Elk Grove Dev. Co. v. Four Corners Cnty. Water & Sewer Dist.

400 Mont. 515

469 P.3d 153

2020 MT 195

ELK GROVE DEVELOPMENT COMPANY, Plaintiff and Appellee,

v.FOUR CORNERS COUNTY WATER AND SEWER DISTRICT, Defendant and Appellant,Elk Grove Homeowners Association, Inc., a Montana Non-Profit Corporation, Intervenor and Appellee.

DA 19-0599

Supreme Court of Montana.

Submitted on Briefs: June 3, 2020

Decided: August 4, 2020

For Appellant: Susan B. Swimley, Attorney & Counselor at Law, Bozeman, Montana Brian K. Gallik, Gallik, Bremer & Molloy, P.C., Bozeman, Montana Dana E. Pepper, River and Range Law, Bozeman, Montana

For Appellee Elk Grove Development Company: Alan F. McCormick, Nicholas J. Lofing, Garlington, Lohn & Robinson, PLLP, Missoula, Montana

For Intervenor and Appellee Elk Grove Homeowners Association, Inc.: Alanah N. Griffith, Liz Leman, Griffith & Cummings, PC, Big Sky, Montana

Justice Jim Rice delivered the Opinion of the Court.

¶1 Four Corners County Water and Sewer District (Water District) appeals from the entry of summary judgment in favor of Elk Grove Development Company (Elk Grove) and the Elk Grove Homeowners Association (HOA), by the Eighteenth Judicial District Court, Gallatin County, and entry of an injunction enjoining the Water District "from using the [Elk Grove] Subdivision's water sourced from any of the wells located within the Subdivision and from the Water Right" for use upon property outside the Subdivision. We reverse and remand, addressing only the issue restated as follows:

Did the District Court err by determining the subdivision covenant was a reasonable restraint upon the alienation of a water right?

FACTUAL AND PROCEDURAL BACKGROUND

¶2 This case arises out of the use and proposed use of water pursuant to a water right obtained for a water system located in the Elk Grove Subdivision (Subdivision), in Gallatin County, Montana. The Subdivision consists of numerous properties in four platted, approved, and recorded phases, for residential, commercial, and open space uses. Three of the phases have been developed for primarily residential purposes, and the fourth remains yet undeveloped, including 12 commercial lots. The Subdivision was originally developed by Elk Grove and its related entity, Concinnity, LLC (Concinnity), in the early 2000s.¹ Concinnity applied for and was issued Water Use Permit 41H-110168-00 (the Water Right) by the Montana Department of Natural Resources and Conservation (DNRC), for the Subdivision's use, and Elk Grove designed and developed a technologically advanced, closed-loop, self-supporting water and wastewater system that did not require any off-site utilities, to serve the Subdivision.

¶3 A set of covenants entitled the "Real Covenants" were adopted for the Subdivision. One such covenant, separately untitled within the Real Covenants but denominated by the District Court as the "Water Distribution Covenant" (Covenant), is the central focus of this litigation, and provides:

The Water Distribution Properties shall be possessed and used exclusively for the diversion and distribution of a water and water supply for residential, commercial and open space use (including, but not by way of limitation, the irrigation of parks) of all the Benefited Property and each part thereof, and all of the Water Distribution Properties shall be deemed dedicated to a public use.

The referenced "Water Distribution Properties" were further defined as property "burdened" by the Real Covenants, and are comprised of "[a]ll water and water rights related to or arising out of Water Use Permit No. 41H-P110168-00," as well as the physical components of the water system and associated easements, separately described in detail within the Real Covenants and summarized by Elk Grove's appellate briefing as the "utility lots, easements, pumps, wells, pipelines and related infrastructure that were developed to deliver water to the Benefited Property.² " Additional "Burdened Property" under the Real Covenants included the sewage and wastewater treatment properties.³ All of the Real Covenants were made to "run with the land and benefit each and all of the owners" of the land within the Subdivision.

¶4 In 2003, Elk Grove/Concinnity conveyed the water system and the Water Right to Utility Solutions, LLC (Utility Solutions) by warranty deed that was made "subject to ... and shall be burdened by those real covenants set forth as Exhibit 5 hereto." Exhibit 5 was the Real Covenants, including the Water Distribution Covenant. In 2006, Utility Solutions applied with the DNRC to modify the Water Right to include additional property in a portion of a neighboring undeveloped subdivision owned by APK, LLC (APK Property). The DNRC received no objections to Utility Solutions' application, and authorized the change in July of 2007. In accordance with the authorization, Utility Solutions thereafter contracted to provide water to the APK Property.

¶5 In 2015, Utility Solutions sold its interest in the system, including the Water Right, to the Water District, which assumed the contract to provide water to the APK Property. The conveyance to the Water District was made by warranty deed that provided the transfer was subject to "all covenants, conditions, restrictions, and agreements and instruments of record," which indisputably included the Real Covenants.

¶6 Subsequent action by the Water District before the DNRC with regard to the Water Right is factually contested. The Water District states it "applied for an extension of the Water Right before its expiration date," and that DNRC "has treated the Water Right as extended." Elk Grove contends, referring to the change to the Water Right approved by DNRC in 2007, that Utility Solutions and its successor Water District "appear to have failed to complete the change within the time allotted in the change approval. In other words, the conditional water rights change authorization may now be expired."⁴ However, Elk Grove further offers that "[t]he fact that DNRC has not definitively taken final action on the extension during the pendency of this appeal is immaterial to the outcome of the present issues. Elk Grove offers these facts for context only."

¶7 Also factually disputed is whether the 2006-2007 change application process before the DNRC was properly noticed. The Water District states, at that time, "DNRC published notices in the Bozeman Daily Chronicle in accordance with [the MCA]," and that, "[h]ad Appellee Elk Grove or Intervenor HOA objected to DNRC's Change of Place of Use Permit between 2007 and 2015, the Appellant Water District had time and ability not to assume the APK Contract. Their silence caused the Appellant Water District to assume the contractual obligation to provide water to APK." Elk Grove answers that "[n]otice of the change application was not completed in accordance with the [MCA.] Having not given proper notice, no objections were received," leading DNRC to conditionally approve the change. Elk Grove asserts it did not learn of the Water District's intent to provide water to property outside the Subdivision until a couple years later. The District Court reasoned that resolution of these questions was not necessary for purposes of its ruling.

¶8 Elk Grove initiated this litigation by filing a complaint for a permanent injunction, praying for "an order enjoining [the Water District] from offering water service sourced from any well located on the Burdened Property and from the Water Right to any property" outside the Subdivision. Elk Grove moved for summary judgment, arguing "[t]he Covenants unambiguously restrict off-subdivision use of water from wells and appurtenant infrastructure[.]" The Water District opposed the motion and filed a cross motion for summary judgment, arguing "an interpretation of the Covenant that precludes the use of the Water Right ... is an unreasonable restraint on alienation that renders the Covenant void." The HOA intervened in the action and moved the District Court for issuance of a preliminary injunction prohibiting the Water District from "withdraw[ing] water, in violation of the Association's rights and water right covenants, during the pendency of this litigation." At a hearing on the motions, the Water District argued, in response to the District Court's questioning, that the restraint was ineffective because the DNRC's change-of-use determination "trumps" the Covenant.

¶9 The District Court first interpreted the Covenant, holding "the Water Distribution Covenant clearly and unambiguously restricts water supply only to those lots in the Subdivision," and any "attempt to deliver water from the Subdivision's water supply to property outside the Subdivision is therefore a violation of the plain terms of the Water Distribution Covenant." Addressing the water right change process, the District Court held that "enforcement of the Water Distribution Covenant precludes any attempt by the Water Right holder to apply to change or potentially expand the right[,]" thus essentially voiding as a matter of law the change process that had been conducted by the DNRC for Water Use Permit No. 41H-110168-00 in response to Utility Solutions' application.

¶10 Turning to the question of whether the Covenant was an unreasonable restraint of alienation, the District Court applied the factors we have cited for assessing the reasonableness of such provisions. See Edgar v. Hunt , 218 Mont. 30, 33-34, 706 P.2d 120, 122 (1985) ; Urquhart v. Teller , 1998 MT 119, ¶ 18, 288 Mont. 497, 958 P.2d 714. Although recognizing several unique aspects of water rights generally, the District Court determined that "the Water Distribution Covenant, although a restraint on alienability, is not unreasonable or repugnant to the interest created, but rather furthers its intended purpose of proactively protecting the exclusive water distribution source for the Subdivision." The District Court granted summary judgment in favor of Elk Grove and the HOA, and entered an injunction that provided as follows:

[The Water District] is

...