock, 812, the absent interest adequate therein"). consideration, 13 S.Ct. its t r u s t 1 1 0 , 36 i n public s u p r a a t 5 4 , 409 P.2d ("[wlhen s t a t e land i s l e a s e d , entire 387, a t it does n o t r e l i n q u i s h The to State grant has the no power, lessees the permission t o d e v e l o p non-appurtenant w a t e r r i g h t s , and e v e r y s c h o o l t r u s t l e a s e c a r r i e s w i t h it t h i s l i m i t a t i o n . Respondents' argument that they have detrimentally r e l i e d upon " r e p r e s e n t a t i o n s " by t h e S t a t e made t h r o u g h i t s is not persuasive. laws and r e g u l a t i o n s , detriment. receive S e c t i o n 77-6-302, reasonable There h a s been no MCA p r o v i d e s t h a t lessors w i l l compensation for any improvements they h a v e made on t h e l e a s e h o l d i f t h e y r e l i n q u i s h t h e p r o p e r t y t o a new lessee o r p u r c h a s e r . rule Further, sets up d i s i n c e n t i v e s resources, contrary to t h e argument t h a t t h i s t o t h e development of the genera1 policy our water set o u t i n the W a t e r U s e A c t of p r o m o t i o n g t h e b e n e f i c i a l u s e o f w a t e r , also not persuasive. Section 77-6-302, MCA is actually i n s u l a t e s t h e developer-lessee would h a v e t o b e a r The Montana IX, i f making from a n y m a r k e t r i s k t h a t h e i m p r o v e m e n t s o n h i s own l a n d . Constitution requires this result. Art. sec. 3 (1), p r o v i d e s t h a t " a l l e x i s t i n g r i g h t s t o t h e u s e o f a n y w a t e r s for a n y u s e f u l o r b e n e f i c i a l p u r p o s e a r e h e r e b y r e c o g n i z e d and confirmed." This provision prevents t h e S t a t e f r o m a f f e c t i n g r i g h t s v e s t e d a t t h e t i m e t h e C o n s t i t u t i o n was adopted o t h e r than through t h e e x e r c i s e o f C o n s t i t u t i o n a l l y p r o v i d e d p o w e r s s u c h a s e m i n e n t d o m a i n , Mont. C o n s t . A r t . sec. 29, o r t h e g e n e r a l p o l i c e power, d u e p r o c e s s o f l a w , Mont. State, through t h e and w i t h o u t a f f o r d i n g Art.m, sec. Const. adjudication was Here the is claiming, process, t h i s Court i s recognizing r i g h t s "existing" 1972 C o n s t i t u t i o n 11, adopted-- Art. we h o l d that the a t the t i m e the sec. IX, and 3 ( l ) merely reaffirms these rights. As t e r m s of water stated t h e school t r u s t 'lease, to the appurtenant beneficial school the above, user thereof, it lands prohibits land absent full under the is entitled t o the use of leased and lessee, land. its duty State is the trustee of the The as from a l i e n a t i n g t h i s i n t e r e s t i n compensation therefor. Absent such compensation, t h e t i t l e t o t h e water r i g h t s i n t h i s c a s e v e s t in the State. A p p e l l a n t s and a m i c i have urged t h i s C o u r t t o f i n d t h a t school right trust lands benefit from a a s o r i g i n a l l y recognized ( 1 9 0 7 ) , 207 U.S. 564, 28 S . C t . t h e S t a t e has succeeded. federally reserved water i n Winters v. United 207, 340, 52 L.Ed. I n our opinion, States t o which it i s p e r h a p s b e s t t o keep t h e reserved r i g h t s d o c t r i n e confined t o s i t u a t i o n s w h e r e it a r o s e a n d i s m o s t a p p r o p r i a t e ; between f e d e r a l and s t a t e i n t e r e s t s . a s a n accommodation S i n c e t h e r u l e we have s t a t e d i s s u f f i c i e n t t o settle t h e case a t bar, p r i n c i p l e s of judicial restraint counsel us to decline ruling further. This r u l e applies t o a l l the waters a t issue. Subject t o T i t l e 8 5 , C h a p t e r 2 , P a r t 5 , MCA, g r o u n d w a t e r a p p r o p r i a t e d and u s e d on S t a t e l a n d s h o u l d b e t r e a t e d n o d i f f e r e n t l y t h a n surface waters appropriated Montana C o n s t i t u t i o n , A r t . Water U s e A c t , and u s e d IX, sec. s e c t i o n 85-2-102(14), on t h o s e 3 , Mont. lands. Const. The and t h e MCA, make no d i s t i n c t i o n b e t w e e n g r o u n d w a t e r and o t h e r w a t e r r i g h t s . The O r d e r o f t h e Water C o u r t i s r e v e r s e d , and t h e c a s e remanded f o r t h e p u r p o s e o f m o d i f y i n g t h e Powder R i v e r F i n a l Decree i n c o m p l i a n c e w i t h t h i s O p i n i o n . W e concur: , / 1 Justices Mr. Justice Frank B. Morrison, Jr. specially concurring: The majority opinion recalls to mind the old Montanan who said, "A moose is a cow designed by a committee." Indeed, this moose must have been designed by a committee. The only bright light which shines through otherwise verbose and rambling epistle is the result. this In that I concur. The majority opinion contains a good deal of judicial chaff including a rather lengthy recital of irrelevant historical data surrounding passage of the Montana Water Use Act of 1973. This effort effectively obfuscates the issues while impressing the casual reader that scholarship is the cornerstone of the majority's pronouncement. The issue in this case is quite simple and straight forward. At the time the federal government granted school lands to the state in trust for educational purposes, did the federal government include within the grant the right to develop water to achieve the educational purposes of the trust? If, as an incident of ownership, the state acquired, as appurtenant to the land, the right to develop water so that the purpose of the trust could be realized, then the state cannot alienate that property right in diminution of the trust res. The majority opinion initially indicates that the educational purpose of the trust cannot be realized without an appurtenant water right. With this I agree. However, in an apparent attempt to avoid interrupting the priorities of other appropriators, the majority seems to be saying that this appurtenant right did not spring into existence until it was developed by the lessee. priority of appropriators. This approach recognizes the In order to accomplish this objective the majority has created a fictional agency whereby t h e lessee, who d e v e l o p s t h e w a t e r , d o e s s o on b e h a l f o f t h e T h i s n o n s e n s e i s engaged t o a c h i e v e a r e s u l t . state. The majority's effort to secure unto school lands a s u f f i c i e n t amount o f w a t e r t o maximize t h e i r income p o t e n t i a l for the trust, without disrupting p r i o r r i g h t s , could have been a c h i e v e d on a more l e g a l l y sound f o u n d a t i o n by s i m p l y holding that the federal government granted to the state school lands w i t h t h e appurtenant r i g h t t o develop water i n o r d e r t o maximize t h e i r income p r o d u c i n g a b i l i t y . then could doctrine, have held that, under the prior The c o u r t appropriation a p r i o r i t y d a t e d i d n o t commence u n t i l t h e r i g h t was d e v e l o p e d . I n t h i s way, at have the right recognized beginning which property would give a least, in basis t h e m a j o r i t y would the for state from t h e holding that the l a n d s w e r e withdrawn from the lessee d e v e l o p e d t h e r i g h t f o r t h e s t a t e . In public truth, domain government purposes, these prior granted school to to any the appropriation. state, in The trust for federal educational l a n d and t h e w a t e r n e c e s s a r y t o d e v e l o p t h e f o r i t s t r u s t purposes. Later, land when t h e p u b l i c domain was s e t t l e d a p p r o p r i a t i o n s w e r e made b u t t h e a p p r o p r i a t i o n s o n l y operated on those lands remaining in the public domain. S e t t l e r s who moved i n and a p p r o p r i a t e d c o u l d have o b t a i n e d no w a t e r from I s c h o o l l a n d s which r e s i d e d s a f e l y i n t h e t r u s t . find it unfortunate that reference i s made "Winters Doctrine" o r t o f e d e r a l reserved r i g h t s . is some anticipation precedent will effect there the by the majority adjudication P e r h a p s by a n a l o g y it w i l l . of to the Apparently that Indian this water However, those cases I concur i n t h e r e s u l t f o r t h e reason t h a t , a t the t i m e rights. a r e not before us. o f t h e c r e a t i o n o f t h e s c h o o l t r u s t , t h e f e d e r a l government conveyed to the state, not only the land, but the appurtenant right to develop water necessary for fulfillment of the trust purpose. I specifically disavow the remainder of the

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