Summary 2007 WY 94

Summary of Decision issued June 8, 2007

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Case Name: Bentley v. Director of the Office of State Lands and Investments

Citation: 2007 WY 94

Docket Number: 06-131

Appeal from the District Court of Carbon County, Honorable Wad E. Waldrip, Judge

Representing Appellants (Plaintiffs): Karen Budd-Falen and Brandon L. Jensen, Budd-Falen Law Offices,Cheyenne, Wyoming. Argument by Mr. Jensen.

Representing Appellees (Defendants): Patrick J. Crank, Attorney General; Michael L. Hubbard, Deputy Attorney General; Bridget Hill, Assistant Attorney General; C. Levi Martin, Senior Assistant Attorney General; Susan K. Stipe, Senior Assistant Attorney General.

Issues: Whether the district court erred when it dismissed appellants' causes of action relating to the Board of Land Commissioners' easement to the Wyoming Game and Fish Commission. Whether the district court erred when it found that the water rights which were historically attached to Section 16 were severed by the easement and, therefore, conveyed to the Wyoming Game and Fish Commission.

Facts: In 1992, the State Board of Land Commissioners ("Board") began contemplating a sale of school lands in Carbon County where the Dome Rock Reservoir is located. In response to public concern that sale of the land would prevent public use of the reservoir for fishing purposes, the Board approved an easement in favor of the Wyoming Game and Fish Commission in 1993. The land was subsequently advertised for public auction subject to the easement. It was purchased by John Anselmi, who entered into an installment sales contract with the Board.

In 2000, Mr. Anselmi assigned the sales contract to Appellants. A short time later, the Game and Fish easement was recorded with the county clerk. In 2002, when the Bentleys made full payment under the sales contract, the State of Wyoming issued a patent conveying the land to them. The Bentleys initiated this action in 2004, seeking a declaration that the easement was void, injunctive relief, and damages. The district court upheld the validity of the easement and determined that the water rights appurtenant to the publicly auctioned land had also been transferred to Game and Fish.

On appeal, the Bentleys claim that their ownership of Section 16 is not subject to the easement because: 1) the easement was not created and validly established prior to their purchase of the property; and 2) they had no notice of the easement at the time they purchased the property. Invoking bona fide purchaser status, they assert the easement cannot be enforced against them, relying upon the operation of Wyo. Stat. Ann. § 34-1-120. The Bentleys' argument is premised on the nature of the State's ownership after the Sales Contract was executed. As stated in their brief, "as of June 3, 1993, the State of Wyoming no longer owned Section 16; and therefore, no longer owned any interest in which to convey an easement." The Bentleys contend that any interest granted by the State after June 3, 1993, cannot be enforced against them.

Holdings: In an installment land contract, the seller agrees to accept payments from the buyer, usually over a period of time, until the price set by the contract has been paid. When all payments have been made, the seller is bound to convey title to the buyer. The buyer must record an installment contract for the purchase of state lands in the county where the property is located. However, a buyer does not acquire a complete equitable title until paying the purchase-money and complying with the other conditions precedent. A buyer's interest under an installment land contract is equitable in nature, and legal title remains with the seller. The State possesses the same rights as any other seller under an installment land contract and continues to retain legal title to the property. Until the full purchase price is paid, the State is not bound to convey; there are many uncertain events to happen before it will be known whether it will ever have to convey, and it retains for certain purposes, its old dominion over the estate. In the present action, the Appellants took assignment of the contract when it was still executory and assumed the risks inherent in purchasing an equitable interest, which is subject to outstanding equities and possible imperfections. They could not acquire full "equitable title" until they were entitled to a patent, i.e., when full payment under the Sales Contract had been made. Thus, under the executory Sales Contract, the State retained legal title to Section 16 and transferred only a limited equitable interest. After Appellants made full payment under the Sales Contract, they received a patent in accordance with Wyo. Stat. Ann. § 36-9-112(a). Patent number 2992 issued on May 16, 2002, and was recorded on May 24, 2002. The patent specifies that the Appellants' title to Section 16 is subject to the easement. Although Appellants have framed their causes of action and arguments on appeal as if there are inconsistent claims to Section 16, the patent is consistent with the existence of the easement. The Appellants' real complaint is that they do not believe their patent conveyed all they were entitled to receive under the Sales Contract. However, once a contract for the sale of realty has been executed, its provisions merge with the conveyance and are no longer separately enforceable. The Appellants' rights are therefore controlled by the patent. Because the patent specifies that title is subject to the easement, the Appellants' title is indeed subject to the easement.
The Appellants acknowledge that they did not obtain legal title until the patent issued in 2002, but they assert that two principles - relation back and equitable conversion - apply under the circumstances. According to the Appellants, equity transforms the nature of the interests discussed above to recognize in them full ownership of Section 16 prior to the patent. They reason that their full ownership in Section 16 thereafter divested the State of the ability to convey an easement to Game and Fish. However, even when viewed in a light most favorable to the Appellants, it is clear they seek relation back of a legal title they have not acquired. They claim entitlement to an unencumbered fee interest, free from the easement, under the Sales Contract. However, the doctrine of relation has never been applied to rectify a perceived deficiency in a patent, i.e., the owner's claim that his earlier, equitable interest was not fully realized by the conveyance. The Section 16 patent, by its terms, conveyed title subject to the easement. Even if it were concluded that the patent related back, that legal fiction would not provide the Appellants the relief they desire. Under these circumstances, the district court properly concluded that the Appellants did not present any reason and justice did not require the application of the doctrine of relation.
The Appellants also assert that equity made them full owners of Section 16 and divested the State of ownership before the patent issued. The equitable conversion theory treats the interest of the purchaser to be tangible real estate from the time the installment land contract or contract for deed is executed and considers the purpose of the retention of title by the vendor to be a security interest, with the contractual right to the balance of the purchase price treated as personalty. The application of equitable conversion to installment land contracts has been rejected in Wyoming.
Although no official grant of easement was recorded until 2000 and the Board's approval lacked material terms and formalities required in a formal conveyance of an interest in state land, it is also true that the intent to create an easement was demonstrated by the Board's actions. Evidence showed that there was application, approval, and recited consideration, which reflected a clear intent to convey the easement in the future. This documented intent may not have the formal, legal significance of creating an easement, but it is highly relevant to a determination of competing equitable interests in land. Additionally, the board of land commissioners may, at their discretion, grant permanent rights-of-way or easements across or upon any portion of state or school lands, upon such terms as the board may determine, for any ditch, reservoir, railroad, public highway, telegraph and telephone lines, or other public conveyances. Having already determined that the State held legal title to Section 16 on the date it granted the easement, the Appellants' repeated assertions that the November 28, 2000 grant was void on that basis is rejected.
To prevail in a contest under Wyo. Stat. 34-1-120, the Appellants must show that they have the status of a "bona fide purchaser," which is: (1) a purchaser in good faith; (2) for a valuable consideration, not by gift; (3) with no actual, constructive or inquiry notice of any alleged or real infirmities in the title; and (4) who would be prejudiced by the cancellation or reformation. The term 'purchaser', shall be construed to embrace every person to whom any estate or interest in real estate shall be conveyed for a valuable consideration, and also every assignee of a mortgage or lease, or other conditional estate. The term "conveyance", shall be construed to embrace every instrument in writing by which any estate or interest in real estate is created, alienated, mortgaged or assigned, or by which the title to any real estate may be affected in law or in equity, except wills, leases for a term not exceeding three (3) years, executory contracts for the sale or purchase of lands, and certificates which show that the purchaser has paid the consideration and is entitled to a deed for the lands, and contain a promise or agreement to furnish said deed at some future time. Appellants, who were paying valuable consideration and expecting a conveyance of Section 16, were "purchasers" within the meaning of the recording act. However, they did not receive a conveyance to Section 16 until they received the patent. The Sales Contract was an executory contract, specifically excluded from the statutory definition of conveyance. Accordingly, the fact that the Sales Contract was recorded does not change the operation of Wyo. Stat. Ann. § 34-1-120. By its express terms, the statute provides no protection for a purchaser who was not the first to record a conveyance. For purposes of this appeal, the first conveyance to be recorded was Easement No. 5382. The Appellants' conveyance, the patent, was recorded two years later.
Moreover, the Appellants are likewise ineligible for protection under the recording act because they cannot demonstrate that they are bona fide purchasers. Under the third prong of that inquiry, the Appellants would have to prove that they lacked "actual, constructive or inquiry notice of any alleged or real infirmities in the title" to Section 16. This they cannot do. While they might not have discovered documentation of the easement before they received their assignment, the assignment itself reflects a defect in the title, i.e., it was retained by the State. Any effort to check the county clerk's records would have revealed that their predecessor in interest lacked the ability to convey legal title to Section 16. It is apparent that the Appellants did not make such efforts.
Additionally, the Appellants' claims that they lacked notice of the easement are solidly refuted by the very facts alleged in their complaint. Their complaint states that at the time of their purchase, Section 16 featured a roadway to the reservoir, a parking lot, and signs announcing that the reservoir was a public fishery. Also, members of the public used the fishery. According to the Appellants, that public use was known to them and was ongoing. The improvements visible upon physical inspection of the property, as well as the continual access and use by the public, provided inquiry notice of an easement. Perhaps conceding the import of these facts, counsel for the Appellants admitted actual knowledge of the easement at the hearing on the motion to dismiss.
As the foregoing demonstrates, the Appellants' reliance upon the recording act to void the easement is misplaced. The protections afforded by recording acts generally do not extend to equitable interests as such holders are not considered bona fide purchasers. It is apparent from their pleading that the Appellants are not entitled to relief under Wyo. Stat. Ann. § 34-1-120.
A purchaser under an installment contract, although lacking a conveyance, may have a remedy in equity. However, resort to principles of equity is of no assistance to the Appellants. Their equitable interest was preceded in time by a public interest, documented in public records, of which they had knowledge. The inchoate, equitable interest purchased by Game and Fish arose prior to the Appellants' equitable interest under the Sales Contract. Where the purchase is only of an equitable title, it is ordinarily taken with all its imperfections and outstanding equities, notwithstanding the fact that a valuable consideration may have been given and that there may have been no notice of the equity or defense against the title. Accordingly, the Appellants' ownership of Section 16 could equitably be made subject to a prior equitable interest, even if they had no knowledge of it. However, the Appellants did have knowledge of public use. There is no indication that they possessed Section 16 in a manner that was inconsistent with the easement. The public continued to access Dome Rock Reservoir without interference. In this case, equity favors upholding the easement which was prior in time to the Appellants' interest, is consistent with the clearly expressed intent of the Board and Game and Fish, and ultimately benefits the public.
As a general rule, a water right beneficially used upon land becomes appurtenant to the land. And, when the land is conveyed, the water right passes with it. However, in this case, the water rights could be, and were, identified and separately transferred to the Game and Fish. Although the Board's reference to "any rights" language could have been more precise, there is no question which reservoir was involved because Dome Rock Reservoir is the only reservoir on Section 16 and was also the subject of the easement. It is obvious that water in the reservoir is essential to a public fishery, the interest served by the easement. Thus, the Board sufficiently demonstrated its intent to convey its water rights to Game and Fish, along with the easement. This intent was manifested in the patent, which excludes the reservoir water rights.
The Appellants also assert that the conveyance was invalid and could not have severed the water rights because the Board did not petition the State Engineer's Office for change in use, change in point of diversion, enlargement of use, or change in place of use of the water. The water rights at issue are for stored water, not for the direct use of the natural unstored flow of any stream. Appellants appear to overlook this distinction. The fact that the reservoir rights were permitted for irrigation does not impact the ownership of the rights conveyed by the Board when it granted the easement to the Game and Fish.
Additionally, the Appellants claim that the indications of an easement upon Section 16 would not have alerted them to the transfer of water rights in Dome Rock Reservoir. While that may be true, as discussed above, the Appellants' claims that they lacked notice are unavailing because they accepted an assignment of a mere equitable interest, subject to all imperfections and competing claims.
Appellants failed to state a claim for relief which would invalidate the easement, and the district court properly dismissed those causes of action. Their equitable interest in Section 16 did not prevent the Board from granting a valid easement to Game and Fish. The district court was also correct in holding that the water rights were severed and conveyed to the Game and Fish with the easement.

Affirmed.

J. Burke delivered the opinion for the court.

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