By James Rusk

The Court of Federal Claims this month awarded more than $4.2 million to the estate of Wayne and Jean Hage as compensation for the federal government’s taking of the Hages’ water rights and rangeland improvements.  Hage v. United States, No. 91-1470L (Fed. Cl. June 6, 2008).  Hage V, the latest chapter in the long-running Hage case, affirms the principle that private parties do not have a compensable property interest in federal grazing permits.  But the decision nonetheless recognizes that government actions distinct from the cancellation of grazing permits may, under some circumstances, effect a Fifth Amendment taking of an individual’s vested right to water flowing from federal lands. 

Competing Uses Caused Conflict on Federal Lands

The Hages purchased the Pine Creek Ranch in central Nevada in 1976.  The arid ranch, which was used primarily for grazing cattle, included grazing allotments on adjacent federal lands.  The Hages also used water originating on federal lands for livestock, agriculture and domestic uses on their own ranchlands.  Most of this water was conveyed to the Hages’ private lands through irrigation ditches that were constructed across federal lands pursuant to the Ditch Rights-Of-Way Act of 1866, 43 USC § 661 (the “1866 Act”)[1].  In addition, the Hages constructed improvements such as fences and roads on the lands covered by their grazing permits.

Conflict between the Hages and the federal government began after the U.S. Forest Service (the “USFS”) allowed the introduction of elk onto grazing allotments used by the Hages.  This led to other USFS actions and policies that interfered with the Hages’ use of their water rights.  Ultimately, the USFS suspended cattle grazing on some of the allotments and revoked grazing permits held by the Hages.  The Hages’ takings claims, and a string of decisions by the Court of Federal Claims, followed.

Revocation of Grazing Permits Cannot Give Rise to a Compensable Taking

In Hage V, the court once again rejected the Hages’ claim to compensation for the taking of the “entire ranch,” which was based on the cancellation of the Hages’ grazing permits and the suspension of grazing on certain allotments.  Relying on the Federal Circuit’s recent decision in Colvin Cattle Co. v. United States, 468 F.3d 803, 808 (Fed. Cir. 2006), the court reiterated that the Hages were not entitled to compensation for any diminution in the value of the ranch caused by cancellation of the permits.  The Hages’ interest in the permits simply was not a “constitutionally cognizable property interest.”

Similarly, the court rejected the Hages’ claim that the cancellation of their grazing permits had caused a taking of their right to stockwaters that “originate and terminate on federal lands” and are used for watering cattle when they graze on federal lands.  The Hages’ right to the waters rested entirely on the existence of the grazing permits, which the government could cancel without affecting a cognizable property interest.

Discrete Actions by the USFS Caused a Taking of the Hages’ Surface Water Rights

In contrast to the first two claims, the court found that the government did effect a compensable taking of the Hages’ vested rights in waters flowing from federal lands to the Hages’ private lands.  The crucial factor distinguishing these claims was the existence of government actions or policies, distinct from the decision to cancel the Hages’ grazing permits, that affected the Hages’ vested property rights.

While the Hages’ grazing permits were still valid, the USFS built fences that excluded the Hages’ cattle from access to streams on federal lands in which the Hages had established vested water rights.  The court found that these actions effected a “physical ouster” that deprived the Hages of the use of their water rights and therefore constituted a physical taking for Fifth Amendment purposes.

The USFS also adopted policies that reduced the amount of water flowing from federal lands onto the Hages’ lands, such as allowing vegetation to overgrow stream beds on federal lands upstream from the Hage ranch.  In addition, the USFS used “threats and intimidation” to prevent the Hages from accessing federal lands to remove these obstructions, which the Hages were entitled to do under Nevada law.  These USFS policies and actions prevented the Hages from receiving water that they could have applied to a beneficial use.  Thus, although not a physical taking, the government actions had such a “severe economic impact” on the Hages’ investment-backed expectations that they rose to the level of a regulatory taking under Penn Central.

Prohibition of Maintenance Effected a Taking of Rights in 1866 Act Ditches

The USFS also interfered with the Hages’ access to the 1866 Act ditches that were used to convey water from federal lands to the Hage ranch.  First, the USFS prevented the Hages from performing needed maintenance on the ditches, through threat of prosecution for trespassing.  Second, the USFS told the Hages that only hand tools could be used to maintain the ditches unless they applied for a special use permit.  It would have been “economically impractical” for the Hages to maintain the ditches, which were spread over thousands of acres, without authorization to use powered earth moving equipment.  But applying for a special use permit “would clearly have been futile” given the history of hostility between the Hages and the USFS, the court found.  Thus, the permit requirement amounted to an outright prohibition on maintenance.

Because the ditches were the primary means of obtaining water for irrigation on the ranch, the USFS actions preventing maintenance of the ditches reduced the amount of water that could flow to the Hages’ property.  The USFS thereby interfered significantly with the Hages’ investment backed expectations.  Thus, under Penn Central, the government’s actions amounted to a regulatory taking of the Hages’ rights in the ditches.[2]

Dedicating Range Lands to ‘Another Purpose’ Requires Compensation for Improvements

Turning to the Hages’ statutory claims, the court found that the Hages were entitled to compensation for the value of the improvements that they had constructed on lands covered by their grazing permits.  43 USC § 1752(g) provides that the government must compensate permittees for “authorized permanent improvements” constructed on such lands, if the government cancels a grazing permit “in order to devote the lands covered by the permit . . . to another public purpose.”  The court found that the federal lands formerly covered by the Hages’ cancelled grazing permits had, in fact, been devoted to another public purpose, because they were no longer used for grazing and because “active efforts” had been made to use the lands for other activities such as agriculture, conservation and recreation.  Consequently, the Hages were entitled to compensation for the fences, roads and other improvements they had constructed on the allotments—but not for improvements constructed by their predecessors.

Just Compensation: $4.2M Plus Interest and Attorney’s Fees

The court awarded the Hages approximately $2.85 million for their water rights and $1.37 million for the value of their improvements, plus attorney’s fees and interest from the date of taking.

For more information please contact James Rusk.  James Rusk is an associate with the Land Use and Natural Resources Practice Group, in the firm’s San Francisco office.

[1] The 1866 Act granted private rights of way across federal lands to owners of water pipelines, ditches and canals that were used to convey water for agriculture and other beneficial uses.  See, e.g., Hage v. United States, 51 Fed. Cl. 570, 581 (Fed Cl. Jan. 29, 2002) [“Hage IV”].

[2] The court already had found, in Hage IV, that “the Government’s actions which physically prevented Plaintiffs from accessing their 1866 Act ditches amounted to a physical taking.”