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Indian Mountain Corp. v. Indian Mountain Metropolitan District

Court of Appeals of Colorado, Division I

August 11, 2016

Indian Mountain Corporation, Plaintiff-Appellant,
Indian Mountain Metropolitan District, Defendant-Appellee.

         Park County District Court No. 14CV30056 Honorable Stephen A. Groome, Judge

          Announced August 11, 2016 Adam Davenport, Golden, Colorado, for Plaintiff-Appellant

          Hill & Robbins, P.C., Peter J. Ampe, Matthew A. Montgomery, Denver, Colorado, for Defendant-Appellee

          FREYRE JUDGE.

         ¶ 1 Plaintiff, Indian Mountain Corporation (IMC) appeals the trial court's judgment imposing a constructive trust on its water rights and augmentation Plan for the benefit of defendant, Indian Mountain Metropolitan District (IMMD), based on a theory of unjust enrichment. IMC also appeals the court's finding that IMMD is compliant with its service Plan.

         ¶ 2 This case presents the unusual circumstance of a private company (successor of the original developer) holding legal title to the water rights and augmentation Plan for the benefit of a subdivision rather than a mandatory homeowners association, as is the customary practice, and its desire to be compensated for providing water services to the subdivision. It also presents a unique situation in which a special district asserts unjust enrichment on behalf of some of the constituents it was created to serve. Because we conclude that IMC is the legal title holder to the water rights and augmentation Plan and that the elements of unjust enrichment have not been proved, we reverse that part of the court's judgment imposing a constructive trust. We affirm the court's finding that IMMD is in compliance with its service Plan.

         I. Background

         ¶ 3 This case arose out of a dispute concerning the ownership of water rights and a corresponding water augmentation Plan in Park County. In 1970, Park Development Company (later Meridian Property and hereafter developer) purchased 10, 000 acres of property, including water rights, with the vision of creating an upscale residential subdivision situated within a community of outdoor amenities, including an executive golf course, a ski resort, equestrian trails, and hiking trails. The water rights encompassed the Slater Ditch and two reservoirs (Tarryall Ranch Reservoirs 1 and 2).

         ¶ 4 The Indian Mountain Subdivision (subdivision) currently comprises approximately 2, 450 lots zoned for residential use. Each lot is served by a residential well. The groundwater pumped by the wells reduces the stream flow in Tarryall Creek, which flows into the South Platte River. The South Platte River is over-apportioned, meaning that the demand for water exceeds the available supply.

         ¶ 5 In 1972, after residential construction had begun, the Colorado General Assembly enacted new legislation (Senate Bill 35) in response to the recognition that land development was outpacing available water supplies. As relevant here, this new legislation required that water depleted by subdivision lots of less than thirty-five acres be replenished or augmented by a water-court-approved augmentation Plan. This new legal requirement caused the sale of subdivision lots to cease until the developer could secure a court-approved augmentation Plan.

         ¶ 6 In January 1974, Water Court Division 1 approved the Indian Mountain Augmentation Plan (the Plan). The Plan required that portions of developer's water rights be used solely for the benefit of the subdivision, and it guaranteed a household well permit to each lot owner upon the payment of a $5 application fee. Importantly, the PLAN did not address the remaining water rights in the Slater Ditch or the reservoirs and did not require the transfer of the Plan Decree to a mandatory homeowners association[1] or to a metropolitan district.

         ¶ 7 Thereafter, development of the subdivision resumed. Crucially, the plat filings for the subdivision and the lot deeds addressed water services and informed prospective buyers that "[a]ll utilities (Elec., Water, Sewer, Gas and Telephone) shall be provided at the individual lot owner's expense."

         ¶ 8 The costs associated with obtaining the Plan left the developer with too much debt to continue the development project. Thus, in 1976, the developer sold its interest (including debts) in the platted and unplatted lands, the water rights, and the Plan to IMC and its principal owner, James Campbell. IMC sold the remaining lots (totaling 2, 450) in the subdivision to pay off the debts it had assumed.

         ¶ 9 IMC's lot purchase agreements included a "Developer's Property Report, " which informed buyers that water would be supplied by individual wells, that the state engineer would issue a well permit upon payment of an application fee, [2] and that water use was governed by the covenants. It further stated that there was "no assurance that wells [could] be drilled and operated successfully in the subdivision, " and provided that in the event no well could be drilled or operated successfully "no refund of the purchase price of [the] lot [would] be made." Finally, it did not guarantee the purity of the water and contained a warning stating as follows: "THERE IS NO ASSURANCE OF A SUFFICIENT SUPPLY OF WATER FOR THE ANTICIPATED POPULATION OF THE SUBDIVISION."

         ¶ 10 Attached to the purchase agreement was the "Developer's Statement, " which set forth specific items a purchaser acknowledged by his or her signature. As relevant here, item three stated

I/we hereby understand that a well and septic tank are not included in the price of the site and when and if these facilities are installed, that the cost shall be born[e] by the purchaser(s).

         ¶ 11 Although the deeds and developer's materials stated that the cost of water was a lot owner's expense, IMC did not separately advise prospective buyers that they would be charged for operation of the Plan. Indeed, from 1974 to 2013, both the developer and IMC maintained and operated the Plan for the subdivision at their own expense. This entailed cleaning out and repairing the water diversion ditches leading into the reservoirs and releasing water downstream when requested by the district water engineer. No one disputes that the lot owners have always received uninterrupted water services under the Plan.

         ¶ 12 In 1972, the developer spearheaded the creation of the Indian Mountain Park and Recreation District (IMPRD)[3] to assume maintenance of and to eventually purchase the common areas through a tax assessment. Importantly, because the IMPRD did not have the legal authority to acquire water rights or to provide water services, its service plan did not include water services. Campbell eventually deeded the common areas to the IMPRD for $17, 000.

         ¶ 13 Through the years, Campbell encouraged the subdivision lot owners to explore ways for the homeowners to assume responsibility for the Plan. Homeowners association minutes and newsletters reflect the subdivision's recognition that it faced being assessed a charge for the Plan and that several options were available for management of the Plan, including sale of the water rights and Plan to a third party, sale to a water district, or sale to an entity within the Indian Mountain community.

         ¶ 14 In 2012, members of the IMPRD suggested converting to a metropolitan district that could legally purchase and provide water services.[4] The Park County Board of County Commissioners approved the conversion and the amended service plan in January 2013. Then, the district court entered an order approving the board's actions and converting the district's name to the Indian Mountain Metropolitan District.

         ¶ 15 Negotiations for IMMD's acquisition of the Plan from Campbell began, but no agreement could be reached. Campbell believed the water rights possessed monetary value and wished to be compensated accordingly. IMMD, on the other hand, believed that Campbell's involvement in amending the service plan and IMC's operation of the Plan for forty years at no expense to the lot owners obligated him to convey the water rights and Plan to the district for the benefit of the lot owners at no cost.[5]

         ¶ 16 In August 2013, the owners of Bar Star Land, Jim Ingalls and Mark Goosman, approached Campbell about his willingness to sell the reservoir[6] because they had purchased 142 acres abutting the reservoir for their cattle ranch operations. Campbell informed Ingalls of his failed negotiations with IMMD, and both parties believed a new face would improve relations. Campbell sold all of IMC's assets, including the remaining property, the mineral rights, the water rights, and the Plan to Bar Star for $290, 000.

         ¶ 17 Following the sale, Ingalls entered into negotiations with IMMD to either lease or sell the water rights and Plan in accordance with the amended service Plan. He complied with the Plan by cleaning out the diversion ditches and releasing water at the water engineer's request. At IMMD's insistence that there be clear title to the water rights, Ingalls also incurred legal fees for the execution of a quitclaim deed (recorded in April 2014) confirming the previous conveyance of the developer's interest in the water rights to IMC.

         ¶ 18 Unlike Campbell, who was willing to absorb the expenses of managing the Plan with the hope of future reimbursement, Ingalls expected reimbursement. Ingalls valued his water rights at $1.6 million based upon his research of comparable water rights located in South Park and conversations with representatives from the Head Waters Authority of the South Platte (HASP) and Still Water Resources. He presented IMMD with two purchase options and three lease options.[7]

         ¶ 19 When Ingalls and IMMD could not reach an agreement on the proposed options, Ingalls submitted two invoices to IMMD (one for 2012 and one for 2013) each in the amount of $143, 000[8] for the operation of the Plan on behalf of the subdivision. This charge reflected an annual per well cost of $178.75 (based on 800 existing wells) or per lot cost of $58.37 (2, 450 lots). IMMD refused to pay the invoices.[9]

         ¶ 20 IMC filed this action in district court seeking a declaratory judgment that as between IMC and IMMD, IMC is the legal owner of the water rights and Plan and that IMMD have no right, title, or interest in them. IMC also alleged that IMMD had been unjustly enriched by not paying IMC for water services in 2012 and 2013 that IMMD had been specifically created to provide. Thereafter, IMMD filed an answer and a counterclaim seeking a declaratory judgment that the Indian Mountain lot owners, not IMMD or IMC, own the Plan and associated water rights as beneficiaries of a constructive trust.

         ¶ 21 As relevant here, the district court issued an order in favor of IMMD, finding that IMC held the water rights and the Plan in a constructive trust for the benefit of the lot owners, that costs related to the Plan were part of the lot sales price, and that IMC would be unjustly enriched if it was permitted to charge lot owners for operating the Plan. It also concluded that IMMD was in compliance with the amended service plan. IMC filed a post-judgment motion requesting a hearing on the amount of reasonable fees it could charge IMMD for ongoing operation of the Plan which the court denied.

         II. Procedural Posture

         ¶ 22 Initially, we note that this case comes before us in an unusual procedural posture. Both parties sought competing declaratory judgments under C.R.C.P. 57(a). IMC sought declaratory relief as to ownership of the water rights and Plan. IMMD sought declaratory relief in its counterclaim under the theory that IMC held the water rights in a constructive trust for the benefit of the lot owners and would be unjustly enriched by continuing to hold, control, and charge for operation of the Plan. While a declaratory judgment is the proper vehicle to determine the relative rights between the parties, it is usually based on the interpretation of a written instrument or statute. Am. Family Mut. Ins. Co. v. Bowser, 779 P.2d 1376, 1379 (Colo.App. 1989); see also C.R.C.P. 57(b).

         ¶ 23 Here, rather than basing its theory of ownership on a written instrument, IMMD pleaded a theory of ownership based on "constructive trust." However, such trusts are remedial in nature and are not appropriately pleaded as a separate cause of action. See Bryant v. Cmty. Choice Credit Union, 160 P.3d 266, 276 (Colo.App. 2007). Nonetheless, a district court may impose a constructive trust as a remedy for unjust enrichment, and the district court did so here, construing IMMD's claim as one alleging that IMC had been unjustly enriched. Accordingly, we review the court's order under the law of unjust enrichment - "an equitable remedy [that] does not depend on any contract, oral or written"- not as a declaratory judgment based on a written instrument or statute. Lewis v. Lewis, 189 P.3d 1134, 1141 (Colo. 2008).

         ¶ 24 Further, we note that the lot owners, who received and continue to receive the benefit of the Plan, are not parties to this action. The lot owners were not joined in the district court, and a joinder issue was not preserved for appeal. Accordingly, our review is limited to the relative rights of IMC and IMMD.

         III. Unjust Enrichment

         ¶ 25 IMC contends the district court erred in finding that it held the water rights and Plan in a constructive trust and that it would be unjustly enriched by seeking reimbursement for ...

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