Embed Size (px)
Citation preview
Colorado Mutual Ditch Companiesand Some (Non-Water Law Related)
Traps for the Unwary
John A. Eckstein, Esq.
Water Law SectionColorado Bar Association
September 10, 2015
Mutual Ditch Companies Are:• Creatures of contract among
individuals.• Favored in the Colorado
Constitution and statutes and deferred to by our courts.
• Valuable vehicles for owning and managing water rights.
• Increasingly misunderstood by the legislature, the courts, the business community, and even their own.
Forms of Mutual Ditch Companiesin Colorado Today (Theoretically)
• Territorial companies• Unincorporated nonprofit associations• Nonprofit corporations• Not-for-profit corporations• Business corporations• Cooperatives and cooperative associations
Colorado Territory – 1861-1876
Example of Colorado Territorial Ordinances and Enabling Acts:• August 15, 1862 – “An Act to Enable Road,
Ditch, Manufacturing and Other Companies to Become Bodies Corporate” – general provisions in §§ 1 and 34-40, and §§ 9-15 specifically empower ditch companies [e.g., § 9 “whenever any number of persons associate to form a company for the purpose of constructing a ditch. . . .;” § 11 “the company may make such regulations and by-laws . . . as are provided in the fourth section of this Act.”]
• Note: If your ditch company was formed prior to February 28, 1861, you may need to check the territorial laws of Kansas, Nebraska, Utah, or New Mexico.
A Sampling of Early Colorado State Statutes
• General Laws of 1877, chapter XIX – “An Act to provide for the formation of corporations.” General provisions for corporations in §§ 1-33; §§ 106-107, 114-132 apply to all corporations. General provisions for not for pecuniary profit corporations in §§ 34-45; § 121 – “No corporation, association or society, for any purpose authorized by this act, shall be formed under any other act;” §§ 84-88 of the Act specifically reference ditch companies [e.g., § 84 – “Whenever any three or more persons associate, under the provisions of this act, to form a company for the purpose of constructing a ditch . . . .”].
• Mills Annotated Statutes 1891 – Chapter XXX “Corporations.” General provisions for all corporations are in §§ 472-509, and §§ 616-635; corporations not for profit are in §§ 636-640; ditch companies are specifically dealt with in §§ 567-574 [e.g., § 567 entitled “additional statements in certificate” starts, “Whenever two or more persons associate, under the provisions of this act, to form a company for the purpose of constructing a ditch . . . .”] [the annotators refer the reader back to § 473 (the general incorporation provisions) for the provisions applicable].
1953 Recodification
Chapter 31 – included general corporations, corporations not for profit, and ditch provisions. Ditch provisions are §§ 31-14-1 to 31-14-17 [e.g., § 1: “When any three or more persons associate under the provisions of this chapter [31] to form a corporation for the purpose of constructing a ditch . . . they shall, in addition to the matters required in section 31-1-6, specify . . . .”]
Colorado Nonprofit Corporation Act
• Enacted in 1967 and effective January 1, 1968 at §§ 31-24-1 et seq.
• Not for profits can elect to be governed by the nonprofit act.
• Section 31-14-1(2) is added to the “Ditch Act” to allow corporations organized under the new nonprofit act to take the additional rights and powers granted by the ditch provisions.
Recodification in 1973• Re-organized corporations and associations provisions
into “Colorado Corporation Code,” §§ 7-1-101 to 7-10-112 (for general corporations); §§ 7-20-101 to 7-29-106 for “nonprofit corporations;” §§ 7-40-101 to 7-48-116 for “special purpose corporations” [under which are listed not for profits, telegraph companies, ditch companies, flume and pipeline companies, water users’ associations, toll road companies, bridge and ferry companies, cemetery companies, and now business development corporations].
• Cooperative associations and partnerships are now part of Title 7.
• Section 7-42-101 now reads, “When three or more persons associate under the provisions of law [should have said “title (7)” to be consistent with 1963 organization] to form a corporation for the purpose of constructing a ditch . . . they shall in their articles of incorporation, in addition to the matters otherwise required, specify . . . .”
Section 7-42-118 Re Immunity From Liability was added by the Colorado Legislature in 1986
“Stockholders, directors, and officers of corporations formed under the provisions of this article shall enjoy the same measure of immunity from liability for corporate acts or omissions as stockholders, directors, and officers of corporations formed under the ‘Colorado Corporation Code’, articles 1 to 10 of this title, or the ‘Colorado Nonprofit Corporation Act’, articles 20-29 of this title.”
Jacobucci v. District Court for Jefferson County, 189 Colo. 380, 541 P.2d 667 (1975):
• Held that 271 stockholders in Standley Lake Division of FRICO were necessary parties to condemnation action by Thornton of decreed ditch and storage priorities, ditches and ditch rights, interest in other ditch companies owned by FRICO, the Standley Lake Dam and Reservoir, contracts between FRICO and another ditch company, and records of FRICO relating to the foregoing.
• Inartful dicta by Justice Erickson particularly include the following: “These companies are not organized under the general Colorado corporation statutes, but under special legislation for ditch and reservoir companies [citing §§ 7-42-101 et seq., C.R.S. § 1973].”
• Some commentators view this as a ruling that use of general incorporation laws has been foresworn for ditch companies.
Left Hand Ditch Company v. Hill, 933 P.2d 1 (1997):
• Colorado Supreme Court held that certain stockholders in a mutual ditch company had a common law right to inspection of the stockholders’ list.
• Chief Justice Vollack’s dicta fall into a trap of statutory interpretation by implicitly interpreting the recodification and reorganization in 1973 as determining that mutual ditch companies fall outside the Colorado Corporation Code.
Justice Vollack relies upon dicta in Billings Ditch Co. v. Industrial Commission, 127 Colo. 69, 253 P.2d 1058 (1953): “What it does, and the practice and policy adopted by a corporation in its operation, rather than the language contained in its articles of incorporation, are determinative of its character [citation omitted]. Although incorporated under the general laws as a public corporation, the stockholders of a ditch company may so limit operative policy as to convery [sic] their corporation into a private or mutual company [citation omitted].”
Section 7-123-101(8) – Added in 2006
(8) “A mutual ditch company may elect by a statement in its articles of incorporation that one or more of the provisions of the “Colorado Business Corporation Act”, articles 101 to 117 of this title, apply to the mutual ditch company in lieu of one or more of the provisions of articles 121 to 137 of this title.”• Thus a mutual ditch company, incorporated under the
Colorado Non-Profit Corporation Act, may “reconfigure” if the owners so desire to, for example, declare and pay dividends.
Some Thorny Issues:• “Piercing the corporate veil” -
“It seems to the court that by its very creation and of its own essence a mutual ditch company is, in fact, the alter-ego [sic] of the shareholders … Justice, however, dictates that Plaintiffs be permitted to amend their complaint to add the individual shareholders as defendants.”
Order Regarding Motion for Leave to File Plaintiffs’ Second Amended Complaint and Jury Demand dated November 27, 2007, Mousley et al. v. The Walker Ditch Company, 06CV21, District Court, Routt County, Colorado.
• “Share Transfers” –“Because mutual ditch shares are water rights, which are real property interests, they are subject to notice and recording requirements provided by [the real property statutes].”
- Mesa Cnty Land Conservancy, Inc. v. Allen, 318 P.3d 46, 56 (Colo.App. 2012)
See A. Hamre, “Title Fight - Avoiding a Water Right Conveyancing TKO,” 44 Colorado Lawyer 41 (March 2015)
Some thoughts regarding interactions with a ditch entity:
1. Know the ditch company: Under which statute it was formed? What do its articles, bylaws, and rules and regulations say? How it has been operated over the years? Have custom and practice altered its written charter?
2. If the charter documents do not reflect reality, should they be revised in writing or are they best left alone?
3. Regardless of the charter document, make sure directors and officers have the protections they are entitled to by Colorado statute and public policy, including good written indemnification provisions and good D&O insurance.
Eckstein’s Rules of Thumb For Lawyers Advising Ditch Companies re Any Actions:
a. Are they explicitly permitted by the Ditch Act?
b. Do they affect stockholder rights regarding water interests? If so, substantively or procedurally?
c. Do they affect the balance of interests among the stockholders or between the stockholders and the board?
d. Do they address control and management of assets? If so, are they water assets or non-water assets?
e. Do they change historic practices, policies, or operations?
f. Are they reasonable, not against “public policy”, and not violative of the jurisdiction of the water court?
g. Do they implicitly comply with the Ditch Act?
h. “If it ain’t broke, don’t fix it”.
Aside Number 1Office of Colorado Secretary of State:• Organized filings for ditch companies as distinct
and separate category up to 1999.• All corporations are now classified as “for profit”
or “nonprofit” regardless of actual statutes under which they were originally incorporated or which they have accepted.
• All existing ditch companies in the SOS system at 2002 were classified as nonprofit companies.
• SOS can identify an additional 361 ditch companies individually which existed in 2002 but which it has not reclassified as nonprofits.
Aside Number 2
The word “mutual” before “ditch company” = IRC § 501(c)(12) – Provides the federal income tax exemption for mutual ditch or irrigation companies:
a. Cooperative organization and operational test (democratic control, operating at cost, subordination of capital [i.e., member control and ownership and limited returns to members], plus some specific requirements).
b. Activities test (operate a ditch or irrigation water system bringing, channeling, or controlling water coming to or from the land, including preventing erosion).
c. Income source test (85% + income member sourced, computed annually; may be exempt some years and not others without reapplying for exemption).
Conclusions• Ditch company entities can take
several legal forms in Colorado.• Without active and continuing
owner input, the legislature and the courts might effect changes to the benefits and burdens provided by the original form.
• Ditch companies and owners should be vigilant if they wish to preserve their written benefits and rights.
• Lawyers should know each client’s history and practice and avoid under-analyses and over-generalizations.
Questions, Issues, and Strategies Discussion
Fairfield and Woods, P.C.
John A. Eckstein – [email protected]
John A. Eckstein is a senior corporate attorney and actively advises in business and project finance. John has advised many owners, boards, and management teams in reorganizing and operating hundreds of business entities. He has also been on the boards of directors of several for profit and nonprofit companies. He is in the corporate department of Fairfield and Woods, Denver, Colorado. For 82 years lawyers at Fairfield and Woods have given legal advice regarding corporate, real estate, and water law to the people of Colorado.
Disclaimer
The information included in this presentation is for general informational purposes only, and is not intended to be relied upon as legal advice. Each ditch company is unique and depends upon its own facts. Should you require legal advice regarding a particular issue, we recommend that you consult with your company’s attorney.
