By Matthew Hinks
In a question of first impression, the California Court of Appeal has held in, People ex rel. Department of Transportation v. Dry Canyon Enters., LLC, that "a business owner is entitled to a jury trial on the amount of goodwill lost by a taking only if he or she first establishes, as a threshold matter, that the business had goodwill to lose." The court's analysis seems correct; nevertheless, the result is a troubling one for property owners.
Dry Canyon is a wine maker. As part of its business plan, Dry Canyon planned to develop a flagship wine to be made from grapes grown on property it owns in Paso Robles. In 2009, Caltrans initiated eminent domain proceedings to acquire a strip of Dry Canyon's Paso Robles property on which was located 21 percent of the vines Dry Canyon was growing for its new flagship wine. By the time the proceedings were initiated, Dry Canyon had blended and sold a few vintages but had yet to turn a profit on the new flagship brand. The parties agreed to a valuation of $203,500 for the real property, which was paid to Dry Canyon, leaving one remaining issue: the amount of lost goodwill.
Dry Canyon's expert testified that Dry Canyon lost $240,000 in goodwill as a result of the taking, which he calculated using two different methodologies. First, the expert utilized a "cost-to-create" methodology in which he added all expenses incurred in cultivating the new wine and divided by four (being that Caltrans took one-fourth of the vines). The second methodology was defined as a "premium pricing" approach in which the expert calculated that the new vintage would fetch a premium of $10.62 more per bottle than comparable wines, then multiplied that figure by the total number of bottles that would not be sold as a result of the taking. Both methodologies yielded a $240,000 lost goodwill figure.
Unfortunately for Dry Canyon, the trial court disagreed that Dry Canyon had any goodwill at all and granted a motion for judgment. The court of appeal affirmed.