Sears v. Orchards Water Co.

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 293 IN BANC. This is a suit to enjoin the defendant from collecting an alleged excessive assessment on its stockholders by withholding water for irrigation purposes. For a statement of the facts out of which the suit has grown, see In re Matter of theDetermination of the Relative Rights to the Waters of WillowCreek, decided this day. Also same case, 74 Or. 592 (144 P. 505, 146 P. 475). The management of the defendant corporation was transferred from the Moline Farms Company, the successor in interest of the Willow River Land and Irrigation Company, in 1919, to the stockholders of the defendant corporation. The defendant corporation was awarded a decree by the Circuit Court. The plaintiffs appeal, basing their appeal on three separate grounds, to wit: (1) It is claimed by appellants that the system was not completed as required by the contract between the Orchards Water Company and the Willow River Land and Irrigation Company, entered into in 1910, at the time of said transfer. (2) That the defendant should not be permitted to withhold water from its stockholders because of alleged delinquent assessments. (3) That the plaintiffs are entitled to two acre-feet of water for every acre of land described in their contracts with the defendant, notwithstanding the fact that less than the *Page 294 entire acreage described therein was given a water right of the State Water Board. All of these claims on the part of the plaintiffs are contested by the defendant. AFFIRMED. The assessments complained of by the plaintiffs were legally levied by the directors of the defendant corporation. The articles of incorporation and its by-laws authorize the corporation to levy the assessments for the maintenance of the irrigation system. By the laws of this state the management of a corporation is fixed in the board of directors: Or. L., § 6867. This is also the general law: 14-A C.J. 354, § 2216. The directors of the defendant corporation accepted the transfer of the irrigation system in 1919. Thereafter, at a meeting of the stockholders thereof, regularly called and held, this action of the directors was confirmed. The plaintiffs, as stockholders of the defendant corporation, are, therefore, bound by the action of the board of directors and the ratification thereof by the stockholders. The issues framed by the plaintiffs in this suit do not include allegations sufficient to warrant the court inquiring into the legality or validity of the act of the defendant corporation in accepting the transfer of the irrigation system:Baillie v. Columbia Gold Mining Co., 86 Or. 1 (166 P. 965, 167 P. 1167); 6 Fletcher's Cyc. Corp., §§ 4025-4053. The prayer of the complaint does not invoke a decree annulling or avoiding the act of the defendant *Page 295 corporation accepting the irrigation system. The plaintiffs tendered the amount of $1.50 per acre, thereby recognizing the authority of the corporation to make an assessment. The assessment made was $2.50 per acre. To uphold the contention of the plaintiffs would be to substitute the judgment of the minority stockholders for the judgment of the directors, ratified by a majority of the stockholders. This would not be lawful. The Circuit Court correctly refused to decide the question of whether or not the irrigation system was completed in 1919 when the transfer was made. The original contract between the Willow River Land and Irrigation Company and the Orchards Water Company provided that the system should be completed before it should be transferred to the defendant corporation. In order for the court, however, to take cognizance of that question, as well as the act of the corporation accepting the transfer, it should be presented directly by a suit instituted for that purpose, since the plaintiffs are bound by it: 14-A C.J. 83, 84, § 1843;Budd v. Multnomah Street Ry. Co., 15 Or. 416 (15 P. 659, 3 Am. St. Rep. 169); Stanley v. Luse, 36 Or. 25 (58 P. 75). By the terms of the contract between the plaintiffs and the defendant corporation, the latter may withhold the supply of water until the maintenance charge shall have been paid. In this suit the plaintiffs claim that a part of the assessment was for prior indebtedness of the plaintiffs to the defendant. Plaintiffs admit the authority of the defendant to levy assessments for the maintenance of the irrigation system and the right of the defendant to withhold water until current assessments are paid, but denies the right of the defendant to withhold water for past indebtedness. In this contention the appellants are supported by respectable authority: Shelby *Page 296 v. Farmers' Ditch Co., 10 Idaho 723 (80 P. 222); Adams v.Twin Falls Co., 29 Idaho 357 (161 P. 322); Reynolds v.North Side Canal Co., 36 Idaho 622 (213 P. 344). It is not disputed by the appellants that the entire assessment levied by the defendant corporation is a maintenance charge. They contend, however, that the extra assessment was made necessary by the incomplete condition of the irrigation system at the time the transfer was made. A large amount of testimony was adduced by appellants to support that contention. We have held, in the Willow River case decided this day, that it was the duty of the Moline Farms Company, as the successors in interest of the Willow River Land and Irrigation Company, to maintain the system until it was transferred to the defendant corporation. The obligation of the Moline Farms Company in this regard was the same as the obligation of the Irrigation Company defined in its contract with the defendant corporation. The directors of the Orchards Water Company were trustees for the vendees of the Irrigation Company and its successors in interest, and as such were obligated to conduct the affairs of the Orchards Water Company, defendant corporation, for the benefit of the stockholders thereof:Baillie v. Columbia Gold Mining Co., 86 Or. 1, 24 (166 P. 965, 167 P. 1167); Corbett v. Woodward, 5 Sawy. 403 (Fed. Cas. No. 3223); 14a C.J. 97, § 1866. Until the action of the defendant corporation accepting the transfer of the irrigation system has been set aside, however, the assessment complained of must stand. It was the duty of the directors of the defendant corporation to levy the assessment: Harvey v. Campbell,107 Or. 373, 438 (209 P. 107, 214 P. 348). The stockholders of the defendant corporation are lawfully obligated to pay the assessment complained *Page 297 of unless the action of the board of directors in making the levy shall have been set aside. No proceeding has been instituted to set aside that assessment. This suit was instituted to enjoin the collection of the assessment by shutting off the water because they claimed the assessment to be excessive. The court will not substitute its judgment for the judgment of the directors of the corporation. It is only where the directors have exceeded their authority or have acted fraudulently that the courts will interfere with the authority of the board of directors to control the affairs of a corporation, and then only in a proceeding instituted for the express purpose of annulling the unlawful or fraudulent acts of the directors. We have held in the Willow Creek case, this day decided, that the plaintiffs are entitled to have made appurtenant to the several tracts of land two acre-feet of water by the defendant corporation for every acre described in their contracts, whether or not the entire acreage was reclaimed prior to January 1, 1918. The reason for this decision is fully stated in our opinion in the Willow Creek case. The Moline Farms Company had no right to divert to its own land any of the water adjudicated to the Willow River Land and Irrigation Company until it had fully supplied the quantity of water sold to the purchasers of the Irrigation Company. By unlawfully diverting to its own land large quantities of the limited supply of water prior to 1918, the Moline Farms Company prevented the plaintiffs, and others similarly situated, from reclaiming the entire acreage sold to them by the Irrigation Company or its successors, with water rights appurtenant. To hold now that the plaintiffs are not entitled to the water because it was not utilized prior to January 1, 1918, *Page 298 is to award to the Moline Farms Company and its successors water sold by it and its predecessors in interest to the appellants. The effect of such a decision would be to permit the Moline Farms Company to take advantage of its own wrong. This equity will not permit. But we did not intend to authorize any person to change a water right from one tract of land to another not contiguous. The law forbids that: Or. L., §§ 5744, 5754; Squaw Creek Irr. Dist. v. Mamero et al., 107 Or. 291 (214 P. 889); Central OregonIrr. Co. v. Public Service Com., 101 Or. 442, 457 (196 P. 832, 15 A.L.R. 1216). Our statute provides for a change of the use of water, but such change must be approved by the State Water Board. It is not the intention of the law to require the application of the water awarded to a forty-acre tract to be applied to each and every acre of that tract each year. The principal object of the Water Code is to require water appropriated to be used beneficially without waste. Different seasons require a different quantity of water. Different crops require different quantities of water. As long, therefore, as a water right appurtenant to a specified tract is used beneficially and without waste, it is immaterial whether or not the water is spread all over the entire tract or only a part thereof. But water made appurtenant to one tract cannot be lawfully used on a detached tract, even though owned by the same person, without the approval of the State Water Board: Or. L., § 5764. Courts of equity will be diligent to protect the rights of minority stockholders when a suit has been properly instituted for that purpose: 14-A C.J. 694; 6 Fletcher, Cyc. Corp., §§ 3998, 4053, pp. 6872-6873; *Page 299 Rights of Minority Stockholders, Harvey, pp. 63, 74, 78, 79. But this suit was not instituted for that purpose, nor prays for that result. Finding no error in the decree appealed from, it is affirmed. AFFIRMED. Mr. Justice BELT, not having heard the argument, took no part in this decision.