Summary of a Recent
Judicial Development in
Water Law

District Court Properly Interpreted Settlement Agreement Regarding
Division of Water Rights

Eric H. Foy
National AgLaw Center Research Associate

Summary of Decision

In Kruer v. Three Creeks Ranch of Wyoming, L.L.C., 194 P.3d 634 (Mont. 2008), the Supreme Court of Montana affirmed the district court's decision, awarding disputed water rights, costs, and attorney fees to a purchaser of water rights. A vendor filed the instant appeal disputing the district court's interpretation of the contract between the parties. The court held that the district court appropriately exercised jurisdiction to hear the case, the district court properly determined the percentage of rights between the parties, the purchaser was a prevailing party, and the purchaser's documentation of attorney fees was sufficiently detailed.

Background

In 1999, Three Creeks Ranch of Wyoming (Three Creeks) purchased 2,500 acres of land located in Madison County, Montana. Id. at 635. Three Creeks intended to develop the land into subdivisions in three stages. Id. During fall of 1999, Kruer began working for Three Creeks. Id. at 636. A few months later, Kruer signed an agreement to purchase two subdivision lots from Three Creeks. Id. Under the purchase agreement, Kruer obtained 80 percent of the water rights from each of the two existing water decrees, while Three Creeks retained the remaining 20 percent. Id. In May 2000, Kruer and Three Creeks formed a limited liability corporation together, but their relationship soured soon thereafter. Id. The purchase of the two subdivision lots eventually closed in July 2002; however, the parties continued to entertain a hostile relationship. Id.

In August 2004, Kruer filed an amended complaint against Three Creeks seeking a declaratory judgment, and showing that she owned the two lots in fee simple and was not a trespasser or holdover tenant. Id. She also sought attorney fees and costs. Id. Three Creeks responded, asserting several affirmative defenses, and counter-claimed for breach of contract, unjust enrichment, fraud, and trespass. Id. In August 2005, the parties entered into a settlement agreement and Three Creeks released all claims of title to the two lots. Id. Under the settlement agreement, Kruer received an additional subdivision lot by warranty deed and 80 percent of the water rights from the two existing water decrees. Id. The settlement agreement also gave Kruer the rights to water appurtenant to the newly acquired lot, but it failed to divide the other 20 percent of the existing water decrees or address what the agreement meant by "appurtenant to the newly acquired lot." Id. In November 2005, each of the parties filed motions to enforce the settlement agreement. Id. The district court's rulings are the subject of the instant appeal. Id.

Analysis and Holdings

The court was presented with three questions on appeal: (1) Did the district court appropriately exercise subject matter jurisdiction to initially hear the case; (2) did the district court correctly interpret the terms and provisions of the settlement agreement; and (3) was Kruer a prevailing party and entitled to attorney fees? Id. at 637.

Three Creeks maintained that the water rights to the existing water decrees had been determined by a prior water court determination. Id. It argued that the instant court could not re-adjudicate the originally declared water rights. Id. Kruer argued that the court was not re-adjudicating the originally declared water right, but instead was interpreting the settlement agreement as requested by both parties. Id. The court held that interpreting the settlement agreement was the crux of the dispute and was wholly within the jurisdiction of the court. Id. The district court had the authority to supervise the distribution of water that was already adjudicated. Id.

The district court examined the historic use of one of the water decrees and awarded it to Kruer. Id. Three Creeks claimed that the award was improper and erroneous. Id. Kruer asserted that a water right is appurtenant to the land where it is used. Id. The court held that historic beneficial use was the proper standard to judge appurtenance. Id. Based on the historical beneficial use, the court determined that the water rights were appurtenant to Kruer's property. Id.

Next, Three Creeks argued that the district court's apportionment violated the express provisions of the settlement agreement, which stated that Three Creek's irrigation or water rights would not be effected. Id. at 641. The court concluded that interpreting the settlement agreement did not violate the settlement agreement. Id.

Finally, Three Creeks claimed that the district court incorrectly awarded attorney fees and costs to Kruer because it claimed that Kruer was not a prevailing party. Id. Three Creeks also claimed that Kruer's attorney did not keep accurate billing statements. Id. at 642. For these reasons, Three Creeks argued that Kruer was not entitled to attorney fees. Id. Although Kruer's attorney used block billing, the court found that Kruer's attorney's billing statements were accurate enough. Id. The court also held that Kruer was a prevailing party because she received more than she had requested in the settlement agreement. Id. at 641.

The case was decided on September 9, 2008.