Colorado Mutual Ditch Companies
and Some (Non-Water Law Related)
Traps for the Unwary
John A. Eckstein, Esq.
Water Law Section
Colorado 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 Companies
in Colorado Today (Theoretically)
•
•
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•
•
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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
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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,” §§ 7-1101 to 7-10-112 (for general corporations); §§ 7-20101 to 7-29-106 for “nonprofit corporations;” §§ 740-101 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.
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“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 1
Office 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 overgeneralizations.
Questions, Issues, and Strategies
Discussion
Fairfield and Woods, P.C.
John A. Eckstein – Director
jeckstein@fwlaw.com
303.894.4448
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.