Wolf Creek Clears The Board In Jury Trial vs VVWD

By VERNON ROBISON

The Progress

The jury trial pitting Paradise Canyon, LLC, the owner of Wolf Creek Golf Course in Mesquite, against Virgin Valley Water District (VVWD) came to a final conclusion last week in District Court in Las Vegas. The jury’s verdict was delivered to Judge Timothy Williams on Monday afternoon, June 12.

The jury found in favor of plaintiff Wolf Creek, awarding the golf course a total of $811,000 in damages. It also set the local lease value for the Mesquite Irrigation Company (MIC) river water shares owned by VVWD at $300 per share annually.

This awarded rate was only $50 per year above the rate agreed upon in the original lease back in 2011. It was far short of the rate that the VVWD board of directors had set for the shares in advance of the lease renewal. That renewal came up on January 1, 2020.

In advance of that time, VVWD had informed Wolf Creek that the lease rate would increase to nearly $1,200 per share per year. The huge increase was the genesis of the legal wrangling between the two parties which have lasted more than five years now.

Implied in the contract
Wolf Creek’s case dealt in great detail with the negotiations leading up to the 2011 agreement. It drew testimony from Cory Clemetson, Wolf Creek owner; Rob Fuller, who was General Manager at Wolf Creek during the 2011 agreement; Ken Rock, who was VVWD General Manager at that time; Kelby Hughes, President of MIC board; Kevin Brown, current VVWD General Manager, and many others who were involved in the negotiations.

Wolf Creek attorney Jeffery Sylvester claimed that the express terms of a contract are only part of the agreement. There are also promises implied through the relationship of the parties, and through the prior transactions between them, that must be fulfilled, he said.

Expressed in the contract itself, the VVWD promised to lease 150 of its MIC water shares to Wolf Creek for a period of ten years at the price of $250 per share per year. The lease locked that rate for the term of the contract. After that, the golf course would have a right of first refusal on continuing to lease the shares in return for an up-front fee of $25,575. The contract states clearly that any lease renewal would be at a new rate determined at the sole discretion of the VVWD Board.

But the plaintiff contended that, implied in that contract were also a long and detailed set of negotiations and discussions which had led up to the agreement.

In his testimony, Cory Clemetson said that the agreement had been forged with an understanding that there were actually two market rates for the MIC shares: one that applied locally within the water’s originally designated place of use, and another for when the water was leased or sold to the Southern Nevada Water Authority (SNWA) for use in the Las Vegas valley.

River shares vs effluent
In addition, Clemetson and other witnesses for the plaintiff pointed out that there were three levels of water for golf course use.

The most expensive of these was culinary water which is sourced from ground water wells and runs through the VVWD primary distribution system. Clemetson said that he is forced to use culinary water on the golf course greens because the river water he leases is too coarse for those carefully manicured areas.

The least expensive water, according to Clemetson, was the MIC water shares. This is much lower quality river water which must be pumped a mile and a half from the Virgin River up to Wolf Creek.

Because of mud and a number of corrosive minerals in this water, it is hard on the pumping infrastructure. This causes a good deal of expense to Wolf Creek for repairs and replacement of the system, Clemetson said.

In the middle of these two extremes is effluent water, the “gray water” end-product that flows from Mesquite’s sewage treatment plant. Because it is higher quality water than river water and requires less infrastructure repair costs from Wolf Creek, the cost of effluent comes in higher; at about $600 per equivalent share.

Wolf Creek was under contract with the city to use effluent water as it became available. The VVWD contract required Wolf Creek to use the effluent when it became available and then to return the district’s irrigation shares.

Clemetson admitted that he would far prefer to use the effluent if he could. But because growth in the city had slowed down significantly from what was expected before 2008, the full measure of effluent water had not become available to the golf course. Not wishing to give back his primary sure source of water for a more tentative effluent supply, Clemetson said that he had declined to take the smaller portion of effluent that was available to him from the city.

But Clemetson insisted that the underpinning beneath the original rate negotiations with VVWD was the irrigation water’s quality in respect to the city’s effluent. This comparison had established a local market for the water, independent of what it might be leased for outside of the community, he said.

‘No local market rate’
Virgin Valley Water District General Manager Kevin Brown, in his testimony, disagreed with this. He insisted that there was not two markets for the water. Rather there was only a single market value.

In recent years, this controversial issue has been driven by a change made to the law of the Colorado River in 2007. That change, master-minded by SNWA officials, allowed the Authority to take credit for tributary water it controls that is allowed to flow into the Colorado River system. This includes leased irrigation shares from the Virgin and Muddy Rivers. SNWA could now pull those credits from its intakes at Lake Mead for treatment and final use as culinary water in Las Vegas.

Brown said that this major change had made an indelible impact on the market rate for MIC shares; both for use locally and outside the valley. Because of their value for use in Las Vegas, SNWA had made agreements to lease irrigation shares from the district at far higher rates than had ever been seen before. The proposed 2020 renewal rate would have been in line with those rates, Brown said.
Brown added that to continue to lease the shares so far below that higher rate would have been unfair to VVWD ratepayers who would have to make up the difference. He clarified that the district is currently facing high costs on infrastructure expansion and system improvements. Any unrealized revenue, such as lease rates far below the market price, would be money from ratepayers’ pockets, he said.
“There is no ‘local market rate,’” Brown insisted. “There is only a market rate.”

Why below market rate?
Asked why the Wolf Creek lease rate had been set so far below the SNWA rate to begin with, Brown said that it was in a community-minded attempt by the district to help the golf courses.
“My understanding is that it was based on the great recession and the board’s desire to help those local entities out during the tough times that were going on then,” Brown said.

Sylvester noted that this idea of helping the golf course with a lower rate was not mentioned in any of the meeting minutes leading up to the agreement.

Having established the fact that Brown had not been working at the district in 2011 when the agreement was made, Sylvester asked Brown what was the foundation for his idea that the low rate was to help the golf course through the recession.

Brown responded that he had discussed it with board members and other district staffers who were serving at that time and had learned that this was the intention.

But Sylvester suggested instead that Brown, the VVWD board and its attorney had simply crafted the idea, after the fact, once litigation in the matter had begun and they were trying to build their case.
“I believe there were also discussions by representatives of the golf courses indicating that they needed to have a less-than-market-value rate to help them at those times,” Brown countered.
“But there are no minutes, no memos, no papers, nothing to prove that is the case,” Sylvester pressed.
“That is correct, there are no minutes that say that,” Brown said.

Sylvester suggested instead that the lease rates had been set according to a lower local use rate on the river water. He pointed out that, in the years before the agreement, the district had attempted an auction of the shares to local users in an attempt to find a local use for the water at the highest possible return. The auction was largely unsuccessful. Most of the shares had received no bids. The shares were later leased to SNWA for a much higher rate. Sylvester said that this indicates that there were two market rates for the water.

Case for the defense
After nearly four weeks of the jury hearing testimony for the plaintiff, VVWD attorney Bo Bingham began calling witnesses for the defense.

At this point, Judge Williams began running a time clock in the courtroom to limit time for each attorney in their questioning. He cited concerns about the extended time that Bingham had spent in cross-examining the plaintiff’s witnesses. He pointed out that the proceedings had already gone well beyond the timeframe that had been promised to the jury. He was concerned about losing the jury which would cause a mistrial.

With this time clock practice put in place, the defense case took only about a week to complete.
The defense called, as witnesses, former VVWD board members Nephi Julien and Kenyon Leavitt. Also called were current VVWD board members Rich Bowler and Ben Davis; as well as local golf pro Brian Wursten, Bunkerville farmer Brian Haviland and others.

Former VVWD board members testified to their intent while the agreement was being drafted.
They verified that the MIC shares had been purchased by the district at great expense with the purpose of supplying future culinary water needs of the community.

VVWD experts have estimated that the current groundwater sources will continue to supply growth in the community only for another 20 years or so. With added treatment facilities, the river water shares could be used to continue growth for a long time after that, they’ve said.

With that being the focus, former board members testified that the goal of the board in leasing the shares was to gain a high return on the water in the meantime. This would help bolster district revenues as much as possible to keep culinary water rates lower. Each also said that they were specifically concerned about strapping a future board down by making the lease term too long or by allowing the discounted rate to be permanent.

Current board members testified that as the end of the contract term approached in 2017, they and the district had been diligent about contacting Wolf Creek and seeking a solution to the problem. But those negotiations had ended in a stalemate, they said.

The verdict
On Friday, June 2, the defense finished presenting its case and the court was adjourned for the weekend.
The jury spent the morning on Monday in deliberation. They came back with a unanimous verdict shortly after noon.

In the verdict, the jury answered a number of questions that had been posed by the plaintiff in the case.
The jury found that, when the lease was signed in 2011, the plaintiff had justified expectations that the renewal rates in 2020 would be set to a “local market rate,” and that this rate would exclude the rates paid by SNWA for using the water in Las Vegas.

In addition to declaring the lease value of the VVWD shares to be $300/share/year, the jury also found the defendant in breach of the lease agreement. Thus they awarded the plaintiff damages of $811,000.