New Court Guidance on Rights to Use Captured Water/Percolating Groundwater | Nossaman LLP

On March 14, 2025, the Court of Appeal for California’s Fifth Appellate District issued its decision in Sandton Agriculture Investments III v. 4-S Ranch Partners, 2025 S.O.S. 659. That case provided guidance on ownership of captured water and percolating groundwater.

Facts

Sandton Agriculture Investments III (Sandton) acquired real property from 4-S Ranch Partners (4-S) through foreclosure proceedings related to 4-S’s bankruptcy. A dispute then arose as to whether Sandton’s acquisition of the property included the 500,000 acre-feet of groundwater stored in the land under the property. 4-S claimed that it still owned that water as its personal property. The 500,000 acre-feet of water was valued at $200 million in 2020, and 4-S claimed the value had risen to $600 million by 2022.  

Trial Court Decision

The case was originally heard in the Superior Court for the County of Merced. The judge there granted Sandton’s motion for summary adjudication, holding that it gained the water rights when it purchased the property. Contrary to 4-S’s claim that the water needed to be treated separately from the rest of the real property, the Court held that since the water was not physically severed from the land, it was part of the real property and thus Sandton acquired it with the real property.

Appellate Court Decision

The Fifth Appellate District started by reviewing water rights principles, largely focusing on the usufructuary nature of water rights within California, and different categories of water under California law.

The court held that “the broad issue before us is whether the water claimed by 4-S is properly classified as personal property or, alternatively, 4-S’s rights and interests in the water were appurtenant to the Property and ran with the land.” To decide that issue, the Court analyzed three questions – (1) does someone who captures floodwater own that water as personal property; (2) assuming the preceding answer is yes, did that captured floodwater lose its status as personal property when it was allowed to seep into the ground; and (3) can the water at issue be considered personal property if it is not severed from the real property.

The Court answered the first question no, holding that capturing floodwater is not enough to reclassify that water as personal property. In so holding, the Court overturned a 1913 case [Dannenbrink v. Burger (1913) 23 Cal.App. 587], noting that the 1928 amendment to the California Constitution that limited water rights to reasonable and beneficial uses changed the analysis.

The Court answered the second question no as well, holding that allowing the captured floodwater to seep into the ground changed its classification to percolating groundwater. Since 4-S exerted no control over the percolating groundwater, 4-S would have lost any right it had to the water as personal property, especially since percolating groundwater is qualified under California law as water in its natural state, which makes it real property.

The Court also answered the third question no, holding that California Supreme Court precedent mandated that water that is not severed from real property is part of that real property and thus is not personal property.

As a result of its answers to all three questions (and, in fact, as a result of its answer to any one of the three questions by itself), the Court affirmed the trial court’s opinion and held that when Sandton acquired the property, it also acquired the water rights.

The second and third answers may be dicta and thus not binding on lower courts, since the first answer alone was sufficient to dispose of 4-S’s claim. Despite that fact, all three holdings may impact future cases.

Impacts

The opinion in this case is a timely one that provides guideposts for how parties should think about property rights when purchasing or selling property. The water rights at issue in this case were arguably worth between $200 million and $600 million, and Sandton acquired them almost for free. This case should be considered in any acquisition or transfer of property with captured water or groundwater.

What makes this case particularly timely is the fact that the Making Conservation a California Way of Life framework went into effect earlier this year (see a podcast here and a blog post here on the framework). As discussed in the podcast, that framework, which essentially sets water use budgets for water providers that get stricter over time, will likely change the way people view projects and their water needs. The framework combined with the growing interest in stormwater capture and water reuse will likely lead to substantially more capture and reuse projects across the state. Sandton should be considered in these projects, as it clarifies the rights of the capturing/reusing parties, the rights of competing claimants, and it bolsters the value of real property overlying percolating groundwater.