Arizona Court of Appeals Division One Affirms a Decision by the State Land Department Reclassifying Trust Lands in Pinal County from Agricultural to Commercial.

The Arizona-New Mexico Enabling Act of 1910 granted almost 10 million acres of land to the State of-Arizona to be held in trust to support the state’s public schools.  Trust lands are administered by the Arizona State Land Department, under the direction of the Commissioner, who must classify and appraise state lands for purposes of sale, lease, and granting of rights-of-way.  Among the classifications, which are assigned based on the land’s highest and best use, are agricultural and commercial.

Max Koepnick held leases to 900 contiguous acres of trust lands in Pinal county, which had been classified as agricultural lands and used as such by Koepnick and his predecessors for more than 50 years.  In 2006, prompted by significant residential and commercial growth in the area, the Commissioner reclassified the leased lands from agricultural to commercial, canceling Koepnick’s leases by operation of law.  Koepnick successively appealed to the Arizona Land Board of Appeals, the Superior Court, and the Court of Appeals, all of which affirmed the Land Department’s decision.

Koepnick first argued that the Department was prohibited from classifying lands as commercial when the intended future use of the lands was for both commercial and residential development.  The Court of Appeals rejected this argument because the statutory definition of “commercial lands” includes lands principally used for “business.”  Development of land, whether for commercial or residential use, is business use and therefore “falls squarely within the commercial classification.” 

Koepnick next argued that in reclassifying the leased lands as commercial, the Commissioner violated fiduciary duties owed to the land trust and duties owed to Koepnick as lessee of the lands.  The basis for Koepnick’s argument was an alleged quid pro quo between the Land Department and Pinal county:  the Land Department’s reclassification would allowPinalCounty to obtain a right-of-way across the leased lands without having to reimburse Koepnick for damage to extensive improvements, and Pinal county would rezone the lands to allow for future development.  Evidence was presented to the Land Board of Appeals that would support a finding that the Land Department struck a deal with Pinal County as alleged by Koepnick.  The Court of Appeals, however, deferred to the factual findings of the Board, which had concluded, on sound evidence, that the Commissioner’s reclassification decision was based on the highest and best use of the lands and was in the best interest of the trust. 

The Court of Appeals noted that this case presented a situation in which the Commissioner’s duties to the trust and its beneficiaries conflicted with his duties to the lessee of the lands. While the Commissioner must maximize revenue for the trust, he need not focus on generating the highest immediate revenue but is empowered to formulate detailed plans for future use of lands.  On the other hand, the Commissioner owes a duty to a lessee to ensure the lessee is reimbursed by his successor for approved improvements placed on state lands.  In this case, the Commissioner’s plan did not provide an immediate successor to the leased lands and therefore deferred reimbursement to Koepnick for his improvements.  Ultimately, however, the court held that the Commissioner’s resolution of this conflict was appropriate.   

Judge Norris authored the opinion; Judges Kessler and Gemmill concurred.