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March 22, 2024  |  Written by Krisha Yadav-Ranjan

California Appellate Court Determines That the “Pay First” Rule Applies to SGMA Fee Lawsuits

The Fourth District Court of Appeal has ruled in Mojave Pistachio, LLC et al. v. Superior Court of Orange County, Indian Wells Valley Groundwater Authority (Case No. G062327, opinion published Feb. 8, 2024) 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.). In accordance with the court’s holding, a groundwater user is required to pay an outstanding fee imposed under SGMA before commencing an action to challenge the fee and to obtain a refund. (Wat. Code, §10726.6(d)). As a result of this ruling, water users must pay a fee currently due before bringing a legal challenge against a groundwater sustainability agency for imposition of the fee. Further, this ruling requires water users to pay any fee that becomes due during litigation in order to maintain an action before the court.

Background

Mojave Pistachio, LLC (Mojave) irrigates a pistachio orchard in the Mojave Desert with groundwater from the underlying Indian Wells Valley Groundwater Basin (Basin). The Basin was designated as a high-priority basin subject to critical overdraft per the Department of Water Resources (DWR).

SGMA took effect in 2015 and requires the creation of groundwater sustainability plans to manage high-priority groundwater basins. Per that directive, the Indian Wells Valley Groundwater Authority (IWVGA) – the local groundwater sustainability agency – determined that groundwater extractions from the Basin would be subject to a monthly Basin “replenishment fee” of $2,130 per acre-foot of groundwater or about $0.0065 per gallon of groundwater. According to IWVGA, the replenishment fee is necessary to fund the significant costs of bringing in supplemental water and mitigating damage to shallow wells that may be impacted by declining water levels. This fee resulted in Mojave owing over $8 million annually in replenishment fees. Because pistachio orchards require more water each year as they mature, Mojave’s replenishment fees are set to nearly double by 2080.

Mojave’s Lawsuit

Mojave filed an action against IWVGA alleging, in part, that IWVGA’s groundwater sustainability plan illegally deprived Mojave of its vested rights to pump groundwater from the Basin by conditioning Mojave’s continued use of groundwater on payment of the replenishment fee. The lower court denied Mojave’s attempt to enjoin the IWVGA from taking any action to implement the replenishment fee. In doing so, the lower court reasoned that California’s “pay first, litigate later” rule barred injunctive relief as to the replenishment fee because Mojave had not yet paid the fee it sought to invalidate. Mojave appealed the case to the Fourth District Court of Appeal for review of the lower court’s ruling.

The Court’s Reasoning

In reaching a decision on the novel question of whether the “pay first” rule applies in litigation challenging SGMA fees, the appellate court relied on confirmed law in the context of tax disputes. The sole legal avenue for resolving tax disputes is a post-payment refund action; a taxpayer may not obtain adjudication of the validity of a tax which is due but not yet paid. The appellate court applied this rule, reasoning that suits to enjoin the collection of fees may not be maintained even if the fee’s basis is illegal and void. Thus, although Mojave’s lawsuit was based on the alleged illegality of the challenged fee, Mojave was not excused from compliance with the “pay first” rule and must pay the outstanding fee before their claims challenging the merits of the fee could proceed.

Moreover, the appellate court confirmed that the “pay first” rule comports with due process requirements, so long as the parties are “at some point” given a meaningful opportunity to contest the legality of the fee. The court found that the post-payment refund procedure provides an adequate remedy at law to such challenges. Therefore, Mojave is not excused by its inability to pay the fee, or the resulting lack of opportunity for judicial review, which the appellate court determined does not violate Mojave’s due process rights because the action could proceed at a later time once Mojave pays its balance. The court further reasoned that, given the Basin’s severe overdraft status and the fact that SGMA authorizes the imposition of a replenishment fee, IWVGA did not violate substantive due process as it had a conceivable or rational reason for assessing the fee.

Further, the appellate court relied on references to the “pay first” rule in SGMA and throughout state law to justify its application here. The appellate court held that the Legislature contemplated inclusion of a “pay first” requirement in SGMA by incorporating by reference the procedure to protest taxes through post-payment actions. (Wat. Code, § 10726.6(d).) Moreover, the public policy basis of the “pay first, litigate later” rule is well-established as a means to ensure revenue collection to continue during litigation so that essential public services dependent on the funds are not disrupted while tax challenges proceed.

Mojave argued that the court should create a new exception to the “pay first” rule on public policy grounds, such as when a groundwater agency’s sustainability plan acts inconsistently with California water law. The court declined, noting that to do so would require the court to adjudicate the validity of a groundwater agency’s sustainability plan at the demurrer stage. Further, creating such an exception could defeat SGMA’s goal of managing overdrafted groundwater basins by allowing extractors to challenge a fee before paying it.

The Court’s Holding

The appellate court found that the “pay first” rule applies to lawsuits challenging fees imposed by a local groundwater management sustainability agency under SGMA, and therefore Mojave’s challenge cannot proceed until it completes payment of the outstanding fee. The court opted not to resolve when (if ever) a fee or tax would be so extraordinarily high that the rule should not apply. Accordingly, questions remain as to how to implement this rule. On the one hand, the rule places a financial burden on water users by requiring payment of any challenged fee currently due. On the other hand, local groundwater agencies are tasked with fairly allocating a limited amount of groundwater between numerous competing users.

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