McGarry v. Thompson , 114 Utah 442 ( 1948 )

I have difficulty in following the reasoning of the prevailing opinion. I shall merely state my reasons for dissenting.

Stripped of non-essential window-trimming, the fundamental skeletal facts of this case are as follows:

On August 17, 1945, Hintzen made application to the office of the state engineer to appropriate 4 c.f.s. of water. On February 26, 1946, Hintzen assigned this application to McGarry by written assignment, and for valuable consideration. Later, on April 6, 1946, Hintzen assigned the same application to appropriate water to Thompson for a valuable consideration, and Thompson filed his assignment for recording in the office of the state engineer. On August 9, 1946, Thompson filed in the office of the state engineer a change application by which he proposed to change the diversion point and place of use from those set forth in the Hintzen application. To this change application McGarry filed his protest, and on March 3, 1947, the state engineer, without any hearing, approved the change application.

The assignment of the application to appropriate from Hintzen to McGarry was not recorded in the State Engineer's office until December 20, 1946, long after Hintzen's subsequent assignment to Thompson. I think the record is clear that Thompson did not have actual knowledge of the prior assignment to McGarry, at the time he took the assignment from Hintzen.

From the order of the state engineer granting Thompson's change application, McGarry appealed to the district court, which reversed the state engineer. From that judgment defendants prosecute this appeal.

The ultimate question in this case is, of course, whether the state engineer erred in granting Thompson's change application. But to determine that question, it is necessary to determine first many preliminary questions.

I agree with the majority that we may take judicial notice that the Hintzen application to appropriate was not approved until March 19, 1947, and that at all times material to the questions involved in this case, the application to appropriate was unapproved. Therefore, we must first consider what rights, if any, vest in the holder of an application to appropriate water while his application to appropriate remains unapproved.

It is elementary, of course, that an application to appropriate does not give any vested right to the use of any waters. Defendants assert that the holder of an unapproved application to appropriate water holds nothing more than a mere possibility or expectancy not coupled with an interest, and hence not assignable. This puts defendants in a somewhat inconsistent position, since Thompson, like McGarry, acquired whatever rights he holds by an assignment. It is difficult to understand how Thompson could acquire any rights by assignment from Hintzen if McGarry could not.

I cannot agree with the contention of defendants that the holder of an unapproved application to appropriate has no assignable rights. It is true that he has no vested rights to the use of water, but he does have an inchoate right of sufficient substance and importance that it may be defended in a court of law. Robinson v. Schoenfeld, 62 Utah 233,218 P. 1041; Tanner v. Provo Reservoir Co., 78 Utah 158,2 P.2d 107.

It must be remembered too, that one of the most important elements of a perfected water right is priority date. Priority date is determined, not by the date appropriation is completed and right of use vests, but on the date when the right to appropriate is initiated, i.e., when application to appropriate is received in the state engineer's office. Section 100-3-18, U.C.A. 1943.

I agree with the majority that the right of a holder of an unapproved application to appropriate is such a right as may be assigned. Countenance is given to this position by the terms of Section 100-3-18, U.C.A. 1943, which provides in part as follows:

"Prior to issuance of certificate of appropriation, rightsclaimed [not vested] under applications for the appropriation of water may be transferred or assigned by instruments in writing." (Italics added.)

The statute says nothing about vested rights to the use of water. It makes no distinction between approved and unapproved applications. It does not say "after approval of an application and prior to issuance of certificate of appropriation, etc." Since the statute does not make any distinctions between approved and unapproved applications, and does not contain any language of limitation, I think it must be construed as applying to all applications to appropriate, whether approved or unapproved. I am therefore of the opinion that rights claimed under an unapproved application to appropriate are assignable.

Having determined that the rights of Hintzen in the unapproved application to appropriate were assignable, the question remains as to which of his two assignees acquired his rights. The general rule is that a person can transfer no greater property interest than he owns. His transferee ordinarily takes subject to the rights of third parties. If the transferor has no interest, he can transfer no interest, and his transferee acquires no legal interest. There are a few exceptions to this rule, e.g. a thief of money or of a bearer instrument can transfer good title thereto. Ordinarily a bona fide purchaser for value without notice cuts off the equitable interests of third persons.

It is undisputed that McGarry was the prior assignee, and hence he was the one who acquired Hintzen's interest in the application to appropriate. The question then to be determined is whether he could assert his rights as against Thompson in view of his failure to record his own assignment.

Whether McGarry's interest under his assignment from Hintzen be regarded as legal or equitable, it is certain that it could not be cut off by Thompson if he had either actual knowledge of the prior assignment to McGarry, or if he had knowledge of such facts as would have put him on inquiry.

The trial court and the majority here hold that Thompson was on notice of such facts as should have put him on inquiry, and that reasonable inquiry would have revealed to him that Hintzen had previously assigned his application to appropriate to McGarry. With this holding, I cannot agree.

On July 21, 1945, McGarry had contracted to sell 100 acres of land to Hintzen, and by the terms of the contract it was agreed that in case he (Hintzen) should make application to the state engineer to appropriate water from wells located on these premises and should thereafter default on his contract, McGarry would thereupon become the assignee of such application to appropriate. So far as the record shows this contract was never recorded. Thereafter, on August 17, 1945, Hintzen made application to appropriate 4 c.f.s. of water for the purpose of irrigating 160 acres of land including the 100 acres which he had contracted to purchase from McGarry. That is the application about which this case revolves.

The contract between McGarry and Hintzen was later rescinded by mutual agreement, and Hintzen agreed to accept in lieu of the 100 acres which he had contracted to purchase a different 80 acre tract together with an approved application to appropriate water for the irrigation of the same. On the same day, February 26, 1946, Hintzen executed to McGarry an assignment of his rights under his application of August 17, 1945. That assignment is the basis of McGarry's claim in this action.

On March 19, 1946, Thompson made inquiry at the state engineer's office as to how he might acquire a water right in the vicinity, and he was informed that Hintzen, inter alia, had an application on file which he did not intend to perfect, and which Thompson might be able to purchase.

The following day, Thompson had a conversation with McGarry, but said nothing to him about his plan to purchase Hintzen's application, although he knew that McGarry was then the owner of the lands for which the application to appropriate had been made.

Later Thompson contacted Hintzen, who informed him that he still owned the application to appropriate, but that he had notified the state engineer that he did not intend to complete the appropriation and that he had returned to the state engineer the copper identification band, and that he doubted that his application to appropriate was still valid. Nevertheless, Thompson expressed a desire to acquire whatever interest Hintzen had, and he agreed to perform certain work for Hintzen in return for the assignment of the application. Accordingly, on April 6, 1946, Hintzen executed to Thompson an assignment of his application to appropriate, and as heretofore noted, Thompson filed the same for recording in the state engineer's office on April 16, 1946.

Although Thompson knew that Hintzen's application was of doubtful validity, in view of the fact that he (Hintzen) had indicated to the state engineer that he did not intend to complete his appropriation, I see nothing in the above facts which should have put Thompson on notice that McGarry held or might hold Hintzen's rights under the application. He (Thompson) had been informed by no less an authority than the state engineer that the application stood in Hintzen's name, and Hintzen also so advised him. In the absence of any information to the contrary, this should be sufficient. The only fact pointing to McGarry as a probable assignee of Hintzen's rights is the fact that he then owned the land for which the application to appropriate was made. But in view of Hintzen's statement that he had surrendered his rights thereunder, Thompson would have no reason to believe that such rights were assigned to McGarry. I am of the opinion that the court erred in finding that Thompson was not a bona fide purchaser for value. By the terms of Section 100-3-15, U.C.A. 1943, proceedings to review decisions of the state engineer are governed by the rules of equity practice, and therefore this court may review the facts as well as the law.

The question remaining is to my mind at once the most difficult and the most important question involved in this case, viz. whether McGarry, the prior assignee, may assert his interest against Thompson, the subsequent assignee, who purchased in good faith, without notice and for value. The general rule is that a bona fide purchaser for value cuts off outstanding equities, but he does not defeat prior legal interests. See 3 Pomeroy's Equity Jurisprudence, Sec. 735. A familiar exception to this rule is provided by the express terms of our recording statutes.

Section 78-3-3, U.C.A. 1943, provides as follows:

"Every conveyance of real estate hereafter made, which shall not be recorded as provided in this title, shall be void as against any subsequent purchaser in good faith and for a valuable consideration of the same real estate, or any portion thereof, where his own conveyance shall be first duly recorded." (Italics added.)

Section 100-3-18, U.C.A. 1943, provides for written assignment of rights claimed under unapproved applications to appropriate, and further provides that such assignments

"may be filed in the office of the state engineer and shall fromtime of filing of same in said office impart notice to all persons of the contents thereof." (Italics added.)

There is no statute similar to Section 78-3-3, U.C.A. 1943, above quoted, providing that failure to record such assignments shall make such assignments void as against subsequent bona fide purchasers for value.

The defendants, and particularly the defendant state engineer, earnestly urge that although there is no express statutory provision similar to Section 78-3-3, such a provision is necessarily implicit in the terms of Section 100-3-18. In support of this argument, they cite the very early case of Wells Fargo Co. v. Smith, 2 Utah 39. It is also earnestly contended that the state engineer cannot intelligently and efficiently perform the duties of his office if he may not rely on his records as to ownership of water rights, applications to appropriate, etc.

Plaintiff, McGarry, asserts with equal force that the case ofWells Fargo Co. v. Smith, supra, is not in point, and further that it is a well recognized principle of law that recording statutes are not to be enlarged by implication.

The Wells Fargo case is somewhat similar to the case at bar. In that case the court held, in effect, that as between two mortgages, the junior mortgagee should take precedence, where the senior mortgagee had failed to record his mortgage, and the junior mortgagee took without notice. There, as here, the statute permitted the filing of mortgages for record, but did not provide what the consequences of the failure to record should be. The basis of the prevailing opinion in that case was apparently negligence on the part of the senior mortgagee in failing to record his interest when he had knowledge of a general custom in the community of recording instruments of such nature. I think a sounder basis for the decision would be that the senior mortgagee, by failing to record, had made it possible for the junior mortgagee to be led into believing that the land was free of incumbrances, and therefore he was estopped to assert his interest against the junior mortgagee.

I am of the opinion that when the legislature provides for recording of instruments, and further provides that such recording shall constitute notice, that there is implicit in such statute a provision that the claimant of rights or interests under an instrument coming with the terms of such statute who fails to record such instrument, may not assert his rights against a subsequent innocent purchaser for value. There could be little purpose or value in a recording statute, if the public could not rely thereon. To hold that a prior assignee who had failed to record could assert his interest against a subsequent assignee without notice, would, in effect, emasculate the statute.

The effect of a failure to record under a recording statute is discussed by Pomeroy as follows:

"Although the statutes pronounce unrecorded deeds and mortgages to be void as against subsequent purchasers who have complied with their provisions, yet in the practical operationof this legislation the right created by a prior unrecordedinstrument is generally regarded as tantamount to an equitableinterest, which may therefore be cut off by a subsequentpurchaser for value [italics mine] or encumbrancer who is in all respects bona fide, and who has also obtained the first record. The total effect of the system is thus twofold; it both enlarges the scope of the doctrine concerning bona fide purchaser, byextending it to all those interests, legal or equitable, whichare required or permitted to be recorded [italics mine] * * *." 3 Pomeroy's Equity Jurisprudence 71, Sec. 758.

In view of the foregoing, I am constrained to hold that McGarry, who failed to record, should not be permitted to assert his interest, against Thompson, an innocent subsequent purchaser; or stated in the more popular but perhaps less accurate parlance, that Thompson "cut off" the prior interest of McGarry.

I may note here that I am also impressed with the argument of the state engineer that he cannot faithfully and efficiently discharge his duties if he cannot rely upon his own records as to the ownership of unapproved applications. However, that is not the basis for my position. I prefer to rest my dissent upon the reasons heretofore stated.

The prevailing opinion implies that Thompson did not testify as fully and frankly as he might have, that he was evasive, and that his testimony was "tricky". I find nothing in the record to indicate that Thompson testified falsely or evasively. On the contrary, I find his testimony as frank, candid, and fair as that of an interested witness might be expected to be. He freely admitted many things which were against his interest. His testimony is to my mind perfectly plausible, and so far as the record reveals free of taint.

For the reasons above stated, I think the judgment of the trial court should be reversed.

McDONOUGH, C.J., concurs in the views expressed by WOLFE, J.