Opinion
1 CA-CV 23-0632
08-01-2024
YOUNG ACRES, INC., an Arizona corporation, and YOUNG'S FARM, INC., an Arizona corporation, Plaintiffs/Appellants, v. GARY C. MORTIMER and SHARLA D. MORTIMER, a married couple, Defendants/Appellees.
May Potenza Baran & Gillespie, PC, Phoenix By Andrew A. Harnisch, Eric W. Moats Counsel for Plaintiffs/Appellants Fennemore Craig, PC, Phoenix By Lauren J. Caster, Kevin J. Bonner, Mario C. Vasta, Timothy J. Berg Counsel for Defendants/Appellees
Not for Publication - Rule 111(c), Rules of the Arizona Supreme Court
Appeal from the Superior Court in Yavapai County No. P1300CV202100413 The Honorable Michael P. McGill, Judge
May Potenza Baran & Gillespie, PC, Phoenix By Andrew A. Harnisch, Eric W. Moats Counsel for Plaintiffs/Appellants
Fennemore Craig, PC, Phoenix By Lauren J. Caster, Kevin J. Bonner, Mario C. Vasta, Timothy J. Berg Counsel for Defendants/Appellees
Judge Kent E. Cattani delivered the decision of the Court, in which Presiding Judge Daniel J. Kiley and Judge D. Steven Williams joined.
MEMORANDUM DECISION
CATTANI, JUDGE
¶1 Young Acres, Inc. and Young's Farm, Inc. (collectively, "Young") appeal from the superior court's summary judgment in favor of Gary and Sharla Mortimer regarding surface water rights attached to real property that was once owned by Young and is now owned by the Mortimers. For reasons that follow, we affirm.
FACTS AND PROCEDURAL BACKGROUND
¶2 This case concerns the surface water rights (the "Surface Water Rights") appurtenant to an approximately 324-acre property (the "Property") in Yavapai County. Young sold the Property to Yavapai Holdings, LLC and Yavapai Land Holdings, LLC (collectively, "Yavapai") for $16.65 million in 2006. The purchase agreement and addendum governing the sale contemplated that Young would initially retain the Surface Water Rights, which Yavapai would later purchase from Young for additional sums after certain conditions were met. Young conveyed the Property to Yavapai by special warranty deed, recorded in June 2006. This deed excepted the Surface Water Rights from the list of appurtenances conveyed with the Property, expressly reserving to Young "all legal and equitable right, title and interest in and to all surface water rights that are appurtenant to the Property," less 60.2 acre-feet/year.
Several other individuals related to Young were also grantors in this transaction. Because these individuals later quitclaimed any interest in the Surface Water Rights, we refer only to Young.
The addendum included other obligations related to the Surface Water Rights, such as full participation by both sides in pursuing an application with the Arizona Department of Water Resources to change the use of the Surface Water Rights (agricultural to municipal) and change the location of the use on the Property.
¶3 Yavapai financed the purchase with a loan from First United Funding, L.L.C., secured by a deed of trust on the Property (the "First United DOT") recorded on January 19, 2007. The First United DOT did not, however, except the Surface Water Rights from the security interest. Instead, the property placed into trust included "all of [Yavapai's] present and future estate, right, title and interest in and to the tracts or parcels of land . . ., together with . . . all . . . appurtenances, . . . water and water rights now or hereafter flowing through, belonging or in any way pertaining to the [Property]." The attached metes and bounds description of the Property likewise did not except the Surface Water Rights (although it included several other exceptions). The closest the First United DOT came to singling out water rights for different treatment was a term in which Yavapai "represent[ed], warrant[ed] and covenant[ed]" that the property placed into trust was "free from all liens, security interests and encumbrances" except those enumerated in an attached list of "Permitted Encumbrances"; that list included "[w]ater rights, claims or title to water, whether or not shown by the public records."
In contrast, Yavapai executed a deed of trust in favor of Young (the "Young DOT") that expressly carved the Surface Water Rights out from the security interest granted. The Young DOT, which secured performance of Yavapai's obligations under the addendum to the purchase agreement, encumbered the Property, improvements, appurtenances, and "all water, drainage, irrigation and electrical or water user's rights (except surface water rights) appurtenant or related to the [Property]." (Emphasis added.) The Young DOT was recorded January 23, 2007, and was thus junior to the First United DOT.
¶4 Over the years that followed, the First United DOT was assigned to a new beneficiary and the trustee was substituted. Neither the assignment nor the substitution included language excepting the Surface Water Rights, and each attached a legal description of the trust property that (like the description attached to the First United DOT) listed several exceptions but not one for surface water rights.
Yavapai also apparently sold the Property to a third party in 2019 via special warranty deed-a deed that acknowledged Young's reservation of the Surface Water Right but was later in time and thus subject to the First United DOT.
¶5 Citing a payment default, the trustee under the First United DOT initiated nonjudicial foreclosure of the Property in September 2020. The recorded notice of trustee's sale cross-referenced the First United DOT and included a legal description of the Property that (again) did not except the Surface Water Rights. The trustee mailed notice of the sale to Young two months before the sale, but Young did not seek to prevent the sale or obtain a pre-sale injunction.
¶6 The trustee's sale went forward as scheduled on December 30, 2020, and the Mortimers (who had been long-term tenants on the Property) purchased the Property for just over $4.8 million. A trustee's deed-which did not include an exception for the Surface Water Rights in the deed itself or the attached legal description-conveyed the property to the Mortimers and was recorded a few days later.
¶7 In April 2021, Young demanded that the Mortimers execute a quitclaim deed disclaiming any interest in the Surface Water Rights. The demand letter acknowledged that the "Trustee's Deed purports to transfer title to the Property without any exception for [Young's] continuing interest in water rights" and demanded that the Mortimers quitclaim any interest in the Surface Water Rights "in order to resolve any ambiguity in the public records as a result of the oversight in the Trustee's Deed." The Mortimers declined to do so.
¶8 Young then sued the Mortimers seeking declaratory relief and quiet title to the Surface Water Rights. After unsuccessfully requesting that Young execute a quitclaim deed as to the Surface Water Rights, the Mortimers counterclaimed to quiet title to the Surface Water Rights in their favor.
Young's complaint also asserted contract claims against Yavapai for breach of its obligations under the addendum to the purchase agreement and under the Young DOT.
¶9 The parties filed cross motions for summary judgment regarding the Surface Water Rights. After briefing and oral argument, the superior court granted summary judgment in favor of the Mortimers. The court found (consistent with Young's position) that Young's reservation of the Surface Water Rights was permissible and effective under Arizona law, and that the Mortimers had record notice of the reservation. But the court held that, because the notice of sale and trustee's deed did not except the Surface Water Rights, the trustee's sale conveyed the Surface Water Rights to the Mortimers along with the Property. And because Young received notice of the sale but failed to obtain a pre-sale injunction, any defense or objection it might otherwise have had to the sale was waived.
¶10 The superior court awarded the Mortimers their costs and reasonable attorney's fees and entered judgment in their favor on their counterclaim and on all of Young's claims against them. The court certified the judgment as final under Arizona Rule of Civil Procedure 54(b), and Young timely appealed. We have jurisdiction under A.R.S. § 12-2101(A)(1).
DISCUSSION
¶11 Summary judgment is proper if there is no genuine dispute as to any material fact and, based on those undisputed facts, the moving party is entitled to judgment as a matter of law. Ariz. R. Civ. P. 56(a); Orme Sch. v. Reeves, 166 Ariz. 301, 305 (1990). We review the grant of summary judgment de novo, viewing the facts in the light most favorable to the party against which judgment was entered. Weitz Co. v. Heth, 235 Ariz. 405, 409, ¶ 11 (2014); Wells Fargo Bank, N.A. v. Allen, 231 Ariz. 209, 213, ¶ 14 (App. 2012).
¶12 The timing of Young's challenge-after the trustee's sale was completed-is dispositive here. Under A.R.S. § 33-811(C), "[t]he trustor . . . and all persons to whom the trustee mails a notice of a sale . . . shall waive all defenses and objections to the sale" unless raised in a successful request for a pre-sale injunction. "Under this statute, a person who has defenses or objections to a properly noticed trustee's sale has one avenue for challenging the sale: filing for injunctive relief." BT Cap., LLC v. TD Serv. Co. of Ariz., 229 Ariz. 299, 301, ¶ 10 (2012). After the sale is completed, "a person subject to § 33-811(C) cannot later challenge the sale based on presale defenses or objections." Id. at ¶ 11. The "defenses and objections" to which waiver applies include any claim that "would effectively result in a legal determination that the sale was defective." Zubia v. Shapiro, 243 Ariz. 412, 415, ¶ 18 (2018); Madison v. Groseth, 230 Ariz. 8, 13, ¶ 15 (App. 2012) (waiver under § 33-811(C) extends to all claims that "depend on [] objections to the validity of the trustee's sale"). The waiver provision thereby ensures that trustee's sales are afforded "the finality the legislature intended." Zubia, 243 Ariz. at 415, ¶ 18; see also Morgan AZ Fin., L.L.C. v. Gotses, 235 Ariz. 21, 23, ¶ 7 (App. 2014) (describing how the process is intended "to operate quickly and efficiently") (citation omitted).
¶13 Here, the trustee mailed a notice of trustee's sale to Young months before the sale. That notice-like the First United DOT itself and, ultimately, the trustee's deed-did not except the Surface Water Rights from the property to be sold. Young had an opportunity to raise its objections to the sale by seeking a pre-sale injunction based on failure to except the Surface Water Rights-but Young did not do so. Young's continued objection to inclusion of the Surface Water Rights in the property conveyed to the Mortimers by trustee's deed is thus waived by operation of § 33-811(C). See Zubia, 243 Ariz. at 415, ¶ 16 (waiver applies "to any claim arising out of the sale").
¶14 Young attempts to distinguish case law construing § 33- 811(C)'s waiver provision on the basis that the cases involved waiver by a trustor, and here, Young was not in that position. But the waiver provision applies not just to the trustor, but also to "all persons to whom the trustee mails a notice of a sale"-a category that includes Young. Id.
¶15 Young also asserts that waiver does not apply because its challenge is not to the validity of the sale but rather to what was sold. Young argues that the trustee's deed neither did nor could transfer the Surface Water Rights, so it was under no obligation to seek a pre-sale injunction. But the undisputed facts show that the First United DOT purported to encumber, and the trustee's deed purported to convey, the Surface Water Rights.
¶16 Neither the notice of trustee's sale nor the eventual trustee's deed included any language excepting the Surface Water Rights, and the legal description of the Property attached to each likewise did not except the Surface Water Rights. See A.R.S. § 33-808(A) (requiring the trustee to provide notice of the sale "legally describing the trust property to be sold"); cf. Norwest Bank Ariz. v. Superior Court, 192 Ariz. 240, 247, ¶ 30 (App. 1998) (noting that such notice protects buyers from purchasing property at a trustee's sale only to find out, after the fact, "that significant rights were reserved and not conveyed in the trustee's sale").
¶17 Moreover, both the notice of sale and the trustee's deed expressly cross-referenced and relied on the power of sale granted in the First United DOT. Not only did the legal description attached to the First United DOT not except the Surface Water Rights, but the text of the First United DOT expressly included appurtenant water rights as part of the trust property subject to sale. By its terms, the First United DOT granted a security interest in Yavapai's ownership interest in the land plus "all . . . appurtenances, . . . water and water rights now or hereafter flowing through, belonging or in any way pertaining to the [Property]." As water rights appurtenant to the Property, the Surface Water Rights fell into both of these expressly included categories.
¶18 The language of the Young DOT highlights the distinction. There, Yavapai excepted the Surface Water Rights from a security interest by stating the exception expressly: "all water, drainage, irrigation and electrical or water user's rights (except surface water rights) appurtenant or related to the [Property]." (Emphasis added.) And although Young emphasizes that water rights were listed in the First United DOT as a permitted encumbrance, that list was relevant only to the scope of Yavapai's warranty that the Property was free of senior liens and encumbrances and its covenant to defend title. The fact that Yavapai did not warrant against adverse claims of water rights did not alter the operative terms of the deed of trust defining the property encumbered. Cf. Phx. Title &Tr. Co. v. Old Dominion Co., 31 Ariz. 324, 331 (1927) ("Covenants of warranty do not constitute any operative part of the instrument in transferring the title.").
¶19 The First United DOT thus, by its terms, swept in the Surface Water Rights. And the trustee's deed, consistent with the notice of sale, likewise purported to convey the Surface Water Rights. Young acknowledged as much in its demand letter to the Mortimers, noting that the "Trustee's Deed purports to transfer title to the Property without any exception for [Young's] continuing interest in water rights." Young's current challenge-asserting that the Surface Water Rights were not conveyed despite the fact that the trustee's deed purported to do so- "would effectively result in a legal determination that the sale was defective" and thus falls within the ambit of § 33-811(C). See Zubia, 243 Ariz. at 415, ¶ 18.
¶20 Finally, Young asserts that the Surface Water Rights cannot have been transferred by the trustee's deed because, under A.R.S. § 33-811(E), that conveyance "shall be subject to all liens, claims or interests that have a priority senior to the deed of trust." But the issue here is not a priority fight, but rather a dispute as to the scope of the conveyance itself- what property was transferred by the trustee's deed. And because the First United DOT and through it the trustee's deed included the Surface Water Rights (even if they did so in error), Young's attempt to claim priority under § 33-811(E) is unavailing.
¶21 Accordingly, the trustee's deed in fact conveyed the Surface Water Rights to the Mortimers, and Young's claim that the Surface Water Rights should have been excepted is now barred by § 33-811(C). We thus affirm the superior court's ruling granting summary judgment in favor of the Mortimers. And because Young challenges the superior court's award of attorney's fees only based on its argument that the quiet title decision was erroneous, we likewise affirm that award.
The Mortimers suggest as an alternative basis to affirm the judgment that Young's attempt to reserve the Surface Water Rights was invalid under Arizona law. Because we affirm based on conveyance via the trustee's deed, we decline to address this alternative argument.
¶22 Both sides seek an award of attorney's fees on appeal under A.R.S. § 12-1103(B). Given our resolution of the appeal, and because the Mortimers complied with the statute's requirements, we award the Mortimers their reasonable attorney's fees and costs on appeal upon compliance with ARCAP 21.
CONCLUSION
¶23 We affirm.