Court Of Appeals Holds That Lessee Of Mining Claims Developed Water Rights As Agent For The Lessor

November 03, 1999

Summary
The New Mexico Court of Appeals recently decided a quiet title dispute over who owns water rights that were developed and used for mining purposes by the lessee of a combination of unpatented claims and privately owned claims that had been patented under the General Mining Law of 1872.

The New Mexico Court of Appeals recently decided a quiet title dispute over who
owns water rights that were developed and used for mining purposes by the lessee
of a combination of unpatented claims and privately owned claims that had been
patented under the General Mining Law of 1872. See Hydro Resources Corporation v.
Gray, 206-NMCA-108, 45 N.M. Bar Bull. 42 at p. 30 (Oct. 16, 2006), cert. granted,
Appeal No. 29931. New Mexico's intermediate appellate court held that the lessee
developed the rights as agent for the lessor, and the court thus quieted title in the
lessor's successor-in-interest. As of this publication, further appellate review is
pending in the New Mexico Supreme Court.

Inspiration Development Company (the "Lessor"), which owned the patented lands
and unpatented claims at the time of the water development, leased the claims to
Copper Flat Partnership (the "Lessee"), in an area of Sierra County known as
"Copper Flat." The lease was silent on the subject of water rights, but provided that
Lessee had the rights to "mine using all necessary resources" and to "construct and
maintain all works" needed in its operations under the lease. The lease also provided
that the Lessee could expend its own funds to relocate, amend or apply for patents
on the unpatented claims under lease, but it could only do so in the name of Lessor.

The Lessee developed the water rights in question by drilling several wells on mill
site claims that were located and held in the Lessor's name. The Lessee filed
declarations of ownership of underground water rights in its own name, however,
with the Office of the State Engineer. The declarations were based on the wells
drilled on the Lessor's mill site claims, and the water was used by the Lessee to carry
on mining operations authorized by the lease. The declarations stated that the
Lessee partnership appropriated and put the water to beneficial use for mining,
milling and other uses. It was undisputed that development of the water was
essential to the mining operation.

By the time the quiet title action was filed in 2001, the lease pursuant to which the
mining operations and water development had occurred was terminated. Upon
termination of the lease, the property was surrendered to the Lessor. Both of the
original parties to the lease subsequently conveyed what interests they had to their
respective successors-in-interest, who are the parties to the instant appeal.
The New Mexico Court of Appeals, in quieting title to the water rights in the Lessor's
successor-in-interest, reasoned as follows:

A mineral lessee may cease mining, and a mining lease may terminate, but mining
operations can continue. Water is essential for continued mining operations. Under
the circumstances in this case, we will not read into the lease, nor will we extend the
law of water rights to permit the lessee to walk away with water rights that could be
developed by the Partnership only through the lease and as lessee. Water was a
"resource" the lessee was permitted under the lease to develop and use in order to
perform under the lease. There is no question that the water rights were acquired for
the benefit of the lessor's mineral lands.

Id. at 32.

The Court of Appeals also relied on uncontested evidence that, during the course of
the mining operations, mill site claims were located in the Lessor's name for the
purpose of developing water. The water was developed for the mining operation.
Further, according to the Court, "[u]nder federal law, mill sites must be used for
development of mining claims." Id. The Court concluded, therefore, that the Lessee
developed the water rights as agent of the Lessor and on the Lessor's behalf. Id. The
Court found it unnecessary to reach or address a further theory advanced by the
Lessor, which was that the water rights were "appurtenant" to the Lessor's mining
and mill site claims and were never severed from those real property interests.

Note: the author currently represents Lessor with one of
his water law partners in Lessee's appeal to the New Mexico Supreme Court.