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California Court Clarifies Recovery of Goodwill in Eminent Domain Cases

Goodwill is one of the trickier areas of eminent domain law.

When a governmental agency takes private property through the exercise of eminent domain powers, the agency generally must pay the property owner the fair market value of the real property taken.

On top of the fair market value of the real property, however, is the potential recovery of “lost goodwill.”  California’s Code of Civil Procedure, at section 1263.510, defines goodwill 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.”  (Emphasis added.)

A recent opinion from California’s Second Appellate District Los Angeles County Metropolitan Transportation Authority v. Yum Yum Donut Shops, Inc. — clarifies the standard governing entitlement to goodwill recovery.

Facts: donut shop property condemned; potential relocation sites rejected

The Los Angeles County Metropolitan Transportation Authority (MTA) sued Yum Yum Donut Shops, Inc. (“Yum Yum”) in eminent domain to take one of Yum Yum’s donut shops that was in the path of a proposed MTA rail line.  Yum Yum sought compensation for loss of goodwill resulting from the taking under section 1263.510.

The donut shop at issue — “Store 58” — had a prime location on Crenshaw Boulevard in Los Angeles.  Yum Yum had operated Store 58 for over 30 years, and the location scored highly on Yum Yum’s list of criteria for optimal store location, including such factors as being on the morning traffic side of a heavily trafficked street leading to a freeway; easy access for ingress, parking, and egress; good visibility from the street; near a signalized intersection; and located in a densely populated area with favorable demographics (lower to middle income).

Yum Yum evaluated three potential relocation sites proposed by the MTA for Store 58, but rejected them, concluding they failed to satisfy Yum Yum’s location criteria.

Trial court’s judgment: no mitigation of damages, so no recovery for lost goodwill

At trial, MTA’s expert appraiser testified that the total value of Store 58’s goodwill was $620,000.  He also testified that if Yum Yum relocated Store 58 to one of MTA’s three proposed sites, Yum Yum would recapture $202,000, $138,000, or $340,000 in goodwill, respectively.

In other words, Yum Yum could have “mitigated” some, but not all of its lost goodwill by relocating to one of MTA’s proposed sites.  Thus, there would have been some lost goodwill at any of the proposed relocation sites.

The trial court interpreted section 1263.510 narrowly, holding that if the condemnee (here, Yum Yum) fails to take reasonable steps to mitigate some of its goodwill damages, it is not entitled to recover for any lost goodwill.

Yum Yum appealed.

Court of Appeal’s Opinion: goodwill recovery permitted if there is any unavoidable loss of goodwill

The Court of Appeal reversed.

The court held that section 1263.510 is a remedial statute that should be construed liberally, with the goal of providing just compensation to the condemnee.

The statute uses a two-step process: first, the court determines whether the landowner is entitled to compensation for lost goodwill; second, a jury determines the amount of the loss.  The determining factor in the first phase regarding entitlement is whether the landowner has suffered some unavoidable loss of goodwill.

Thus, the court held, if the condemnee would lose any goodwill even if it relocated its business or otherwise reasonably mitigated the loss, “the condemnee satisfied its threshold burden.”  “The purpose of the entitlement phase is to discern whether the condemnee suffered ‘some‘ loss of goodwill[.]”

The court instructed the trial court to enter a new order finding that Yum Yum established its entitlement to compensation for lost goodwill, and to hold a jury trial to determine the value of that loss.  The court noted that at the jury trial phase, MTA could assert an offset for the portion of lost goodwill that could have been avoided by reasonable mitigation efforts (including relocation).

Lesson

A business losing its location through eminent domain proceedings can recover for lost goodwill under Code of Civil Procedure section 1263.510 by showing that some lost goodwill is unavoidable due to the taking.  The owner’s failure to mitigate some of those damages through relocation will not absolutely bar recovery for lost goodwill — instead it is one factor for a jury to consider in determining the amount of lost goodwill.

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