No. 83-281 INTHE 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 INCARTER, CUSTER, FALLON, PRAIRIE, and POWDER RIVER COUNTIES, MONTANA, DEPARTMENT OF STATE LANDS, Objectorand 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 Courtsof the Stateof 

### Montana, TheYellowstone Division-Powder RiverBasin, The HonorableW.W. Lessley, ChiefJudge.

COUlJSEL OF RECORD: For Appellant: LyleManley 

### argued, Dept. of StateLands, Iielena, 

### Montana; John F. North, Dept. 

### of StateLands ForRespondents: John Carrargued for Bliss & Bales Ranch, MilesCity, 

### Montana ForAmicus Curiae: AlbertW. Stone, U of M Law School, 

### Missoula, Montana Gough, Shanahan, 

### Johnson & Waterman; RonaldF. Waterman argued forMontana StockgrowersAssoc., Helena, Montana

Submitted: February 21, 1985 Decided: June 18, 1985 Filed: 

## -1UM

# 1:

## 1985

ClerkMr. 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. Wereverse. 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 solelytothe following question of law: Does titletothewater right

### vest inthe 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 

### firstheard by thisCourt 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 curiaeparticipation. The parties, and several amici, submitted supplemental briefs, and the matterwas againheard on January 25, 1985. There are twenty-three water rights involved in this appea1. They generally fa11 into one of the following categories: 1) Groundwater Wells: Four rights are from groundwater wells. Three of the

### wellsareon school trust lands, and used wholly thereon. One straddlestheborder between a state-owned and privately-owned section, and 

### isused on both. 2) Developed Springs: Three rights are in developed springs for stock watering. The springs, and theiruses, areconfined tothe schooltrust lands. 3) Diversions of Tributaries: Fifteen rishts arise from divertins named 

### or unnamed tributariesof 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 tothe larger creek. One of the rights involves 

### a draw of water from the Powder River devoted to irrigation, not stockwatering. Thirteen of these diversionsoccurwholly on school trust lands with the use confined thereon. One right 

### is in a reservoir on state land that serves both the statesectionand an adjacentprivate section. The lastof these rights 

### isan 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 righthas the oldestprioritydate of any atissuehere, October 1, 1883. According tothe decrees associated with these rights, each is exercised year-round; although in 

### times of drought, thismay notbepossi-ble. The lands upon which these water rights lie are those that 

### were granted to the State of Montana by the Federal Government in theMontana Enabling Act. Actof 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, 13Stat. 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 subdivisionsof 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 forthe support of common schools.

"Section 11. That all lands herein granted foreducationalpurposes shallbe disposed of only atpublic sale, and ata pricenot less than ten dollarsper acre, the proceeds to constitute a permanent school fund, the interest of which only shallbe 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 

### termsof theEnabling Act, Montana Constitution of 1889, art. XVII, 

### sec. 1. The 1972Montana Constitution continued these 

### terms, Mont. Const. art. 

### X, sec. 11, ch. 1. See alsosection 77-1-202, MCA (school lands held intrust for the support of education)

# . The duty of administering the school trust lands 

### is placed upon theBoard 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 tothe State." Pursuant to77-1-301(1), MCA, theDepartment of StateLands, (DSL) under thedirection of the Board, 

### " 

# . .

# .has charge of the selecting, exchange, classification, appraisal, leasing, management, sale, or other disposition of state lands" The Department of StateLands has also promulgated regulations governing the management, sale or lease of school trust lands. See generallyTitle26, 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 todivertwaters

on the leasehold, developthem, and putthem touse on oroff that land. None of the rights at issue in this case were perfected pursuant to the abov~mentioned statutes or regulations. Rather, the lessees claimthese 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 forthe 19801s,p. 3, (1981ed.) These rights are atissuebecause of thegeneral water rights adjudication underway inMontana. 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 

## - inWater RightsAdjudication, 31Mont.L.Rev. 1 (1969); Stone, Are There Any Adjudicated Streams inMontana? 19 Mont.L.Rev. 

## - 19 (1957). It 

### set up a system of general streamadjudication administered 

### by the Department of Natura

### 1 Resources and Conservation (DNRC) and also provided, from that 

### time on, that the statutorymethod was the exclusive way toacquire a water right. Prior to 1973, there 

### were two possible ways of perfecting a water right. Firstwas themethod 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

### simplyby putting thewater 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.

[Citationsomitted.] 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 1973Act

soon encountered difficulties. First, it required the DNRC to physically inspect or discover all water rights. It soon became evident that thisprocess 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 1973Act did not provide for the adjudication of federally reserved rights--presenting the spectre of concurrent, wasteful and possibly inconsistent litigation in the FederalCourts. 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 uponappropriators and users theburden of filingclaims fortheir 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 theclaims filedby

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, atthat 

### time, an opportunity toobject tothe temporary preliminary decree. If no objections are raised, thetemporary decree 

### ismade final. Objections areheard and adjudged by theWater Court, with the right of appeal tothis Court.This 

### isthe firstappealwe have been called on tohear from a final decree of the Water Court. In reviewing this, and subsequent final decrees, 

### we will apply the same standards of review asany otherappeal from a DistrictCourt order.The question 

### we consider 

### is: Who 

### is the owner of a water right diverted or developed on school trust land; the Stateorthe lessee? We hold that 

### title tothese 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 stateaction that the 

### lessee is on the land, and Montana law expressly provides that the lessee shall be reimbursed for all capital expenditures made inputting the water tobeneficial use. The lessee, under the

### terms of the lease, 

### is simply entitled tothe 

## - use of water appurtenant to the school trust land. The State 

### is the beneficial user of the water, and 

### its duty astrustee of the school trust landsprohibits 

### 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 tothe State of Montana for thebenefit of the common schools. A major policy of the fledgling nation was to foster public education by grants of land tonewly admitted states for that purpose. Each of the thirty states carved outof thepublic domain received suchgrants, varying inthe quantity granted, and 

### termsof the grant, asnational policy and political winds dictated. See generally Woodgerd and McCarthy, State School Trusts and Oiland 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 earlierenabling acts, governingthe school land granttrusts



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

### v. Stateof Indiana (1852), 55 U.S. 268, 14 L.Ed. 267, and SpringfieldTownship

### 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 statecould not abridge; 2) that the enabling acts

### were tobe strictlyconstrued according to fiduciary principles, and; 3) thatthe enablingactspreempt statelaws orconstitutions. See alsoAndrus 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 imposedupon the statesa binding and perpetual obligationtouse the granted lands forpubliceducation. The courts have been very protective of the trust concept, and emphatic about theneed topreserve thevalue 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) forthe value of easements taken across school lands. The Court held that theArizona Enabling Act, ch. 310, 36 Stat. 557 (1910) "contain[ed] 'a specific enumeration of the purposes forwhich the lands

### were granted and the enumeration 

### is necessarily exclusive of any other purpose'" Lassen at467, 87 S.Ct. at589, 17L.Ed.2d at522 (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 federaldistrictcourtconcluded thatthe lessees of state school lands had an implied right of access totheir leasehold across adjacent federal lands. The court feltthat if 

### it held otherwise, "the very purpose of the school trust landswould fail. Without accessthe statecould 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 inUtah v. Andrus made 

### it clear thatany restriction on theuse (i.e. access) of school trust land thateffectivelydevalues it cannotbe sustained. This Court has likewisebeen emphatic inprotectingthe 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 rulethat interests in school trustlands 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; Cityof Sierra Vista



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

### v. University of Alaska (Ak. 1981), 624 P.2d 807. In Jerkev. StateDept. of Lands (1979), 182Mont. 294, 597 P.2d 49, 

### we addressed a situation analogous tothe one at bar. The general question presented was how far the State could surrender

### itsmanagerialprerogatives 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 tomembers in the re-leasing of school lands that are within the district. The plaintiff inJerke 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 practicesand 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 inthis case would be 

### to install the Grazing District as the trustee of the land. It, ratherthan the Department of State Lands, would decide who willoccupy the land but 

### it would not be bound by a constitutionalorfiduciary duty." 182Mont. at297, 597 P.2d at51. See also Stateex rel. Thompson v. Babcock (1966), 147Mont. 46, 409 P.2d 808 (upholding theCommissioner's discretionary authority to accept lease 

### terms less than the highest bid in order toeffectuate sustained yield concepts and insure thelong-term strength of the trust corpus); In ReMontana 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 thisCourt did inJerke. The Oklahoma courtwent further and found several state statutes limitingthe amount of interestthatthe statecould

### receive on school lands, and creatingpreferences inthe re-leasing of school lands, tobe unconstitutional. Most recently, theWashington 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 tothe decline of the prices in the forestproducts industry atthe 

### time. It allowed theWashington 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 tothe decline in prices, if the contracts 

### were enforced. The Washington Supreme Court, in Skamania County v. Washington (Wa. 1984)

## , 685 P.2d 576, dealtwith 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 fiduciaryduties applicable toprivate 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 LitigationDigest Commentary 7.The above cases establish two main points that are important when considering either minor premise 1-eadingto

our decision. First, an interest in school land cannot be alienated unless thetrustreceives adequate compensation for that interest. Water that

### isappurtenant tothe school lands 

### isan interest forwhich thetrustmust 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 thevalue of the land. In thiscase, 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 statesthat: "A thing 

### is deemed to be incidental or appurtenant to land when 

### it is by right used with the land for

### itsbenefit, asin the case of a way orwatercourse orof a passage for light, air or heat from or acrossthe land of another." Further, Professor Wells A. Hutchins, in his treatise Water Rihts Laws in the Nineteen Western States Vol. I at 455 

### L--- (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 thewater 

### isapplied." In Montana, the determination of whether water 

### is appurtenant tothe 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 allof thewater 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 forstockwatering or other agricultural purposes. The water rights inquestion areappurtenant. 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), 163Mont. 

### 41, 515 P.2d 89. Respondents point to no authority explainingwhy the rule inregard toleases of land should be different than with the sale of land. Webelieve 

### 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. Itdoes notmake

sense for each succeeding tenant towalk off with one water right afteranother. 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 factthat 

### it concerned water appropriationsmade by squatters

on the federal landswho divertedwater foruse on thepublic domain. The school trust lands 

### were withdrawn from the publicdomain by theMontana TerritoryOrganic 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. Secondlythey 

### citeHayes 

### v. Buzzard (1904), 31 Mont. 74, 77 P. 423 for the rulethatthequestion 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 thatdistinction:"The legal titletothe land upon which a water right acquired by appropriation

-- - made on the public doiain 

## --- [emphasis added] 

### isused or intended tobe used in no 

### wise affects the appropriators 

### title to the water right, for the bona fide 

# -- [emphasisinoriginal] intentionwhich 

### 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, ora use forpurposes other than those for which the right was originallyappropriated." 31Mont. at81 

### 77 P.2d at425, 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 

### inthe land 

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

### v. Asso. Mtg. Investors, supra) 

### it cannot be surrendered by the Statewithout the trustreceiving fairmarket value. None of the lessees alleged payment of consideration to the State apart from that required by the lease, and thus

### we conclude thatthewater rightsappurtenant tosuch landsbelong tothe 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 effectbe abletocontrol theuse 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-onof negotiating with a former lessee, who might be inclined torelease 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 atan inflated price. Finally, the former lessee could conceivably dictatepossible uses of the land inreturn for thewater. This situation 

### isclearly 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 Stateof Utah v. Andrus, supra, have consistently held that any infringement

on the use or management prerogatives of the State that effectivelydevalue school lands 

### isimpermissible. Weagree, and find this tobe an alternative ground for our decision. Respondents point to section 77-6-115, MCA, which statesinpertinentpartthat: 

### "(1)The 

### lessee of state landsmay atany 

### 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 shallbe 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 incase of the saleorleaseof the lands tootherparties, 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 tomake the state liableto the lessee for thepayment of the costor 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 inthe water by releasing itself from liability for the cost of irrigation improvements. Respondents alsopoint to 526.3.123, A.R.M., which provides that the State shallreimburse 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 shallbe secured inthe name of the stateof 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 atissue in thiscase

### 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 tobeing retained by the lesseeupon 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 

### isthatwhenever 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 trustprinciples establishedby that state's EnablingAct.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 relianceby 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, orotherwise, 

### is that anyone who acquires interests in such property do so "subjecttothetrust"Nat. Audubon Society

### v. SuperiorCourt (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 at54, 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 todevelopnon-appurtenant water rights, and every school trust leasecarrieswith

### it thislimitation. Respondents' argument that they have detrimentally relied upon "representations" by the Statemade 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 ifthey relinquish theproperty 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 thebeneficial use of water, 

### is also not persuasive. Section 77-6-302, MCA actuallyinsulates the developer-lessee from any market risk that he would have tobear if making improvements on his own land. The Montana Constitution requires this result. Art. IX, 

### sec. 3(1)

## ,provides that "all existingrights totheuse of anywaters 

### for anyuseful orbeneficial purpose arehereby recognized and confirmed." Thisprovision prevents the State from affectingrightsvested atthe

### timetheConstitutionwas adopted other than through the exercise of Constitutionally provided powers such aseminent 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" atthe 

### timethe 1972 Constitution was adopted-- Art. IX, 

### sec. 3(l) merely reaffirms theserights. 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

### tothewater rights inthiscasevest in the State. Appellants and amici have urged thisCourttofind that school trust lands benefit from a federally reserved water right as originally recognized inWinters v. United States (1907), 207 U.S. 564, 28 S.Ct. 207, 52 L.Ed. 340, to which the Statehas succeeded. In our opinion, it 

### isperhaps best tokeep the reserved rights doctrine confined to situations where 

### it arose and 

### is most appropriate; as an accommodation between federal and stateinterests. Since the rule

### we have stated

### is sufficientto 

### settle the case atbar, principlesof judicial restraint counsel us 

### to decline ruling further.This rule applies toallthewaters atissue. Subject toTitle 85, Chapter 2, Part 5, MCA, groundwater appropriated and used on State land should be treated no differentlythan surface waters appropriated and used on those lands. The Montana Constitution, Art. IX, 

### sec. 3, Mont. Const. and the Water UseAct, section 85-2-102(14), MCA, make no distinction between groundwater and otherwater rights. The Order of theWater Court 

### is reversed, and the case remanded for the purpose of modifying the Powder River Final Decree in compliancewith thisOpinion.

We concur: 

### ,/

1 Justices

### Mr. JusticeFrank 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 surroundingpassage 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 themajority'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 incidentof 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 rightdid not spring into existence until it

was developed by the lessee. This approach recognizes the priority of appropriators. In order to accomplish this objective themajority has created a fictional agencywherebythe 

### lessee, who develops thewater, does soon behalf of the state. This nonsense 

### isengaged toachieve a result. The majority's effort to secure unto school lands a sufficient amount of water tomaximize 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 todevelop water in order tomaximize 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 theright 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. Settlerswho moved inand 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" ortofederalreserved 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

arenotbeforeus. I concur inthe result for the reason that, atthe 

### time of the creation of the school trust, the federal government

### conveyed to the state,not only the land, but the appurtenant right todevelopwater necessary for fulfillment of the trust purpose. I 

### specifically disavow the remainder of the