Paradise Canyon vs VVWD: Opening Statements and Early Testimony

By VERNON ROBISON

The Progress

The major court case between Paradise Canyon, LLC, owner of the Wolf Creek Golf Course in Mesquite, and the Virgin Valley Water District (VVWD) got its start in Clark County District Court last week. Presiding over the proceedings was Judge Timothy Williams of District Court Department 16.

Early in the week, attorneys for both sides gave opening statements to the jury. Later in the week, testimony from the first two witnesses were heard including Kelby Hughes, President of Mesquite Irrigation Company; and Colby Pellegrino, Deputy General Manager of Resources for Southern Nevada Water Authority (SNWA).

The outcome of this trial could have major ramifications for both Wolf Creek and VVWD. But it also could have repercussions felt by the entire Virgin Valley community well into the future.

A summary on the background of this long-standing case was published previously and can be read in The Progress online archives at https://mvprogress.com/2022/09/27/trial-looms-on-wolf-creek-vvwd-dispute/.

Wolf Creek’s case
Wolf Creek attorney, Jeffery Sylvester, introduced his case, beginning Tuesday morning. He characterized it as a contract law case. His client, as plaintiff, was alleging a breach of contract against VVWD.

Sylvester stated that contract law is largely built on a set of promises between parties. “Promises are the immediately human way of ordering our future,” Sylvester said. “A contract is just a series of promises between parties, for the purpose of promoting certainties of their future.”

Sylvester acknowledged that the substance and terms of a contract, sometimes called the “four corners of the contract,” give the express language of what the two parties agree to. But he also emphasized that there is more to a contract than what is expressed within its four corners. There are also promises implied through the relationship of the parties, and through any prior transactions between them, he said.

“Though these are not expressly stated, they’re nevertheless understood to be a part of the contract and for our purposes are equally as enforceable in Nevada,” Sylvester said.

In the current case, Sylvester claimed that the district had promised to provide “predictable, affordable and reliable water” to Wolf Creek. He said that his case would argue that VVWD had not kept those promises.

The contract at issue was entered into in June of 2011. The district promised to lease 150 shares in Mesquite Irrigation Company water to Wolf Creek for a period of ten years at the price of $250 per share per year.

SNWA enters the market
Sylvester talked about an event which took place in 2007 which had become pivotal in the relationship between Wolf Creek and VVWD. A seven state agreement was signed, negotiated by SNWA, regarding tributary river water flowing into the Colorado River. Before that, water rights on tributaries like the Virgin and Muddy Rivers were required to be used within the narrow geographic area of those valleys. Though SNWA could own shares on the rivers previous to that time, they were unable to divert the water from those shares for use in the Las Vegas valley.

The seven state agreement changed that. It set up parameters where SNWA could take credit for tributary river shares that it legally controlled. If the entity owned or leased river shares, and allowed the water from those shares to flow through the valleys into Lake Mead, then it was permitted take credit for that water and pump it as drinking water to serve its customers in Las Vegas.

In 2008, just after the agreement was signed, SNWA issued a request for offers of sale or lease to all owners of Virgin Valley irrigation water shares. The Authority expressed a willingness to purchase Mesquite Irrigation Company (MIC) shares at no less than $71,000 per share; or lease them for $2,500 per year. Prior to that, the most an MIC share had sold for was about $6,200 and shared had leased for maximum of $200-$250 per share.

Two water markets?
Sylvester claimed that this set of circumstances had set up two separate markets for Mesquite Irrigation Company (MIC) water shares. The first was a “local rate” for irrigation water being used in the Virgin Valley. The second was a much higher SNWA rate for water that, under special dispensation through the seven state agreement, could flow through the valley and be used as drinking water in Las Vegas.
“Two different markets, two different rates,” Sylvester said.

Sylvester claimed that the 2011 lease between Wolf Creek and VVWD had been negotiated at $250 per share; at the local rate since it would be used locally. But in the years since, the district had negotiated leases with SNWA at the much higher rate. In 2018, as the term of their lease was approaching, the district informed Wolf Creek that the renewal rate would be set at $1,115 per share, effective in 2020, Sylvester said. .
“(The district) set the price at 500 percent in excess of what the expectations were,” Sylvester said. “And what’s more, it continues to rise.”

He said that the evidence in the case would show that VVWD did not operate within the bounds of predictability, affordability and reliability implied in the contract.

Sylvester added that evidence in the case would also show that VVWD had begun a campaign of “manufactured claims of breach (of contract) against Wolf Creek”. He called it a legal “Blitzkrieg” that had been staged by VVWD against Wolf Creek on various fronts over the past two years to wrest the leased shares away from them. .

“Generally speaking, (the district) has performed both their express and their implied expectations in a manner that was NOT honest and wasn’t fair,” Sylvester said.

Opening statement: VVWD
On Tuesday afternoon, VVWD attorney Bo Bingham stood before the jury to introduce the district’s side of the case.

Bingham spent a good deal of time combing through the details of the 2011 agreement. He specifically talked about the terms that dealt with what would happen in 2020 when the lease came up for renewal.

Bingham asserted that the district had acted in accordance with all reasonable expectations set forth in the lease itself. He cited from the lease document which states: “Under no circumstances shall the Lessee have the right to lease the Irrigation Shares on the same terms as set forth in this Lease after Jan. 1, 2020….the rent amount for the Irrigation Shares after (that time) shall be determined in the sole and absolute discretion of VVWD.”

Bingham said that the entire case may end up hinging upon the jury’s interpretation of the words “sole and absolute discretion.”

“Do those words really mean what they say?” Bingham asked. “And was it fair for the district, and the board members at that time, to expect that they would have the right to set whatever rate they deemed to be in the public’s best interest in 2020? In 2011, that’s the language that everybody agreed would be the controlling language. The contract doesn’t say anything else about what the rate would be in 2020.”

No special local rate
Bingham said that evidence and testimony would show that the board members had given a reduced water rate to Wolf Creek, and other local golf courses. This was because the agreements were forged during the deepest part of the Great Recession when the golf courses were struggling the most. But he clarified that there had been no mention in the contract of the existence of there being a discounted “local rate.”

Bingham also pointed out that the other golf courses, which had entered similar agreements with the district during the 2011 time frame, had accepted renewal at the new 2020 rate without question and were all now paying the higher rate.

“So what a surprise it was, after eight years of receiving the cheapest water they could possibly get during that time – rather than receiving a ‘thank you’ from Wolf Creek, like ‘Thank you for that discount we just got on all of that water for eight years at the expense of the community’ – instead of that it was, ‘Now we want that same rate indefinitely’,” Bingham, said. “‘We want it forever!’”

Predictability in the contract
Bingham pointed out that if Wolf Creek was seeking to predict what the terms would be in the 2020 renewal, all they had to do is look at the 2011 contract.
“Any expectation that they have, had better come from the written contract itself,” Bingham said. “Not from, ‘Well, this is what I imagined in my mind might happen’.”

Related to that, Bingham asked the jury to ask the question whether the VVWD board had lived up to its bargain of being predictable in setting the renewal rate for 2020. “The board has an agreement in front of them that says they have sole and absolute discretion to set the rate,” Bingham said. “And what rate did it set? It set the rate that virtually everybody in the valley is paying.”

Bingham said that the jury would find out that no witness in the case will testify that there is a separate “local rate” of between $275 and $300 to lease irrigation shares; as Wolf Creek is claiming.
“That local rate doesn’t exist,” he said. “You won’t hear anyone say that they are paying a lower rate just for being local. Virtually everyone is paying around $1,300 per share and you will hear that. Hold me to that. All this is, is Wolf Creek thinking that ‘sole and absolute discretion’ means that ‘we get a deep discount in 2020.’”

Value and heritage of water
Bingham said that the VVWD board takes very seriously the value set upon the irrigation shares. That is not because boar dmembers are motivated by impacting a local business by forcing it to pay top dollar, he said. Rather it is because the water is viewed as a vital community resource – part of the pioneer heritage of the area – which should benefit the entire community.

“This water was not acquired by VVWD to water golf courses,” Bingham said. “It was acquired, at great expense to the district and its ratepayers, so that VVWD could continue to provide drinking water into the future.”

Bingham said that VVWD board members involved in the 2011 agreement would testify to the jury that they had insisted on the wording of the agreement to protect a future board from having its hands tied on the renewal rates it would set.

“They will tell you that this was important to them because circumstances change,” Bingham said. “Imagine a world where those who we elect can’t change something if it isn’t working. It is just common sense. And I think that you will agree that common sense is the one consistent theme that runs through this entire document and through the decisions the board is making.”

Witness: Kelby Hughes
Kelby Hughes was the first witness called by the plaintiff on Wednesday afternoon. Sylvester spent time introducing Hughes as President of MIC, a private company that operates under a 1925 decree of irrigation rights on the Virgin River.

Eventually, the questions focused on the differences between the sale and lease rates of MIC water to SNWA as opposed to those transacted in the local area.

In this line of questioning, Hughes initially agreed that there were two separated markets for the water, and two separate uses. But Hughes was less certain in his testimony when asked if the two markets also came with two different rates: one for SNWA, and another for locals.

“I’m not so sure about there being two different rates,” Hughes said in responding to the question.
The next morning, under cross examination from Bingham, Hughes sounded more resolved that there were NOT two rates.

“To me it doesn’t matter,” Hughes said. “A share of water is worth a share of water in Mesquite, Nevada. So whether they come from Mesquite or whether they come from Timbuktu, if they want a share of MIC water it goes at fair market value. It’s the same whether its SNWA buying it or someone local.”

Witness: Colby Pellegrino
The next witness to be called was Colby Pellegrino, SNWA Deputy General Manager of Resources.
Pellegrino testified that the prices that SNWA have paid for MIC irrigation shares is similar to the price it pays for other water it acquires or leases on the Colorado River. She also said that those prices might fluctuate based on how much SNWA needs the water at any given time.

Sylvester asked Pellegrino why the irrigation shares from the Virgin River were such a critical component in the SNWA water portfolio. Pellegrino responded that, because the MIC water decree goes back to 1925, the water rights are senior to most others.

“That means those rights are available during all levels of declared shortage on the Colorado River,” Pellegrino said.

Sylvester spent a good deal of time working through a 2019 document that amended a lease agreement from 2014 between SNWA and VVWD. In this agreement it was arranged for SNWA to pay a lease cost for any VVWD shares left unused by its lessors. That way it could take credit for them after they flowed into Lake Mead. This was unused water is tracked through the use of meters showing how much of the VVWD water was used by each party. as well as aerial photography showing how much ground in the MIC territory was under irrigation.

Getting paid twice?
Sylvester presented a hypothetical where Wolf Creek was only using 100 of its 55 shares, with the rest being allowed to flow through the river. Within this hypothetical, he asked Pellegrino if this didn’t essentially allow VVWD to get paid twice for the same shares.

Pellegrino protested that she was not a party to the details of the Wolf Creek agreement with VVWD and so could not answer the question with certainty. But with some pressing from Sylvester she agreed that this would be true within the narrow bounds of his hypothetical.

During cross-examination, Bingham asked why there was not more stability in the SNWA rates for purchase and lease. Pellegrino responded that the rates were dependent upon a myriad of complex factors in the market. Thus the rates could not be predicted.

Bingham asked the witness how SNWA provides predictability in its lease contracts. Pellegrino responded that the SNWA lease contracts lock in a market rate for the term of the lease. That rate stays largely the same throughout that term. The only modifier is that SNWA builds a 3 percent annual escalator to account for the value of money over time; or inflation, Pellegrino said.
Pellegrino stated that when a lease came up for renewal, there would be no way to know what the new rate would be until the negotiations were completed.

Finally, Bingham asked about the question of the SNWA leasing unused shares from VVWD, which might include a portion of Wolf Creek shares.

Using the same hypothetical, Bingham asked if this ex post facto lease arrangement between VVWD and SNWA had any effect on Wolf Creek to use its allotment of leased shares.
“If I am Wolf Creek, I have every right to use every drop of that 155 shares, right?” Bingham asked.
“Correct,” Pellegrino said.

“So what we are really talking about is an amount of water that Wolf Creek had every ability to use throughout the year,” Bingham said.

Pellegrino explained that all the accounting on how much water went unused is done at the end of the year. The lease is then paid back retroactively to VVWD on that unused water.
“We don’t divert any water,” she said.

The court case between Wolf Creek and VVWD resumed on Monday morning with more testimony. It is expected to continue through the rest of this week and possibly further. Keep an eye on The Progress for more details on the ongoing case.