On Wednesday, April 17, attorneys for Paradise Canyon (Wolf Creek Golf Course) filed a motion to amend their May 15th, 2018 civil suit (A-18-774539-B) against the State of Nevada’s Virgin Valley Water District (VVWD), located in Mesquite, NV.
The attorneys argue that the depositions taken from Virgin Valley Water District Manager Kevin Brown and Mesquite Irrigation Company (MIC) President Kelby Hughes support a decision by the court to:
- Not consider rates paid by the Southern Nevada Water Authority (SNWA) to lease the Mesquite Irrigation Company (MIC) irrigation water under the Bureau of Reclamation Intentionally Created Surplus (ICS) program;
- Declare a fair market rent for Paradise Canyon leased water shares necessary to irrigate the Wolf Creek Golf Course;
- Add a claim of Breach of Contract [i]arising from VVWD’s recent demand that Paradise Canyon pay $1,115.67 per share [up from $250 per share]; and
- Add a claim of Breach of the Implied Covenant of Good Faith and Fair Dealing[ii] arising out of VVWD’s recent demand; and
- Add a claim of Abuse of Process[iii] arising out of VVWD’s filing of a Counterclaim for breach of contract that is totally unsupported by admissible evidence.
Water Issue Background
[All] sources of water within the State, above and below the ground, belong to the public and so-called “rights” do not constitute ownership of the water itself. Nonetheless, these benefits can be conveyed, mortgaged and encumbered.
The Virgin Valley Water District was formed under the state of Nevada to manage and distribute potable (underground) water, not surface water, [iv] for the public’s benefit.
The Mesquite Irrigation Company (MIC) and the Bunkerville Irrigation Company (BIC) are private mutual water companies formed to divert surface (not potable) water from the Virgin River in amounts guaranteed by water rights acquired by the company shareholders.
Historically, Virgin Valley Nevada pioneers “shared” the Virgin River water for their agriculture, dairy, and human consumption needs. Those needs were drastically reduced as the agriculture and dairy business declined, and residents shifted human consumption to healthier underground water.
By the late 1980s, the demand for river water was low enough that its local market value was virtually non-existent.
In 1993, the sons and daughters of the original river water shareholders formed the Virgin Valley Water District (VVWD) to provide potable (underground) water to the growing community of retirees, gambling institutions and small business ventures.
These descendant shareholders of MIC and BIC moved to create their own market value by establishing and becoming board members in the Virgin Valley Water District (VVWD). From their board positions, they moved to expand the statutory authority from potable to include shareholder river water.
Between 1993 and 2010, they spent $12,159,670.86 in public money collected from rate payers and bond holders of VVWD for 550 shares of river water managed by MIC and BIC.
While not illegal per se, their purchases created a public debt in the water district. Their actions placed the rate payers and bond holders under the management of MIC and BIC when it came to the management and distribution of river water shares acquired by the district.
The current legal action filed by the owners of Paradise Canyon (Wolf Creek) deals exclusively with VVWD irrigation water pricing strategies emerging from the use of public resources to create a private sector market, primarily but not exclusively for the descendant shareholders of MIC and BIC.
Today MIC has 1,673 outstanding shares of Virgin River water. The water district (rate payers and bond providers) “rent” 403 (24%) of the total outstanding MIC shares.
In 1992, before VVWD was formed, the to-be board members and Virgin River shareholders paid $900 for one MIC share.
Between 1992 and 2010, the shareholders had pushed the market price to $68,500 per share.
Paying over $12 million to pioneer descendants for water shares acquired free around 100-years ago for agriculture and dairy purposes created the need to increase local water rates.
Impact on Local Water Rates
Jedidiah (Bo) Bingham, the private sector trust lawyer who serves as VVWD’s lawyer, did acknowledge that “millions of dollars” were spent by various members of the VVWB on MIC and BIC water shares. He also reported a 40 percent increase in customer rates in 2010, and a 38 percent increase in 2015, and acknowledged a $10 per month surcharge on water services.
Incorrectly, Bingham puts the price increase blame on the local golf courses. According to Bingham (in an interview for The Nevada Independent), golf courses paying a low rate for (public owned Virgin River) irrigation water which has harmed ratepayers.
Bingham, in referring to SNWA rate prices, said: “Because the golf courses are paying such a low rate [for irrigation water] the district is not recouping as much money as it could if it were leasing the water at a rate closer to where demand is.”
“Every dollar that the district loses is one more dollar that the ratepayers across the valley have to pay to effectively subsidize the low rate to the golf courses,” Bingham told the Nevada Independent.
Long-time golfers to any of the Mesquite Golf Courses have noticed fairways narrowing and giving way to desert scape. They hear golf course owners expressing concerns about rising water costs.
MIC, BIC, and the VVWB managers know they could never get away with charging local irrigation users anything close to the averages the water board paid out to MIC and BIC shareholders.
Paradise Canyon vs. VVWD
On January 20, 2004, Paradise Canyon and the district entered into a lease agreement to irrigate Wolf Creek Golf Course with 150 shares of MIC water rented by the District. They set an annual rental rate of $125 per share. That was the current market value for local irrigator shares which included a MIC annual assessment. The price was set not to exceed $200 per share. That rate was considerably higher than the $52 average per share rate for off farm irrigation water in Nevada in 2008.
On September 6, 2007, Paradise Canyon and the District entered into another lease agreement, again for 150 MIC shares at $250 per share for five years starting on May 30, 2010. The agreement set a limit of $500 per share.
Intentionally Created Surplus (ICS)
The Virgin River is a tributary of the Colorado River. It flows naturally from mountains in Utah into Lake Mead through its Overton’s arm. It naturally contributes, along with the Muddy River, to the heights of that Lake. Unfortunately, the decades long drought has caused the Lake level, including the Overton Arm, to decline.
The Department of Interior, through their Bureau of Reclamation, as part of their Colorado River drought efforts included significant amounts of river water from the Virgin and Muddy Rivers, as an “intentionally Created Surplus (ICS),” to allow the SNWA to “clean” that water, return it to Lake Mead and then “credit” as a reduction to their authorized limits on Colorado River water.
To comply with the ICS program, SNWA entered into various agreements to rent Virgin River water from MIC and BIC shareholders including shares acquired by VVWD.
The entire Virgin-Muddy River ICS program is problematic. Fundamentally, those rivers run naturally through Overton’s arm into Lake Mead thus naturally contributing to the Lake without any intervention by SNWA.
Fundamentally, ICS is an accounting program. SNWA pays shareholders of Virgin and Muddy River waters to create a bookkeeping entry in the BOR ICS accounting journal.
Unfortunately, that journal entry costs SNWA and VVWD rate payers tens of thousands of public dollars each year essentially for the accounting of publicly owned water. That program enriches pubic water shareholders simply because about 100 years ago their ancestors obtained permits to freely use publicly owned water to irrigate their crops and wash their dairy cows.
No one knows how much Virgin and Muddy River water is flowing through the Overton Arm into Lake Mead today. In 1991 the water level at Lake Mead had been allowed to drop down to around 1,174-foot elevation. Nowadays there is no sign of any beach at all at Overton Beach. The Lake water has long since receded from the area. The Overton Beach Marina was removed in February 2007. The boat launch was closed in May 2008. In July 2017, the water level at Lake Mead around 1,079 feet.
Southern Nevada Water Authority (SNWA) Deals
Regardless of the absurdity of the ICS program, on April 11, 2008 SNWA was approved under the ICS provisions to divert Virgin and Muddy River water for municipal use in the Las Vegas Valley. The ICS program requires accurate accounting methods to measure the amount of SNWA owned or controlled water rights conveyed to Lake Mead.
On May 12, 2008, SNWA and MIC entered into a water operation and management agreement allowing for leasing of shares to SNWA. However, the agreement was neither negotiated or discussed by Kelby Hughes, the President of MIC nor with SNWA authorities. Rather, MIC shareholders simply agreed to accept any price SNWA was willing to pay.
On July 21, 2008, a special meeting was held by VVWB to discuss the leasing of MIC shares to SNWA. That board decided not to lease shares based upon a longstanding policy of limiting the place of use of its local river water to the Virgin Valley.
On June 7, 2011, VVWB approved an annual lease with Paradise Canyon for 150 MIC shares for $250 per share for irrigating Wolf Creek on a perpetual basis. That is higher than the $98 per share average for Nevada in 2013 and higher than the $212 per share price in Arizona that year. Nonetheless, the owners of Wolf Creek wished to ensure the availability of water over time.
In September 2014, the water board denounced its not to lease outside the Virgin Valley policy and entered into an agreement to lease all its MIC shares to SNWA for $1,246 per share.
According to Paradise Canyon attorneys in its April 17 motion to amend, “When the Board considered and approved the 2014 SNWA Lease Agreement they recognized that the SNWA Lease Rate was ‘inflated’ and would not be used to establish the new Lease Rate for Paradise Canyon (and other golf courses) on their Lease Renewal Dates.”
At that time, VVWD Board member Barbara Ellestad publicly acknowledged that the SNWA lease rate was inflated thus affirming that the SNWA lease rate would not be used to establish the new lease rate for local golf courses. Water Board member Richard Bowler moved to approve the 2014 lease agreement with the condition that the District was not constrained by the SNWA rate.
However, that same day, the Board extended its lease of irrigation water to SNWA for $1,620 per year per share or 6.5 times the golf course rate for local golf course irrigation water.
Before that agreement was approved by the SNWA board, the VVWB collaborated with MIC officers and agreed to attempt to modify the Paradise Canyon and Conestoga Golf Course leases for the express purpose of clawing back several leases shares held by those golf courses and lease them downriver to SNWA to serve the Las Vegas metropolitan area.
The claw back, if accomplished, does three things: 1) It creates a potential seasonal shortfall for the golf course and 2) allows SNWA to create an accounting record under the ICS in order to increase their share of Colorado River Water and, of course, 3) using public dollars generates profits for MIC and BIC shareholders.
The owners of Wolf Creek balked. Not only would a claw back create a potential shortfall in their irrigation needs but the price is inconsistent with past practices. Further, they pay $43,000 per year for irrigation water and another $130,000 per year for drinking water.
There is another wrinkle in the claw back proposal. In November 2017 and reiterated in May 2018 and again in August 2018, SNWA notified the district that it was unable to lease the clawed back surplus shares since doing so was inconsistent with BOR-ICS accounting methodology.
In simple terms, the accounting process is based upon the amount of water acquired on an annual basis. The golf course agreements are based on monthly accounting procedures. This may seem like a simple thing, but it is not. Monthly accounting appears inconsistent with, among other things, the Virgin River Decree. That court order requires annual accounting of MIC and BIC shares.
Any leasing of golf course clawed back shares would require an amendment to the 2014 SNWA lease agreement (from monthly to annually). However, such modifications require the consent and cooperation of the golf courses. No modifications have been made to the ICS accounting method, and the 2014 SNWA lease has not been amended
Therefore, the District has been unable to lease any clawed back shares from golf courses or lease them to 3rd parties, and they cannot establish beneficial use of the shares nor derive the revenue from any surplus shares.
Regardless, Bingham, members of the water district board, and Ellestad, reporting for Mesquite Local News (MLN) have publicly criticized Wolf Creek. They have stated that Wolf Creek’s failure to return the shares has and continues to cause VVWD ratepayers to suffer a financial detriment in the form of rate increases. Yet they know that the District Board is unable to lease those shares.
Had the Wolf Creek lease remained in place water district rate payers would have received $32,000 to date with revenues continuing to accrue. Instead, ratepayers have paid and continue to pay legal fees to Bingham and his law firm.
The original complaint filed in the Clark County District Court sought to halt the District’s price increase on irrigation water which was acquired from MIC by the VVWD to irrigate Wolf Creek.
On September 26, 2018, Bingham filed a counterclaim arguing among other things that:
- Wolf creek has failed to use effluent available from the City of Mesquite as required by their lease agreement with the VVWD;
- Unused shares leased for Wolf Creek were not put to beneficial use;
- The owners of Wolf Creek subleased shares leased from the water district.
However, on March 18, 2019, Brown admitted in his deposition that:
- VVWD has not suffered any damages resulting from Wolf Creek’s refusal to utilize the City’s effluent water;
- VVWD is not required to prove “beneficial use” of Wolf Creek water until 2022 and,
- VVWD has no evidence that Wolf Creek is now or has ever attempted to sublease the water shares to third parties.
Applications for water use are filed with the State Water Engineer, or in the case of certain vested and other authorizations, granted by the court. If use is permitted, the applicant has a certain amount of time to develop the water and put it to beneficial use. Once put to beneficial use it is certified in good standing.
By statute, [xi]MIC was required to complete work on that request by December 30, 2015, and file a proof of beneficial use to the State Engineer by December 30, 2017, to be certified.
This has not happened. Therefore, VVWD has and continues to lease uncertified MIC water to Wolf Creek and others. [xii]
On December 28, 2017, MIC filed for an extension of proof of beneficial use with the State Engineer. A one-time extension was granted on January 17, 2018, to December 30, 2022.
In his deposition, Hughes admitted that MIC is not currently undertaking any efforts to require any of its shareholders (including VVWD) to prove beneficial use of their water shares.
The Effluent Controversy
City Attorney Robert Sweetin claimed that the City could intervene on behalf of the District because of an alleged default by Wolf Creek for the use of City owned effluent to water their golf course.
Recently in a meeting with Mesquite’s Mayor, City Manager, and two council members, Bill Tanner, head of Mesquite Public Works, admitted that all effluent processed is committed and is not, nor ever has been, available to irrigate Wolf Creek.
On November 27, 201, Judge Timothy C. Williams of the Eighth Judicial Court in Las Vegas denied the motion by the City to intervene in the law suit. The Judge reminded Sweetin that had the Plaintiff (Paradise Canyon) wanted the City involved, they would have included them.
[i] Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party’s performance. Breach occurs when a party to a contract fails to fulfill its obligation(s) as described in the contract or communicates an intent to fail the obligation or otherwise appears not to be able to perform its obligation under the contract. Where there is breach of contract, the resulting damages will have to be paid by the party breaching the contract to the aggrieved party.
[ii] In contract law, the implied covenant of good faith and fair dealing is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract.
[iii] Abuse of process is an intentional tort that arises when a person deliberately misuses a court process that is not justified by the underlying civil or criminal legal action. As with most torts, the elements that a plaintiff must prove in order to win his or her case will vary from state to state. However, the typical elements that a plaintiff must prove in an abuse of process lawsuit are:
- The existence of an ulterior motive or purpose in using the process, and
- An act in the use of the process that is not proper in the regular prosecution of the legal proceedings.
[iv] Bingham, Jedediah (Bo), attorney for Virgin Valley Water District, in answer to counterclaim case No: A-18-774539-B Paradise Canyon LLC vs. State of Nevada- Virgin Valley Water District, a political subdivision of the State of Nevada, September 26, 2018.
[vii] Calculated at 7.18 AFY per share.
[viii] Applications 83920.
[ix] Application 83921.
[x] Application 83922.
[xi] NRS 533.380, 533.390 and 533.410.
[xii] The State Engineer shall not grant an extension of time unless the State Engineer determines from the proof and evidence so submitted that the applicant is proceeding in good faith and with reasonable diligence to perfect the application. The failure to provide the proof and evidence required pursuant to this subsection is prima facie evidence that the holder is not proceeding in good faith and with reasonable diligence to perfect the application.