Childs v. Neitzel

SULLIVAN, J. This action was brought by C. O. Childs .against N. J., R. E. and H. R. Neitzel, W. D. McReynolds and H. A. Toole, directors of the Murphy Land & Irrigation Co., and the Murphy Land & Irrigation Company, for the — 119 — purpose of ousting said Neitzels, McReynolds and Toole from the office of directors of said company and to have the offices of president, vice-president, secretary and treasurer declared v.acant, and to have a certain mortgage executed by said corporation in favor of H. R. Neitzel declared void and for other relief, and for the appointment of a receiver to take charge of the property of said corporation. The answer put in issue many of the material allegations of the complaint. This action was based upon the ownership of 2,000 shares of the capital stock of the defendant corporation by said Childs and not upon a contract for a water right. Upon the trial of the case the lower court granted Childs certain relief prayed for by him and an accounting, but before the findings in the case were filed, Childs waived an accounting, owing to the insolvency of the corporation and the refusal of certain intervenors to assume the major part of the expense of an accounting before a referee. Childs did not appeal from the judgment entered and is only a nominal party in this court, and it appears from the record that the rights of appellant H. R. Neitzel are alone before this court for consideration, so far as appellants are concerned. A complaint and an amended complaint in intervention were filed in said action, and it is alleged in the amended complaint that the intervenors are holders of certain contracts for water rights under the said Murphy Land & Irrigation Company project, and are the owners and in the possession of more than 3,500 acres of land under said project, which lands intervenors have settled upon and improved at great expense and labor and upon which they and their families are dependent for support. A copy of said water contracts is attached to said complaint in intervention and made a part thereof. The contracts, so far as the covenants and agreements contained therein are concerned, are all the same. The defendant corporation entered into such agreements with the intervenors and divers other persons, wherein it contracted to construct a certain irrigation system in Owyhee county known as the Murphy project, and to sell to said intervenors and such other persons shares of water appro — 120 — priated and impounded by it, also certain rights in and to the irrigation system itself. Among other things said contracts contain the following stipulation: “Each of such shares [of water] shall represent a carrying capacity in said canal sufficient to deliver water at the rate of one-eightieth of one cubic foot of water, per acre, per second of time, or in lieu thereof, in event the company shall hereafter elect to distribute the waters flowing and to flow in its canals by a system of rotation, then the company agrees to deliver to second party under such rotation system a quantity of water equivalent thereto in service.” The contract also provides that all dams, reservoirs, head-gates, conduits, canals, laterals and other works for the diversion of water shall, at the discretion of the defendant corporation, be and remain its- sole property until such time as the said irrigation system shall have been fully completed, and all waters to be diverted and beneficially applied under the said system shall have been sold by it. The corporation also agreed that within one year after the final completion of the whole project and within five years from December 31, 1906, it would turn over the entire project to its water users under its water contracts. The contract also contains the following provision: “The water to be furnished under this contract may not be available to the purchaser prior to May 15, 1908, and if for any reason the canal shall not be completed so as to enable the company to furnish water through the same by said date, the date of maturity of each and every deferred payment shall be advanced one year, with a waiver of interest upon all such payments for a like period of one year.” The contract also provides that the purchase price of water rights is $35 per acre except in certain eases, and that the purchase price should be paid in ten annual instalments, the first in cash and the second on December 1, 1908, and the remaining eight instalments on December 1st of each succeeding year. Deferred payments were to draw interest at the rate of 6% per annum. The corporation was authorized to collect annually from its water users a maintenance of sixty — 121 — cents an acre on the entire tract covered by their contracts whether water was used on the whole of said land or not. The last provision of said contract is as follows: “It is agreed that the stipulations, covenants and agreements in this contract shall be mutually binding upon the parties hereto, their and each of their heirs, executors, administrators, successors and assigns.” The contracts had the following indorsement printed thereon: “I hereby consent to the assignment of the within contract,” which consent was signed by the intervenors and all other purchasers of water rights. This contract is the basis of the intervenors’ cause of action. The intervenors allege in their amended complaint, among other things, substantially as follows: That the' defendant corporation had never completed said irrigation project and had refused and neglected to do so, and had never delivered and was unable to deliver to the intervenors and the holders of contracts for water rights the amount of water which it had agreed to deliver to them, and that it would be unable to deliver the same until the said irrigation system was fully completed; that the lands included in the contracts were arid in character and required the amount of water bargained for in said contracts in order to grow crops thereon, and that water was not available from any other source for the irrigation of said lands; that the defendant corporation had never turned over said project to its water users; that the defendant had made contracts for the irrigation of about 6,000 acres of land; that there were about $100,000 remaining unpaid on the purchase price of said water rights, all of which would have to be expended in order to complete said system and deliver to the water users the amount of water sold to them; that the defendant threatened to sell other water rights although it had failed to comply with the laws of 1909 (Sess. Laws, p. 335), providing for the regulation and control of the sale of water rights, etc.; that said contracts for water rights had been assigned by the defendant corporation to the defendant H. R. Neitzel to secure an alleged indebtedness of $150,000 for money advanced by the defendant H. R. Neitzel to the Murphy company for the — 122 — purpose of constructing said system, together with interest thereon at the rate of 12% per annum, interest payable semiannually; that said corporation was unable to pay its debts or meet its current obligations as they accrued and was insolvent in law and in fact; that the intervenors had failed and refused to pay the 1912 instalment of principal and interest due on their said water contracts because of the said default of the defendant corporation in the completion of said system and in the delivery of water and its insolvency, and because of the mortgage given to the appellant Neitzel on the irrigation system and the said assignment of said contracts to the defendant H. R. Neitzel, and the intention of appellants to apply the payments made on the unpaid purchase "price of water rights to the payment of said alleged indebtedness to H. R. Neitzel with interest thereon at the rate of 12% per annum; that the intervenors were jointly interested in, and were joint owners with, the other water users of said irrigation system, and that they and the other water users were entitled to have the proceeds received by the defendant corporation from said contracts as principal, interest and maintenance applied to the completion, maintenance and repair of said irrigation system, and to have all other terms and conditions of said contracts kept and performed by the defendant corporation. The- defendant corporation admitted that the form of the contract attached to the complaint in intervention was a copy of those issued to all purchasers of water rights; denied that the system had never been completed or that it was unable to deliver to the water users the amount of water contracted to be delivered to them; denied that it threatened to sell other water rights or that it was insolvent or in default, or that it never offered to turn over said irrigation project to the water users. Upon the issues thus presented, after a trial the court made findings of fact to the following effect: That the contracts of the form attached to the complaint in intervention had been issued for water for the irrigation of about 6,000 acres of land and that said contracts were in full force and — 123 — effect; that the defendant corporation had not completed the said irrigation project, and that it had neyer delivered and was unable to deliver the amount of water sold to the water users under said contracts, and would not be able to keep its contracts in that respect until the irrigation system had been completed; that the lands covered by said contract were arid in character and required the amount of water for their irrigation that the appellant corporation had agreed to deliver for that purpose, and that water was not available from any other source for the irrigation of said lands; that on the 1st day of December, 1912, there became due from the intervenors, with the exception of two of them who held paid-up contracts, one instalment of principal and interest; that the defendant corporation had never turned over the project to its water users or offered to turn it over to them; that the interest on the $150,000 loaned to said corporation by the said H. R. Neitzel at the rate of 12% per annum, if collected, would have the effect of exhausting the proceeds of principal, interest and maintenance fund due and unpaid on the said contracts, and'that appellants threatened to collect interest thereon at said rate and to compel the water users to pay the sum of $150,000 with interest thereon at said rate before turning over said system to them; that the said holders of contracts. had paid the defendant corporation the sum of about $122,000, exclusive of maintenance dues, on the purchase of said water rights; that the defendant corporation threatened to issue other contracts for watei rights although it had failed to comply with the laws of 1909 providing for the regulation and control of the sale of water rights, etc.; that the holders of water contracts had refused to pay the defendant corporation and the defendant EL R. Neitzel the instalment of principal and interest on deferred payments which became payable by the terms of said contracts on the 1st day of December, 1912; that otherwise they had fully performed their contract in all things to be kept and performed by them; that said intervenors based such refusal on the insolvency of the defendant corporation and its default and the threat of appellants to apply all payments on — 124 — the purchase price of said contract to the payment of the alleged indebtedness owing to the defendant Neitzel, including interest thereon at the rate of 12% per annum; that the defendant corporation was unable to pay its debts or meet its current obligations as they accrued, as it was insolvent and without means to maintain the said system or to pay the said indebtedness to the defendant EL R, Neitzel. From said findings of fact proper conclusions of law were made by the court and judgment entered in favor of the intervenors. Among other conclusions of law were the following : ‘ ‘ That there is now unpaid on the contracts for water rights issued by the defendant corporation the sum of about $100,000.00, which money the holders of said contracts are entitled to have expended in the completion, operation and repair of said irrigation system so far as may be necessary to comply with said contracts; that the use of the waters now held or appropriated by the defendant corporation is a public use and the right of the defendant corporation to collect rates or compensation from the holders of said contracts for the use of water supplied or to be supplied to them ds a franchise, and the money remaining unpaid on said contracts for water rights is a trust fund, of which the defendant corporation or the defendant H. R. Neitzel, as assignee, is the trustee; that the holders of said contracts are jointly interested in the said irrigation system, including the water appropriated by the defendant corporation to be used in the irrigation of the lands lying under said project, and are the equitable owners of the said irrigation system to the extent necessary to supply water as provided in said contracts, and that the defendant corporation holds the legal title to said irrigation system,, subject to said claim and said contracts; that the defendant corporation, or the defendant H. R. Neitzel, as assignee, is entitled to any surplus remaining unpaid on the purchase price of said water rights after the said contracts for water rights have been fully kept and performed by the defendant corporation; that by reason of the failure and neglect of the defendant corporation to complete said system and of its inability to deliver to the holders of said contracts for water — 125 — rights the amount of water to which they are entitled for the irrigation of their lands, and because of its insolvency, the holders of said contracts for water rights have failed and refused to make the payments due under their contracts in December, 1911 (1912), and still refuse to make said payments, as they have a right to do; that the probable cost of completing the said irrigation system and making it possible to deliver the required amount of water for the irrigation of the lands owned by the holders of said contracts for water rights is, approximately, $100,000.00, and that there are no assets available for the completion of the said system except the amount remaining unpaid on said contracts.” After entering judgment for the intervenors, a receiver was appointed and was authorized to collect the unpaid part on the purchase price of said water rights with the accrued interest thereon and the maintenance fees, and was directed to manage and operate and complete the construction of said irrigation system, subject, however, to the right of the appellant corporation to co-operate with the receiver in the completion thereof. The rights of appellant H. R. Neitzel and the rights of the intervenors under said contracts for water are involved in this appeal, and so far as the intervenors are concerned, their claim is' based on the breach of the provisions of said contracts by the defendant corporation. The object and purpose of the action on behalf of the intervenors is the enforcement of' such contracts through the instrumentality of a receiver and to restrain the appellant H. R. Neitzel from collecting the money due on said water contracts and applying it to the payment of his said mortgage indebtedness, and for general relief. It is contended by counsel for appellant that the facts as found by the court clearly show that the appellant corporation was organized solely to provide a system of irrigation for certain lands, the cost of which was to be paid by the owners of such lands, and that to provide funds for the construction of such system $150,000 was borrowed by said corporation, and to secure the payment of the same a mortgage was given — 126 — by said corporation 'covering its interest 'in such system, and also by an assignment of said water contracts. The mortgage was given to said H. E. Neitzel and the said water contracts were assigned to him. The sum so borrowed was used in the construction, maintenance and operation of said system but was insufficient to complete the same. The court found that there had been paid on said water contracts about $122,000 to the appellant corporation. Upon that state of facts, counsel for appellant propounds the following question: In the light of these facts, the question presented for determination is, Can such land owners apply the balance due on such written obligations to the completion, operation and maintenance and repair of such system instead, of applying the same to the payment of the money so borrowed? Counsel contends that the defendant company was the mere instrument or legal means for providing the lands with water, the cost thereof to be paid by such land owners or purchasers of water under said contracts. We cannot agree with counsel in that contention. The Murphy company agreed to complete said irrigation system with its dams, reservoirs and canals and turn the same over to the purchasers of water rights within a specified time, the price per acre for such water rights being stipulated in most of the- contracts at $35 per acre. The Murphy company no doubt contemplated making a considerable profit for itself in the construction of said system. It was not an eleemosynary corporation or the trustee or agent of the water right purchaser for the construction of said irrigation system, but was a corporation organized for the purpose of making a profit to its stockholders from the construction of said system. IE any profits had arisen to the company from the construction of said system, the purchasers of said water rights could not, under said contracts, share in them with the Murphy company. The Murphy company had employed engineers and experts to examine said irrigation project as to its feasibility, the quantity of water that could be obtained for the irrigation of said land and the cost of the construction of said system to make the water available to the land to be irrigated, and — 127 — after that was done, an estimate was made of the amount to be charged for each acre water right that would be necessary and sufficient to construct said system and pay a good profit to the Murphy company. Under said water contracts it was not expected, contemplated or necessary for the purchasers of water rights to employ engineers and other experts to make a proper estimate of the amount of water obtainable and the cost of the construction of the system, and to ascertain whether the company could place the water at feasible points near the land to be irrigated. That had been done by the Murphy company, and it sold water rights upon the representations that it had water sufficient to furnish each purchaser with the amount called for in his water contract, and also was able to construct said system and complete it. Hence the purchasers of water rights under such system had a legal, right to depend upon the estimates made by the irrigation company and upon their contracts with it to the effect that the company would finish and complete, the system and furnish the water according to the terms of the contract. They did not purchase under the rule caveat emptor. Said contracts show their exact terms on their face and include mutual covenants, and since H. R. Neitzel received said contracts by assignment, he had notice of all the covenants contained therein. Those contracts were made by the purchasers of water rights with the Murphy company, and that company could not have enforced the collection of the deferred payments and interest thereon without complying with the terms thereof as to the construction of said system and the delivery of water, and neither the mortgagee nor the assignee could acquire any greater rights in that regard than the Murphy company itself had under said water contracts. H. R. Neitzel, by loaning said money to the Murphy company and taking as security for the payment of the same a mortgage on said company’s interest in said system and water rights and an assignment of said water right contracts, did not become an insurer for the Murphy company to the water right claimants that said system would be completed and the water furnished, but he stands in the shoes of the Murphy — 128 — company so far as the collection of the deferred payments is concerned and cannot enforce their collection until said system is completed and the water furnished in accordance with the terms of said water right contracts. The purchasers of water rights depended upon their contracts as to what their water rights and said system would cost them, and had they considered that their water rights would cost them more than $35 per acre, they might not have entered into said contracts. It would have been an easy matter to have worded said contracts so as to have required such purchasers to pay the entire cost of said system had that been the intention of the parties. That was clearly, not the intention, as the agreement was to pay $35 per acre for the right, and no more. The Murphy company had agreed to turn over to the purchasers of said water rights certain amounts of water with a canal system completed in such a manner as to make it feasible to irrigate said lands, and until that was done neither the Murphy company nor its assigns could enforce the payment of the amounts that were to become due upon said contracts. When H. R. Neitzel loaned • the said Murphy company $150,000 he knew'that only a part of the money due on the contracts was payable prior to the time the Murphy company had agreed to complete the system and turn it over to said purchasers. He certainly knew that if his assignor, the Murphy company, made default and failed to complete said system, it would be necessary for him to complete the project or lose his security, at least to the extent of the cost of completing the system. The fact that the purchasers of said water rights authorized the Murphy company to assign said contracts does not estop them from setting up as a defense to the payment thereof the fact that the Murphy company has not complied with its contract in the construction and completion of said canal system. The purchasers of water rights wer'e not the stockholders in the appellant corporation; they had no voice- whatever in directing its affairs, and, as before stated, they could not share in the profits of the enterprise had there been any — 129 — profits realized, nor can they be required to stand the loss incurred in case there is a loss on the part of the Murphy company in completing said system in accordance with the terms of the contract. The purchasers of water rights ought not to be penalized because they were so unfortunate as to purchase a water right from an irresponsible and unreliable company. The obligation rests upon the person who loans money to such a corporation to investigate the financial condition of the corporation and its ability to perform its covenants with the purchasers of water rights, and if he does so investigate, he has full notice that the deferred payments for such water rights cannot be collected until the system is completed and the water delivered. The purchasers of the water rights, as shown by the record, have neglected no duty they owed to the appellant H. R. Neitzel; they have been guilty of no fraud, have made no false representations, and, so far as the record shows, have committed no wrong, legal or equitable. It is a part of the irrigation history of the state that under the representations made by many such irrigation companies, persons have sold their holdings elsewhere and been induced to settle upon lands under such projects with the understanding and agreement that they should receive water at a certain price per acre, and were thus induced to take up land and settle upon it under such projects. If a corporation thus inducing people to purchase and settle upon such lands is permitted to violate its contract and increase the price per acre for a water right without the purchasers’ consent, it would be most unjust to the settler. The last provision of said water contract is to the effect that the covenants and agreements in said contract shall be mutually binding upon the parties thereto, their and each of their heirs, executors, administrators, successors and assigns. Counsel for appellants contend that in lending the money to the Murphy company, Neitzel relied upon said water contracts as security, and for that reason-the water users are estopped to deprive him of the benefit of such security. From the admissions in the answer of appellants, it appears — 130 — that Neitzel’s chief reliance for the payment of said money was not entirely on the security which he received but in his faith in his judgment as to what it would cost to complete the project and in his ability to carry out the contracts. It is alleged in appellants’ answer as follows: “That on the 15th day of January, 1910, the defendant H. R. Neitzel, acting for himself entered into a contract with the plaintiff C. C. Childs and the defendant R. E. Neitzel, by the term's of which said defendant H. R. Neitzel agreed to finance to completion the project of the Murphy Land & Irrigation Company in Owyhee County,” etc. Neitzel’s object in entering into that contract no doubt was to protect and preserve his security, but since the system is going to cost much more than was anticipated to complete it, he is seeking to avoid the natural consequences of his own mistaken judgment. It is not claimed that the water users made any inducements or representations to him as to the cost of the completion of said system. It was the Murphy company which promoted this scheme; it prepared the printed form of contracts for the water users to sign and made and held out all the inducements that were offered by anyone connected with the enterprise. The Murphy company was the one that had carefully gone into all of the facts relative to the cost of said system and the amount of water that could be conserved thereby. It represented to the purchasers that it had the ability to deliver to them a completed system so that each of the purchasers of water rights should have water for his land delivered within a short distance thereof at a point feasible for him to take it upon his land. Under such contracts the water users were empowered to enforce them against the company or its assignee, and the company upon complying with the terms of the contract required to be performed by it could enforce the payment of the purchase price from the original purchaser of a water right or his assign. Construction companies of this kind will not be permitted to do indirectly what they are prohibited from doing directly. They will not be permitted to make contracts with third parties in regard to the construction or completion of an irriga — 131 — tion system whereby the land owners or purchasers of water rights can be deprived of the rights acquired under their water right contracts. For instance, if a company, such as the Murphy company, fails to complete its system and furnish the water as provided in the water right contracts, or if such company should sublet the construction of its system and fail and neglect to pay such subcontractor, the subcontractor could not acquire greater rights as against the water right purchasers than the irrigation company itself had under its contract with the purchasers of water rights, and could not deprive the purchasers of water rights under such system of their rights or acquire a right by foreclosure of a lien or mortgage for such construction work as would deprive the water right purchasers of their rights under their contracts. Sec. 15 of art. 11 of the constitution provides that the legislature shall not pass any law permitting the leasing or alienation of any franchise so as to release or relieve the franchise or property held thereunder from any of the liabilities of the lessor or grantor, or lessee or grantee, contracted or incurred in the operation, use, or enjoyment of such franchise, or any of its privileges. Sec. 2 of art. 15 is as follows: “The right to collect rates or compensation for the use of water supplied to any county, city, or town, or water district, or the inhabitants thereof, is a franchise, and cannot be exercised except by authority of and in the manner prescribed by law.” Sec. 1 of art. 15 provides that the use of all waters now appropriated or that may hereafter be appropriated for sale, rental or distribution, is declared to be a public use subject to the regulation and control of the state in the manner prescribed by law. The Murphy company was a public service or a quasi public corporation, and the use it was making of its irrigation system and of the waters appropriated by it was a public use, and the right it was exercising in selling water shares and rights in the irrigation system and issuing contracts therefor and collecting rates and compensation was a franchise, and such franchise could not be granted to it in any manner so as to — 132 — relieve it of its duty to the public or release its franchise and the property acquired thereunder of any liability for a failure to complete its system. In loaning money to such a corporation, the one loaning must rely primarily on the borrower to carry out the contracts with the water right purchasers. The mere consent of the water right users to the assignment of said contracts was not a waiver of their right to have the system completed; but the assignment was given subject to the obligation of the Murphy company, or its assigns, to carry out and complete said irrigation system and deliver the water. It is contended by counsel for appellants that the court erred in decreeing that the amounts remaining due and unpaid on said water contracts, or so much thereof as may be necessary, be expended in the completion, operation, maintenance and repair of said irrigation system by the receiver, and that this decree places no limitation as to the time or conditions in which this money can be so used in maintaining, operating and repairing such system, and that said water contracts provide that such land owners must pay sixty cents an acre annually as an operating and maintenance fee. Under the terms of said contract, the Murphy company was to maintain and operate said canal until the system was completed, and turned over to the water users. Now, this matter has been placed in the hands of a receiver whereby the Murphy company is permitted to co-operate .with the receiver in the work of completing and maintaining said system, and the receiver is authorized to collect the maintenance fee of sixty cents per acre as well as the deferred payments, which moneys are to be applied in the maintenance and completion of said system. Counsel intimates that there is no time limit to which such moneys may be used for the operation and maintenance of said system. Counsel is there mistaken, for the Murphy company or its assigns may complete the system as quickly as possible, and when completed may turn it over to the water users and' thus avoid any further expenses in connection with it. There is nothing in this contention. The receiver has full authority to proceed and expend the deferred payments on said contracts in the completion of said canal. — 133 — He has authority also to collect sixty cents an acre maintenance fee, which must be applied as provided by said contracts. (May 28, 1914.) [141 Pac. 83.] Deferred Payments — Payment of to Receiver. 1. Held, under the water right contracts involved in this ease, the deferred payments for such water rights do not become due until water is made available for the reclamation and irrigation of the lands as provided by the terms of such contract; and when the water is made so available, the deferred payments become a lien on the land and the water right. 2. Held, that where a water contract holder pays any part or the whole of the deferred payments to the receiver, under the order of the court, he is entitled to a credit on such contract for the amount paid. REHEARING- on appeal from the District Court of the Third Judicial District, in and for Ada County. Hon. Carl A. Davis, Judge. Action to determine the rights of the several parties under certain water right contracts. Judgment for the intervenors. Affirmed. Davidson & Davison and Richards & Haga, for Appellants. The appointment of a receiver does not have the effect of changing contractual relations between parties. (High on Receivers, secs. 201, 204, 318.) The judgment must therefore be affirmed, and it is so ordered, with costs of this appeal in favor of the respondent intervenors. Ailshie, C. J., and Budge, District Judge, concur.