Agricultural Law and Taxation Blog

Continuing Education Events and Summer Conferences

Overview

There are a couple of online continuing education events that I will be conducting soon, and the dates are set for two summer national conferences in 2021. 

Upcoming continuing education events – it’s the topic of today’s post.

Top Developments in Agricultural Law and Tax

On Monday, January 11, beginning at 11:00 a.m. (cst), I will be hosting a two-hour CLE/CPE webinar on the top developments in agricultural law and agricultural taxation of 2020.  I will not only discuss the developments, but project how the developments will impact producers and others in the agricultural sector and what steps need to be taken as a result of the developments in the law and tax realm.  This is an event that is not only for practitioners, but producers also.  It’s an opportunity to hear the developments and provide input and discussion.  A special lower rate is provided for those not claiming continuing education credit.

You may learn more about the January 11 event and register here:  https://washburnlaw.edu/employers/cle/taxseasonupdate.html

Tax Update Webinar – CAA of 2021

On January 21, I will be hosting a two-hour webinar on the Consolidated Appropriations Act, 2021.  This event will begin at 10:00 a.m. (cst) and run until noon.  The new law makes significant changes to the existing PPP and other SBA loan programs, CFAP, and contains many other provisions that apply to businesses and individuals.  Also, included in the new law are provisions that extend numerous provisions that were set to expire at the end of 2020.  The PPP discussion is of critical importance to many taxpayers at the present moment, especially the impact of PPP loans not being included in income and simultaneously being deductible if used to pay for qualified business expenses.  Associated income tax basis issues loom large and vary by entity type.

You may learn more about the January 21 event and register here:  https://agmanager.info/events/kansas-income-tax-institute

Summer National Conferences

Mark your calendars now for the law school’s two summer 2021 events that I conduct on farm income tax and farm estate and business planning.  Yes, there are two locations for 2021 – one east and one west.  Each event will be simulcast live over the web if you aren’t able to attend in-person.  The eastern conference is first and is set for June 7-8 at Shawnee Lodge and Conference Center near West Portsmouth, Ohio.  The location is about two hours east of Cincinnati, 90 minutes south of Columbus, Ohio, and just over two hours from Lexington, KY.  I am presently in the process of putting the agenda together.  A room block will be established for those interested in staying at the Lodge.  For more information about Shawnee Lodge and Conference Center, you made click here:  https://www.shawneeparklodge.com/

The second summer event will be held on August 2-3 in Missoula, Montana at the Hilton Garden Inn.  Missoula is beautifully situated on three rivers and in the midst of five mountain ranges.  It is also within three driving hours of Glacier National Park, and many other scenic and historic places.  The agenda will soon be available, and a room block will also be established at the hotel.  You may learn more about the location here:  https://www.hilton.com/en/hotels/msogigi-hilton-garden-inn-missoula/

Conclusion

Take advantage of the upcoming webinars and mark you calendars for the summer national events.  I look for to seeing you at one or more of the events.

Principles of Agricultural Law

Overview

The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 47^th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; lawyers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous and can lead to unnecessary litigation. What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed? Is a liability release form necessary?  Is it valid?  What happens when a contract breach occurs?  What is the remedy? 

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  What about dealing with an ag cooperative and the issue of liens?  What are the priority rules with respect to the various types of liens that a farmer might have to deal with? 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.  That’s especially true with the unsettled issue of whether Payment Protection Program (PPP) funds can be utilized by a farmer in bankruptcy.  The courts are split on that issue.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation as well as help minimize the bleeding when times are tough.

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract?  How do the like-kind exchange rules work when farmland is traded? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is a critical part of the business transition process.

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  Agritourism is a very big thing for some farmers, but does it increase liability potential?  Nuisance issues are also important in agriculture.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  What constitutes a regulatory taking of property that requires the payment of compensation under the Constitution?  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

It is always encouraging to me to see students, farmers and ranchers, agribusiness and tax professionals get interested in the subject matter and see the relevance of material to their personal and business lives. Agricultural law and taxation is reality.  It’s not merely academic.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. It’s also a great investment for any farmer – and it’s updated twice annually to keep the reader on top of current developments that impact agriculture.

If you are interested in obtaining a copy, perhaps even as a Christmas gift, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  Instructors that adopt the text for a course are entitled to a free copy.  The book is available in print and CD versions.  Also, for instructors, a complete set of Powerpoint slides is available via separate purchase.  Sample exams and work problems are also available.  You may also contact me directly to obtain a copy.

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  You may also contact me directly. 

Principles of Agricultural Law

Overview

The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 46^th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; laywers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous as one recent bankruptcy case points out.  See, e.g., In re Kurtz, 604 B.R. 549 (Bankr. D. Neb. 2019).  What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed?

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  For instance, in one recent Kansas case, the lender failed to get the debtor’s name exactly correct on the filed financing statement.  The result was that the lender’s interest in the collateral (a combine and header) securing the loan was discharged in bankruptcy.   In re Preston, No. 18-41253, 2019 Bankr. LEXIS 3864 (Bankr. D. Kan. Dec. 20, 2019). 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation. 

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is part and parcel of the business organization question. 

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

The academic semesters at K-State and Washburn Law are about to begin for me.  It is always encouraging to me to see students getting interested in the subject matter and starting to understand the relevance of the class discussions to reality.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. 

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

Changing Water Right Usage

Overview

Monday’s post featured commentary by Prof. Burke Griggs at Washburn University School of Law concerning a battle over the application of the prior appropriation doctrine in central Kansas.  Another matter involving water usage in Kansas concerns a couple of west-central Kansas towns that need water and agricultural (and other interests) in another county that don’t want to give it up.  This battle concerns the change of an existing water right.  Again, I have asked Prof. Griggs to provide the bulk of today’s commentary.

Changing the use of an existing water right – it’s the topic of today’s post.

Water Right Usage – What’s the Issue?

Monday’s post explained the prior appropriation method – the first-in-time, first-in-right system for allocating water rights.  The system allows the holder of a water right to change the place of use of the water associated with the right; change the type of water use; and also change the point of diversion of the water.  The ability of a water right holder to do these things is important.  In Kansas, for example, some parts of the state do not have any water available for allocation under newly issued permits.  In those areas, the ability to acquire a water right (say, for example, by purchasing the tract the water right is associated with) and changing the point of diversion, place of use or type of usage is critical.  While possible, those changes can only be made by filing an application with the Division of Water Resources (DWR) and paying a filing fee. 

The Hays/Russell Water Quandary

Prof. Griggs provides the following commentary on a water issue in Kansas involving the cities of Hays and Russell in west-central Kansas:

The City of Hays is a great location for railroads, as the Kansas Pacific Railroad realized in the late 1860’s. The City of Russell lies above a great location for oil and gas production.  Russell County is the home of the first fracked oil and gas well. But both cities are running short on water.  In 1995, Hays purchased the R9 Ranch (Ranch) in southwestern Edwards County along with its 30 irrigation water rights, which total approximately 7,726 acre-feet of annual use.  An acre-foot is the volume of water needed to cover an acre of land to the depth of one-foot.  

In 2015, the Cities of Hays and Russell (Cities) together applied to change these water rights to municipal use. Under typical circumstances, the DWR would evaluate the change applications by its standard statutory and regulatory procedure, accounting for the usual changes in consumptive uses and making provisions to protect existing water rights from the effects of the proposed changes.  Kan. Stat. Ann. 82a-708b; Kan. Admin. Regs. 5-5-1 et seq.  However, because the water rights under review exceed 2,000 acre-feet and are to be moved more than 35 miles, the change also engaged the Kansas Water Transfer Act (KWTA), which places an additional layer of review upon the change applications. Kan. Stat. Ann. 82a-1501 et seq.   Thus, in early 2016, the Cities also submitted an application to transfer water from the Ranch to the Cities pursuant to the KWTA.

The Cities’ application attracted opposition by irrigation interests in Edwards County, including Groundwater Management District 5 (GMD5), which is concerned by the export of groundwater out of the area. On March 28, 2019, the DWR contingently approved the change applications to municipal use for 6,757 acre-feet, a reduction based on the higher level of consumptive use for municipal rights.  See, e.g., In the Matter of the City of Hays’ and City of Russell’s Applications, Master Order, March 28, 2019, at 8-10, 43-45available at https://agriculture.ks.gov/docs/default-source/dwr-water-appropriation-documents/haysr9_master-order_final_complete.pdf?sfvrsn=7e168ac1_4.  The order also allows for the quantification of water usage on a ten-year rolling average of 48,000 acre-feet, more than the reduction required by the consumptive use determination. Id. At 17-18, 43-45.  The order is one of “contingent approval” because the change will not be final until the Cities fulfill the requirements of the KWTA.

Opponents of the change filed petitions for administrative review, alleging, among other things, that the approvals were unreasonable by allowing too much water to leave Edwards County, and that the Cities’ operation of the changed rights would impair existing irrigation rights.  See requests for administrative review available at https://agriculture.ks.gov/divisions-programs/dwr/water-appropriation/change-applications/hays-change-and-water-transfer.  In Kansas, the Secretary of Agriculture has the authority to review decisions by the chief engineer regarding changes in water rights.  Kan. Stat. Ann. 82a-1901(a).  Kansas is the only state in the union in which the water rights agency is statutorily subservient to the department of agriculture.  The Secretary of Agriculture did not exercise administrative review (due to past associations with the irrigators filing the petitions for review), instead deferring to the procedure set forth in the KWTA.  Having exhausted its administrative remedies, the largest private irrigation group in the area, Water PACK, filed a petition for judicial review to contest the changes.  Water Protection Association of Central Kansas v. Barfield, No. 2019-CV-5 (Edwards Co., Kansas), filed May 29, 2019, available at https://agriculture.ks.gov/docs/default-source/dwr-water-appropriation-documents/2019-05-29_waterpack_v_barfield_petition_63291.pdf?sfvrsn=b7d18bc1_0.  The Cities moved to intervene in June, and the matter is currently pending before the Edwards County District Court.

If Water PACK’s suit against the DWR does not succeed in overturning the DWR’s approvals of the water rights changes pursuant to the KWTA, then the Cities will proceed to hearings to satisfy the requirements of the KWTA. Briefly summarized here, the KWTA requires the applicant to demonstrate, before a three-person panel (the chief engineer of the DWR, the director of the Kansas Water Office, and the secretary of the Kansas Department of Health and Environment) that the benefits of approving the transfer outweigh the benefits of not approving the transfer. Kan. Stat. Ann. 82a-1501a, 1502(a).   Assuming the changes in the Cities’ water rights survive judicial review, the KWTA proceeding should not present significant obstacles to the Cities.

Conclusion

As noted in Monday’s post, the prior appropriation system has some economic shortcomings.  However, the provisions in Kansas law allowing for changing a diversion point, type of use or place of use is an attempt to address those economic issues.  The present matter involving Hays and Russell, Kansas, also points out that state and local politics can become entangled in water disputes.  The “water wars” rage on.

The Politics of Prior Appropriation – Is a Senior Right Really Senior?

Overview

Water is of critical importance to agriculture.  It’s vitally necessary to grow crops and raise livestock.  Of course, too much water can be a problem.  That was the case in parts of the Midwest and Plains throughout 2019.  But, most often water issues center around a water shortage and how the law in a particular state appropriates water in times of scarcity. 

Sometimes the manner in which state law allocates water to holders of water rights for agricultural purposes conflicts with other federal laws and public policy goals involving environmental and wildlife concerns.  One such conflict has been going on in Kansas for some time.  The conflict illustrates the policy concerns over the strict application of state water law. 

The prior appropriation doctrine and associated water rights and concerns – it’s the topic of today’s blog post.

Prior Appropriation System

One way that the legal system allocates water is with the prior appropriation system.  The prior appropriation system is based on a recognition that water is more scarce, and establishes rights to water based on when water is first put to a beneficial use.  The doctrine grants to the individual first placing available water to a beneficial use, the right to continue to use the water against subsequent claimants.  Thus, the doctrine is referred to as a “first in time, first in right” system of water allocation. The oldest water right on a stream is supplied with the available water to the point at which its state-granted right is met, and then the next oldest right is supplied with the available water and so on until the available supply is exhausted.  For a particular landowner to determine whether such person has a prior right as against another person, it is necessary to trace back to the date at which a landowner's predecessor in interest first put water to a beneficial use.  The senior appropriator, in the event of dry conditions, has the right to use as much water as desired up to the established right of the claimant to the exclusion of all junior appropriators.  This is the key feature of the prior appropriation system.

Water rights in a majority of the prior appropriation states are acquired and evidenced by a permit system that largely confirms the original doctrine of prior appropriation.  The right to divert and make consumptive use of water from a watercourse under the prior appropriation system is typically acquired by making a claim, under applicable procedure, and by diverting the water to beneficial use.  The “beneficial use” concept is basic; a non-useful appropriation is of no effect.  What constitutes a beneficial use depends upon the facts of each particular case.

Sometimes the right of a senior appropriator under a prior appropriation system to shut junior appropriators off in time of shortage conflicts with other policy interests.  Some of the so-called “Western water wars” have centered around this issue.  One such battle is occurring in Kansas at the present time and involves impairment of the Quivira National Wildlife Refuge (Refuge) near Great Bend, Kansas.    I have asked my colleague at the law school (and water law expert), Prof. Burke Griggs, for his commentary on the matter.  He has advised the National Audubon Society and Audubon of Kansas regarding the impairment of the Refuge.

Here is Prof. Griggs’ explanation of the Kansas conflict and thoughts on the matter:

The Kansas Issue – Quivira National Wildlife Refuge Priority Right

The Refuge, a wetland of international importance for whooping cranes and other endangered species, is located near Great Bend in the Arkansas River Basin.  The Refuge holds a water right obtained under the Kansas Water Appropriation Act (KWAA) with a 1957 priority, enabling the Refuge to divert about 14,500 acre-feet annually from Rattlesnake Creek (a small tributary of the Arkansas River) to supply salt marshes and other wetlands on the Refuge. The advent of large-scale groundwater pumping (related to agricultural and oil and gas production) in the 1960’s and 1970’s did not immediately affect the Refuge, but by the late 1980’s it had become clear that pumping was reducing the groundwater baseflows upon which Rattlesnake Creek and the Refuge depend. For decades the U.S. Fish & Wildlife Service (Service), which holds the Refuge’s senior water right, sought to compromise with junior irrigators. After three decades of little progress, the Service in 2013 filed a water right impairment complaint with the chief engineer of the Kansas Division of Water Resources (DWR)—the first formal step in requesting the “administration,” or curtailment, of junior rights in the Rattlesnake Creek sub-basin. In 2016, DWR issued its impairment report, which found that junior rights within the Big Bend Groundwater Management District No. 5 (GMD5) were impairing the Service’s water right. The scale of the impairment is substantial: pumping causes between 40,000 to 50,000 acre-feet of stream depletions annually from junior groundwater pumping, reducing between 3,000 and 5,000 acre-feet of stream flows to the Refuge, even as much as 9,000 acre-feet. Wildlife groups have been complaining of the Refuge’s water shortages for years.

Since the DWR’s finding of impairment in 2016, the DWR and GMD5 have been engaged in unsuccessful negotiations about how to resolve it. To avoid the clear but draconian remedy of administering junior groundwater rights in the Rattlesnake Creek sub-basin according to their priorities (i.e., in accordance with state law), GMD5 has proposed several versions of a Local Enhanced Management Area (LEMA) since 2017 in accordance with Kan. Stat. Ann. 82a-1041. These proposals have offered to repurpose irrigation wells as “augmentation” wells pumping local groundwater supplies into Rattlesnake Creek just upstream of the Refuge, and to remove end-guns from center-pivot irrigation systems. But according to its impairment report, the DWR found that it will be necessary to reduce pumping by 15 percent, or approximately 24,000 acre-feet, in the 135,000 acres closest to the Refuge, together with augmentation wells; or, without such wells, a 30 percent reduction in pumping.  

The Service has also been skeptical of GMD5’s LEMA plans for failing to address fundamental problems of water shortage and water quality. After the DWR formally rejected GMD5’s last LEMA proposal, negotiations between the DWR and GMD5 reached a stalemate. During the summer of 2019, GMD5 sought administrative review of the DWR’s decision.  The Kansas Secretary of Agriculture granted the petition in hopes of extending negotiations.  After those negotiations produced no real results, DWR prepared to administer water rights for the 2020 irrigation season. It sent letters to holders of junior groundwater rights that the DWR had previously determined were impairing the Refuge’s right, notifying them that the chief engineer would likely administer those rights during 2020.  For a week or so in October 2019, it appeared that Kansas water law might mean what the KWAA states, that “first in time is first in right.”  See, e.g., K.S.A. §82a-707(c). 

Apparently, following Kansas water law was intolerable.  The fall of 2019 witnessed an extraordinary intervention by groundwater interests, agency heads, and other politicians to prevent the priority administration of water rights that the DWR had planned for 2020. Multiple agribusiness entities wrote the chief engineer, requesting that the administration of rights be delayed, to reach a “collaborative solution” in 2019-20—one that has somehow eluded the parties since the 1980’s.  Representative Roger Marshall (R-KS) repeatedly contacted the KDA-DWR offices seeking the same. In October, Senator Jerry Moran (R-KS) obtained a promise from Ms. Aurelia Skipwith (the nominee to be the Director of the Service and the current Deputy Assistant Secretary for Fish, Wildlife, and Parks at the Department of Interior) that the Service would not file a request to secure water for the 2020 irrigation season, and would cooperate with DWR and GMD5 to achieve a voluntary solution.  In other words, the Service would not protect its own water right for the coming year.  Apparently, the Service has reverted to its pre-2016 position. It looks forward to working with KDA, “the congressional delegation, and all water users to develop concrete milestones and lasting solutions.”  Barring other developments, it seems likely that the largest senior water right in the Rattlesnake Creek sub-basin will suffer continued impairment in 2020, while junior groundwater pumpers continue to irrigate at their full capacity.   That essentially flips the prior appropriation doctrine on it’s head – “First in time, last in right.”

Questions raised.  The “Showdown at Rattlesnake Creek” raises multiple questions—most especially, the extent to which water officials can avoid and abdicate their statutory duties to protect the Refuge under federal law and the Refuge’s water right under both federal and state law. Can the Service avoid the sustainability mandate in the National Wildlife Refuge System Improvement Act?  16 U.S.C. § 668dd(a)(4)(B).   By not filing a request to secure water to protect its state-law water right, might the Service be risking violations of the Migratory Bird Treaty Act and the Endangered Species Act?  See, e.g., 16 U.S.C. §§ 703, 1539.  If the Service does not defend its existing state law appropriation water right, might it be entitled to a federal reserved water right to satisfy the purposes of the Refuge?   See, e.g., Winters v. United States, 207 U.S. 564 (1908); Potlatch Corp. v. United States, 12 P.3d 1256 (2000).

Does an augmentation plan to repurpose irrigation wells and pump groundwater into Rattlesnake Creek require review under the National Environmental Policy Act?  See, e.g., Middle Rio Grande Conservancy Dist. v. Norton, 794 F.3d 1220 (10th Cir. 2002); Industrial Safety Equipment Association v. Environmental Protection Agency, 656 F.Supp. 852, 855 (D.D.C. 1987), aff’d, 837 F.2d 1115 (D.C. Cir. 1988).  Based on its conciliatory actions to GMD5 and its irrigators, the Service does not appear to be interested in these federal questions, preferring to frame the conflict as one of state law only. State officials are similarly reticent, having issued repeated statements that they would not administer water rights in the basin to protect the Refuge—despite the clear priority of its right, its obvious and documented impairment, and the chief engineer’s non-discretionary duties to protect senior water rights. 2020 will prove to be an interesting year at the Refuge, especially if things turn dry.

Conclusion                                                                                                                         

I thank Prof. Griggs for his commentary today.  Is there a solution to the issue at the Refuge?  There hasn’t been one for decades.  It appears to me that government officials have realized what I have been pointing out about the prior appropriation system.  That is, from an economic standpoint, a senior appropriator can be expected to put water to a beneficial use until the marginal return equals the cost of the water. Junior appropriators, or those unable to obtain rights, could have high potential returns but (under the strict application of the prior appropriation doctrine) be prevented from putting water to a beneficial use. As such, the prior appropriation system does not allocate water where the return is highest so long as water rights are not transferable. Unfortunately, in many prior appropriation states, barriers to transfer of water rights are as great as in riparian states. This is the case even though a prior appropriation water right is not as closely linked to land ownership as is a riparian right, and a prior appropriation right may be separately conveyed.

In some states, especially the more arid western states, a water right is a right to use the water and is not a right to own the water. The water right is attached to the land on which the water is used, and can be severed from that land. The prior appropriation system also does not deal with return flow problems caused by differing rates of consumptive use between different appropriators.  For example, agricultural irrigation is approximately an 80 percent non-consumptive use in the wet and tile-drain states of the corn belt from Ohio through Iowa. This means that about 80 percent of water appropriated for irrigation eventually returns to its source. However, in Kansas and the remainder of the High Plains states, the non-consumptive use of water for agricultural irrigation ranges from five to 20 percent.  This is similar to industrial uses of water that are typically more consumptive in nature, although the use of water for cooling typically involves low rates of consumption.

The issue with the Refuge involves water law and economics, agricultural usage and wildlife protection.  Not easy issues to resolve.

Regulating Existing Water Rights – How Far Can State Government Go?

Overview

Water is an important natural resource to agriculture.  In some parts of the country it is more plentiful than it is in other areas.  That relative scarcity has led the legal system to develop, over time, different approaches for the allocation of water rights.  Particularly in the western two-thirds of the U.S. where water is most scarce, water rights are regulated by at the state level.

The state regulation of water rights can have a significant impact on agricultural activities and land values.  But, just how far can a state go in regulating such rights?  How solid is the water right of a farmer or rancher?  It’s a big issue that is looming large in Kansas at the present time.

The state regulation of water rights – it’s the topic of today’s post.

The Prior Appropriation System

Most of the United States west of the 100th Meridian (a longitude line connecting the North and South Poles that runs through Cozad, Nebraska, Dodge City, Kansas that also forms the eastern border of the Texas panhandle with Oklahoma) utilizes the prior appropriation system for purposes of allocating water.  See, e.g., In re Water Rights of Deschutes River and Tributaries, 134 Ore. 623, 286 P. 1049 (1930).  

The prior appropriation system is based on a recognition that water is relatively scarce, and establishes rights to water based on when water is first put to a beneficial use.  The doctrine grants to the individual first placing available water to a beneficial use, the right to continue to use the water against subsequent claimants.  Thus, the doctrine is referred to as a “first in time, first in right” system of water allocation. The oldest water right on a stream is supplied with the available water to the point at which its state-granted right is met, and then the next oldest right is supplied with the available water and so on until the available supply is exhausted.  In order for a particular landowner to determine whether such person has a prior right as against another person, it is necessary to trace back to the date at which a landowner's predecessor in interest first put water to a beneficial use.  The senior appropriator, in the event of dry conditions, has the right to use as much water as desired up to the established right of the claimant to the exclusion of all junior appropriators. 

The right to divert and make consumptive use of water from a watercourse under the prior appropriation system is typically acquired by making a claim, under applicable procedure, and by diverting the water to beneficial use.  The “beneficial use” concept is basic; a non-useful appropriation is of no effect.  What constitutes a beneficial use depends upon the facts of each particular case.  A prior appropriation water right is typically administered by a state agency that certifies via the issuance of a permit that a water right has been acquired dating from a particular time and tying it to a particular diversion point. 

As applied to groundwater, the prior appropriation doctrine holds that the person who first puts groundwater to a beneficial use has a priority right over other persons subsequently desiring the same water.  This doctrine is applied in many western states that also follow the prior appropriation doctrine with respect to surface water. 

A prior appropriation water right is typically administered by a state agency that certifies via the issuance of a permit that a water right has been acquired dating from a particular time and tying it to a particular diversion point.  Accordingly, such a state administrative process basically confirms the application of the prior appropriation system.  But, can a state do more than simply validate a prior appropriation right and establish a regulatory framework for protecting those rights?  Can a state modify the regulatory system in a manner that diminishes existing water rights without triggering liability to the existing right holders or owing them compensation?  This last point is being tested in Kansas, a state that utilizes the prior appropriation doctrine, at the present time.

Kansas Case

A case in western Kansas is presently testing the limits of how far a state regulatory agency can go in regulating existing water rights.  Just recently the local county trial court issued its opinion in Friesen v. Barfield, No. 2018 CV 10 (Gove County, KS Dist. Ct. Oct. 15, 2019).  The case involved the application of a Kansas law that took effect in 2012, that modified existing water rights.

Under the facts of the case, Kansas Ground Water Management District (GMD) 4 was the first GMD to implement a Local Enhanced Management Area (LEMA) that Kansas law authorized beginning in 2012. A LEMA allows GMD’s to voluntarily implement water conservation practices. After great success with the first LEMA, GMD 4 proposed a district-wide LEMA. The GMD held many public meetings over 2015 and 2016. The GMD Board approved the final LEMA plan and submitted it to the Chief Engineer, Division of Water Resources (CE). The CE approved the LEMA Plan on June 27, 2017, and an official public notice and comment period was opened. After the required two public hearings, the CE found that the LEMA plan was satisfactorily addressed the water conservation issues within GMD 4, and approved the plan. On April 13, 2018, the CE issued the Order of Designation creating the GMD District-Wide LEMA.

The plaintiffs, irrigators and voting members of the GMD, sued to stop the implementation of the LEMA on the basis that it violated vested water rights, was arbitrary and capricious, and unconstitutional. The local trial court disagreed and upheld the district-wide LEMA. The plaintiffs claimed that the water conservation restrictions contained in the proposal were a “collateral attack” on perfected water rights that the CE could not alter. The trial court disagreed, concluding that the groundwater permits did not guarantee any set amount of water. In addition, the trial court noted that the district-wide LEMA was not a permanent reduction in water appropriation but contemplated revisiting the matter in the future. Thus, the trial court concluded that so long as the LEMA is in place and the reduction in pumping is within state law limits, the CE had the discretion to approve the district-wide LEMA.

The plaintiffs also claimed that state law did not provide a definitive guide to the CE and did not protect against arbitrary action, unfairness, or favoritism. The trial court disagreed, noting that state law establishes six prerequisites for a LEMA, five of which must occur within the LEMA area - including decline of the water source. In addition, the trial court noted that the LEMA was additionally reviewable by the state Ag Secretary and subject to judicial review. The trial court also noted that the GMD is elected in a democratic process.

On the plaintiffs’ constitutional equal protection claim, the trial court determined that the LEMA, while sorting irrigators into different classes, did not violate equal protection because such sorting was rationally related to the LEMA's purposes of conserving water resources. On the plaintiffs' claim that the state law governing a LEMA cannot adversely affect vested water rights, the trial court found it relevant that the LEMA was not permanent and concluded that further reductions in water permits are not a taking because all economic benefits of the water have been eliminated. The plaintiffs claimed that the appeal process for the LEMA was inadequate because it did not provide for review by an independent unbiased tribunal. The trial court disagreed, noting that state law provides for judicial review. Also, the trial court determined that the recordkeeping requirements of irrigators was not unconstitutionally vague. The LEMA allows irrigators two ways to record water usage, inspect and record meter readings on a bi-weekly basis or "install or maintain an alternative method of recording," other than the meter that is sufficient to be used to determine operating time in the event of a meter failure."

On the claim that the CE did not follow proper procedure when implementing the LEMA plan, the trial court determined that state law did not require the CE to include findings of fact or law in notice letters. In addition, the final orders did not need to consider constitutional concerns as those are properly reserved for a court. Likewise, the trial court held that the CE did not unlawfully delegate oversight of the LEMA hearing, and that the creation of the district-wide LEMA was not done in a manner that was arbitrary and capricious. 

Conclusion

The Kansas case is the opening round in what will likely be lengthy litigation on the issue of how far a state can go in regulating existing, vested water rights.  As the litigation proceeds, the state might do well to remember that for an alleged regulatory taking of private property rights by the state, disaffected parties no longer need to endure state court litigation on the taking issue before seeking compensation in the federal court system.  Knick v. Township of Scott, 139 S. Ct. 2162 (2019).

Ag Law in the Courts

Overview 

Agricultural law issues in the courts are many.  On a daily basis, cases involving farmers, ranchers, rural landowners and agribusinesses are decided.  Periodically, on this blog I examine a few of the recent court decisions that are of particular importance and interest.  Today’s post is one such post.

Proving water drainage damage; migrating gas and the rule of capture; and suing for Clean Water Act (CWA)  – these are the topics of today’s post.

The Case of the Wayward Water

In Kellen v. Pottebaum, 928 N.W.2d 874 (Iowa Ct. App. 2019), the defendant installed a drain pipe that discharged water from the defendant’s land to the plaintiffs’ land. The plaintiff sued alleging that the pipe caused an unnatural flow of water which damaged the plaintiff’s farmland and sought damages and removal of the pipe. The defendant counterclaimed arguing that the plaintiff’s prior acts and/or inaction regarding the flow of the water caused damage to the defendant’s property. The trial court determined that neither party had established their claims and dismissed each claim with prejudice.

The appellate court affirmed.  As for the sufficiency of the evidence, the appellate court noted that the defendant owned the dominant estate and the plaintiff owned the servient estate. As such, if the plaintiff could prove that the installation of the pipe considerably increased the volume of water flowing onto the plaintiff’s land or substantially changed the drainage and actual damage resulted, the plaintiff would be entitled to relief. However, most of the evidence presented to the court was the observations of lay witnesses rather than measured water flow. Accordingly, the appellate court agreed with the trial court that the plaintiff did not prove by a preponderance of the evidence that installation of the pipe caused the increased water flow. The appellate court noted that a “reasonable fact finder” could attribute the additional water on the plaintiffs’ property to the increased rain fall during the years at issue. The appellate court also determined that the plaintiffs did not prove by preponderance of the evidence that installation of the pipe substantially changed the drainage. The water did not flow in a different direction on the plaintiff’s property. Rather, the defendant altered the flow of water across his property in a natural direction towards the plaintiff’s drainage, which is permissible under state (IA) law. Thus, the plaintiff did not prove harm by a preponderance of the evidence. The appellate court also concluded that the trial court did not abuse its discretion excluding some of the plaintiff’s evidence. 

Ownership of Migrated Gas

In Northern Natural Gas Co. v. ONEOK Field Servs. Co., LLC, No. 118,239, 2019 Kan. LEXIS 324 (Kan. Sup. Ct. Sept. 6, 2019), the plaintiff operated an underground gas storage facility, which was certified by the proper state and federal commissions. The defendants were producers with wells located two to six miles from the edge of the plaintiff’s certified storage area. Stored gas migrated to the defendants’ wells and the defendants captured and sold the gas as their own. The plaintiff sued for lost gas sales and the defendants moved for summary judgment on the grounds that the Kansas common law rule of capture allowed the gas extraction. The trial court granted the defendants’ motion. Two years later, the plaintiff received certification to expand the storage area into the areas with the defendants’ wells. Another dispute arose as to whether the defendants could capture the gas after the plaintiff’s storage area was expanded. The trial court held that the defendants could under the common law rule of capture.

On review, the Kansas Supreme Court reversed and remanded on the basis that the rule of capture did not apply. That rule, the Court noted, allows someone that is acting within their legal rights to capture oil and gas that has migrated from the owner’s property to use the migrated oil and gas for their own purposes. The rule reflects the application of new technology such as injection wells and applies to non-native gas injected into common pools for storage. However, the Court reasoned, the rule does not apply when a party (such as the plaintiff) is authorized to store gas and the storage is identifiable. The Court determined that state statutory law did not override this recognized exception to the application of the rule of capture. The Court remanded the case for a computation of damages for the lost gas. 

Jurisdiction Over CWA §404 Permit Violations – Who Can Sue?

A recent case involving a California farmer has raised some eyebrows.  In the case, the trial court allowed the U.S. Department of Justice (DOJ) to sue the farmer for an alleged CWA dredge and bill permit violation without a specific recommendation from the Environmental Protection Agency (EPA).  The farmer was alleged to have discharged “pollutants” into a “waters of the United States” (WOTUS) as a result of tractor tillage activities on his farmland containing or near to wetlands contiguous to a creek that flowed into a WOTUS.  Staff of the U.S. Army Corps of Engineers (COE) saw the tilled ground and investigated.  The COE staff then conferred with the EPA and then referred the matter to the U.S. Department of Justice (DOJ).  The DOJ sued (during the Obama Administration) for enforcement of a CWA §404 permit “by the authority of the Attorney General, and at the request of the Secretary of the Army acting through the United States Corps of Engineers.”  The DOJ alleged that the equipment "constituted a 'point source'" pollutant under the CWA and "resulted in the placement of dredged spoil, biological materials, rock, sand, cellar dirt or other earthen material constituting “pollutants” (within the meaning of 33 U.S.C. § 1362(6) into waters of the United States. The DOJ alleged that the defendant impacted water plants, changed the river bottom and/or replaced Waters of the United States with dry land, and "resulted in the 'discharge of any pollutant' within the meaning of 33 U.S.C. § 1311(a)." 

The defendant moved for summary judgment on the basis that the CWA authorizes only the EPA Administrator to file a CWA §404 enforcement action and that the court, therefore, lacked jurisdiction.  The court disagreed with the defendant on the basis that 28 U.S.C. §1345 conferred jurisdiction.  That statute states, “Except as otherwise provided by Act of Congress, the district courts shall have original jurisdiction of all civil actions, suits or proceedings commenced by the United States or by any agency or officer thereof expressly authorized to sue by Act of Congress.  The court rejected the defendant’s claim that 33 U.S.C. §1319(b) and 33 U.S.C. §1344(s)(3) authorized only the EPA to sue for violations of the CWA, thereby limiting the jurisdiction conferred by 28 U.S.C. §1345.  Those provisions provide that the EPA Secretary is the party vested with the authority to sue for alleged CWA violations.  The court determined that there is a “strong presumption” against implied repeal of federal statutes, especially those granting jurisdiction to federal courts.  In addition, the court determined that the defendant failed to show that the general grant of jurisdiction was irreconcilable with either of the statutes the defendant cited.  Accordingly, the court determined that the defendant could be sued by the U.S. Department of Justice upon the mere recommendation of the COE and without a specific recommendation from the EPA alleging a CWA violation, and in a situation where the CWA did not determine any CWA jurisdiction and only the COE did.  This finding was despite a 1979 Attorney General opinion No. 197 determining that the EPA and not the COE has the ultimate authority to construe what is a navigable WOTUS.

Ultimately, the parties negotiated a settlement. The settlement included $1,750,000 civil penalty. The land which the farmer’s acts occurred will be converted to a conservation reserve and a permanent easement will run with the land to bar any future disturbance.  The settlement also specified that the farmer would spend $3,550,000 "to purchase vernal pool establishment, re-establishment, or rehabilitation credits from one or more COE-approved mitigation banks that serve the [applicable] area . . . .".  The settlement also included other enforcement stipulations, including fines and the civil penalty for noncompliance.  No comments on the settlement were received during the public comment period, after which the settlement was submitted to the court for approval.  The court approved the settlement ad consent decree on the basis that it was fair, reasonable, properly negotiated and consistent with governing law.  The court also determined that the settlement satisfied the goals of the CWA in that it permanently protected the Conservation Reserve (which contained between 75 and 139 acres of WOTUS); fixed damage caused by unauthorized discharges; applied a long-term pre-clearance injunction; required off-site compensatory mitigation and recouped a significant civil penalty.  The case is United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 75309 (E.D. Cal. May 3, 2019).  United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 93590 (E.D. Cal. Jun. 3, 2019).

Conclusion

The three cases summarized today further illustrate the various legal battles that involve farmers, ranchers and rural landowners.  They also illustrate the need to legal counsel that is well-versed in agricultural issues.  That’s what we are all about in the Rural Law Program at Washburn Law School – providing high-level training in agricultural legal and tax issues and then getting new graduates placed in rural areas to represent farmers and ranchers. 

Ag Legal Issues in the Courts

Overview

It’s been about a month since I devoted a blog post to court litigation involving agricultural producers and businesses.  So, it’s time to devote another post to the matter as an illustration of how often the law and the business of agriculture intersect.  These posts have proven to be quite popular and instructive.

“Ag in the Courtroom” – the most recent edition.  It’s the topic of today’s post.

More Bankruptcy Developments

As I have noted in numerous posts over the past couple of years, the difficult economic conditions in much of agriculture in the Great Plains and the Midwest have made bankruptcy law rise in importance.  Fortunately, legislation is headed to the President’s desk that will increase the debt limit in Chapter 12 bankruptcy to $10 million and place some of the existing Chapter 12 provisions in Chapter 11 for use by non-farm small businesses.  Those were needed pieces of legislation.

A recent Alabama bankruptcy case illustrates the peril of selling loan collateral without the creditors notice and consent.  It’s a unique set of facts because the debtor sold the collateral, a tractor, to bail her boyfriend out of jail.  In In re Reid, 598 B.R. 674 (Bankr. S.D. Ala. 2019), the Farm Service Agency (FSA) attached itself as a creditor in the debtor’s chapter 7 bankruptcy proceeding. In March of 2016 the debtor took out two FSA loans for a total of $50,000. A security agreement was also executed at the same time granting the FSA a security interest in "All farm equipment . . . and inventory, now owned or hereafter acquired by the Debtor, together with all replacements, substitutions, additions, and accessions thereto, including but not limited to the following which are located in the State of Alabama." A specific list of assets was attached, including a New Holland tractor, ten beef breeding cows, and nine calves. The debtor used the loan proceeds to purchase the equipment and livestock that was listed as collateral.

In June of the same year, the debtor was notified that she could not have cattle on the land she purchased with another loan not at issue in the case. However, the debtor was never notified of the restriction and it was not stated in the purchase contracts. Ultimately, the debtor was given thirty days to vacate the premises. Around this time, the debtor’s equipment and cattle started to go missing. The debtor was also becoming aware that her boyfriend (and father of her children) had a drug problem, and she began to suspect that he was selling the equipment and cattle for drugs. Later, the debtor attempted to stop a man from taking cattle from the property and the man said to take it up with her boyfriend. The debtor did not report the cattle or equipment as stolen. The debtor’s boyfriend was arrested about the same time for drug crimes and eluding the police. The debtor vacated the property with the only collateral remaining at the property being the New Holland tractor, which the debtor listed for sale on Facebook. The debtor testified that she sold the New Holland tractor to an unknown purchaser for between $6,000.00 and $8,000.00. But the exact price and identity of the purchaser could not be found as the debtor deleted her Facebook account. The proceeds of the tractor sale were put towards bail money for the boyfriend. The debtor never made a payment on the loans and vacated the property before the first payment was due.

The FSA attempted to recover the tractor but was unsuccessful. The FSA sought to have the bankruptcy court find the debt owed to the FSA in the amount of $52,048.56 plus interest to be non-dischargeable for fraud; fiduciary defalcation; embezzlement; and willful and malicious injury. The court averaged the alleged selling price of the tractor and rendered $7,000 non-dischargeable. The court also determined that the debtor did not fraudulently obtain the FSA loans, and did not embezzle the collateral because fraud wasn’t present. Because willful and malicious injury was present upon the debtor’s sale of the tractor without notice to the FSA and use of the proceeds for the debtor’s personal benefit, the $7,000 that the debtor received upon sale of the tractor was non-dischargeable. 

The Intersection of State and Federal Regulation

Agriculture is a heavily regulated industry.  Sometimes that regulation is apparent and sometimes it occurs an a rather unique manner.  Sometimes it comes from the federal government and sometimes it is purely at the state and local level.  In yet other situations, the regulation is an interesting (and frustrating for those subject to it) blend of federal and state/local regulation. 

In 2009, the defendant in Carroll Airport Comm'n v. Danner, No. 17-1458, 2019 Iowa Sup. LEXIS 57 (May 10, 2019), planned to construct a grain leg (bucket elevator) and grain bins. In 2013, the defendant obtained the proper county zoning permits but was told of the need to comply with the airport zoning ordinances. The grain leg stands within 10,000 feet horizontally from the end of plaintiff’s runway. The structure reaches a height of 127 feet off the ground. The parties agree the grain leg intrudes within the airport's protected airspace by approximately sixty feet. After construction began it was evident that there would be issues with the airport zoning ordinances and the plaintiff asked the Federal Airport Administration (FAA) to perform an aeronautical study of the grain leg and its impact on aviation safety. The FAA issued a letter stating, "This aeronautical study revealed that the structure does exceed obstruction standards but would not be a hazard to air navigation." It also warned, “This determination concerns the effect of this structure on the safe and efficient use of navigable airspace by aircraft and does not relieve the sponsor (i.e., the defendant) of compliance responsibilities relating to any law, ordinance, or regulation of any Federal, State, or local government body.” Lastly the FAA requested that the defendant paint the structure and add red lights to the top of it. The defendant did so. The FAA also adjusted the flight patterns in and out of the airport to accommodate this structure. The plaintiff did not seek review under this determination.

Two years later, the plaintiff (the local airport commission) sued alleging the grain leg violated certain building ordinances; city and county zoning ordinances; airport commission regulations; and constituted a nuisance and hazard to air traffic. The plaintiff sought equitable relief—an injunction requiring the defendant to modify or remove the grain leg. The defendant raised an affirmative defense of federal preemption. In June 2017, the trial court found that the grain leg violated state and local zoning ordinances and constituted a nuisance and an airport hazard. The trial court found that the grain leg did not fall within the agricultural exemption to certain zoning laws and rejected the defendants’ affirmative defense that the no-hazard letter preempted state and local zoning ordinances. The appellate court affirmed, concluding that the doctrines of express, implied, and conflict preemption did not apply to the FAA no-hazard determination. On further review, the state Supreme Court affirmed. The Supreme Court concluded that the FAA no-hazard determination did not preempt local zoning ordinances, was not legally binding, and contained language notifying the defendant that compliance with local rules was required. 

Water Rights

Rights involving surface water vary from state-to-state.  In some parts of the U.S., however, a party owning land adjacent to a watercourse has what are known as “riparian” rights to the water.  But, do those rights apply to man-made lakes, or just natural lakes?  The issue came up recently in Incline Village Board of Trustees v. Edler, No. SC97345, 2019 Mo. LEXIS 178 (Mo. Sup. Ct. Apr. 30, 2019). 

The defendants owned properties in subdivisions around a lake. One of the properties of the second subdivision abutted the lake. The properties they owned in the first subdivision did not abut the lake. During the creation of the first subdivision, restrictions were added to the land. One such restriction stated, “No structures or other improvements shall be made on or to any common area, including any body of water, other than such structures or improvements which are made by the trustees for the benefit of all lot owners. Except that, the owner of each lot which abuts any body of water, may construct one boat dock on such body of water, provided that, said boat dock extends from said lot and is first approved in writing by the trustees.” All landowners in the first subdivision were entitled to use the lake, even if they did not abut the lake. The second subdivision was not joined with the first one, but it was clear that the second subdivision was excluded from use rights on the lake. Lots in the first subdivision were subject to assessments to maintain the lakes.

The defendants built a dock on the property on the second subdivision. The trustees of the first subdivision defendants sued seeking a declaratory judgment, damages for trespass, and the removal of the dock. The district court ordered removal of the dock and determined that special circumstances existed supporting the award of attorney's fees of $70,000 in favor of the trustees.

On appeal, the appellate court determined that the lake was clearly artificial and, thus, the defendants were not riparian owners. Riparian rights are only extended to landowners adjacent to natural lakes. The appellate court also rejected the defendants’ reliance-based argument. The appellate court noted that the defendants had never had use of the lake for dock purposes or paid assessments for its maintenance. In addition, the defendants’ predecessor in title's deed to the adjacent land explicitly excepted the lake from the transfer. In addition, the plaintiffs had told the defendants of the property restrictions before the dock was built. As for attorney fees, the appellate court determined that there was not any special circumstance to merit an award of attorney fees. The plaintiff had not given any formal warning about not building the dock and the defendants had sought legal advice. 

Conclusion

It’s never a dull moment in ag law involving ag producers, agribusinesses and rural landowners.  The cases keep on rolling in. 

The Accommodation Doctrine – More Court Action

Overview

Over the past three years, I have written on a couple of occasions about the accommodation doctrine – a mineral owner’s right to use the surface estate to drill for and produce minerals.  The doctrine requires a balancing of the interests of the surface and mineral owner.  But, at least one court has also applied the doctrine to groundwater.  Now, a federal appellate court has applied the doctrine to find that vertical drilling on farmland may constitute a trespass.

An update on the accommodation doctrine in the courts – that’s the topic of today’s post.

Accommodation Doctrine

Land ownership includes two separate estates in land – the surface estate and the mineral estate.  The mineral estate can be severed from the surface estate with the result that ownership of the separate estates is in different parties.  In some states, the mineral estate is dominant.  That means that the mineral estate owner can freely use the surface estate to the extent reasonably necessary for the exploration, development and production of the minerals beneath the surface.  If the owner of the mineral estate has only a single method for developing the minerals, many courts will allow that method to be utilized without consideration of its impact on the activities of the surface estate owner.  See., e.g., Merriman v. XTO Energy, Inc., 407 S.W.3d 244 (Tex. 2013). 

But, under the accommodation doctrine, if alternative means of development are reasonably available that would not disrupt existing activities on the surface those alternative means must be utilized.  In other words, the accommodation doctrine applies if the surface owner must establish that the lessee’s surface use precludes (or substantially impairs) the existing surface use, and that the surface owner doesn’t have any reasonable alternative means to continue the current use of the surface estate.  For example, in Getty Oil co. v. Jones, 470 S.W.2d 618 (Tex. 1971), a surface estate owner claimed that the mineral estate owner did not accommodate existing surface use.  To prevail on that claim, the Getty court determined that the surface owner must prove that the mineral estate owner’s use precluded or substantially impaired the existing surface use, that the surface estate owner had no reasonable alternative method for continuing the existing surface use, and that the mineral estate owner has reasonable development alternatives that would not disrupt the surface use. 

Accommodation Doctrine and Water

A question left unanswered in the 1971 decision was whether the accommodation doctrine applied beyond subsurface mineral use to the exercise of groundwater rights.  In 2016, the Texas Supreme Court, in Coyote Lake Ranch, LLC v. City of Lubbock, 498 S.W.3d 53 (Tex. Sup. Ct. 2016), held that it did.  Thus, according to the Court, the doctrine applies in situations where the owner of the groundwater impairs an existing surface use, the surface owner has no reasonable alternative to continue surface use, and the groundwater owner has a reasonable way to access and produce water while simultaneously allowing the surface owner to use the surface.

The Court held that the language of the deed for the land involved in the litigation governed the rights of the parties, but that the deed didn’t address the core issues presented in the case. For example, the Court determined that the deed was silent on the issue of where drilling could occur and the usage of overhead power lines and facilities associated with water development. The Court determined that water and minerals were sufficiently similar such that the accommodation doctrine should also apply to water – both disappear, can be severed, and are subject to the rule of capture, etc. The Court also concluded that a groundwater estate severed from the surface estate enjoys an implied right to use as much of the surface as is reasonably necessary for the production of groundwater. Thus, unless the parties have a written agreement detailing all of the associated rights and responsibilities of the parties, the accommodation doctrine would apply to resolve disputes and sort out rights.

In 2018, however, the Texas Court of Appeals, refused to further expand the accommodation doctrine.  Harrison v. Rosetta Res. Operating, LP, No. 08-15-00318-CV 2018 Tex. App. LEXIS 6208 (Tex Ct. App. Aug. 8, 2018), involved a water-use dispute between an oil and gas lessee and the surface owner. The plaintiff owned the surface of a 320-acre tract. The surface estate had been severed from the mineral estate, with the minerals being owned by the State of Texas.  The plaintiff executed an oil and gas lease on behalf of the State that allowed the lessee to use water from the land necessary for operations except water from wells or tanks of the landowner.

To settle a lawsuit with the plaintiff, the lessee agreed to buy 120,000 barrels of water.  The lessee built a frac pit to store the water that it would use in drilling operations and drilled two wells.  The lessee then assigned the lease to the defendant.  The defendant drilled a third well and had plans to drill additional wells.  However, the defendant did not buy water from the plaintiff as the lessee had.  Instead, the defendant pumped water from a neighbor and brought temporary waterlines onto the plaintiff’s property to fill storage tanks. 

The plaintiff claimed that the defendant (via an employee) orally agreed to continue the existing arrangement that the plaintiff had with lessee and was in violation with an alleged industry custom in Texas – that an oil and gas lessee would only buy water from the surface owner of the tract it was operating.  The plaintiff claimed that it wasn’t necessary for the defendant to bring in hoses and equipment because the defendant should have bought the plaintiff’s water from the plaintiff, Not doing so violated the accommodation doctrine.  The trial court rejected the plaintiff’s arguments.

The appellate court determined that the plaintiff’s accommodation doctrine arguments appeared to rest on his proposition that because a frac pit was built on his land for use by the former lessee, it unified the use of the land with the oil and gas operations, and when the defendant chose not buy his water it substantially interfered with his existing use of the land as a source of water for drilling operations. Thus, the substantial interference complained of was that the frac pit was no longer profitable because the defendant is not using it to supply water for its operations. The appellate court held that categorizing a refusal to buy goods produced from the land as interference with the land for purposes of the accommodation doctrine would stretch the doctrine beyond recognition. Therefore, because the defendant’s use did not impair the plaintiff’s existing surface use in any way, except in the sense that not buying the water had precluded the plaintiff from realizing potential revenue from selling its water to the defendant, the inconvenience to the surface estate was not evidence that the owner had no reasonable alternative to maintain the existing use. Lastly, the court determined that if it were to hold for the plaintiff on these facts they would, in effect, be holding that all mineral lessees must use and purchase water from the surface owner under the accommodation doctrine if his water is available for use. Accordingly, the appellate court affirmed. 

Recent Case

In, Bay v. Anadarko E&P Onshore LLC, No. 17-1374, 2018 U.S. App. LEXIS 36454 (10th Cir. Dec. 26, 2018), the plaintiffs, a married couple, operate a farm in Weld, County, CO. In 1907, the Union Pacific Railroad acquired large swaths of land and sold off surface rights to others, ultimately selling subsurface rights to mineral deposits to the defendant, an oil and gas company. The 1907 deed reserved the following: “First. All coal and other minerals within or underlying said lands. Second. The exclusive right to prospect in and upon said land for coal and other minerals therein, or which may be supposed to be therein, and to mine for and remove, from said land, all coal and other minerals which may be found thereon by anyone. Third. The right of ingress, egress and regress upon said land to prospect for, mine and remove any and all such coal or other minerals; and the right to use so much of said land as may be convenient or necessary for the right-of-way to and from such prospect places or mines, and for the convenient and proper operation of such prospect places, mines, and for roads and approaches thereto or for removal therefrom of coal, mineral, machinery or other material” [emphasis added].

The plaintiffs’ farm was above a large oil and gas deposit. Before 2000, the railroad entered into agreements with surface owners before drilling for oil or gas. Those agreements often included payments to surface owners and provided that the railroad would pay for surface property damages, including crop damages. In 2000, the defendant bought the railroad’s mineral rights in the oil and gas deposit underlying the plaintiffs’ property. In 2004, the defendant leased the mineral rights under the plaintiffs’ farms to an exploration company which drilled three vertical wells on a part of the plaintiffs’ farm. An energy company bought the exploration company in 2006 and drilled four more vertical wells on another part of the plaintiffs’ farm between 2007 and 2011. In an attempt to have fewer wells drilled on their farm and minimize the impact to their farmland, the plaintiffs asked the energy company to drill directionally. The energy company requested $100,000 per directional well. The plaintiffs refused, and the energy company continued to drill vertically. The plaintiffs sued, claiming that the energy company’s surface use constituted a trespass because directional drilling would have resulted in two wells on their property rather than seven.  Directional drilling is the norm in the county with one drill site per pad serving 12-36 wells.

The trial court granted a judgment as a matter of law to the defendant on the basis that the defendant had presented sufficient evidence that vertical drilling was the only commercially reasonable practice; that this practice was afforded in the additional rights granted in the original deed; and that the plaintiffs could not establish trespass. On appeal, the appellate court reversed. The appellate court noted that state law held that deeds containing language identical to the “convenient and necessary” language of the deed at issue does not grant mineral owners more rights than what state common law provides. The appellate court also expressed doubt as to whether a mineral reservation in a deed can expand surface or mineral ownership rights unless those rights are clearly defined in accordance with Gerrity Oil and Gas Corp. v. Magness, 946 P.2d 913 (Colo. 1997). The appellate court concluded that the deed at issue in the case was insufficient to expand mineral or surface rights beyond those recognized in state common law. The appellate court also held that the trial court erred by requiring the plaintiffs to show that vertical drilling wasn’t commercially reasonable. Under Gerrity, the appellate court noted, a surface owner can introduce evidence that "reasonable alternatives were available." Once that evidence is introduced, the appellate court determined that it is then up to a judge or jury to "balance the competing interests of the operator and surface owner and objectively determine whether ... the operator's surface use was both reasonable and necessary." 

Conclusion

The accommodation doctrine sounds reasonable.  But, defining what a reasonable use can be difficult to determine, and if new uses can be asserted the mineral owner’s rights can be diminished.  From an economic standpoint, it would seem that the owner of the surface estate as the accommodated party should pay for the extra expense associated with the accommodation.  In other words, when the mineral estate owner must accommodate, but at the expense of the surface estate owner, both parties benefit and the surface estate owner can’t get rights back for nothing that it sold when the original grant was created.  Some states, such as Kansas, follow this approach.

The "Almost Top Ten" Ag Law and Tax Developments of 2018

Overview

2018 was a big year for developments in law and tax that impact farmers, ranchers, agribusinesses and the professionals that provide professional services to them.  It was also a big year in other key areas which are important to agricultural production and the provision of food and energy to the public.  For example, carbon emissions in the U.S. fell to the lowest point since WWII while they rose in the European Union.  Poverty in the U.S. dropped to the lowest point in the past decade, and the unemployment rate became the lowest since 1969 with some sectors reporting the lowest unemployment rate ever.  The Tax Cuts and Jobs Act (TCJA) doubles the standard deduction in 2018 compared to 2017, which will result additional persons having no federal income tax liability and other taxpayers (those without a Schedule C or F business, in particular) having a simplified return.  Wages continued to rise through 2018, increasing over three percent during the third quarter of 2018.  This all bodes well for the ability of more people to buy food products and, in turn, increase demand for agricultural crop and livestock products.  That’s good  news to U.S. agriculture after another difficult year for many commodity prices.

On the worldwide front, China made trade concessions and pledged to eliminate its “Made in China 2025” program that was intended to put China in a position of dominating world economic production.  The North-Korea/South Korea relationship also appears to be improving, and during 2018 the U.S. became a net exporter of oil for the first time since WWII.  While trade issues with China remain, they did appear to improve as 2018 progressed, and the USDA issued market facilitation payments (yes, they are taxed in the year of receipt and, no, they are not deferable as is crop insurance) to producers to provide relief from commodity price drops as a result of the tariff battle. 

So, on an economic and policy front, 2019 appears to bode well for agriculture.  But, looking back on 2018, of the many ag law and tax developments of 2018, which ones were important to the ag sector but just not quite of big enough significance nationally to make the “Top Ten”?  The almost Top Ten – that’s the topic of today’s post.

The “Almost Top Ten” - No Particular Order

Syngenta litigation settles.  Of importance to many corn farmers, during 2018 the class action litigation that had been filed a few years ago against Syngenta settled.  The litigation generally related to Syngenta's commercialization of genetically-modified corn seed products known as Viptera and Duracade (containing the trait MIR 162) without approval of such corn by China, an export market. The farmer plaintiffs (corn producers), who did not use Syngenta's products, claimed that Syngenta's commercialization of its products caused the genetically-modified corn to be commingled throughout the corn supply in the United States; that China rejected imports of all corn from the United States because of the presence of MIR 162; that the rejection caused corn prices to drop in the United States; and that corn farmers were harmed by that market effect.  In April of 2018, the Kansas federal judge handling the multi-district litigation preliminarily approved a nationwide settlement of claims for farmers, grain elevators and ethanol plants.  The proposed settlement involved Syngenta paying $1.5 billion to the class.  The class included, in addition to corn farmers selling corn between September of 2013 and April of 2018, grain elevators and ethanol plants that met certain definition requirements.  Those not opting out of the class at that point are barred from filing any future claims against Syngenta arising from the presence of the MIR 162 trait in the corn supply.  Parties opting out of the class can't receive any settlement proceeds, but can still file private actions against Syngenta.  Parties remaining in the class had to file claim forms by October of 2018.   The court approved the settlement in December of 2018, and payments to the class members could begin as early as April of 2019. 

Checkoff programs.  In 2018, legal challenges to ag “checkoff” programs continued.  In 2017, a federal court in Montana enjoined the Montana Beef Checkoff.  In that case, Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, No. CV-16-41-GF-BMM, 2017 U.S. Dist. LEXIS 95861 (D. Mont. Jun. 21, 2017), the plaintiff claimed that the federal law requiring funding of the Montana Beef Council (MBC) via funds from the federal beef checkoff was unconstitutional.  The Beef Checkoff imposes a $1.00/head fee at the time cattle are sold. The money generated funds promotional campaigns and research, and state beef councils can collect the funds and retain half of the collected amount with the balance going to the Cattleman’s Beef Production and Research Board (Beef Board). But, a producer can direct that all of the producer’s assessment go to the Beef Board. The plaintiff claimed that the use of the collected funds violated their First Amendment rights by forcing them to pay for “speech” with which they did not agree. The defendant (USDA) motioned to dismiss, but the Magistrate Judge denied the motion. The court determined that the plaintiffs had standing, and that the U.S. Supreme Court had held in prior cases that forcing an individual to fund a private message that they did not agree with violated the First Amendment. Any legal effect of an existing “opt-out” provision was not evaluated. The court also rejected the defendant’s claim that the case should be delayed until federal regulations with respect to the opt-out provision was finalized because the defendant was needlessly dragging its heels on developing those rules and had no timeline for finalization. The court entered a preliminary injunction barring the MBC from spending funds received from the checkoff. On further review by the federal trial court, the court adopted the magistrate judge’s decision in full. The trial court determined that the plaintiff had standing on the basis that the plaintiff would have a viable First Amendment claim if the Montana Beef Council’s advertising involves private speech, and the plaintiff did not have the ability to influence the advertising of the Montana Beef Council. The trial court rejected the defendant’s motion to dismiss for failure to state a claim on the basis that the court could not conclude, as a matter of law, that the Montana Beef Council’s advertisements qualify as government speech. The trial court also determined that the plaintiff satisfied its burden to show that a preliminary injunction would be appropriate. 

The USDA appealed the trial court’s decision, but the U.S. Court of Appeals for the Ninth Circuit affirmed the trial court in 2018.  Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, 718 Fed. Appx. 541 (9th Cir. 2018).  Later in 2018, as part of the 2018 Farm Bill debate, a provision was proposed that would have changed the structure of federal ag checkoff programs.  It did not pass, but did receive forty percent favorable votes.    

GIPSA rules withdrawn.  In the fall of 2016, the USDA sent to the Office of Management and Budget (OMB) an interim final rule and two proposed regulations setting forth the agency’s interpretation of certain aspects of the Packers and Stockyards Act (PSA) involving the buying and selling of livestock and poultry. The proposals generated thousands of comments, with ag groups and producers split in their support. The proposals concern Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e)) which makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. The “effect” language of the statute would seem to eliminate any requirement that the producer show that the packer acted with the intent to control or manipulate prices. However, the federal courts have largely interpreted the provision to require a plaintiff to show an anti-competitive effect in order to have an actionable claim. 

The interim final rule and the two proposed regulations stemmed from 2010.  In that year, the Obama administration’s USDA issued proposed regulations providing guidance on the handling of antitrust-related issues under the PSA. 75 Fed. Reg. No. 119, 75 FR 35338 (Jun. 22, 2010).  Under the proposed regulations, "likelihood of competitive injury" was defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.” It included, but was not limited to, situations in which a packer, swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) was stated to depend on the nature and circumstances of the challenged conduct. The proposed regulations specifically noted that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The proposed regulations also specified that a PSA violation could occur without a finding of harm or likely harm to competition, contrary to numerous court opinions on the issue.

On April 11, 2017, the USDA announced that it was delaying the effective date of the interim final rule for 180 days, until October 19, 2017, with the due date for public comment set at June 12, 2017.  However, on October 17, 2017, the USDA withdrew the interim rule.  The withdrawal of the interim final rule and two proposed regulations was challenged in court.  On December 21, 2018, the U.S. Court of Appeals for the Eighth Circuit denied review of the USDA decision.  In Organization for Competitive Markets v. United States Department of Agriculture, No. 17-3723, 2018 U.S. App. LEXIS 36093 (8th Cir. Dec. 21, 2018), the court noted that the USDA had declined to withdraw the rule and regulations because the proposal would have generated protracted litigation, adopted vague and ambiguous terms, and potentially bar innovation and stimulate vertical integration in the livestock industry that would disincentivize market entrants.  Those concerns, the court determined, were legitimate and substantive.  The court also rejected the plaintiff’s argument that the court had to compel agency action.  The matter, the court concluded, was not an extraordinary situation.  Thus, the USDA did not unlawfully withhold action. 

No ”clawback.”   In a notice of proposed rulemaking, the U.S Treasury Department eliminated concerns about the imposition of an increase in federal estate tax for decedents dying in the future at a time when the unified credit applicable exclusion amount is lower than its present level and some (or all) of the higher exclusion amount had been previously used. The Treasury addressed four primary questions. On the question of whether pre-2018 gifts on which gift tax was paid will absorb some or all of the 2018-2025 increase in the applicable exclusion amount (and thereby decrease the amount of the credit available for offsetting gift taxes on 2018-2025 gifts), the Treasury indicated that it does not. As such, the Treasury indicated that no regulations were necessary to address the issue. Similarly, the Treasury said that pre-2018 gift taxes will not reduce the applicable exclusion amount for estates of decedents dying in years 2018-2025.

The Treasury also stated that federal gift tax on gifts made after 2025 will not be increased by inclusion in the tax computation a tax on gifts made between 2018 and 2015 that were sheltered from tax by the increased applicable exclusion amount under the TCJA.  The Treasury concluded that this is the outcome under current law and needed no regulatory “fix.” As for gifts that are made between 2018-2025 that are sheltered by the applicable exclusion amount, the Treasury said that those amounts will not be subject to federal estate tax in estates of decedents dying in 2026 and later if the applicable exclusion amount is lower than the level it was at when the gifts were made. To accomplish this result, the Treasury will amend Treas. Reg. §20.2010-1 to allow for a basic exclusion amount at death that can be applied against the hypothetical gift tax portion of the estate tax computation that is equal to the higher of the otherwise applicable basic exclusion amount and the basic exclusion amount applied against prior gifts.

The Treasury stated that it had the authority to draft regulations governing these questions based on I.R.C. §2001(g)(2). The Treasury, in the Notice, did not address the generation-skipping tax exemption and its temporary increase under the TCJA through 2025 and whether there would be any adverse consequences from a possible small exemption post-2025. Written and electronic comments must be received by February 21, 2019. A public hearing on the proposed regulations is scheduled for March 13, 2019. IRS Notice of Proposed Rulemaking, REG-106706-18, 83 FR 59343 (Nov. 23, 2018).

Conclusion

These were significant developments in the ag law and tax arena in 2018, but just not quite big enough in terms of their impact sector-wide to make the “Top Ten” list.  Wednesday’s post this week will examine the “bottom five” of the “Top Ten” developments for 2018. 

Drainage Issues – Rules For Handling Excess Surface Water

Overview

For agriculture, drainage of surface water is a significant legal issue. When surface water is sufficient, problems can arise concerning disposal of rainfall and/or melting snow which water-logs valuable fields and pastures forming bogs and sinkholes, thereby making cultivation difficult or impossible. The drainage of excess surface water can create disputes among rural landowners.  While it’s an issue that arises more frequently in the areas of the U.S. that are east of the Missouri River, it sometimes comes up in the more arid parts of the country.  When too much surface water is present, how can it be disposed of without creating legal problems with an adjoining property owner? 

The rules governing the disposal of excess surface water – that’s the topic of today’s post

General Rule

In general, it has historically been wrongful for a landowner to disturb the existing pattern of drainage and thereby obstruct the flow of water from another's lands, or cast upon the lands of another more water than would naturally flow thereupon, or cause an usually high concentration of water in the course of drainage.  While that’s the general rule, there are exceptions.  Indeed, at least three different legal theories may be utilized to resolve surface water drainage conflicts.

The rule of absolute ownership. The rule of absolute ownership, also known as the common enemy rule, is the oldest legal theory applicable to the use of surface water. This rule is based upon the theory that surface water is the enemy of every landowner and a property owner is given complete freedom to discharge surface waters regardless of the harm that might result to others. The owner is allowed to dispose of surface water in any manner that will result in the highest benefit to his or her land. In its original form, the common-enemy doctrine encouraged land development, but also encouraged conflict both between and among landowners.

Today, most courts have modified this rule by importing into it qualifications based on concepts of reasonable use, negligence, and/or nuisance to prohibit discharges of large quantities of water onto adjoining land by artificial means in a concentrated flow, except through natural drainways.  For example, in Currens v. Sleek, 138 Wash. 2d 858, 983 P.2d 626 (1999), the court determined that a landowner has an unqualified right to make lawful improvements on their own land, but those improvements must limit the harm caused by changes in the flow of surface water to that which is reasonably necessary.  See also Johnson v. Philips, 433 S.E.2d 895 (S.C. Ct. App. 1993).  If land clearing activities alter the surface drainage significantly, it may give an adjoining landowner the basis to bring a nuisance suit.  For example, in Lucas v. Rawl Family Partnership, 359 S.C. 505, 598 S.E.2d 712 (2004), the evidence showed that after the neighbors cleared their land, the owner's fields flooded in every heavy rain, making it unsuitable for crops. The court held that there was a jury question presented as to whether the neighbors' actions constituted a nuisance per se and were dangerous to the property at all times.  Similarly, in Mullins v. Greer, 26 Va. 587, 311 S.E.2d 110 (1984), a landowner had constructed an embankment causing excess water to flow onto a neighbor.  The landowner claimed that the embankment was properly constructed and didn’t interfere with the natural channel and flow of a stream.  The court ordered the landowner to remove the embankment. 

The civil law rule.  The civil law rule imposes liability upon one who interferes with the natural flow of surface water and, as a result, invades another's interest in land. This rule is the opposite of the common enemy rule, and is phrased in terms of dominant and servient estates. This rule imposes a servitude upon the lower or servient estate which requires that it receive all waters which flow in the course of nature from the higher or dominant tract. The owner of the dominant tract cannot, however, do anything that would increase the natural drainage burden imposed upon the lower estate.  But, the complaining party must prove that they incurred damage.      For example, in Mullen v. Natural Gas Line Company of America L.L.C., 801 N.W.2d 627 (Iowa Ct. App. 2011), the plaintiff failed to prove that the defendant’s drainage activity increased the quantity of water or changed the manner of discharge onto the plaintiff’s property.  As a result, the plaintiff was denied injunctive relief and damages.

Essentially, the civil law rule involves accepting the natural flow of water. While this rule minimizes conflict between and among landowners, it also discourages land improvement. As a result, some states have modified the civil law rule to accommodate artificial changes in the natural flow of surface water if the change is incidental to the normal use and improvement of land. These changes are most likely to be acceptable when the water empties into an existing natural watercourse. However, substantial changes in natural drainage flows resulting in damages to an adjoining landowner are not permissible. This rule applies even in connection with governmentally approved soil conservation practices that substantially alter the natural flow of surface water.  For example, in O’Tool v. Hathaway, 461, N.W.2d 161 (Iowa 1990), a farmer constructed several conservation terraces as part of his soil and water conservation plan for the farm.  One of the terraces broke during a heavy rainfall and the resulting flow of the previously ponded water in the terrace damaged the basement of neighboring homeowners.  The homeowners sued, alleging liability because the flow of the water from the terrace break had altered the natural flow of water from the dominant to the servient estate.  The trial court agreed and awarded them damages for materials to fix their basement.  The appellate court tacked on labor expenses, finding that the farmer was liable under the "natural flow" doctrine because the farmer had substantially changed the water drainage method.  The appellate court found that the farmer was negligent in constructing a terrace in a location that if it broke, the resulting water flow would cause foreseeable damages to the homeowners. 

The strict application of the civil law rule has also been modified by a so-called “husbandry” exception, and interference with natural drainage will be allowed if the interference is limited to that which is incidental to reasonable development of the dominant estate for agricultural purposes.  See, e.g., Callahan v. Rickey, 93 Ill. App. 3d 916, 418 N.E.2d 167 (1981).

Reasonable Use Rule. Today, many jurisdictions have adopted the rule of reasonable use which attempts to avoid the rigidities of either the civil-law or common-enemy doctrines. Instead, the reasonable use rule determines the rights of the parties by an assessment of all the relevant factors with respect to interference with the drainage of surface waters. Under the reasonable use rule, a landowner is entitled to make a reasonable use of diffused surface water, with such use being a factual question for a jury_.  For example, in Kral v. Boesch, 557 N.W.2d 597 (Minn. Ct. App. 1996), a landowner created a channel to drain surface water from his property to a tile intake bordering the parties' properties by lowering the intake in order to allow the channel water to flow into it.  The neighbor discovered what the landowner had done and raised the intake to keep the water out and plugged it with cement, which caused surface water to stand in three areas of the landowner’s property and damaged the landowner’s crops.  The trial court determined that the granted injunctive relief to the landowner under the reasonable use rule.  On appellate court affirmed.  It was appropriate for the landowner to drain water into the adjoining owner’s tile drainage system. 

Ultimately, in legal disputes over the application of the reasonable use rule, it’s often up to a jury.  The jury must determine whether the benefit to the actor's land outweighs the harm that results from the alteration of the flow of surface water onto neighboring lands. A landowner will be liable for damages only to the extent that interference with the flow of surface water is unreasonable. Whether a landowner has acted reasonably in removing excess surface water depends upon such things as the degree or extent of harm, the foreseeability of damage, and the amount of care that was exercised to prevent damage. Is the drainage reasonably necessary?  Did the party draining the excess water take reasonable care to avoid unnecessary damage to a neighbor’s property?  Is the benefit from diverting the excess water greater than the harm to the neighbor?  Does the draining improve the “normal and natural” system of drainage?  These are all important questions to ask before diverting excess water on to a neighbor.  These are often the questions a jury will weigh.

Drainage codes.  Many states have adopted statutory drainage codes.  Under those codes, a  landowner  can  institute  drainage  proceedings for the construction, repair or improvement of agricultural drainage ditches.  These codes, if they apply in a particular situation, must be complied with.

Conclusion

Excess surface water can be can be diverted and discharged onto a neighbor.  However, care must be taken in doing so.

Agricultural Law Online!

Overview

For the Spring 2019 academic semester, Kansas State University will be offering my Agricultural Law and Economics course online. No matter where you are located, you can enroll in the course and participate in it as if you were present with the students in the on-campus classroom.
Details of next spring’s online Ag Law course – that’s the topic of today’s post.

Course Coverage

The course provides a broad overview of many of the issues that a farmer, rancher, rural landowner, ag lender or other agribusiness will encounter on a daily basis. As a result, the course looks at contract issues for the purchase and sale of agricultural goods; the peril of oral contracts; the distinction between a lease and a contract (and why the distinction matters); and the key components of a farm lease, hunting lease, wind energy lease, oil and gas lease, and other types of common agricultural contractual matters. What are the rules surrounding ag goods purchased at auction?

Ag financing situations are also covered – what it takes to provide security to a lender when financing the purchase of personal property to be used in the farming business. In addition, the unique rules surrounding farm bankruptcy is covered, including the unique tax treatment provided to a farmer in Chapter 12 bankruptcy.

Of course, farm income tax is an important part of the course. Tax planning is perhaps the most important aspect of the farming business that every day decisions have an impact on and are influenced by. As readers of this blog know well, farm tax issues are numerous and special rules apply in many instances. The new tax law impacts many areas of farm income tax.

Real property legal issues are also prevalent and are addressed in the course. The key elements of an installment land contract are covered, as well as legal issues associated with farm leases. Various types of interests in real estate are explained – easements; licenses; profits, fee simples, remainders, etc. Like-kind exchange rules are also covered as are the special tax rules (at the state level) that apply to farm real estate. A big issue for some farmers and ranchers concerns abandoned railways, and those issues are covered in the course. What if an existing fence is not on the property line?
Farm estate and business planning is also a significant emphasis of the course. What’s the appropriate estate plan for a farm and ranch family? How should the farming business be structured? Should multiple entities be used? Why does it matter? These questions, and more, are addressed.

Agricultural cooperatives are important for the marketing of agricultural commodities. How a cooperative is structured and works and the special rules that apply are also discussed.

Because much agricultural property is out in the open, that means that personal liability rules come into play with respect to people that come onto the property or use farm property in the scope of their employment. What are the rules that apply in those situations? What about liability rules associated with genetically modified products? Ag chemicals also pose potential liability issues, as do improperly maintained fences? What about defective ag seed or purchased livestock that turns out to not live up to representations? These issues, and more, are covered in the scope of discussing civil liabilities.

Sometimes farmers and ranchers find themselves in violation of criminal laws. What are those common situations? What are the rules that apply? We will get into those issue too.

Water law is a very big issue, especially in the western two-thirds of the United States. We will survey the rules surrounding the allocation of surface water and ground water to agricultural operations.

Ag seems to always be in the midst of many environmental laws – the “Clean Water Rule” is just one of those that has been high-profile in recent years. We will talk about the environmental rules governing air, land, and water quality as they apply to farmers, ranchers and rural landowners.
Finally, we will address the federal (and state) administrative state and its rules that apply to farming operations. Not only will federal farm programs be addressed, but we will also look at other major federal regulations that apply to farmers and ranchers.

Further Information and How to Register

Information about the course is available here:
https://eis.global.ksu.edu/CreditReg/CourseSearch/Course.do?open=true&sectionId=127126

You can also find information about the text for the course at the following link (including the Table of Contents and the Index):
https://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

If you are an undergraduate student at an institution other than Kansas State, you should be able to enroll in this course and have it count as credit towards your degree at your institution.  Consult with your academic advisor to see how Ag Law and Economics will transfer and align with your degree completion goals.

If you have questions, you can contact me directly, or submit your questions to the KSU Global Campus staff at the link provided above.

I hope to see you in January!

Checkout the postcard (401 KB PDF) containing more information about the course and instructor.

The Accommodation Doctrine – Working Out Uses Between Surface and Subsurface Owners

Overview

Land ownership includes two separate estates in land – the surface estate and the mineral estate.  The mineral estate can be severed from the surface estate with the result that ownership of the separate estates is in different parties.  In some states, the mineral estate is dominant.  That means that the mineral estate owner can freely use the surface estate to the extent reasonably necessary for the exploration, development and production of the minerals beneath the surface.

The “accommodation doctrine” is a court-made doctrine relating to the mineral owner's right to use the surface estate to drill for and produce minerals. ... The doctrine requires a balancing of the interests of the surface and mineral owner.  How that balancing works was at issue in a recent case.

The accommodation doctrine – that’s the topic of today’s post.

The Accommodation Doctrine

If the owner of the mineral estate has only a single method for developing the minerals, many courts will allow that method to be utilized without consideration of its impact on the activities of the surface estate owner.  See., e.g., Merriman v. XTO Energy, Inc., 407 S.W.3d 244 (Tex. 2013).  But, under the accommodation doctrine, if alternative means of development are reasonably available that would not disrupt existing activities on the surface those alternative means must be utilized.  For example, in Getty Oil co. v. Jones, 470 S.W.2d 618 (Tex. 1971), a surface estate owner claimed that the mineral estate owner did not accommodate existing surface use. 

To prevail on that claim, the Texas Supreme Court, determined that the surface owner must prove that the mineral estate owner’s use precluded or substantially impaired the existing surface use, that the surface estate owner had no reasonable alternative method for continuing the existing surface use, and that the mineral estate owner has reasonable development alternatives that would not disrupt the surface use.  A question left unanswered in the 1971 decision was whether the accommodation doctrine applied beyond subsurface mineral use to the exercise of groundwater rights.  But, in 2016, the court said that the doctrine said the doctrine applied to groundwater.  Coyote Lake Ranch, LLC v. City of Lubbock, No. 14-0572, 2016 Tex. LEXIS 415 (Tex. Sup. Ct. May 27, 2016).

Recent Case

Harrison v. Rosetta Res. Operating, LP, No. 08-15-00318-CV 2018 Tex. App. LEXIS 6208 (Tex Ct. App. Aug. 8, 2018), involved a water-use dispute between an oil and gas lessee and the surface owner. The plaintiff owned the surface of a 320-acre tract. The surface estate had been severed from the mineral estate, with the minerals being owned by the State of Texas. In October 2009, the plaintiff executed an oil and gas lease on behalf of the State with Eagle Oil & Gas Co. Eagle began its drilling operations, but before completing its first well it assigned the lease to Comstock Oil & Gas, L.P., subject to an agreement to indemnify Eagle against claims arising from its operations to that point. Within a few months, the plaintiff and several other plaintiffs sued Eagle for negligently destroying the plaintiff’s irrigation ditch as well as damage resulting from road construction, among other claims. Comstock defended Eagle in the lawsuit and settled a few months later. According to the settlement agreement, Comstock would make repairs to a water well on the plaintiff’s land and purchase 120,000 barrels of water from the plaintiff at a rate of fifty cents per barrel. A plastic-lined “frac pit” was also built on the property to store water produced from the well, although the pit was not a requirement of the settlement agreement. Comstock complied with the agreement and purchased the required amounts of water from the plaintiff at the agreed price. Comstock completed two oil wells on the property that year and began constructing a third well the following year. Before completing the third well, however, Comstock assigned the least to Rosetta Resources Operating, LP, the defendant in this case, who continued construction of the third well and began construction of several more. Unlike Comstock, the defendant did not purchase its water from the plaintiff, choosing instead to pump in water from an adjacent property, a neighbor of the plaintiff.

After learning that the defendant was importing his neighbor’s water, the plaintiff filed suit in his individual capacity and as trustee against the defendant for breach of contract, claiming an employee of the defendant had orally agreed to continue the same arrangement the plaintiff had enjoyed with Comstock. He also sought to permanently enjoin the defendant from using his neighbor’s water and sought cancellation of the State’s oil and gas lease. The defendant filed three motions for summary judgment that collectively challenged all of the plaintiff’s claims. In response, the plaintiff filed an amended petition asserting that the defendant had violated the “accommodation doctrine” by not purchasing his water, thus rendering his well and frac pit useless and unnecessarily causing damage to his property. The trial court granted the defendant’s motions for summary judgment in their entirety. The plaintiff appealed.

The appellate court determined that the plaintiff’s accommodation doctrine arguments appeared to rest on his proposition that because a frac pit was built on his land for use by the former lessee, it unified the use of the land with the oil and gas operations, and when the defendant chose not buy his water it substantially interfered with his existing use of the land as a source of water for drilling operations. Thus, the substantial interference complained of was that the frac pit was no longer profitable because the defendant is not using it to supply water for its operations. The appellate court held that categorizing a refusal to buy goods produced from the land as interference with the land for purposes of the accommodation doctrine would stretch the doctrine beyond recognition. Therefore, because the defendant’s use did not impair the plaintiff’s existing surface use in any way, except in the sense that not buying the water had precluded the plaintiff from realizing potential revenue from selling its water to the defendant, the inconvenience to the surface estate was not evidence that the owner had no reasonable alternative to maintain the existing use. Lastly, the court determined that if it were to hold for the plaintiff on these facts they would, in effect, be holding that all mineral lessees must use and purchase water from the surface owner under the accommodation doctrine if his water is available for use. Accordingly, the appellate court affirmed. 

Conclusion

The accommodation doctrine is not designed to substitute for common sense reasonableness when the dominant estate owner has two clear options for doing something that involve the same cost. If one option is more disruptive to the surface owner, inherent limits of reasonable use dictate use of the less disruptive option.  The recent Texas case is just another illustration of how courts wrestle with the application of the doctrine.

Agricultural Law and Economics Conference

Overview

Next month, Washburn Law School and Kansas State University (KSU) will team up for its annual symposium on agricultural law and the business of agriculture.  The event will be held in Manhattan at the Kansas Farm Bureau headquarters.  The symposium will be the first day of three days of continuing education on matters involving agricultural law and economics.  The other two days will be the annual Risk and Profit Conference conducted by the KSU Department of Agricultural Economics.  That event will be on the KSU campus in Manhattan.  The three days provide an excellent opportunity for lawyers, CPAs, farmers and ranchers, agribusiness professionals and rural landowners to obtain continuing education on matters regarding agricultural law and economics.  

Symposium

This year’s symposium on August 15 will feature discussion and analysis of the new tax law, the Tax Cuts and Jobs Act, and its impact on individuals and businesses engaged in agriculture; farm and ranch financial distress legal issues and the procedures involved in resolving debtor/creditor disputes, including the use of mediation and Chapter 12 bankruptcy; farm policy issues at the state and federal level (including a discussion of the status of the 2018 Farm Bill); the leasing of water rights; an update on significant legal (and tax) developments in agricultural law (both federal and state); and an hour of ethics that will test participant’s negotiation skills. 

The symposium can also be attended online.  For a complete description of the sessions and how to register for either in-person or online attendance, click here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

Risk and Profit Conference

On August 16 and 17, the KSU Department of Agricultural Economics will conduct its annual Risk and Profit campus.  The event will be held at the alumni center on the KSU campus, and will involve a day and a half of discussion of various topics related to the economics of the business of agriculture.  One of the keynote speakers at the conference will be Ambassador Richard T. Crowder, an ag negotiator on a worldwide basis.  The conference includes 22 breakout sessions on a wide range of topics, including two separate breakout sessions that I will be doing with Mark Dikeman of the KSU Farm Management Association on the new tax law.  For a complete run down of the conference, click here:  https://www.agmanager.info/risk-and-profit-conference

Conclusion

The two and one-half days of instruction is an opportunity is a great chance to gain insight into making your ag-related business more profitable from various aspects – legal, tax and economic.  If you are a producer, agribusiness professional, or a professional in a service business (lawyer; tax professional; financial planner; or other related service business) you won’t want to miss these events in Manhattan.  See you there, or online for Day 1.

Top Ten Agricultural Law and Tax Developments of 2017 (Five Through One)

Overview

This week we are looking at the biggest developments in agricultural law and taxation for 2017.  On Monday, I discussed those developments that were important but just not quite significant enough based on their national significance to make the top ten.  On Wednesday I addressed developments 10 through 6.  Today I discuss the top five developments of 2017 – the really big ones.  These are the developments that I deem to be of the highest importance on a national scale to agricultural producers, agribusiness and rural landowners in general. 

Today’s blog post – the top five developments in agricultural law and taxation in 2017.

• 5 – Federal Implied Reserved Water Rights Doctrine Applies to Groundwater. Water issues are big in the West, and the Federal Government owns about 28 percent of the land area of the United States, with approximately 50 percent of that amount concentrated in 11 Western states (excluding Alaska).  Across the West, most water rights are granted under and governed by state law. Federal law touching on water rights has generally deferred to state law for over 140 years, and the federal government waives its sovereign immunity from state court proceedings involving water rights.  However, the U.S. Supreme Court has long recognized that Native American tribes can be entitled to water rights under federal law, rights that supersede many of these state rights. These federal implied rights are based upon the belief that the United States, when establishing Indian reservations, “intended to deal fairly with the Indians by reserving for them the waters without which their lands would have been useless.”  But, the federal government’s water rights are not limited to its trustee capacity for Native American Tribes, but also apply to national monuments, national forests, and other public lands.  In 2017, the U.S. Court of Appeals for the Ninth Circuit became the first federal appellate case to reach a decision on this issue, and its reasoning follows multiple state court decisions across the West.  The court first held that the United States clearly intended to reserve water under federal law when it created the Tribe’s reservation. The court noted that the underlying purpose of the reservation was to establish a tribal homeland supporting an agrarian society.  That purpose would be entirely defeated, the court reasoned, without sufficient water supplies held under federal law. Thus, the Tribe was entitled to a reserved water right for the Agua Caliente Reservation.  Next, the Ninth Circuit held that the Tribe’s reserved water right extended to groundwater. It was necessary for the Tribe to access groundwater in the Coachella Valley Basin because surface supplies were clearly inadequate—a reservation without an adequate supply of surface water must be able to access groundwater as well. Thus, the court held that the reservation and establishment of the Agua Caliente Reservation carried with it an implied federal reserved right to use water from the aquifer.  The court also determined that the Tribe’s implied reserved water rights pre-empted state water rights, and the Tribe’s lack of groundwater pumping did not defeat those rights, because they are immune from abandonment.  The court also determined that the proper inquiry was whether water was envisioned as necessary for the reservation’s purpose at the time the reservation was created. Thus, the Ninth Circuit held, the issue of the Tribe’s state law-based water rights did not affect the existence of its federal implied reserved water right.  That right, the court held, always applies as a matter of federal pre-emption, regardless of how a state allocates groundwater rights.  The court’s opinion is significant because groundwater has become the dominant supply of water across the West.  The decision also has important implications for California, the number one agricultural state in the nation (in terms of cash receipts), which enacted the Sustainable Groundwater Management Act (SGMA) in 2014.  Because the Ninth Circuit’s decision establishes strong (and largely non-negotiable) rights for tribes within California’s groundwater basins, it complicates the formidable task of achieving sustainable groundwater management.  Across the West, the other implications of the decision likely depend upon what remains of basin-wide adjudications of water rights.

                Note:  On November 27, 2017, the U.S. Supreme Court denied certiorari in the first phase of the case, allowing the Ninth Circuit’s holding to stand.  Coachella Valley Water                 District v. Agua Caliente Band of Cahuilla Indians, No. 17-40, Vide No. 17-42, 2017 U.S. LEXIS 7044 (U.S. Sup. Ct. Nov. 27, 2017).

• 4 - EPA Rule Exempting Farms From Air Release Reporting Vacated.Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation. In 2008, the EPA issued a final regulation exempting large (commercial) farms (those that emit more than 100 pounds total of hydrogen sulfide or ammonia daily) from the CERCLA reporting/notification requirement for air releases from animal waste (by issuing an annual report of “continuous releases”) on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for Confined Animal Feeding Operations (CAFOs) under EPCRAs public disclosure rule.  Indeed, in early 2009, EPA, pursuant to the EPCRA, issued a final regulation regarding the reporting of emissions from confined AFO’s – termed a “CAFO.”  The rule applies to facilities that confine more than 1,000 beef cattle, 700 mature dairy cows, 1,000 veal calves, 2,500 swine (each weighing 55 pounds or more), 10,000 swine (each weighing less than 55 pounds), 500 horses and 10,000 sheep.  The rule requires these facilities to report ammonia and hydrogen sulfide emissions to state and local emergency response officials if the facility emits 100 pounds or more of either substance during a 24-hour period. Various environmental activist groups challenged the exemption in the final regulation on the basis that the EPA acted outside of its delegated authority to create the exemption. Agricultural groups claimed that the carve-out for CAFOs was also impermissible. The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but noted that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve-out was mooted and dismissed.  Later, the court, granted a motion filed by the EPA and ag groups to delay the removal of the exemption until November 14, 2017.  The EPA’s interim guidance on the new reporting requirements was issued on October 26, 2017, but the EPA again motioned for an extension of time to fully implement the regulations.  The court granted the motion on November 22, 2017, staying the implementation of the new reporting regulations until January 22, 2018. The reporting requirement will have direct application to larger livestock operations with air emissions that house beef cattle, dairy cattle, horses, hogs and poultry.   It is estimated that approximately 60,000 to 100,000 livestock and poultry operations will be subject to the reporting requirement.  The reporting level would be reached by a facility with approximately 330-head (for a confinement facility) according to a calculator used by the University of Nebraska-Lincoln which is based on emissions produced by the commingling of solid manure and urine.  The underlying action is Waterkeeper Alliance, et al. v. Environmental Protection Agency, 853 F.3d 527 (D.C. Cir. 2017).
• 3 – Clean Water Act “WOTUS” Developments. In 2015, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE) finalized a regulation (known as the “Clean Water Rule”) concerning “waters of the United States” (WOTUS) which expanded the parameters of waters (streams, rivers, ponds, ditches, puddles and other water bodies) that are subject to federal jurisdiction and regulation.  The final regulation became effective in the late summer of 2015, but a federal court stayed its implementation later that year in October. In early 2016, the U.S. Court of Appeals for the Sixth Circuit held that federal law placed jurisdiction with the federal appellate courts rather than the federal district courts concerning any challenges to the WOTUS rule.  In January of 2017, the U.S. Supreme Court agreed to review the Sixth Circuit’s decision.  National Association of Manufacturers v. Department of Defense, et al., 137 S. Ct. 811 (2017).  About a month later, President Trump issued an Executive Order directing the EPA and the COE to revisit the Clean Water Rule and change their interpretation of waters subject to federal jurisdiction such that it only applied to waters that were truly navigable – the approach taken by Justice Scalia in Rapanos v. United States, 547 U.S. 715 (2006).  The EPA and Corps later indicated they would follow the President’s suggested approach, and would push the effective date of the revised Clean Water Rule to two years after its finalization and publication.        

In addition, there were several important WOTUS cases decided/finalized in 2017:

• COE jurisdictional determination is final agency action; no WOTUS present. The plaintiff, a peat moss mining company, sought the approval of the Corps of Engineers (COE) to harvest a swamp (wetland) for peat moss to use in landscaping projects. The COE issued a jurisdictional determination that the swamp was a wetland subject to the permit requirements of the Clean Water Act (CWA). The plaintiff sought to challenge the COE determination, but the trial court ruled for the COE, holding that the plaintiff had three options: (1) abandon the project; (2) seek a federal permit costing over $270,000; or (3) proceed with the project and risk fines of up to $75,000 daily and/or criminal sanctions including imprisonment. On further review, the U.S. Supreme Court unanimously reversed, holding that COE Jurisdictional Determinations constitute final agency actions that are immediately appealable in court. The court noted that to hold elsewise would allow the COE to effectively kill the project without any determination of whether it's position as to jurisdiction over the wetland at issue was correct.  Not only did the jurisdictional determination constitute final agency action under the Administrative Procedure Act, the court held that it also determined rights or obligations from which legal consequences would flow. That made the determination judicially reviewable. United States Army Corps of Engineers v. Hawkes Company, No. 15-290, 136 S. Ct. 1807 (2016).  On remand, the trial court granted summary judgment for the plaintiff on the grounds that the plaintiff’s property did not constitute “waters of the United States” that the defendant had jurisdiction over. The court determined that the government did not establish a “significant nexus” under the Rapanos standard between the plaintiff’s property and the Red River 93 miles away that the defendant claimed were connected via ditches and seasonal tributaries. The court also determined that the Jurisdictional Determination was not based on the “significant nexus” standard of Rapanos and was arbitrary and capricious. The court entered an injunction that ordered the defendant to not assert jurisdiction over the plaintiff’s property. In doing so, the court determined that the defendant had an adequate chance to develop a record which negated a remand back to the defendant to address the evidentiary inadequacies. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-107 ADM/TNL, 2017 U.S. Dist. LEXIS 10680 (D. Min. Jan. 24, 2017).

• Prior Converted Cropland Exception to CWA Jurisdiction Inapplicable.The plaintiff, a developer, obtained title to a 100-acre tract on the southeast side of Chicago metro area in 1995. The defendant claimed federal jurisdiction over water on a portion of the property on the basis that the “wetland” drained via a storm sewer pipe to a creek that was a tributary to a river that was a navigable water of the U.S. After exhausting administrative appeals, the court upheld the defendant’s nexus determination because it sufficiently documented a physical, chemical and biological impact of the navigable river. The court also determined that the prior converted cropland exemption did not apply because farming activities had been abandoned for at least five years and wetland characteristics returned. The court noted that the defendant and the EPA had jointly adopted a rule in 1993 adopting the NRCS exemption for prior converted cropland. The court also that prior caselaw had held that the CWA’s exemption of “prior converted croplands” included the abandonment provision, and that it would apply the same rationale in this case. The court noted that the specific 13-acre parcel at issue in the case had not been farmed since 1996, and that conversion to a non-ag use did not remove the abandonment provision. The plaintiff also claimed that the wetlands at issue were “artificial” wetlands (created by adjacent development) under 7 C.F.R. §12.2(a) that were not subject to the defendant’s jurisdiction. However, the court noted that the defendant never adopted the “artificial wetland” exemption of the NRCS and, therefore, such a classification was inapplicable. The court granted the defendant’s cross motion for summary judgment. Orchard Hill Building Co. v. United States Army Corps of Engineers, No. 15-cv-06344, 2017 U.S. Dist. LEXIS 151673 (N.D. Ill. Sept. 19, 2017).
• Conviction Upheld for Clean Water Act Violations.The defendant, a disabled Vietnam Navy veteran, was charged with multiple counts of criminal violations of the (CWA) by virtue of the unauthorized knowing discharge of “pollutants” into the “waters of the United States” (WOTUS) (in violation of 33 U.S.C. §1251-1388) and depredation of U.S. property (18 U.S.C. §1361). The defendant was indicted for building illegal ponds (nine in total) in an existing stream on two parcels - one federal and one private (which the defendant did not own). The defendant did the work due to multiple fires in the area that had recently occurred and to create stock water ponds for his animals. The government claimed that the ponds resulted in the discharge of dredged and fill material into a tributary stream and adjacent wetlands and damaged both properties, even though there was no tributary from the ponds. Dredged material from the ponds had been used to create the berms and had been placed in and around the streams and wetlands. The trial court determined that the stream at issue was a WOTUS on the basis that the stream headwater and wetland complex provided critical support to trout in downstream rivers and fisheries, including the Boulder and Jefferson Rivers (60 miles away) – navigable waters of the U.S. The trial court jury, after a second trial and the introduction by the government of evidence that it allegedly manufactured, found the defendant guilty of two counts of illegal discharge of pollutants into WOTUS without a federal permit and one count of injury or depredation of U.S. property. On appeal, the appellate court affirmed. The appellate court held that U.S. Supreme Court Justice Kennedy’s opinion in Rapanos v. United States, 547 U.S. 715 (2006) was controlling and that the trial court jury instructions based on Justice Kennedy’s “significant nexus test contained in his opinion in Rapanos were proper. The appellate court also held that the definition of WOTUS was not too vague to be enforced. Thus, there was no due process violation. The defendant had fair warning that his conduct was criminal.  United States v. Robertson, 875 F.3d 1281 (9th Cir. 2017).
• 2 – Rental and Employment Agreements Appropriately Structured; No Self-Employment Tax on Rental Income.The petitioners, a married couple, operated a farm in Texas. In late 1999, they built the first of eight poultry houses to raise broilers under a production contract with a large poultry integrator. The petitioners formed an S corporation in 2004, and set up oral employment agreements with the S corporation based on an appraisal for the farm which guided them as to the cost of their labor and management services. They also pegged their salaries at levels consistent with other growers. The wife provided bookkeeping services and the husband provided labor and management. In 2005, they assigned the balance of their contract to the S corporation. Thus, the corporation became the "grower" under the contract. In 2005, the petitioners entered into a lease agreement with the S corporation. Under the agreement, the petitioners rented their farm to the S corporation, under which the S corporation would pay rent of $1.3 million to the petitioners over a five-year period. The court noted that the rent amount was consistent with other growers under contract with the integrator. The petitioners reported rental income of $259,000 and $271,000 for 2008 and 2009 respectively, and the IRS determined that the amounts were subject to self-employment tax because the petitioners were engaged in an "arrangement" that required their material participation in the production of agricultural commodities on their farm. The Tax Court, in an opinion by Judge Paris, noted that the IRS agreed that the facts of the case were on all fours with McNamara v. Comr., T.C. Memo. 1999-333 where the Tax Court determined that the rental arrangement and the wife's employment were to be combined, which meant that the rental income was subject to self-employment tax. However, the Tax Court's decision in that case was reversed by the Eighth Circuit on appeal. McNamara v. Comr., 236 F.3d 410 (8th Cir. 2000).  Judge Paris, in the current case, determined that the Eighth Circuit's rationale in McNamara was persuasive and that the "derived under an arrangement" language in I.R.C. §1402(a)(1) meant that a nexus had to be present between the rents the petitioners received and the "arrangement" that required their material participation. In other words, there must be a tie between the real property lease agreement and the employment agreement. The court noted the petitioners received rent payments that were consistent with the integrator's other growers for the use of similar premises. That fact was sufficient to establish that the rental agreement stood on its own as an appropriate measure as a return on the petitioners' investment in their facilities. Similarly, the employment agreement was appropriately structured as a part of the petitioners' conduct of a legitimate business. Importantly, the court noted that the IRS failed to brief the nexus issue, relying solely on its non-acquiescence to McNamara (A.O.D. 2003-003, I.R.B. 2003-42 (Oct. 22, 2003)) and relying on the court to broadly interpret "arrangement" to include all contracts related to the S corporation. The Tax Court refused to do so and, accordingly, the court held that the petitioner's rental income was not subject to self-employment tax. Martin v. Comr., 149 T.C. No. 12 (2017).
• No 1 – The Tax Bill ("To provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018"). The most significant development of 2017 with the widest impact on agricultural producers, agribusinesses and rural landowners is unquestionably the tax bill enacted into law on December 22, 2017.  The new law establishes new tax brackets, essentially doubles the standard deduction, eliminates many itemized deductions, modifies many cost-recovery provisions and changes the corporate tax rate to a flat rate of 21 percent.  The legislation also creates a new 20 percent deduction for qualified business income from a pass-through entity.  Prior law was also modified concerning cash accounting, the tax rate applicable to commodity gifts made to a non-charitable donee above certain levels of unearned income, the rules surrounding net operating losses, interest deductibility, elimination of the corporate alternative minimum tax (AMT) and modification of the individual AMT, the child tax credit and various international tax provisions.  The new law will create many planning questions and opportunities with the structure of perhaps many farm operations being modified to take advantage of the new provisions. 

Conclusion

2017 was another active year on the agricultural law and taxation front.  It was also the first year in many years where some rather significant federal regulations as applies to agriculture were either rolled back or eliminated.  2018 will be another very busy year.  That is certainly to be the case especially on the tax side of things. 

Top Ten Agricultural Law and Tax Developments of 2017 (Ten Through Six)

Overview

This week we are looking at the biggest developments in agricultural law and taxation for 2017.  On Monday, I discussed those developments that were important but just not quite significant enough based on their national significance to make the top ten.  Today I start a two-day series on the top ten developments of 2017 with a discussion of developments 10 through six.  On Friday, developments five through one will be covered. To make my list, the development from the courts, IRS and federal agencies must have a major impact nationally on agricultural producers, agribusiness and rural landowners in general. 

Without further delay, here we go - the top developments for 2017 (numbers 10 through six).

• 10 – South Dakota Enacts Unconstitutional Tax Legislation. In 2017, the South Dakota Supreme Court gave the South Dakota legislature and Governor what it wanted – a ruling that a recently enacted South Dakota law was unconstitutional.  South Dakota’s thirst for additional revenue led it to enact a law imposing sales tax on businesses that have no physical presence in the state.  That’s something that the U.S. Supreme Court first said 50 years ago that a state cannot do.  Accordingly, the South Dakota Supreme Court struck the law down as an unconstitutional violation of the Commerce Clause.  The legislature deliberately enacted the law so that it would be challenged as unconstitutional in order to set up a case in hopes that the U.S. Supreme Court would review it and reverse its longstanding position on the issue.  See, e.g., National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967) and Quill Corporation v. North Dakota, 504 U.S. 298 (1992).  If that happens, or the Congress takes action to allow states to impose sales (and/or use) tax on businesses with no physical presence in the state, the impact would be largely borne by small businesses, including home-based business and small agricultural businesses all across the country.  It would also raise serious questions about how strong the principle of federalism remains.  State v. Wayfair, Inc., et al., 901 N.W.2d 754 (S.D. Sup. Ct. 2017), pet. for cert. filed, Oct. 2, 2017.
  
  
• 9 - Amendment to Bankruptcy Law Gives Expands Non-Priority Treatment of Governmental Claims. H.R. 2266, signed into law on October 26, 2017, contains the Family Farmer Bankruptcy Act (Act). The Act adds 11 U.S.C. §1232 which specifies that, “Any unsecured claim of a governmental unit against the debtor or the estate that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor's discharge under section 1228, as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation”… is to be treated as an unsecured claim that arises before the bankruptcy petition was filed that is not entitled to priority under 11 U.S.C. §507 and is deemed to be provided for under a plan, and discharged in accordance with 11 U.S.C. §1228. The provision amends 11 U.S.C. §1222(a)(2)(A) to effectively override Hall v. United States, 132 Sup. Ct. 1882 (2012) where the U.S. Supreme Court held that tax triggered by the post-petition sale of farm assets was not discharged under 11 U.S.C. §1222(a)(2)(A). The Court held that because a Chapter 12 bankruptcy estate cannot incur taxes by virtue of 11 U.S.C. §1399, taxes were not “incurred by the estate” under 11 U.S.C. §503(b) which barred post-petition taxes from being treated as non-priority. The provision is effective for all pending Chapter 12 cases with unconfirmed plans and all new Chapter 12 cases as of October 26, 2017. H.R. 2266, Division B, Sec. 1005, signed into law on October 26, 2017.
  
  
• 8 – “Hobby Loss” Tax Developments. 2017 saw two significant developments concerning farm and ranching activities that the IRS believes are not conducting with a business purpose and are, thus, subject to the limitation on deductibility of losses.     Early in 2017, the IRS issued interim guidance on a pilot program for Schedule F expenses for small business/self-employed taxpayer examinations.  It set the program to begin on April 1, 2017 and run for one year.  The focus will be on “hobby” farmers, and will involve the examination of 50 tax returns from tax year 2015.  The program could be an indication that the IRS is looking to increase the audit rate of returns with a Schedule F, and it may be more likely to impact the relatively smaller farming operations.  The interim guidance points out that the IRS believes that compliance issues may exist with respect to the deduction of expenses on the wrong form, or expenses that actually belonged to another taxpayer, or that should be subject to the hobby loss rules of I.R.C. §183.  Indeed, the IRS notes that a filter for the project will be designed to identify those taxpayers who have W-2s with large income and who also file a Schedule F “and may not have time to farm.”  In addition, the guidance informs IRS personnel that the examined returns could have start-up costs or be a hobby activity which would lead to non-deductible losses. The interim guidance also directs examiners to look for deductions that “appear to be excessive for the income reported.”  The implication is that such expenses won’t be deemed to be ordinary and necessary business expenses.  How that might impact the practice of pre-paying farm expenses remains to be seen.  The guidance also instructs examiners to pick through gas, oil, fuel, repairs, etc., to determine the “business and non-business parts” of the expense without any mention of the $2,500 safe harbor of the repair regulations.  The interim guidance would appear to be targeted toward taxpayers that either farm or crop share some acres where the income ends up on Schedule F, but where other non-farm sources of income predominate (e.g., W-2 income, income from leases for hunting, bed and breakfast, conservation reserve program payments, organic farming, etc.).  In those situations, it is likely that the Schedule F expenses will exceed the Schedule F income.  That’s particularly the case when depreciation is claimed on items associated with the “farm” - a small tractor, all-terrain vehicle, pickup truck, etc.  That’s the typical hobby loss scenario that IRS is apparently looking for.
  
  The second development on the hobby loss issue was a Tax Court opinion issued by Judge Paris in late 2017.  The case involved a diversified ranching operation that, for the tax years at issue, had about $15 million in losses and gross income of $7 million.  For those years, the petitioner’s primary expense was  depreciation. The IRS claimed that the ranching activity was not engaged in for profit and the expenses were deductible only to the extent of income. The Tax Court determined that all of the petitioner’s activities were economically intertwined and constituted a single ranching activity. On the profit issue, the court determined that none of the factors in the Treasury Regulations §1.183-2(b) favored the IRS. Accordingly, the petitioner’s ranching activity was held to be conducted for-profit and the losses were fully deductible. The court specifically rejected the IRS argument that a profit motive could not be present when millions of dollars of losses were generated.  That’s a very important holding for agriculture.  Depreciation is often the largest deduction on a farm or ranch operation’s return.  Welch, et al. v. Comr., T.C. Memo. 2017-229.
  
  
• 7 - Beneficial Use Doctrine Established Water Right That Feds Had Taken.  In late 2017, the U.S. Court of Federal Claims issued a very significant opinion involving vested water rights in the Western United States.  The court ruled that the federal government had taken the vested water rights of the plaintiff, a New Mexico cattle ranching operation, which required compensation under the Fifth Amendment.  The court determined that the plaintiff had property rights by virtue of having “made continuous beneficial use of stock water sources” predating federal ownership.  Those water rights pre-dated 1905, and the U.S. Forest Service (USFS) had allowed that usage from 1910 to 1989.  The court also agreed with the plaintiff’s claim the water was “physically taken” when the United States Forest Service (USFS) blocked the plaintiff’s livestock from accessing the water that had long been used by the plaintiff and its predecessors to graze cattle so as to preserve endangered species.
  
  More specifically, the plaintiff held all “cattle, water rights, range rights, access rights, and range improvements on the base property, as well as the appurtenant federally-administered grazing allotment known as the Sacramento Allotment” in New Mexico. The plaintiff obtained a permit in 1989 from the USFS to graze cattle on an allotment of USFS land which allowed for the grazing of 553 cows for a 10-year period. At the time the permit was obtained, certain areas of the allotment were fenced off, but the USFS allowed the plaintiff’s cattle access to water inside the fenced areas. However, in 1996, the USFS notified the plaintiff that cattle were not permitted to graze inside the fenced areas, but then later allowed temporary grazing due to existing drought conditions. In 1998, the USFS barred the plaintiff from grazing cattle inside the fenced areas, but then reissued the permit in 1999 allowing 553 cattle to graze the allotment for 10 years subject to cancellation or modification as necessary. The permit also stated that “livestock use” was not permitted inside the fenced area. In 2001, the USFS denied the plaintiff’s request to pipe water from the fenced area for cattle watering and, in 2002, the USFS ordered the plaintiff to remove cattle that were grazing within the fenced area. Again in 2006, the plaintiff sought to pipe water from a part of the fenced area, but was denied. A U.S. Fish and Wildlife Service Biological Opinion in 2004 recommended the permanent exclusion of livestock from the allotment, and the plaintiff sued for a taking of its water rights which required just compensation. While the parties were able to identify and develop some alternative sources of water, that did not solve the plaintiff’s water claims and the plaintiff sued.
  
  The court determined that the plaintiff’s claim was not barred by the six-year statute of limitations because the plaintiff’s claim accrued in 1998 when the USFS took the first “official” action barring the grazing of cattle in the fenced area. The court also determined that under state (NM) law, the right to the beneficial use of water is a property interest that is a distinct and severable interest from the right to use land, with the extent of the right dependent on the beneficial use. The court held that the “federal appropriation of water does not, per se constitute a taking….Instead, a plaintiff must show that any water taken could have been put to beneficial use.” The court noted that NM law recognizes two types of appropriative water rights – common law rights in existence through 1907 and those based on state statutory law from 1907 forward. The plaintiff provided a Declaration of Ownership that had been filed with the New Mexico State Engineer between 1999 and 2003 for each of the areas that had been fenced-in. Those Declarations allow a holder of a pre-1907 water right to specify the use to which the water is applied, the date of first appropriation and where the water is located. Once certified, the Declaration of Ownership is prima facie evidence of ownership. The court also noted that witnesses testified that before 1907, the plaintiff’s predecessor’s in interest grazed cattle on the allotment and made beneficial use of the water in the fenced areas. Thus, the court held that the plaintiff had carried its burden to establish a vested water right. The plaintiff’s livestock watering also constituted a “diversion” required by state law.   Thus, the USFS action constituted a taking of the plaintiff’s water right.  Importantly, the court noted that a permanent physical occupation does not require in every instance that the occupation be exclusive, or continuous and uninterrupted.  The key, the court noted, was that the effects of the government’s action was so complete to deprive the plaintiff of all or most of its interest.  The court directed the parties to try to determine whether alternative water sources could be made available to the plaintiff to allow the ranching operation to continue on a viable basis.  If not, the court will later determine the value of the water rights taken for just compensation purposes. Sacramento Grazing Association v. United States, No. 04-786 L. 2017 U.S. Claims LEXIS 1381 (Fed. Cl. Nov. 3, 2017).
  
  
• 6 – Department of Labor Overtime Rules Struck Down. In 2017, a federal court in Texas invalidated particular Department of Labor (DOL) rules under the Fair Labor Standards Act (FLSA).  The invalidation will have a significant impact on agricultural employers.  The FLSA exempts certain agricultural employers and employees from its rules.  However, one aspect of the FLSA that does apply to agriculture are the wage requirements of the law, both in terms of the minimum wage that must be paid to ag employment and overtime wages.  But, an exemption denies persons employed in agriculture the benefit of mandatory overtime payment. 29 U.S.C. § 213(b)(12). The agricultural exemption is broad, defining “agriculture” to include “farming in all its branches [including] the raising of livestock, bees, fur-bearing animals, or poultry,…and the production, cultivation, growing, and harvesting of...horticultural commodities and any practices performed by a farmer or on a farm as an incident to or in conjunction with farming operations.”   In addition, exempt are “executive” workers whose primary duties are supervisory and the worker supervises 2 or more employees.  Also exempt are workers that fall in the “administrative” category who provide non-manual work related to the management of the business, and workers defined as “professional” whose job is education-based and requires advanced knowledge.  Many larger farming and ranching operations have employees that will fit in at least one of these three categories.  For ag employees that are exempt from the overtime wage payment rate because they occupy an “executive” position, they must be paid a minimum amount of wages per week.
  
  Until December 1, 2016, the minimum amount was $455/week ($23,660 annually).  Under the Obama Administration’s DOL proposal, however, the minimum weekly amount was to increase to $913 ($47,476 annually).  Thus, an exempt “executive” employee that is paid a weekly wage exceeding $913 is not entitled to be paid for any hours worked exceeding 40 in a week.  But, if the $913 weekly amount was not met, then the employee would generally be entitled to overtime pay for the hours exceeding 40 in a week.  Thus, the proposal would require farm businesses to track hours for those employees it historically has not tracked hours for – executive employees such as managers and those performing administrative tasks.  But, remember, if the employee is an agricultural worker performing agricultural work, the employee need not be paid for the hours in excess of 40 in a week at the overtime rate.  The proposal also imposes harsh penalties for noncompliance.  Before the new rules went into effect, many states and private businesses sued to block them.  The various lawsuits were consolidated into a single case, and in November of 2016, the court issued a temporary nationwide injunction blocking enforcement of the overtime regulations.  Nevada v. United States Department of Labor, 218 F. Supp. 3d 520 (E.D. Tex. 2016).
  
  On Aug. 31, 2017, the court entered summary judgment for the plaintiffs in the case thereby invalidating the regulations.   In its ruling, the court focused on the congressional intent behind the overtime exemptions for “white-collar” workers as well as the authority of the DOL to define and implement those exemptions.  The court also concluded that the DOL did not have any authority to categorically exclude workers who perform exempt duties based on salary level alone, which is what the court said that the DOL rules did.  The court noted that the rules more than doubled the required salary threshold and, as a result, “would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level.”  The court went on to state that the overtime rules make “overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.”  The court noted that his was contrary to the clear intent of the Congress and, as a result, the rules were invalid.   The court’s ruling invalidating the overtime rules is an important victory for many agricultural (and other) businesses.  It alleviates an increased burden to maintain records for employees in executive positions (e.g., managers and administrators), and the associated penalties for non-compliance.  The case is Nevada v. United States Department of Labor, No. 4:16-cv-731, 2017 U.S. Dist. LEXIS 140522 (E.D. Tex. Aug. 31, 2017). 

Conclusion

Those are the "bottom five" of the "top 10" developments of 2017.  On Friday I will reveal what I believe to be the top five developments.

Big Development for Water in the West - Federal Implied Reserved Water Rights Doctrine Applies to Groundwater

Overview

Water issues are big in the West.  Couple that fact with the fact that the Federal Government owns about 28 percent of the land area of the United States, with approximately 50 percent of that amount is concentrated in 11 Western states (excluding Alaska).  Recently, a federal appeals court held that that the federal implied reserved water rights doctrine categorically extends to groundwater.  The court’s decision could have significant implications for the usage of water in the West – a very big issue for affected farmers and ranchers.  It could also have an impact on water policy. 

For today’s blog post, I asked Washburn Law School’s water law expert, Prof. Burke Griggs, to take a look at the recent case and project the important implications for agriculture and Western water policy in general.  Here’s what Burke had to say:

Western Water Rights

Across the West, most water rights are granted under and governed by state law. Federal law touching on water rights has generally deferred to state law, most prominently in legislation such as the General Mining Law of 1872, the Desert Land Act of 1877, and the Reclamation Act of 1902. Since Winters v. United States, 207 U.S. 564 (1908), however, the Supreme Court has recognized that Native American tribes can be entitled to water rights under federal law, rights that supersede many of these state rights. Specifically, when the United States withdraws land from the public domain and reserves it for a particular federal purpose—as for a reservation intended to be the permanent home for a Native American tribe—then the federal government has impliedly reserved sufficient unappropriated water supplies required to effect the purpose of the reservation. These federal implied rights are based upon the belief that the United States, when establishing Indian reservations, “intended to deal fairly with the Indians by reserving for them the waters without which their lands would have been useless.” Arizona v. California, 373 U.S. 546, 600 (1963).

The Winters doctrine thus reserves water to the extent it is necessary to accomplish the purpose of the reservation, and it only reserves water if it is appurtenant, or connected to, the land that has been withdrawn and reserved. Once established, however, Winters rights vest on the date of the reservation, and are thus superior to the rights of future appropriators; and unlike most state-law granted water rights, they are also immune from abandonment. Because most western states follow the prior appropriation doctrine—first in time, first in right—Winters inserted a substantial exception into the operation of their water rights systems. This was due both to the seniority of tribal rights (which antedate most state law water rights, since most Indian reservations were established in the nineteenth century) and the size of the rights (which are large, because they must be sufficient to satisfy irrigation rights - the usual, agrarian purpose of the reservations). For example, the Winters right of the Kickapoo Tribe in Kansas dates from 1834—twenty years before Kansas became a territory pursuant to the Kansas-Nebraska Act of 1854, and twenty-seven years before it became a State. 

Since the 1970’s, many western tribes have obtained recognition of their Winters rights, primarily through state law water-rights adjudications. The United States holds substantial water rights across the West, not only in its trustee capacity for Native American Tribes, but also for national monuments, national forests, and other public lands. But because the United States generally enjoys sovereign immunity from state court proceedings, Congress enacted the McCarran Amendment, 43 U.S.C. § 666, which waives that sovereign immunity so that the United States must participate in such state court adjudications. Because, pursuant to Winters, tribes frequently hold some of the most senior and largest water rights in the basins at issue, the extent of their Winters rights has figured prominently in these adjudications.  In addition, because groundwater has become a major source of supply for irrigators and other water users across the West since Winters, these state-court adjudications have been forced to address the issue of whether Winters rights extended to groundwater.

For the most part, state courts have held that Winters rights do extend to groundwater. See, e.g., In re Gen. Adjudication of All Rights to Use Water in Gila River Sys. & Source, 989 P.2d 739 (Ariz. 1999). The logic behind such an extension should be uncontroversial, at least from a hydrological standpoint; surface and groundwater supplies are connected to one another. As the Arizona Supreme Court wrote in the Gila case, “some [Indian] reservations lack perennial streams and depend for present and future survival substantially or entirely upon pumping of underground water. We find it no more thinkable in the latter circumstance than in the former that the United States reserved land for habitation without reserving the water necessary to sustain life.” Id. at 746.  State courts and federal district courts deciding the issue of whether Winters rights extend to groundwater have mostly held in the affirmative, or have refused to exclude groundwater from the scope of Winters. See, e.g., Tweedy v. Texas Co., 286 F. Supp. 383 (D. Mont. 1968) and Confederated Salish and Kootenai Tribes v. Stults, 59 P. 3d 1093 (Mont. 2002); see also United States v. Washington Dep’t of Ecology, 375 F. Supp. 2d 1050 (W.D. Wash. 2005). Wyoming has held otherwise. See In re the General Adjudication of All Rights to Use Water in the Big Horn River System, 753 P.2d 76 (Wyo. 1988), aff’d by an equally divided Court, Wyoming v. United States, 492 U.S. 406 (1989). 

Recent Case

In Agua Caliente Band of Cahuilla Indians v. Coachella Valley Water District, 849 F.3d 1262 (9th Cir. 2017), the court held that the federal implied reserved water rights doctrine, first established in Winters, categorically extends to groundwater.  The case is notable as the first federal appellate case to reach a decision on this issue, and its reasoning follows multiple state court decisions across the West.  On November 27, 2017, the U.S. Supreme Court denied certiorari in the first phase of the case, allowing the Ninth Circuits holding to stand.  Coachella Valley Water District v. Agua Caliente Band of Cahuilla Indians, No. 17-40, Vide No. 17-42, 2017 U.S. LEXIS 7044 (U.S. Sup. Ct. Nov. 27, 2017).

Background.  The case arose as a declaratory judgment action (where the court determines the rights of the parties without ordering any action be taken or that damages be awarded) brought by the Agua Caliente Band of Cahuilla Indians (“Tribe”), seeking a declaration that the Tribe was entitled to federal water rights that supersede state law—including rights to groundwater that lie beneath the tribe’s reservation. The most important of these rights, as noted above, is the federal implied reserved water right first established in Winters. 

The Agua Caliente case was brought outside of the context of a state-court adjudication. Indeed, in many respects, the case does not present the usual facts of a reserved water rights claim. The Tribe’s reservation in the Coachella Valley of California dates to 1876-77, and consists of approximately 31,000 acres interspersed in a checkerboard pattern amid several cities within Riverside County, including Palm Springs, Cathedral City, and Rancho Mirage. By placing the Tribe on the reservation, the United States sought to protect the Tribe and, in the words of the Commissioner of Indian Affairs in 1877, secure them “permanent homes, with land and water enough.” Unfortunately, the Coachella Valley receives less than six inches of precipitation annually, and the Whitewater River System—the only supply of surface water in the area— can only provide between 4,000 and 9,000 acre-feet of water every year, most of which flows during the winter months. Therefore, almost all of the water in the valley comes from the underlying aquifer—the Coachella Valley Groundwater Basin (“Basin,”) which supports nine cities, 400,000 people, and 66,000 acres of farmland. Given the size of this cumulative demand, it is no surprise that pumping vastly exceeds recharge in the basin by 240,000 acre-feet per year. By 2010, the aquifer had become over-drafted by 5.5 million acre-feet. The Tribe, however, does not pump groundwater from its reservation lands. Rather, it obtains most of its water supplies by purchasing groundwater from the defendant water agencies—the Coachella Valley Water District and the Desert Water Agency (“water agencies”). (The Tribe also holds a small surface-water right from the Whitewater River, pursuant to a 1938 state court decree.)

Trial court.  Alarmed by the state of groundwater overdraft in the Basin, the Tribe brought its suit against the water agencies in 2013, seeking a declaration that the Tribe had Winters rights extending to the groundwater supplies in the Basin. In 2014, the United States, acting in its trustee capacity for the Tribe, successfully intervened in the case, and also alleged that the Tribe enjoyed Winters rights. In 2015, the district court held that the reserved rights doctrine applies to groundwater, and that the United States had reserved appurtenant groundwater for the Tribe when it established the Tribe’s reservation in the Coachella Valley. The water agencies perfected an interlocutory appeal whereby the appellate court (the U.S. Court of Appeals for the Ninth Circuit) would rule on the issue of Winters rights before the trial concluded. 

Ninth Circuit.  Given the diversity of state court decisions concerning whether Winters rights extend to groundwater, and the lack of a federal appellate decision on the issue, the appeal provided the first opportunity for a federal appeals court to rule on the issue. In a straightforward decision, the Ninth Circuit upheld the trial court’s decision extending Winters rights to groundwater. The court based its decision on three related holdings. First, it held that the United States clearly intended to reserve water under federal law when it created the Tribe’s reservation. The appellant water agencies argued that Winters and its progeny should not apply in this case, because the Tribe has been able to satisfy its water needs by purchase from them.  Thus, according to the water agencies, the Tribe should be treated as any other private water user obtaining its water rights under state law.  The Ninth Circuit disagreed, noting that the underlying purpose of the reservation was to establish a tribal homeland supporting an agrarian society.  That purpose would be entirely defeated, the court reasoned, without sufficient water supplies held under federal law. Thus, the Tribe was entitled to a reserved water right for the Agua Caliente Reservation. 

Next, the Ninth Circuit held that the Tribe’s Winters right extended to groundwater. In so holding, the court cited the Arizona Supreme Court’s holding in the Gila River case.   It was necessary for the Tribe to access groundwater in the Coachella Valley Basin because surface supplies were clearly inadequate—a reservation without an adequate supply of surface water must be able to access groundwater as well. Thus, the court held that the reservation and establishment of the Agua Caliente Reservation carried with it an implied federal reserved right to use water from the aquifer.

Neither of the Ninth Circuit’s first two holdings seems controversial, given the logic and the scope of Winters and its progeny.  However, the third and final holding addressed a more complicated issue: how the Tribe’s Winters right exists in relation to water rights recognized under California state water law. California (like Nebraska and Arizona, to name two) follows the reasonable use/correlative rights doctrine for groundwater.  At the Ninth Circuit, the water agencies argued that the Tribe’s state law water rights rendered its claim for Winters rights unnecessary.  Their argument was layered: 1) because the Tribe enjoys correlative water rights under California law; and 2) because the Tribe has not drilled for water under the Agua Caliente Reservation; and 3) because the Tribe held some (but not sufficient) surface water rights under state law pursuant to the 1938 state court adjudication of the Whitewater River, then the Tribe, according to the water agencies, did not need a federal reserved right to prevent the purposes of the reservation from being entirely defeated. The Ninth Circuit rebuffed the agencies’ argument.  It determined that 1) the Tribe’s Winters rights pre-empted state water rights; 2) the Tribe’s lack of groundwater pumping did not defeat those Winters rights, because they are immune from abandonment; and 3) the proper inquiry was not one of current necessity, but whether water was envisioned as necessary for the reservation’s purpose at the time the reservation was created. Thus, the Ninth Circuit held, the issue of the Tribe’s state law-based water rights did not affect the existence of its Winters water right. In sum, the Ninth Circuit’s analysis produced a categorical holding: Winters always applies as a matter of federal pre-emption, regardless of how a state allocates groundwater rights.

Supreme Court Review?

The Ninth Circuit’s decision provoked substantial amicus participation on appeal to the Supreme Court. States as legally diverse as Minnesota and Nevada, as well as property-rights advocacy groups such as the Pacific Legal Foundation, submitted amicus briefs. Both the appellants and the amici supporting them made two general arguments in opposition to the Ninth Circuit’s holding:  1) that Winters should be limited to surface water supplies governed by state-law prior appropriation regimes (such as Montana, where Winters originated); and 2) that the Ninth Circuit’s holding will interfere with and even take long-established groundwater rights secured under state law. The Supreme Court’s denial of certiorari, like all of its denials, did not give its reasons.

Conclusion

The arguments involved Agua are important arguments to make, especially as groundwater has become the dominant supply of water across the West. However, the logic of Winters presents formidable obstacles to limiting its scope to surface water supplies only—especially in the Coachella Valley and other desert basins which lack substantial surface water supplies. The Court’s denial of certiorari has allowed the Ninth Circuit’s decision to stand.

The Ninth Circuit’s decision also has important implications for California, which enacted the Sustainable Groundwater Management Act (SGMA) in 2014, an ambitious act that requires local “groundwater sustainability agencies” to establish sustainable groundwater management plans during the next decade or so. Because the Ninth Circuit’s decision establishes strong (and largely non-negotiable) rights for tribes within California’s groundwater basins, it probably complicates the already formidable task of achieving the necessary goal of groundwater management at the level of sustainability.

Across the West, the other implications of the decision likely depend upon what remains the primary vehicle through which tribal rights are clearly established: basin-wide adjudications of water rights undertaken in state courts pursuant to the McCarran Amendment.

P.S.  Absent anything of major significance in the ag law and tax world next week, this is the final post of 2017.  However, that doesn’t mean that I will be sitting idly by.  I will be continuing to prep two courses for the spring semester – one for the law school and one for Kansas State University.  I will also be updating my treatise for the changes triggered by the new tax law and other relevant developments, and preparing materials for the Jan. 10 seminar/webinar on the new tax law.  In addition, travel begins on Jan. 4 as I head for engagements in Illinois and Tennessee before the Jan. 10 event.  Radio and TV interviews also continue as usual next week.  The next post is scheduled for January 1 and will be Part 1 of the top ten ag law and tax developments of 2017. 

To all of my readers, have a wonderful Christmas with your families!  See you on January 1.

The Business of Agriculture – Upcoming CLE Symposium

Overview

On September 18, Washburn School of Law will be having its second annual CLE conference in conjunction with the Agricultural Economics Department at Kansas St. University.  The conference, hosted by the Kansas Farm Bureau (KFB) in Manhattan, KS, will explore the legal, economic, tax and regulatory issue confronting agriculture.  This year, the conference will also be simulcast over the web.

That’s my focus today – the September 18 conference in Manhattan, for practitioners, agribusiness professionals, agricultural producers, students and others. 

Symposium Topics

Financial situation.  Midwest agriculture has faced another difficult year financially.  After greetings by Kansas Farm Bureau General Counsel Terry Holdren, Dr. Allen Featherstone, the chair of the ag econ department at KSU will lead off the day with a thorough discussion on the farm financial situation.  While his focus will largely be on Kansas, he will also take a look at nationwide trends.  What are the numbers for 2017?  Where is the sector headed for 2018? 

Regulation and the environment.  Ryan Flickner, Senior Director, Advocacy Division, at the KFB will then follow up with a discussion on Kansas regulations and environmental laws of key importance to Kansas producers and agribusinesses. 

Tax – part one.  I will have a session on the tax and legal issues associated with the wildfire in southwest Kansas earlier this year – handling and reporting losses, government payments, gifts and related issues.  I will also delve into the big problem in certain parts of Kansas this year with wheat streak mosaic and dicamba spray drift.

Weather.  Mary Knapp, the state climatologist for Kansas, will provide her insights on how weather can be understood as an aid to manage on-farm risks.  Mary’s discussions are always informative and interesting. 

Crop Insurance.  Dr. Art Barnaby, with KSU’s ag econ department, certainly one of the nation’s leading experts on crop insurance, will address the specific situations where crop insurance does not cover crop loss.  Does that include losses caused by wheat streak mosaic?  What about losses from dicamba drift?

Washburn’s Rural Law Program.  Prof. Shawn Leisinger, the Executive Director of the Centers for Excellence at the law school (among his other titles) will tell attendees and viewers what the law school is doing (and planning to do) with respect to repopulating rural Kansas with well-trained lawyers to represent the families and businesses of agriculture.  He will also explain the law school’s vision concerning agricultural law and the keen focus that the law school has on agricultural legal issues.

Succession Planning.  Dr. Gregg Hadley with the KSU ag econ department will discuss the interpersonal issues associated with transitioning the farm business from one generation to the next.  While the technical tax and legal issues are important, so are the personal family relationships and how the members of the family interact with each other.

Tax – part two.  I will return with a second session on tax issues.  This time my focus will be on hot-button issues at both the state and national level.  What are the big tax issues for agriculture at the present time?  There’s always a lot to talk about for this session.

Water.  Prof. Burke Griggs, another member of our “ag law team” at the law school, will share his expertise on water law with a discussion on interstate water disputes, the role of government in managing scarce water supplies, and what the relationship is between the two.   What are the implications for Kansas and beyond?

Producer panel.  We will close out the day with a panel consisting of ag producers from across the state.  They will discuss how they use tax and legal professionals as well as agribusiness professionals in the conduct of their day-to-day business transactions.

Conclusion

The Symposium is a collaborative effort of Washburn law, the ag econ department at KSU and the KFB.  For lawyers, CPAs and other tax professionals, application has been sought for continuing education credit.  The symposium promises to be a great day to interact with others involved in agriculture, build relationships and connections and learn a bit in the process.

We hope to see you either in-person or online.  For more information on the symposium and how to register, check out the following link:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

Agricultural Law in a Nutshell

Overview

Today's post is a deviation from my normal posting on an aspect of agricultural law and tax that you can use in your practice or business.  That’s because I have a new book that is now available that you might find useful as a handbook or desk reference.  Thanks to West Academic Publishing, my new book “Agricultural Law in a Nutshell,” is now available.  Today’s post promotes the new book and provides you with the link to get more information on how to obtain you copy.

Content

The Nutshell is taken from my larger textbook/casebook on agricultural law that is used in classrooms across the country.  Ten of those 15 chapters are contained in the Nutshell, including some of the most requested chapters from my larger book – contracts, civil liabilities and real property.  Also included are chapters on environmental law, water law and cooperatives.  Bankruptcy, secured transactions, and regulatory law round out the content, along with an introductory chapter.  Not included in this Nutshell are the income tax, as well as the estate and business planning topics.   Those remain in my larger book, and are updated twice annually along with the other chapters found there. 

Style

The Nutshell is designed as a concise summary of the most important issues facing agricultural producers, agribusinesses and their professional advisors.  Farmers, ranchers, agribusinesses, legal advisors and students will find it helpful.  It’s soft cover and easy to carry.

Rural Law Program

The Nutshell is another aspect of Washburn Law School’s Rural Law Program.  This summer, the Program placed numerous students as interns with law firms in western Kansas.  The feedback has been tremendous and some lawyers have already requested to be on the list to get a student for next summer.  Students at Washburn Law can take numerous classes dealing with agricultural issues.  We are also looking forward to our upcoming Symposium with Kansas State University examining the business of agriculture and the legal and economic issues that are the major ones at this time.  That conference is set for Sept. 18, and a future post will address the aspects of that upcoming event.

Conclusion

You can find out more information about the Nutshell by clicking here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/agriculturallawnutshell/index.html

Public Access To Private Land Via Water

Overview

Private property and the ability to exclude others is very important to farmers and ranchers.  Land is typically the largest asset in terms of value that an ag producer owns and much farm and ranch machinery and equipment is often outdoors frequently during planting and harvesting.  Not to mention buildings and livestock.  So, trespassing is a big issue for rural landowners. 

One issue that has popped-up recently in South Dakota involves public access to farmland that has become flooded.  What are the rules associated with the recreational use of water?  That’s the focus of today’s post.

Public Access

In the United States, the individual states own the beds of navigable streams or lakes that flow or exist within their borders, and hold them in trust for their citizens.  Under this public ownership concept, states may license use of the beds or lease rights to minerals found there.  The right of the public to recreate over the bed can be asserted either because there is a federal navigational servitude or because the state has an expanded definition of navigability which allows more public uses than exist under federal law.

Under state law, the public's right to use rivers or lakes for recreational purposes is typically limited to those waters where the state owns the bed.  For non-navigable streams, the title to the bed is held by the adjacent upland owner.  Consequently, ownership of the bed is related to the concept of navigability.  In general, navigability for title purposes is determined by the “natural and ordinary condition” of the water. 

Although a federal test for bed title controlled the rights that states received upon joining the Union, state title tests are still important.  When the states received title to the beds, they had the power to keep or dispose of them.  Before the Supreme Court decisions which required federal law to be used in determining bed ownership, there were many state court decisions.  These tests are still in use today and many conflict with federal law.  When they do, federal law controls for title purposes (under the definition of “navigability”), but state law has been incorporated into this to determine what rights the state retains and what rights were granted to adjacent landowners.  For example, some states keep title to watercourse beds only where there is a title influence.  Other states follow a rule of “navigability in fact” similar to the federal rule.  In these jurisdictions, the state retains title to watercourse beds only if the watercourse is navigable in fact.  The remaining states use other approaches. 

In early 2014, the New Mexico attorney general issued a non-binding opinion taking the position that a private landowner cannot prevent persons from fishing in a public stream that flows across a landowner’s property if the stream is accessible without trespassing across privately owned adjacent lands.  Att’y. Gen. Op. 14-04 (Apr. 1, 2014).  That opinion was based on New Mexico being a prior appropriation state and, as a result, unappropriated water in streams belongs to the public and is subject to appropriation for beneficial use irrespective of whether the adjacent landowner owns the streambed.  Thus, the public has an easement to use stream water for fishing purposes if they can access the stream without trespassing on private property.

There are several other ways states have power over the water within their boundaries.  Under its police power, a state may regulate its waters, whether or not they are navigable under the federal test, in order to protect the public's health, safety, and general welfare.  Some western states claim ownership of all the water in the state, and as the owner, they claim the power to regulate.  Other states limit their control to those waters considered navigable under bed ownership tests.  As a result, state laws on public use of watercourses are a complex mix of cases and legislation. 

The South Dakota Situation

Under South Dakota law, “the owner of land in fee has the right to the surface and everything permanently situated beneath or above it.”  S.D.C.L. §43-16-1.  In addition, South Dakota law provides that (with some specifically delineated exceptions), “…no person may fish, hunt or trap upon any private land without permission from the owner or lessee of the land….”.  S.D.C.L. §41-9-1.  Numerous states have similar statutory provisions.  South Dakota also claims to own all wildlife in the state, including wildlife on private land.  But, hunters cannot hunt that wildlife without the landowner’s permission unless the landowner is participating with the South Dakota Department of Game, Fish and Parks (GFP) in the “walk-in” program.  Under that program, and landowner can give permission to the public to hunt on the landowner’s property in exchange for a payment from the GFP.  Many other states also claim to own the wildlife found in the state and offer some sort of “walk-in” program. 

South Dakota law, just like the laws of many other states, also bars “road hunting” outside of the public right-of-way.  Thus, by barring hunting over private land from a public roadway, the state is recognizing landowners have “air rights” over their private property.  

But, what about fishing?  In a March decision, the South Dakota Supreme Court ruled that all water in the state is held in the public trust for “beneficial use.”  That doesn’t seem unreasonable – other state high courts have reached the same conclusion.  But, the Court held that the “beneficial use” rule applies to flooded private land (non-meandered lakes).  This became an issue in South Dakota due to excess rainfall in 1993 which caused the formation of large lakes on private land in the northeastern part of the state.  Fishermen flocked to the expanded lakes and the SD GFP didn’t stop them.  The matter boiled over into litigation resulting in the Court’s recent decision. 

The South Dakota Case

In Duerre v. Hepler, No. 27885, 2017 S.D. LEXIS 29 (S.D. Sup. Ct. Mar. 15, 2017), landowners sued the SD GFP for declaratory and injunctive relief concerning the public’s right to use the waters and ice overlying the landowners’ private property for recreational purposes.  As noted above, in 1993, excessive rainfall submerged portions of the landowners’ property. In accordance with instructions from the United States Surveyor General’s Office, commissioned surveyors surveyed bodies of water in SD in the late 1800s. Pursuant to those survey instructions, if a body of water was 40 acres or less or shallow or likely to dry up or be greatly reduced by evaporation, drainage or other causes, surveyors were not to draw meander lines around the body of water but include it as land available for settlement.  The meander lines delineated the water body for the purpose of measuring the property that abuts the water.   When originally surveyed, the lands presently in question were small sized sloughs that were not meandered. Thus, the landowners owned the lakebeds under them. The 1993 flooding resulted in the sloughs expanding in size to over 1,000 acres each. The public started using the sloughs in 2001 and established villages of ice shacks, etc. In the spring and fall, boats would launch in to the waters via county roads. After the landowners complained to the GFP about trash, noise and related issues, the GFP determined that the public could use the waters if they entered them without trespassing.  That’s sounds exactly like the New Mexico Attorney General opinion in 2014. 

In 2014, the landowners sued. The trial court certified a defendant class to include those individuals who used or intended to use the floodwaters for recreational purposes, appointing the Secretary of the GFP as the class representative. On cross motions for summary judgment, the trial court entered declaratory and injunctive relief against the defendants. The trial court held that the public had no right of entry onto the water or ice without a landowner’s permission, and entered a permanent injunction in favor of the landowners.

On appeal, the South Dakota Supreme Court upheld the trial court’s decision to certify the class and include non-residents users in the class. The Court also upheld the trial court’s determination that the landowners had established the elements necessary for class certification and that the GFP Secretary was the appropriate class representative. The Court also upheld the trial court’s grant of declaratory relief to the landowners, noting that prior caselaw had left the matter up to the legislature and the legislature had not yet enacted legislation dealing with the issue. The legislature had neither declared that the public must obtain permission from private landowners, nor declared that the public’s right to use waters of the State includes the right to use waters for recreational purposes.

The Court remanded the order of declaratory relief and modified it to direct the legislature to determine whether the public can enter or use any of the water or ice located on the landowners’ property for any recreational use. As for the injunctive relief, the Court modified the trial court’s order to state that the GFP was barred from facilitating public access to enter or use the bodies of water or ice on the landowners’ property for any recreational purpose. 

Conclusion

In short, the SD Supreme Court found that neither the GFP nor the landowners have a superior property right, but that the issue is up to the legislature to determine if recreation is a “beneficial use.”  The issue is not just an important one for landowners in South Dakota.  State rules for determining access rights to private property are important in every state.  It certainly seems like a reasonable solution could be reached in South Dakota to protect private property rights while simultaneously providing reasonable access for fishermen.  Time will tell.