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.
The California Supreme Court declared early on in the 20th Century that a business or the goodwill or profits of a business are not the type of property covered by the constitutional guaranty of just compensation. Oakland v. Pacific Coast Lumber, 171 Cal. 392 (1915). That rule remained unchanged for the next 60 years until 1975 when the California Legislature remedied the unfairness by creating a statutory right for business owners to obtain recompense for loss of goodwill. Code of Civil Procedure § 1263.510.
“Goodwill” under Section 1263.510 is defined as the “benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances resulting in probable retention of old or acquisition of new patronage.” The section mandates that a property owner suffering a taking be compensated for the loss of goodwill provided the owner proves that:
- The loss is caused by the taking of the property;
- The loss cannot reasonably be prevented by a relocation of the business or by taking steps and adopting procedures that a reasonably prudent person would take and adopt in preserving the goodwill;
- Compensation for the loss will not be included in relocation payments under Government Code § 7262; and
- Compensation for the loss will not be duplicated in the compensation otherwise awarded to the owner.
A business owner has the right to a jury trial on the amount of lost goodwill. However, that right arises only where it satisfies the conditions identified above, which is a question for the trial court, not the jury. Reviewing those conditions, the court of appeal determined that proof of preexisting goodwill is implicit within Section 1236.510 and, therefore, made it expressly so.
Moreover, the court also held that the trial court properly rejected Dry Canyon’s expert testimony. Neither methodology, the court determined, offered substantial evidence of lost goodwill. Although there is no single acceptable method of valuing goodwill, the methodologies used are normally based on the profitability of a business. The court concluded that the “cost-to-create” methodology, though a proper measure of goodwill in an appropriate case, should be limited to cases where there is clear proof of pre-existing goodwill and a total loss of that goodwill as a result of the taking. The “premium pricing” methodology, the court noted, was invented by the expert, was therefore of doubtful legitimacy, and was too subjective to pass scrutiny. Therefore, the trial court did not abuse its discretion in rejecting the expert’s testimony.
I find the conclusion troubling even if the court’s reasoning appears sound. Prior case law had already determined that the preconditions of Section 1263.510 were a matter for the trial court to determine. Given that, it does seem at least implicit that the section would require the court to make a determination that goodwill exists before allowing the jury to determine the amount of goodwill lost. After all — if the court is tasked with determining, for example, whether the alleged loss of goodwill is caused by the taking of the property — does it not also stand to reason that the court would have to determine that goodwill exists in the first place? So it’s hard to find fault with the court’s analysis.
Nevertheless, there is something unsettling about the result. Dry Canyon’s evidence of goodwill, just as in most eminent domain cases, was put on through expert opinion. Once the trial court rejected that opinion, no evidence was left and a judgment in favor of Caltrans was inevitable. Whether to admit expert testimony is within the sound discretion of the trial court and a court of appeal will not overturn that decision unless an abuse of discretion is shown. Can it really be the case that a property owner’s entitlement to an award of lost goodwill in connection with a taking is subject to a trial judge’s exercise of discretion?
It certainly is the case now — at least where proof of goodwill is put on through expert opinion. Property owners and their lawyers engaged in eminent domain cases are urged to take heed.
Matthew Hinks is a litigator with a wide-ranging practice that focuses primarily on the representation of real estate developers in difficult land use cases. Matt has extensive experience litigating complex mandamus actions and other claims involving signage disputes, governmental takings, CEQA challenges, planning and zoning law, civil rights violations, eminent domain issues, title disputes, lease disputes and community redevelopment and density bonus law. He has extensive experience in both federal and state courts, including trial courts and courts of appeal, as well as in arbitration, mediation and administrative settings. Contact Matt at MHinks@jmbm.com or 310.201.3558