A California court just handed Sandton Agriculture Investments a major win, confirming lenders can claim groundwater rights in big-ticket foreclosures. Find out what this means for your deals
A California court just confirmed that groundwater rights pass with the land in foreclosure, settling a major question for commercial mortgage professionals statewide.
The dispute began in 2017, when 4-S Ranch Partners, LLC secured a $33 million loan from Sandton Credit Solutions Master Fund IV, LP. The collateral for the loan was more than 5,200 acres of farmland in Merced County, California—a property notable not just for its size, but for the huge reserves of underground water beneath it. These water reserves could hold over 500,000 acre-feet, making them a potentially lucrative asset. 4-S Ranch viewed this groundwater as a goldmine, especially since periodic flooding from the San Joaquin River had increased the water stored underground.
However, by 2019, 4-S Ranch had defaulted on the loan. The company missed payments, failed to meet financial targets, and did not share profits from water or crop sales as required by the loan agreement. After several unsuccessful attempts to resolve the default, Sandton Credit initiated foreclosure proceedings. In response, 4-S Ranch filed for bankruptcy, listing the land at $500 million and the groundwater at $200 million. The ranch argued that the groundwater was personal property – essentially inventory that could be separated from the real estate – and therefore not subject to the lender’s claim.
The bankruptcy court eventually lifted the automatic stay, allowing the foreclosure to move forward. At the nonjudicial foreclosure sale, Sandton Credit acquired the property with a $20 million credit bid. The land was then transferred to Sandton Agriculture Investments III, LLC. But the legal battle didn’t end there. Sandton sought a court declaration that all rights to the groundwater passed with the land at foreclosure. 4-S Ranch continued to argue that the groundwater was personal property and should not have transferred with the land.
The trial court ruled in Sandton’s favor, holding that, under California law, water in its natural state – such as groundwater that has not been pumped out or stored separately – is part of the land. It only becomes personal property if it is physically severed from the real estate and placed in containers or otherwise removed. Since the groundwater in question had not been severed from the land, all rights to it passed to Sandton with the foreclosure.
On August 8, 2025, the Fifth District Court of Appeal affirmed the trial court’s decision. The appellate court made it clear that water in its natural state is real property, and cannot be claimed as personal property simply because an owner intends to sell it in the future. The court also noted that 4-S Ranch did not meet the legal requirements to challenge the foreclosure, as it had not paid off the debt or shown any serious procedural errors in the foreclosure process.
For mortgage professionals, this case is a significant reminder about the importance of understanding what constitutes collateral in secured lending. In California, groundwater remains with the land unless it has been physically removed, which is a critical consideration for structuring loans, managing risk, and handling foreclosures involving agricultural or resource-rich properties. The decision also highlights the need for precise language in loan documents regarding what assets are included as collateral.
The bottom line: in California foreclosures, what’s under the ground can be just as important as what’s on top. This ruling gives lenders, investors, and mortgage professionals clear guidance and greater confidence when dealing with high-value, complex assets tied to land and natural resources.
