The United States and the Pyramid Lade Paiute Tribe of Indians (collectively appellants) requested an evidentiary hearing in district court concerning the court-appointed Water Master's report recommending approval of a petition by the Matley family to reclassify its Nevada farm from bottom land to bench land for the purposes of water allocation. The district court remanded the Matley's petition to the Water Master, instructing him to consider the evidence presented by the Tribe and the United States and to hold an evidentiary hearing if necessary. The Water Master reconsidered the petition in light of the new evidence without holding a hearing and again recommended approval. The district court adopted the Water Master's report and approved the reclassification, again without an evidentiary hearing. The Ninth Circuit determined that an evidentiary hearing was not required, but found that the legal standard used by the Water Master was incorrect and remanded the matter for reconsideration under the correct legal standard.

In the early 1900s, pursuant to the Reclamation Act,[1] the Department of the Interior (DOI) withdrew about 200,000 acres of land in western Nevada from public entry, reclaimed it using water from the Truckee and Carson Rivers, and "restore[d] the lands to entry pursuant to the homestead laws."[2] The reclaimed area, called the Newlands Reclamation Project (Project), includes the land occupied by the Matley family farm. Today, allocation of water from the Truckee River is governed by the Orr Ditch Decree,[3] and allocation of water from the Carson River is governed by the Alpine Decree.[4] Both decrees divide Project land into either "bench" land or "bottom" land.[5] Bench lands, which have faster-draining soils than bottom lands, are entitled to more water than bottom lands. In 1986, DOI adopted a classification scheme, based largely on soil characteristics, for determining which land qualifies as bench land and which qualifies as bottom land. After eight years of litigation, DOI's classification scheme was upheld in the 1994 Order[6] with the caveat that landowners could challenge the classification of their land if they could show that the consequent decrease in water allocation had resulted in a reduction in crop yield. At that time, the classification scheme was applied and water allocations were changed accordingly. In August 1996, the Matleys petitioned to change the classification of their land from bottom land to bench land, claiming their crop yield had decreased since their water allocation had been reduced as a result of the classification of the land as bottom land.

Upon receiving a petition for reclassification, the Water Master is required to notify the Tribe or counsel for the United States. The Tribe's interest in reclassification lies in the fact that the Truckee River is the only source of water for Pyramid Lake, a central feature of the Paiute Indian Reservation.[7] Over the years, the withdrawal of water from the Truckee River has lowered the level of Pyramid Lake, endangering indigenous fish and thus jeopardizing Tribal interests.[8] In this case, however, the Water Master neglected to notify either the Tribe or counsel for the United States before issuing a report recommending the petition be approved. When the Tribe and counsel for the United States learned of the report, they objected and requested an evidentiary hearing in district court. The district court ordered the Water Master to consider the Tribe's evidence and hold a hearing if necessary. The Water Master considered the evidence but did not hold a hearing, and issued an amended report, again recommending approval of the reclassification. The district court approved the reclassification. The Tribe and the United States appealed, claiming the lack of a hearing violated their procedural and constitutional rights, and that the Water Master had applied the incorrect legal standard for reclassification. The Ninth Circuit reviewed the district court's holding de novo.

Appellants first claimed that "Federal Rule of Civil Procedure 53 required the Water Master to allow discovery and hold an evidentiary hearing."[9] The Ninth Circuit noted that Federal Rule of Civil Procedure (FRCP) 53(c) requires a court-appointed master to act in accordance with the "specifications and limitations stated in the order" referring the proceedings to the master.[10] The court identified the relevant orders in this case as the Orr Ditch Decree, the Alpine Decree, and the 1994 Order, pointing out that none of these orders prescribe the procedures a Water Master is to use in carrying out his duties. The court concluded that, although FRCP 53 gives the Water Master the authority to allow discovery and hold an evidentiary hearing, it did not require him to do so. The court found support for this conclusion in the history of the rule. FRCP 53 derives from Equity Rules 62 and 65. The court found that Rule 62 gave a court-appointed master discretion to "direct the mode" of the proceeding in front of him by determining the kind of proof required and the manner in which it could be presented.[11] Rule 65 allowed a master to examine witnesses viva voce, through written interrogatories, or both, as the case required. Both rules gave the special master "substantial discretion" to determine the procedures to use in any given case.[12] Because the orders appointing the Water Master said nothing regarding procedure and both the language and history of FRCP Rule 53 gave a special master considerable discretion in determining his procedures, the Ninth Circuit concluded that the Water Master was not required to allow discovery or hold an evidentiary hearing.

Appellants next claimed that the lack of an evidentiary hearing violated their rights under the United States Constitution by depriving them of property without due process. The Tribe argued that meaningful protection of its property interests was only possible in an evidentiary hearing in which it would be allowed to cross examine witnesses. The Ninth Circuit found that while the reclassification deprived the Tribe of property interests in water, the procedures used were adequate. The court determined that "although due process guarantees 'some kind of hearing,'" it does not guarantee a full evidentiary hearing.[13] After "[w]eighing the 'administrative burden and other societal costs,'" the court found that a full evidentiary hearing with witness and cross examination was not required in a ruling reclassifying water rights.[14] Because Appellants had been given notice of the Matley's petition and an opportunity to have their evidence reviewed, constitutional due process requirements were satisfied.

Finally, the Ninth Circuit considered appellants' claim that the Water Master used the incorrect legal standard in reclassifying the Matley's land. The Water Master had applied the standard that any reduction in crop yield justified reclassification of bottom land to bench land. The court noted that under the Reclamation Act, the amount of water that can be acquired by any one appropriator is limited to the amount the appropriator can put to beneficial use, called the appropriator's "water duty."[15] The court pointed out that, although the definition of "water duty" includes the right to "a maximum amount of crops," the principles of beneficial use require in addition that the use of the water not be "'unreasonable' considering alternative uses of the water."[16] The court determined that a use is unreasonable "if the marginal gain is too small . . . compared with . . . the benefits that could be gained" by applying the water elsewhere.[17] Combining these considerations, the court concluded that a de minimis decrease in crop yield resulting from classification of land as bottom land did not justify reclassification of the land as bench land. The court announced a new standard: to justify a reclassification of bottom land to bench land, a reduction in crop yield must be "reasonably significant."[18]

The Ninth Circuit thus upheld the district court's determination that the Water Master's procedures for review of reclassification petitions provided adequate protection for appellants' rights, but reversed the approval of the Matley's reclassification petition, holding the Water Master had used the incorrect legal standard. The court identified a new legal standard, and remanded the case for reconsideration under that new standard.

Circuit Judge Sneed filed a separate opinion, concurring that the Water Master's procedures were not defective but dissenting on the legal standard used. Judge Sneed advocated vacating the 1994 Order allowing the Water Master to reclassify land based on a reduction in crop yield. He pointed out that DOI developed its soil-based water allocation system to alleviate recurring subsurface drainage problems that had plagued the Project from the start. According to DOI, irrigating the bottom land in the Project raises the water table until it "saturates the root zone and damages the crops."[19] Thus, lower crop yields can result from too much water as well as too little water and should not be a basis for a reclassification that increases water allocation. In Judge Sneed's opinion, the district court impermissibly substituted its own judgment for the expert judgment of DOI in allowing reclassifications based on depressed crop yield. Accordingly, Judge Sneed called for the Ninth Circuit to vacate the 1994 Order and to remand this case to the district court for review consistent with that determination.