No. 83-281 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1985 

IN THE MATTER OF THE ADJUDICATION 

OF THE EXISTING RIGHTS TO THE USE 

OF ALL THE WATER, BOTH SURFACE AND 

UNDERGROUND, WITHIN THE POWDER RIVER 

DRAINAGE AREA, INCLUDING ALL TRIBUTARIES OF THE POWDER RIVER IN CARTER, 

CUSTER, FALLON, PRAIRIE, and POWDER 

RIVER COUNTIES, MONTANA, 

DEPARTMENT OF STATE LANDS, 

Objector and Appellant, 

-vsWALTER PETTIBONE, DAVID and MELINDA 

BLISS, ERNEST and PEGGY TOOKE, 

GIACOMETTE RANCH, P . J. RANCH, ELMER 

OEDEKOVEN, E. MIORY HUBBARD, CINCH 

BUCKLE RANCH, MALLET CATTLE COMPANY, 

ROBERT F. HARDY TRUST, ALVIN and HELEN 

IRION, HARDY LAND & LIVESTOCK COMPANY, 

and BALES RAPJCH, 

Claimants and Respondents. 

APPEAL FROM: The Water Courts of the State of Montana, 

The Yellowstone Division-Powder River Basin, 

The Honorable W.W. Lessley, Chief Judge. 

COUlJSEL OF RECORD: 

For Appellant: 

Lyle Manley argued, Dept. of State Lands, Iielena, 

Montana; John F. North, Dept. of State Lands 

For Respondents: 

John Carr argued for Bliss & Bales Ranch, Miles City, 

Montana 

For Amicus Curiae: 

Albert W. Stone, U of M Law School, Missoula, Montana 

Gough, Shanahan, Johnson & Waterman; Ronald F. Waterman 

argued for Montana Stockgrowers Assoc., Helena, 

Montana 

Submitted: February 21, 1985 

Decided: June 18, 1985 

Filed: -1UM 1 : 1985 

Clerk 
Mr. Justice L. C. Gulbrandson delivered the Opinion of the 

Court. 

The State of Montana appeals from the Powder River 

Final Decree holding title to certain water rights to be 

vested in respondents. We reverse. 

The State of Montana, Department of State Lands, 

objected to the portion of the Powder River Preliminary 

Decree that awarded title of certain water rights to the 

above-named respondents, all lessees of State school trust 

lands. All of the factual disputes, as to flow, source and 

place of diversion and place of use were resolved prior to 

the hearing on the State objection held November 24, 1982. 

The hearing was confined solely to the following question of 

law: 

Does title to the water right vest in the 

lessee or the State of Montana as owner 

of the land where the water is diverted? 

On April 4, 1983, The Water Courts Judgment--The Powder 

River Final Decree, was issued. It held that the title to 

the waters diverted on State school trust lands vests in the 

lessee, and not the State. 

The State appealed this portion of the Final Decree. 

The appeal was first heard by this Court on January 13, 1984. 

Subsequently, by Order of March 26, 1984, we directed the 

parties to rebrief the case, and to address certain 

questions. Because of the broad significance of this case, 

we also solicited amicus curiae participation. The parties, 

and several amici, submitted supplemental briefs, and the 

matter was again heard on January 25, 1985. 

There are twenty-three water rights involved in this 

appea 1. They generally fa11 into one of the following 

categories: 

1) Groundwater Wells: Four rights are 

from groundwater wells. Three of the 
wells are on school trust lands, and used 

wholly thereon. One straddles the border 

between a state-owned and privately-owned 

section, and is used on both. 

2) Developed Springs: Three rights are 

in developed springs for stock watering. 

The springs, and their uses, are confined 

to the school trust lands. 

3) Diversions of Tributaries: Fifteen 

rishts arise from divertins named or 

unnamed tributaries of larger-creeks. In 

most, the appropriator has constructed a 

small dam on the tributary creating a 

small reservoir for stock watering. In 

some instances, water continues to flow 

from the reservoirs to the larger creek. 

One of the rights involves a draw of 

water from the Powder River devoted to 

irrigation, not stockwatering. 

Thirteen of these diversions occur wholly 

on school trust lands with the use 

confined thereon. One right is in a 

reservoir on state land that serves both 

the state section and an adjacent private 

section. The last of these rights is an 

appropriation used for irrigation. In 

that case, the diversion is on state 

land, and the use is on both state and 

private land. 

4) Direct Use: One right is in an 

undevelosed sprins and its drainaqe 

adjacent- to a -creek in the Powder ~iver 

drainage. The spring, and its use, is 

confined to the school trust land. This 

right has the oldest priority date of any 

at issue here, October 1, 1883. 

According to the decrees associated with these rights, 

each is exercised year-round; although in times of drought, 

this may not be possi-ble. 

The lands upon which these water rights lie are those 

that were granted to the State of Montana by the Federal 

Government in the Montana Enabling Act. Act of February 22, 

1889, ch. 180, 25 Stat. 676. Originally, these lands were 

set aside in the Montana Territory Organic Act, Act of May 

26, 1864, ch. 95, 13 Stat. 85, which provided that said lands 

were "reserved for the purpose of being applied to schools" 

ch. 95, section 14, 13 Stat. 91 in the Montana Territory. 
The Enabling Act granted these lands to the state on the 

following terms: 

"Section 10. That upon the admission of 

each of said States into the Union 

sections numbered sixteen and thirty-six 

in every township of said proposed 

States, and where such sections, or any 

parts thereof, have been sold or 

otherwise disposed of by or under the 

authority of any act of Congress, other 

lands equivalent thereto, in legal 

subdivisions of not less than one-quarter 

section, and as contiguous as may be to 

the section in lieu of which the same is 

taken, are hereby granted to said States 

for the support of common schools. 

"Section 11. That all lands herein 

granted for educational purposes shall be 

disposed of only at public sale, and at a 

price not less than ten dollars per acre, 

the proceeds to constitute a permanent 

school fund, the interest of which only 

shall be expended in the support of said 

schools. But said lands may, under such 

regulations as the legislatures shall 

prescribe, be leased . . . " ch. 180, 25 

stat. 679. 

The 1889 Montana Constitution accepted these lands and 

provided that they would be held in trust consonant with the 

terms of the Enabling Act, Montana Constitution of 1889, art. 

XVII, sec. 1. The 1972 Montana Constitution continued these 

terms, Mont. Const. art. X, sec. 11, ch. 1. See also section 

77-1-202, MCA (school lands held in trust for the support of 

education) . The duty of administering the school trust lands is 

placed upon the Board of Land Commissioners (Board). Section 

77-1-202(l), MCA provides that "The board shall administer 

this trust to secure the largest measure of legitimate and 

reasonable advantage to the State." Pursuant to 77-1-301(1), 

MCA, the Department of State Lands, (DSL) under the direction 

of the Board, " . . . has charge of the selecting, exchange, 

classification, appraisal, leasing, management, sale, or 

other disposition of state lands" The Department of State 
Lands has also promulgated regulations governing the 

management, sale or lease of school trust lands. See 

generally Title 26, A.R.M. 

Each of the respondents is a lessee of one or more 

sections of school trust lands. The DSL, by statute, 

sections 77-6-115 and 77-6-301 and -302, MCA, and by 

regulation S26-3.123, A.R.M., allows lessees to divert waters 

on the leasehold, develop them, and put them to use on or off 

that land. None of the rights at issue in this case were 

perfected pursuant to the abov~ mentioned statutes or 

regulations. Rather, the lessees claim these rights as "use 

rights," which have long been recognized in this State, see 

Murray v. Tingley (1897), 20 Mont. 260, 50 P. 723, and Stone, 

Montana Water Law for the 19801s, p. 3, (1981 ed.) 

These rights are at issue because of the general water 

rights adjudication underway in Montana. This process began 

with the passage of the Montana Water Use Act of 1973, ch. 

452, L. 1973. The legislature enacted the Water Use Act in 

response to the chaos of previous Montana water law. See 

Stone, - The Long Count on Dempsey: - No Final Decision 

in Water Rights Adjudication, 31 Mont.L.Rev. 1 (1969); Stone, 

Are There Any Adjudicated Streams - in Montana? 19 Mont.L.Rev. 

19 (1957). It set up a system of general stream adjudication 

administered by the Department of Natura 1 Resources and 

Conservation (DNRC) and also provided, from that time on, 

that the statutory method was the exclusive way to acquire a 

water right. 

Prior to 1973, there were two possible ways of 

perfecting a water right. First was the method provided for 

by statute; posting at the point of diversion and filing a 

notice with the county clerk, Mont. Laws 1885, secs. 6 

through 10; R.C.M. (1947), 89-810 through 814. Second was 
simply by putting the water to use, Murray v. Tingley, supra. 

The 1885 Act did not provide for any general adjudication of 

streams. Nor did it provide any mechanism by which actual 

uses, as opposed to claimed uses, could be ascertained. As 

Professor Stone, in Montana Water --- Law for the 1980's states, 

the problems the legislature addressed in 1973 were many: 

"It [the old water rights system under 

the 1885 Act] merely provided for 

isolated lawsuits between particular 

water users over their individual rights 

in isolated parts of streams. The 

statute resulted only in piecemeal 

litigation, often repetitive and among 

the same neighbors, over and over again 

disputing one another' s claims. 

[Citations omitted.] It did not lead to 

security in one's property rights nor to 

finality in determining the fair and 

legal distribution of water among 

neighboring claimants. 

"But not only were the individual water 

users ill-served by this failure to 

establish water rights; the public 

interest also required an inventory of 

the state's water needs so that future 

negotiations or dealings with downstream 

states could allocate the waters of our 

interstate rivers." Stone, supra at p. 

4. 

The system of adjudication established by the 1973 Act 

soon encountered difficulties. First, it required the DNRC 

to physically inspect or discover all water rights. It soon 

became evident that this process would take a very long time. 

Six years after the 1973 Act was passed, the inspection and 

adjudication of the Powder River Basin, one of the smallest 

and relatively simplest in the State, was still in its 

initial stages. Second, the 1973 Act did not provide for the 

adjudication of federally reserved rights--presenting the 

spectre of concurrent, wasteful and possibly inconsistent 

litigation in the Federal Courts. 

Responding to the shortcomings of the 1973 Act, the 

1979 Montana Legislature enacted Senate Bill 76, ch. 697 L. 

1979. It established a system of water courts and put upon 
appropriators and users the burden of filing claims for their 

rights. It also provided for reserved water rights and set 

up a Compact Commission to negotiate the federal and Indian 

reserved rights. Ch. 697, sec. 27, I,. 1979. 

The Water Court system is charged with the final 

adjudication of water rights. Rased upon the claims filed by 

users and appropriators, the court issues temporary 

preliminary decrees cataloging the various rights and 

priorities in the respective basin. All named or affected 

parties have, at that time, an opportunity to object to the 

temporary preliminary decree. If no objections are raised, 

the temporary decree is made final. Objections are heard and 

adjudged by the Water Court, with the right of appeal to this 

Court. 

This is the first appeal we have been called on to hear 

from a final decree of the Water Court. In reviewing this, 

and subsequent final decrees, we will apply the same 

standards of review as any other appeal from a District Court 

order. 

The question we consider is: Who is the owner of a 

water right diverted or developed on school trust land; the 

State or the lessee? 

We hold that title to these water rights vests in the 

State. The lessee, in making appropriations on and for 

school trust sections, is acting on behalf of the State. It 

is only through state action that the lessee is on the land, 

and Montana law expressly provides that the lessee shall be 

reimbursed for all capital expenditures made in putting the 

water to beneficial use. The lessee, under the terms of the 

lease, is simply entitled to the - use of water appurtenant to 

the school trust land. The State is the beneficial user of 

the water, and its duty as trustee of the school trust lands 
prohibits it from alienating any interest in the land, such 

as the appurtenant water right, without receiving full 

compensation therefor. 

The school trust lands are endowments by the United 

States to the State of Montana for the benefit of the common 

schools. A major policy of the fledgling nation was to 

foster public education by grants of land to newly admitted 

states for that purpose. Each of the thirty states carved 

out of the public domain received such grants, varying in the 

quantity granted, and terms of the grant, as national policy 

and political winds dictated. See generally Woodgerd and 

McCarthy, State School Trusts ---- and Oil and Gas Royalty Rates, 

3 Pub.Land L.Rev. 1 (1982). 

Montana was admitted to the Union in 1889 along with 

Washington, North Dakota, and South Dakota. The Omnibus 

Enabling Act, supra, reflects the general policy of Congress 

as set out above. Even before Montana joined the Union, 

genera1 principles, evolving from the judicial review of 

earlier enabling acts, governing the school land grant trusts 

were well settled. In two cases, the Trustees of Vincennes 

University v. State of Indiana (1852), 55 U.S. 268, 14 L.Ed. 

267, and Springfield Township v. Quick (1859), 63 U.S. 56, 16 

L.Ed. 256, the United States Supreme Court set out three 

important principles governing school trust lands: 1) that 

the enabling acts created trusts similar to a private 

charitable trust which the state could not abridge; 2) that 

the enabling acts were to be strictly construed according to 

fiduciary principles, and; 3) that the enabling acts preempt 

state laws or constitutions. See also Andrus v. Utah (1980), 

446 U.S. 500, 520, 523, 100 S.Ct. 1803, 1814, 1815, 64 

L.Ed.2d 458, 472, 474, where the United States Supreme Court 

reaffirmed those principles, holding that Congress imposed 
upon the states a binding and perpetual obligation to use the 

granted lands for public education. 

The courts have been very protective of the trust 

concept, and emphatic about the need to preserve the value of 

the trust corpus-the school lands. The seminal case in this 

regard is Lassen v. Arizona (1967), 385 U.S. 458, 87 S.Ct. 

584, 17 IJ.Ed.2d 515. In Lassen, the United States Supreme 

Court held that the Arizona Highway Department was required 

to fully compensate the State Land Department (administrator 

of the school lands) for the value of easements taken across 

school lands. The Court held that the Arizona Enabling Act, 

ch. 310, 36 Stat. 557 (1910) "contain[ed] 'a specific 

enumeration of the purposes for which the lands were granted 

and the enumeration is necessarily exclusive of any other 

purpose'" Lassen at 467, 87 S.Ct. at 589, 17 L.Ed.2d at 522 

(quoting Ervien v. United States (1928), 251 U.S. 41, 47, 40 

S.Ct. 75, 76, 64 L.Ed. 128, 130). 

In State of Utah v. Andrus (D. Utah 1979), 486 F.Supp. 

995, the federal district court concluded that the lessees of 

state school lands had an implied right of access to their 

leasehold across adjacent federal lands. The court felt that 

if it held otherwise, "the very purpose of the school trust 

lands would fail. Without access the state could not develop 

the trust lands in any fashion and they would become 

economically worth1 ess. This Congress did not intend. I' 486 

F.Supp. at 1002. The Court in Utah v. Andrus made it clear 

that any restriction on the use (i.e. access) of school trust 

land that effectively devalues it cannot be sustained. 

This Court has likewise been emphatic in protecting the 

school trust. In Rider v. Cooney (1933), 94 Mont. 295, 23 

P.2d 261, we first held that a lease is an "interest" in 

land. Then, applying the rule that interests in school trust 
lands cannot be alienated for less than full value, we held 

that the State musts also obtain full value for a lease 

thereof. See also State ex rel. Galen v. Dist. Ct. (1910), 

42 Plont. 105, 112 P. 706; Gladden Farms, Inc. v. State (Az. 

1981), 633 P.2d 325; Arizona State Land Department v. 

Superior Court (Az. 1981), 633 P.2d 330; City of Sierra Vista 

v. Babbitt (Az. 1981), 633 P.2d 333; State v. University of 

Alaska (Ak. 1981), 624 P.2d 807. 

In Jerke v. State Dept. of Lands (1979), 182 Mont. 294, 

597 P.2d 49, we addressed a situation analogous to the one at 

bar. The general question presented was how far the State 

could surrender its managerial prerogatives over school lands 

without violating the trust. Montana law empowers grazing 

districts to manage and allocate lands within their 

jurisdiction. This includes the power to grant preference 

rights to members in the re-leasing of school lands that are 

within the district. The plaintiff in Jerke contended that 

the preference right unconstitutionally prevented the State 

from receiving full fair market value for the land. Since 

the existing lessee who exercised the preference right was 

not using the land (and thus not "follow[ing] good 

agricultural practices and mak[ing] improvements on the land" 

182 Mont. at 297, 597 P.2d at 51), we held the preference 

right was unconstitutional as applied. This was because: 

"To allow the preference right to be 

exercised in this case would be to 

install the Grazing District as the 

trustee of the land. It, rather than the 

Department of State Lands, would decide 

who will occupy the land but it would not 

be bound by a constitutional or fiduciary 

duty." 182 Mont. at 297, 597 P.2d at 51. 

See also State ex rel. Thompson v. Babcock (1966), 147 Mont. 

46, 409 P.2d 808 (upholding the Commissioner's discretionary 

authority to accept lease terms less than the highest bid in 

order to effectuate sustained yield concepts and insure the 
long-term strength of the trust corpus) ; In Re Montana Trust 

and Legacy Fund (1964), 143 Mont. 218, 388 P.2d 366. The 

Oklahoma Supreme Court in Oklahoma Education Association v. 

Nigh (Ok. 1982), 642 P.2d 230 has also addressed the same 

question as this Court did in Jerke. The Oklahoma court went 

further and found several state statutes limiting the amount 

of interest that the state could receive on school lands, and 

creating preferences in the re-leasing of school lands, to be 

unconstitutional. 

Most recently, the Washington Supreme Court upheld the 

federal land grant trust in holding the Washington Forest 

Products Industry Recovery Act of 1982, R.C.W. 

79.01.1331-.1339, unconstitutional. The Act was passed in 

response to the decline of the prices in the forest products 

industry at the time. It allowed the Washington Department 

of State Lands to release contracts previously entered into 

with loggers and other forest products users because the 

industry stood to lose a great deal, due to the decline in 

prices, if the contracts were enforced. The Washington 

Supreme Court, in Skamania County v. Washington (Wa. 1984) , 

685 P.2d 576, dealt with the contracts on school trust land. 

Premising its argument by stating: "Every court that has 

considered this issue has concluded that these are real 

enforceable trusts that impose upon the state the same 

fiduciary duties applicable to private trustees," 685 P.2d at 

580, the court found the act had violated the trust by 

transferring trust assets--the contract rights--for less than 

their full value and held it unconstitutional. 685 P.2d at 

583. See also Torve and Handy, Skamania County - v. 

Washington: --- A Case of Divided Loyalties, Fall 1984, Western 

Natural Resources Litigation Digest Commentary 7. 
The above cases establish two main points that are 

important when considering either minor premise 1-eading to 

our decision. First, an interest in school land cannot be 

alienated unless the trust receives adequate compensation for 

that interest. Water that is appurtenant to the school lands 

is an interest for which the trust must receive compensation. 

Second, any law or policy that infringes on the state's 

managerial prerogatives over the school lands cannot be 

tolerated if it reduces the value of the land. In this case, 

the DSL contends that to allow lessees to develop private, 

personal rights on school lands would impermissibly reduce 

the DSL's ability to manage these lands for their highest 

value. 

Section 70-15-105, MCA states that: 

"A thing is deemed to be incidental or 

appurtenant to land when it is by right 

used with the land for its benefit, as in 

the case of a way or watercourse or of a 

passage for light, air or heat from or 

across the land of another." 

Further, Professor Wells A. Hutchins, in his treatise Water 

L--- Ri hts Laws in the Nineteen Western States Vol. I at 455 

(U.S. Dept. of Agriculture, 1971) states: "Of general 

application in the West is the rule that an appropriative 

right becomes appurtenant to the land for the benefit of 

which the water is applied." 

In Montana, the determination of whether water is 

appurtenant to the land is one of fact. Yellowstone Valley 

Co. v. Associated Mortgage Investors, Inc. (1930), 88 Mont. 

73, 290 P. 255; see also Hutchins, supra at 459. Here, by 

stipulated facts, it appears that all of the water rights at 

issue are used either in whole or in part on the school 

lands. Additionally, all of the lands in question are 

classified grazing lands under sections 77-1-401 to -404, 

MCA, and the water appropriated on them is used for 
stockwatering or other agricultural purposes. The water 

rights in question are appurtenant. 

This conclusion is consistent with the general rule 

that when title to irrigated property is passed, the water 

rights pass as an appurtenance unless specifically excepted. 

Section 85-2-403, MCA; Castillo v. Kunnemann (Mont. 1982), 

642 P.2d 1019, 39 St.Rep. 460; Adams v. Chilcott (1979), 182 

Mont. 511, 597 P.2d 1140; Schwend v. Jones (1973), 163 Mont. 

41, 515 P.2d 89. Respondents point to no authority 

explaining why the rule in regard to leases of land should be 

different than with the sale of land. We believe it should 

be the same--the parties to any such transaction may 

specifically effect a severance, but absent such, the water 

right remains appurtenant, following title. It does not make 

sense for each succeeding tenant to walk off with one water 

right after another. 

Respondents cite several cases that appear to 

articulate a contrary rule. The first, Smith v. Denniff 

(1900), 24 Mont. 20, 60 P. 398, is distinguishable in the 

fact that it concerned water appropriations made by squatters 

on the federal lands who diverted water for use on the public 

doma in. The school trust lands were withdrawn from the 

public domain by the Montana Territory Organic Act, supra, in 

1866, and none of the rights at issue in this case were 

developed before then. As discussed above, school trust 

lands are subject to a different set of rules than other 

public lands. Secondly they cite Hayes v. Buzzard (1904), 31 

Mont. 74, 77 P. 423 for the rule that the question of whether 

water is appurtenant to the underlying land turns upon the 

intention of the appropriator. Again, Hayes arose on public 

domain land, not school trust land. This Court recognized 

that distinction: 
"The legal title to the land upon which a 

water right acquired by appropriation -- - 

--- made on the public doiain [emphasis added] is used or intended to be used in 

no wise affects the appropriators title 

to the water right, for the -- bona fide 

[emphasis in original] intention which is 

required of an appropriator to apply the 

water to some useful purpose may 

comprehend a use upon lands and 

possessions other than those of the 

appropriator, or a use for purposes other 

than those for which the right was 

originally appropriated." 31 Mont. at 81 

77 P.2d at 425, quoting Smith v. Deniff, 

supra. 

(See also Ervien, 246 F. at 280: "Congress did not intend 

that the [school trust] lands granted and confirmed should 

collectively constitute a genera1 resource or asset like 

ordinary public lands held broadly in trust for the 

people. . . ") Respondents' argument does not answer the 

state's concern with meeting its trust responsibilities. 

Since an appurtenant water right is an interest in the 

land (see also section 70-1-106, MCA; Yellowstone Co. v. 

Asso. Mtg. Investors, supra) it cannot be surrendered by the 

State without the trust receiving fair market value. None of 

the lessees alleged payment of consideration to the State 

apart from that required by the lease, and thus we conclude 

that the water rights appurtenant to such lands belong to the 

State. 

The State argues that vesting title in lessees would 

violate the trust for another reason. If a lessee lost his 

lease, but retained the water right, that lessee would in 

effect be able to control the use of the land. In many cases 

in this semi-arid area, the control of water means the 

control of the land itself. Conceivably, the DSL, in a 

desire to insure that the land had water, could find itself 

in the awkward positj-on of negotiating with a former lessee, 

who might be inclined to release his right only to family or 

friends--thus assuring his re-entry. The former lessee could 
"chill" the bidding process by letting it be known that he 

would only release his right at an inflated price. Finally, 

the former lessee could conceivably dictate possible uses of 

the land in return for the water. This situation is clearly 

repugnant to school trust principles. This Court, in Jerke 

v. State Department of Lands, supra, and other courts, see 

Oklahoma Education Assoc. v. Nigh, supra and State of Utah v. 

Andrus, supra, have consistently held that any infringement 

on the use or management prerogatives of the State that 

effectively devalue school lands is impermissible. We agree, 

and find this to be an alternative ground for our decision. 

Respondents point to section 77-6-115, MCA, which 

states in pertinent part that: 

" (1) The lessee of state lands may at any 

time prior to 1 year before the 

expiration of his lease make application 

to the board for permission to secure a 

water right to the land under his 

lease. . . If the proposed plan meets 

with the approval of the board, 

permission shall be granted the lessee to 

secure the desired water right for the 

land and to place the same under 

irrigation. 

" (2) If such water right becomes a 

permanent and valuable improvement, then 

in case of the sale or lease of the lands 

to other parties, the former lessee shall 

be entitled to receive compensation in 

the amount of the reasonable value 

thereof, as in the case of other 

improvements, from the new lessee or the 

purchaser. 

" (3) These provisions shall not be so 

construed as to make the state liable to 

the lessee for the payment of the cost or 

value of such irrigation improvements." 

They contend that this statute, in effect, acknowledges the 

property interest of the lessee in the water right, and 

further, that in subsection (3) the State denounces any 

interest in the water by releasing itself from liability for 

the cost of irrigation improvements. Respondents also point 

to 526.3.123, A.R.M., which provides that the State shall 
reimburse departing lessees for the reasonable value of the 

improvements made (as per section 77-6-115(2), MCA), and 

that, "[alny water rights hereafter secured by the lessee 

shall be secured in the name of the state of Montana." They 

argue that since 526-3.123 A.R.M. was not adopted until 1979, 

it does not apply to the water rights in this case because 

all of them predate it. They also argue that the provision 

lends itself to supporting the position that the State had 

acquiesced in recognizing pre-1979 water rights in lessees. 

Both of these arguments are unfounded. First, none of the 

alleged rights at issue in this case were perfected pursuant 

to section 77-6-115, MCA or 526-3.123, A.R.M. Neither 

provision can be used as direct authority by respondents. 

For that reason we are not called upon to construe section 

77-6-115, MCA. We note though that it is capable of two 

interpretations: first, as applying to water rights as 

respondents argue; secondly, as applying only to 

improvements, such as ditches, reservoirs, headgates, and 

other capital projects, constructed "for" or attached "to" 

the land and not subject to being retained by the lessee upon 

payment by a new lessee or purchaser, as is the case with 

other improvements to the leasehold, as contended by the 

State. The general rule is that whenever there are differing 

possible interpretations of statute, a constitutional 

interpretation is favored over one that is not. United 

States v. Clark (1980), 445 U.S. 23, 100 S.Ct. 895, 63 

L.Ed.2d 171; Sutherland - on Statutory Construction 545.11 

(1984 ed.). In this regard, we point to the Skamania and 

Nigh, decisions holding statutes unconstitutional because 

they violated the school trust principles established by that 

state's Enabling Act. 
In the alternative, respondents argue that section 

77-6-115, MCA, and the principles of the Water Use Act set 

forth in section 85-2-101, MCA, and the prior appropriation 

doctrine, give rise to an implied severance of water from 

land in the school trust land leases, and that the State is 

now estopped to deny these rights because of the 

long-standing and detrimental reliance by the lessees. 

As we discussed above, the State holds these lands 

subject to the school trust. The essence of a finding that 

property is held in trust, school, public, or otherwise, is 

that anyone who acquires interests in such property do so 

"subject to the trust" Nat. Audubon Society v. Superior Court 

(Cal. 1983), 658 P.2d 709, 723. See also Illinois Central 

Railroad v. Illinois (1892), 146 U.S. 387, 13 S.Ct. 110, 36 

L.Ed. 1018 (a state may not abdicate its trust in public 

property); and Thompson v. Babcock, supra at 54, 409 P.2d at 

812, ("[wlhen state land is leased, it does not relinquish 

the entire interest therein"). The State has no power, 

absent adequate consideration, to grant the lessees the 

permission to develop non-appurtenant water rights, and every 

school trust lease carries with it this limitation. 

Respondents' argument that they have detrimentally 

relied upon "representations" by the State made through its 

laws and regulations, is not persuasive. There has been no 

detriment. Section 77-6-302, MCA provides that lessors will 

receive reasonable compensation for any improvements they 

have made on the leasehold if they relinquish the property to 

a new lessee or purchaser. Further, the argument that this 

rule sets up disincentives to the development of our water 

resources, contrary to the genera1 policy set out in the 

Water Use Act of promotiong the beneficial use of water, is 

also not persuasive. Section 77-6-302, MCA actually 
insulates the developer-lessee from any market risk that he 

would have to bear if making improvements on his own land. 

The Montana Constitution requires this result. Art. 

IX, sec. 3 (1) , provides that "all existing rights to the use 

of any waters for any useful or beneficial purpose are hereby 

recognized and confirmed." This provision prevents the State 

from affecting rights vested at the time the Constitution was 

adopted other than through the exercise of Constitutionally 

provided powers such as eminent domain, Mont. Const. Art. 11, 

sec. 29, or the general police power, and without affording 

due process of law, Mont. Const. Art.m, sec. Here the 

State, through the adjudication process, is claiming, and 

this Court is recognizing rights "existing" at the time the 

1972 Constitution was adopted-- Art. IX, sec. 3(l) merely 

reaffirms these rights. 

As stated above, we hold that the lessee, under the 

terms of the school trust 'lease, is entitled to the use of 

water appurtenant to the leased land. The State is the 

beneficial user thereof, and its duty as trustee of the 

school lands prohibits it from alienating this interest in 

the land absent full compensation therefor. Absent such 

compensation, the title to the water rights in this case vest 

in the State. 

Appellants and amici have urged this Court to find that 

school trust lands benefit from a federally reserved water 

right as originally recognized in Winters v. United States 

(1907), 207 U.S. 564, 28 S.Ct. 207, 52 L.Ed. 340, to which 

the State has succeeded. In our opinion, it is perhaps best 

to keep the reserved rights doctrine confined to situations 

where it arose and is most appropriate; as an accommodation 

between federal and state interests. Since the rule we have 

stated is sufficient to settle the case at bar, principles of 

judicial restraint counsel us to decline ruling further. 
This rule applies to all the waters at issue. Subject 

to Title 85, Chapter 2, Part 5, MCA, groundwater appropriated 

and used on State land should be treated no differently than 

surface waters appropriated and used on those lands. The 

Montana Constitution, Art. IX, sec. 3, Mont. Const. and the 

Water Use Act, section 85-2-102(14), MCA, make no distinction 

between groundwater and other water rights. 

The Order of the Water Court is reversed, and the case 

remanded for the purpose of modifying the Powder River Final 

Decree in compliance with this Opinion. 

We concur: ,/ 

1 

Justices 
Mr. Justice Frank B. Morrison, Jr. specially concurring: 

The majority opinion recalls to mind the old Montanan 

who said, "A moose is a cow designed by a committee." 

Indeed, this moose must have been designed by a committee. 

The only bright light which shines through this 

otherwise verbose and rambling epistle is the result. In 

that I concur. 

The majority opinion contains a good deal of judicial 

chaff including a rather lengthy recital of irrelevant 

historical data surrounding passage of the Montana Water Use 

Act of 1973. This effort effectively obfuscates the issues 

while impressing the casual reader that scholarship is the 

cornerstone of the majority's pronouncement. 

The issue in this case is quite simple and straight 

forward. At the time the federal government granted school 

lands to the state in trust for educational purposes, did the 

federal government include within the grant the right to 

develop water to achieve the educational purposes of the 

trust? If, as an incident of ownership, the state acquired, 

as appurtenant to the land, the right to develop water so 

that the purpose of the trust could be realized, then the 

state cannot alienate that property right in diminution of 

the trust res. 

The majority opinion initially indicates that the 

educational purpose of the trust cannot be realized without 

an appurtenant water right. With this I agree. However, in 

an apparent attempt to avoid interrupting the priorities of 

other appropriators, the majority seems to be saying that 

this appurtenant right did not spring into existence until it 

was developed by the lessee. This approach recognizes the 

priority of appropriators. In order to accomplish this 

objective the majority has created a fictional agency whereby 
the lessee, who develops the water, does so on behalf of the 

state. This nonsense is engaged to achieve a result. 

The majority's effort to secure unto school lands a 

sufficient amount of water to maximize their income potential 

for the trust, without disrupting prior rights, could have 

been achieved on a more legally sound foundation by simply 

holding that the federal government granted to the state 

school lands with the appurtenant right to develop water in 

order to maximize their income producing ability. The court 

then could have held that, under the prior appropriation 

doctrine, a priority date did not commence until the right 

was developed. In this way, at least, the majority would 

have recognized the property right in the state from the 

beginning which would give a basis for holding that the 

lessee developed the right for the state. 

In truth, these school lands were withdrawn from the 

public domain prior to any appropriation. The federal 

government granted to the state, in trust for educational 

purposes, land and the water necessary to develop the land 

for its trust purposes. Later, when the public domain was 

settled appropriations were made but the appropriations only 

operated on those lands remaining in the public domain. 

Settlers who moved in and appropriated could have obtained no 

water from school lands which resided safely in the trust. 

I find it unfortunate that reference is made to the 

"Winters Doctrine" or to federal reserved rights. Apparently 

there is some anticipation by the majority that this 

precedent will effect the adjudication of Indian water 

rights. Perhaps by analogy it will. However, those cases 

are not before us. 

I concur in the result for the reason that, at the time 

of the creation of the school trust, the federal government 
conveyed to the state, not only the land, but the appurtenant 

right to develop water necessary for fulfillment of the trust 

purpose. I specifically disavow the remainder of the