Mojave Pistachio, LLC v. Superior Court (2024) 99 Cal.App.5th 605.

In Mojave Pistachio, LLC v. Superior Court (2024) 99 Cal.App.5th 605, the Fourth District Court of Appeal held that the “pay first, litigate later” rule applies to fees imposed by a local groundwater sustainability agency under the Sustainable Groundwater Management Act (“SGMA”). (Wat. Code, § 10720 et seq.) This is the first case to determine such issue. As a result of the court’s decision, water users must pay the outstanding amounts owed before bringing a legal challenge against a groundwater sustainability agency for imposition of the fee, even if the challenged fee allegedly violates SGMA and California water law, and even if the water users allegedly cannot afford to pay the fee. 

Legal Background

Mojave Pistachio, LLC (“Mojave”) irrigates a pistachio orchard in the Mojave Desert it owns with groundwater exclusively from the underlying Indian Wells Valley Groundwater Basin (“Basin”). Mojave currently extracts about 4,000 acre-feet of groundwater per year and anticipates growing to around 7,000 acre-feet per year as its trees mature in the next 50-60 years.

The California Legislature enacted SGMA in 2014, which requires the creation of groundwater sustainability plans to manage high priority groundwater basins. Pursuant to that legislation, the local groundwater sustainability agency, Indian Wells Valley Groundwater Authority (the “Authority”), determined that groundwater extractions from the Basin would be subject to a Basin “replenishment fee” of $2,130 per acre-foot of groundwater starting in 2021. As a result, Mojave would have to pay over $8 million annually in replenishment fees compared to paying zero government-imposed fee on the extraction of water as before. Because pistachio orchards would require more water each year as they mature, Mojave’s replenishment fees would keep increasing as well.

According to the Sustainable Yield Report, the Basin’s sustainable yield is 7,650 acre-feet per year, and the Basin is solely dependent on groundwater. The report further noted that Mojave is one of the most groundwater extractions producers in the Basin, with its estimated future extraction demands will be about 7,200 acre-feet per year, or roughly 94 percent of the Basin’s sustainable yield. Therefore, the Authority concluded that without changes to the Basin’s overdraft condition, its groundwater infrastructure will not be able to produce the needed water by 2065.

Mojave initiated a lawsuit against the Authority alleging that the Groundwater Sustainability Plan (“Plan”) “illegally deprived Mojave of its vested appurtenant overlying water rights to pump groundwater from the Basin by conditioning Mojave’s continued use of groundwater on the payment of the replenishment fee.” Mojave also alleged a taking claim on the ground that the Plan has deprived Mojave of all economically beneficial use of its water rights and pistachio trees without just compensation, which is in violation of the state and federal Constitutions.

The Authority demurred and the trial court ruled in the Authority’s favor. The court of appeal denied the requested writ relief, concluding that California’s “pay first, litigate later” rule would bar injunctive relief as to the Replenishment Fee because Mojave had not yet paid the fee it sought to invalidate. The taking claim also failed because no regulatory actions other than the fee had economic effects on the plaintiff.

The Applicability and Application of “Pay First” Rule

The Legislature enacted the SGMA for sustainable groundwater management in 2014, which intended to give local groundwater authorities the power and support to sustainably manage groundwater, as well as to create a more efficient and cost-effective groundwater adjudication process that protects water rights, ensures due process, and prevents unnecessary delay. (Wat. Code, § 10720.1.) SGMA also empowered groundwater agencies to impose fees, e.g. penalties and interest, on water users for knowingly failing to pay a fee on time and may order them to cease all groundwater extraction until the delinquent fees are paid.  If a person disagrees with fees imposed by the agency, SGMA provides that he or she “may pay” the fee “under protest and bring an action against the governing body in the superior court to recover any money that the governing body refuses to refund.” However, a person is barred from commencing a legal challenge against the agency imposing the fee before paying off the fee currently due.

Here Mojave has not paid any portion of the replenishment fees. Accordingly, any cause of action that attacks the propriety of the Replenishment Fee or attempts to impede its prompt collection cannot proceed, unless an exception to the “pay first” rule applies. However, the court did not find any recognized exceptions to the “pay first” rule apply. 1) There are no criminal penalties for failure to pay the replenishment fee. 2)  There is no due process concern from imposing the “pay first” rule because the action could proceed later once Mojave pays its balance; and 3) The Authority had conceivable basis in law or fact for assessing the replenishment fee. Therefore, the “pay first” rule must be enforced strictly here, although Mojave’s lawsuit was based on the alleged illegality of the challenged fee.

The appellate court relied on the well-established law in the context of tax disputes to reach the applicability of the “pay first” rule in litigation challenging SGMA fees and referred to the same statutory interpretation in Los Altos Golf & Country Club v. County of Santa Clara (2008) 165 Cal.App.4th 198 as support. Just as a tax dispute is a post-payment refund action and a taxpayer may not obtain adjudication of the validity of a tax which is due but not yet paid, the court further reasoned that the Legislature intended the same interpretation apply to laws with substantially similar language and section 10726.6(d) of SGMA requires a person who seeks to challenge a groundwater fee imposed under SGMA to first pay the fee before bringing an action for a refund.

In addition, the court also reasoned that not applying the rule will run contrary to what the Legislature contemplated when it enacted SGMA. It would also undermine the public policies that underlie the “pay first” rule, such as ensuring the continued provision of public services funded by taxes, or in this case, the replenishment fees.

Taking Claim Failed Because No Regulatory Actions Other Than the Fee Had Economic Effects on the User

 Mojave also alleged that the Authority, through the adoption of the Exempted Pumping Allotments and other Implementing Actions (excluding the Replenishment Fee), deprived Mojave of all economically beneficial use of its water rights and pistachio trees, and that this amounts to a physical and regulatory taking of private property without just compensation in violation of the state and federal Constitutions and section 1983 of title 42 of the United States Code. Mojave claimed that Authority took its vested overlying water right to pump native groundwater from the Basin for use on its land and made Mojave’s water available for public use by others without just compensation.

The trial court reasoned that Mojave’s claim specifically removed any reference to the Replenishment Fee, and the takings claims are instead based on the Authority’s groundwater sustainability plan, the Sustainable Yield Report, Exempted Pumping Allotments, and Transient Pool and Fallowing Program, none of which, “without reference to the Replenishment Fee, [has] an economic effect on Mojave.” As for the physical takings claims, the trial court reasoned that Mojave had not alleged it was in fact physically prevented from extracting water, and thus had not stated a claim.

The court of appeal agreed with the trial court’s analysis. The court theorized that if Mojave had paid the Replenishment Fee in compliance with the “pay first” rule, it could perhaps state a takings’ cause of action on the theory that the Replenishment Fee makes Mojave’s agricultural operations economically unviable because the fees for extracting groundwater are so high. But Mojave omitted any reference to the Replenishment Fee from its takings claims, and the only implementing action with an economic effect on Mojave is the Replenishment Fee. None of the other implementing actions physically prevent Mojave from extracting groundwater or interfere economically with Mojave’s ability to extract groundwater.

The case is also instructive in what the court did not decide. The court noted that Mojave’s claim that the Authority took its vested overlying water right to pump ground water from the Basin for use on its land (but not specifying the quality of its water right or, its priority vis-à-vis other extractors), raising the following several questions.

  • Assuming the Basin’s sustainable yield is only 7,650 acre-feet per year, how can multiple extractors each have a viable common law right to most or all that water?
  • Is using the Basin’s limited groundwater to irrigate a water-intensive crop like pistachios in the middle of the high desert a “reasonable and beneficial” use of water protected under the California Constitution, particularly considering most of those trees were planted less than 10 years ago? (See Cal. Const., art. X, § 2.)
  • Does a vested overlying right to groundwater mean a vested overlying right to free groundwater?
  • SGMA states that any judgment in an adjudication action for a basin required to have a groundwater sustainability plan must not substantially impair the ability of a groundwater sustainability agency to achieve sustainable groundwater management. (§ 10737.8.) What impact does that rule have on common law groundwater rights?

The court here did not answer such questions. Those issues are sure to arise again in future SGMA litigation.

Further Discussion and Takeaway on the Court’s Holding

It is worthy noted that although the court was aware that a rigid application of the “pay first” rule could allow local groundwater sustainability agencies to impose unreasonable fees that would be too high to certain users to afford to pay and could even eventually force them to run out of business, the court opted not to discuss the issue, and declined to create a new exemption accommodating the potential unjust and unreasonable result. The current rule places a financial burden on water users by requiring payment of any challenged fee currently due. Therefore, questions remain controversial and open to future challenges as to how to implement this rule in such a situation when a groundwater agency’s sustainability plan may act inconsistently with California water law.

Glen Hansen is Senior Counsel and Simyllina Chen is a Law Clerk at Abbott & Kindermann, Inc.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, Inc. at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, Inc., or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.