The state's alleged intentional mishandling of Wind River Resources LLC's application left then-majority owner Erika Van Alstine financially insolvent, forcing her to sell a majority stake in the Arizona-based company, according to the lawsuit.

Lawyers for the state Department of Water Resources have yet to respond to the lawsuit's charges, instead asking that the lawsuit be thrown out on jurisdiction and other legal grounds, including Wind River's failure to appeal administratively. If the case isn't dismissed, it should at least be transferred to federal court in Arizona, the state's lawyers contend.

Wind River, whose lawsuit seeks unspecified damages, sought to pump water from the Muddy Creek aquifer in the Mormon Wells area north of Beaver Dam and pipe it into Nevada to the Virgin Valley Water District in nearby Mesquite.

The March 15, 2005, application was the first submitted to the Department of Water Resources for a decision under a 1989 state law that set criteria for transporting water out of Arizona. The law was enacted seven years after the U.S. Supreme Court ruled that groundwater is subject to the U.S. Constitution's protections for interstate commerce.

Wind River's application called for exporting up to 14,000 acre-feet of water annually. An acre-foot of water is about 325,000 gallons, enough to supply two average families of four for a year.

Arizona has never approved an application to transfer groundwater to another state.

Many Beaver Dam and Littlefield residents opposed the application, expressing concerns that the project could leave their wells dry.

Following the recommendation of an administrative law judge, state Water Resources Director Herb Guenther rejected Wind River's application on Nov. 28.

In a Nov. 1 report that Guenther adopted with only a few changes, Judge Thomas Shedden recommended that Wind River's application be denied because the company failed to update key aspects, provided inaccurate information and did not submit hydrological studies on the pumping's probable impact on the Mormon Wells area.

That left the department without enough information to decide whether Wind River had satisfied the Arizona law's requirements, including whether the exported water would be used for a "reasonable and beneficial" use in another state, Shedden said.

Wind River contended it submitted all the necessary documentation to support its application and that its project would not harm existing water users in the lower Virgin River basin.

Wind River also has argued that the state law requiring it to get Arizona's permission to export water was unconstitutional.