BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 374 (Wagner)
As Amended April 1, 2013
Hearing Date: June 4, 2013
Fiscal: No
Urgency: No
TH
SUBJECT
Eminent Domain: Compensation: Loss of Goodwill
DESCRIPTION
Existing law provides that an owner of property taken by eminent
domain is entitled to compensation, including compensation
relating to the loss of a business's "goodwill." This bill
would specify that an owner of a business must adduce sufficient
evidence to permit a jury to find that goodwill existed prior to
the taking before the owner is entitled to receive any
compensation for the loss of goodwill.
BACKGROUND
Both the United States Constitution and the California
Constitution condition the state's power to take property by
eminent domain on the payment of "just compensation" to an
aggrieved property owner. (U.S. Const. Am. V.; Cal. Const. Art.
I, Sec. 19.) "Just compensation" is defined in California law
as "the fair market value of the property taken." (Code Civ.
Proc. Sec. 1263.310). Fair market value, in turn, means "the
highest price on the date of valuation that would be agreed to
by a seller . . . and a buyer . . . each dealing with the other
with full knowledge of all the uses and purposes for which the
property is reasonably adaptable and available." (Code Civ.
Proc. Sec. 1263.320).
Unlike federal law, California law guarantees the owner of a
property taken by eminent domain compensation for any "loss of
goodwill" that results from the condemnation. In 1975, the
Legislature enacted the Eminent Domain Law as part of a
(more)
AB 374 (Wagner)
Page 2 of ?
comprehensive revision of eminent domain law in the state,
adopting in substance certain provisions of the Uniform Eminent
Domain Code. (See 13 Cal. Law Revision Com. Rep. (1975) pgs.
1218-1219.) Codified in part at Code of Civil Procedure Section
1263.510, the Eminent Domain Law states that an owner of
property taken by eminent domain is entitled to just
compensation that includes compensation relating to the loss of
a business's "goodwill." Goodwill in this context means "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." (Code Civ. Proc. Sec.
1263.510(b).) The California Supreme Court has observed that
Section 1263.510 "was enacted in response to widespread
criticism of the injustice wrought by the Legislature's historic
refusal to compensate condemnees whose ongoing businesses were
diminished in value by a forced relocation," and its purpose
"was unquestionably to provide monetary compensation for the
kind of losses which typically occur when an ongoing small
business is forced to move and give up the benefits of its
former location." (People ex rel. Dept. of Transportation v.
Muller (1984)
36 Cal.3d 263, 270.)
Loss of goodwill can occur either through the direct taking of
property or by injury to a business resulting from the taking of
property, such as when a non-owner tenant business's leasehold
interest is adversely affected by an eminent domain action.
(See Code Civ. Proc. Sec. 1263.510 (a)(1); City of Vista v.
Fielder (1996) 13 Cal.4th 612, 617 n.1.) In either case, only
an owner of a business conducted on the property taken may claim
compensation for loss of goodwill. Existing law does not
identify a single acceptable method of valuing goodwill, and
courts have found that "valuation methods will differ with the
nature of the business or practice and with the purpose for
which the evaluation is conducted." (Muller, 36 Cal.3d 263, 271
n.7 [citations omitted].) However, the Eminent Domain Law
specifically excludes from compensation for goodwill any cost
that could have reasonably been prevented by a relocation of the
business or by the adoption of procedures that a reasonably
prudent person would take to preserve goodwill, or any other
costs that would be duplicative of compensation otherwise
awarded an owner. (See Code Civ. Proc. Secs. 1263.510(a)(2),
(4).)
Existing law sets out a number of qualifying conditions that
AB 374 (Wagner)
Page 3 of ?
must be met in order to receive an award of compensation for the
loss of goodwill resulting from an exercise of eminent domain.
(See generally Code Civ. Proc. Sec. 1263.510(a).) A California
appellate court recently described these qualifying conditions
as follows:
The owner must prove that the goodwill loss "is caused by
the taking of the property" (causation); "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"
(unavoidability); and will not be duplicated by relocation
payments under Government Code section 7262 or "in the
compensation otherwise awarded to the owner" (no double
recovery). (See People ex rel. Department of
Transportation v. Dry Canyon Enterprises (2012) 211
Cal.App.4th 486, 491 [emphasis in original].)
Existing law does not explicitly state that a business owner
must show proof of preexisting goodwill as a threshold condition
to recovering for loss of goodwill, but many courts have found
this requirement implicit in the Eminent Domain Law. Indeed, a
number of courts have viewed compensation for loss of goodwill
as "a two-step process." (City of Santa Clarita v. NTS
Technical Systems (2006) 137 Cal.App.4th 264, 269.) Under this
two-step process, "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 . . . that the business had goodwill to lose."
(Dry Canyon Enterprises, 211 Cal.App.4th 486, 491; see also
Emeryville Redevelopment Agency v. Harcros Pigments, Inc. (2002)
101 Cal.App.4th 1083, 1118 n.13 [a threshold finding that the
business had no goodwill to lose would preclude a jury award for
loss of goodwill].) "Whether the qualifying conditions for such
compensation . . . have been met is a matter for the trial court
to resolve," and "[o]nly if the court finds these conditions
exist does the remaining issue of the value of the goodwill
loss, if any, go to the jury." (NTS Technical Systems, 137
Cal.App.4th 264, 270.) The business owner seeking compensation
is thus vested with the initial burden of showing entitlement to
compensation for lost goodwill.
Appellate courts have articulated different evidentiary
standards for this threshold burden. Some require an owner to
adduce enough evidence to enable a jury to find that goodwill
existed prior to the taking. (See Redevelopment Agency of San
Diego v. Attisha (2005) 128 Cal.App.4th 357.) Others have
AB 374 (Wagner)
Page 4 of ?
required a showing of preexisting goodwill sufficient to prove
its existence to the court's satisfaction. (See Emeryville
Redevelopment Agency v. Harcros Pigments, Inc. (2002) 101
Cal.App.4th 1083.) This bill would effectively codify the
standard adopted in Attisha by adding as a statutory
precondition to recovery that the owner of a business adduce
sufficient evidence to permit a jury to find that goodwill
existed prior to a taking before the owner can be compensated
for any loss of goodwill.
CHANGES TO EXISTING LAW
Existing federal law , the U.S. Constitution, provides that
"private property [shall not] be taken for public use, without
just compensation." (U.S. Const. Amend. V.)
Existing state law , the California Constitution, provides that
private property "may be taken or damaged for public use only
when just compensation, ascertained by a jury unless waived, has
first been paid to, or into court for, the owner." (Cal. Const.
Art. I, Sec. 19.)
Existing law states that just compensation for a property taken
by eminent domain is equal to the property's fair market value,
which may include compensation for the loss of goodwill.
"Goodwill" consists of 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. (Code Civ.
Proc. Secs. 1263.310, 1263.510.)
Existing law provides that the owner of a business conducted on
the property taken, or on the remainder if the property is part
of a larger parcel, shall be compensated for loss of goodwill if
the owner proves all of the following:
(1) The loss is caused by the taking of the property or the
injury to the remainder.
(2) 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.
(3) Compensation for the loss will not be included in
payments under Section 7262 of the Government Code.
(4) Compensation for the loss will not be duplicated in the
compensation otherwise awarded to the owner. (Code Civ.
AB 374 (Wagner)
Page 5 of ?
Proc. Sec. 1263.510(a).)
Existing case law provides that a business owner has the right
to a jury determination on the amount or value of goodwill lost.
(People ex rel. Department of Transportation v. Dry Canyon
Enterprises (2012) 211 Cal.App.4th 486, 491.)
This bill would add as a statutory precondition to recovering
compensation for any loss of goodwill that the owner of a
business adduce sufficient evidence to permit a jury to find
that goodwill existed prior to the taking.
COMMENT
1. Stated need for the bill
The author writes:
Under current law, the governing body of a public entity
[must] adopt a resolution of necessity, as specified, and
send related notices before commencing an eminent domain
proceeding. The owner of a business taken pursuant to the
government's eminent domain power is entitled to recover
the loss of the business's "goodwill." The amount of that
loss is determined by the jury. However, the jury only
gets to answer the question of the amount of goodwill if
the trial court judge first determines that the business in
fact had goodwill to lose.
This bill would further require the owner of a business to
prove that there is sufficient evidence to permit the trier
of fact to find that goodwill existed prior to the taking
of the property. The addition of the following sentence
could resolve this issue: "the owner of the business
establishes the right to seek 'goodwill' pursuant to this
section by adducing enough evidence to permit the trier of
fact to find that goodwill existed prior to the taking."
The problem here, and the reason for the statutory
amendment, is that the law fails to state the standard by
which the judge makes that determination of goodwill, and
the appellate courts have established different,
inconsistent, standards.
AB 374 (Wagner)
Page 6 of ?
2. Standard for determining when showing of preexisting goodwill
has been satisfied
California courts, and particularly the trial courts, perform a
gatekeeping role in deciding whether a party whose land has been
taken through eminent domain has presented "sufficient evidence
to permit the jury" to hear claims for just compensation.
(Metropolitan Water Dist. of So. California v. Campus Crusade
for Christ, Inc. (2007) 41 Cal.4th 954, 970.) As with other
condemnation proceedings, courts assessing claims of loss of
goodwill are "vested with considerable judicial discretion in
admitting or rejecting evidence of value" (County Sanitation
Dist. v. Watson Land Co. (1993) 17 Cal.App.4th 1268, 1282), and
"[t]he responsibility for defining the extent of compensable
rights" in this field "is that of the courts" (Sacramento & San
Joaquin Drainage Dist. ex rel. State Reclamation Board v. Reed
(1963) 215 Cal.App.2d 60, 69). Consequently, courts exercise
"wide discretion in deciding how [they carry] out [their]
gatekeeping role in requiring business owners to establish [a]
business's preexisting goodwill" as a condition precedent to
recovering compensation for loss of that goodwill. (Dry Canyon
Enterprises, 211 Cal.App.4th 486, 492.)
California's appellate courts have not adopted a single standard
setting out the bounds of this threshold evidentiary burden.
Some courts have required an owner to adduce enough evidence to
enable a jury to find that goodwill existed prior to the taking
(see e.g. Redevelopment Agency of San Diego v. Attisha (2005)
128 Cal.App.4th 357), while others have required a showing of
preexisting goodwill sufficient to prove its existence to the
court's satisfaction (see e.g. Emeryville Redevelopment Agency
v. Harcros Pigments, Inc. (2002) 101 Cal.App.4th 1083). More
recent appellate courts have declined to weigh in on the issue
at all (see e.g. Dry Canyon Enterprises, 211 Cal.App.4th 486,
492 ["We leave for another day precisely what burden the
business owner bears."].) This bill would adopt the first
standard and codify it as part of California's Eminent Domain
Law.
At first glance, the two threshold standards identified above
seem to impose similar requirements. However, on closer
inspection, it is apparent that the first standard articulates a
lighter burden to establish the existence of goodwill than the
second. The first standard - that an owner must adduce enough
evidence to enable a jury to find that goodwill existed prior to
the taking - is essentially a burden of production. It
AB 374 (Wagner)
Page 7 of ?
establishes a business owner's "obligation to come forward with
evidence to support its claim" by placing a burden on the owner
to produce evidence of material fact - specifically, the
existence of goodwill prior to a taking - before the owner's
claim of loss of goodwill can go forward. (Campus Crusade for
Christ, 41 Cal.4th 954, 969.) Upon meeting this threshold
burden, the jury becomes the ultimate or final arbiter of
whether prior-existing goodwill did indeed exist.
In contrast, the second standard - that a business owner make a
showing of preexisting goodwill sufficient to prove its
existence to the court's satisfaction - imposes both a burden of
production and a burden of persuasion, the latter being "the
notion that if the evidence is evenly balanced, the party that
bears the burden of persuasion must lose." (Id.) By requiring
a showing of preexisting goodwill sufficient to prove its
existence to the court's satisfaction, the second standard
places the judge hearing an eminent domain case in the position
of determining whether this preliminary fact exists or does not
exist, and, consequently, deprives a party of a jury decision on
the question.
In its present form, the Eminent Domain Law is silent on whether
a preliminary determination on the existence of goodwill prior
to a taking is to be made by a judge or a jury. (Dry Canyon
Enterprises, 211 Cal.App.4th at 492 ["The statute does not
specify . . ."].) Generally, though not always, "[t]he property
owner in an eminent domain action is entitled to a jury trial on
the issue of just compensation" only. (Campus Crusade for
Christ, 41 Cal.4th 954, 971 [citation omitted].) A condemnation
suit is a special form of civil proceeding, where "all issues
except the sole issue relating to compensation are to be tried
by the court." (Id.) This bill would arguably alter this
existing framework by codifying the line of appellate decisions
that places the resolution of this preliminary question of fact
with the jury. By placing a burden of production without a
burden of persuasion on the business owner seeking compensation,
the judge's function would be to merely determine whether
sufficient evidence has been produced to permit a jury to
discern the existence of pre-taking goodwill, and the judge's
determination would then "merg[e] imperceptibly into the weight
of the evidence, if admitted." (Di Carlo v. United States
(1925) 6 F.2d 364, 367.) Adopting this lower threshold standard
is in keeping with the purpose of California's Eminent Domain
Law, which is "unquestionably to provide monetary compensation
for the kind of losses which typically occur when an ongoing
AB 374 (Wagner)
Page 8 of ?
small business is forced to move and give up the benefits of its
former location." (People ex rel. Dept. of Transportation v.
Muller (1984) 36 Cal.3d 263, 270.)
Support : Association of California Water Agencies
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation :
SB 1650 (Kehoe, Chapter 602, Statutes of 2006) instituted
certain protections against potential misuses of eminent domain
powers, including prohibiting a public entity from using a
property for any use other than the "public use" stated in its
resolution of necessity, unless the entity first adopts a new
resolution that finds the public interest and necessity of using
the property for a new stated public use. The bill also
requires a public entity to offer a one-year leaseback agreement
to a property owner whose property was acquired under threat of
eminent domain, unless the public entity states in writing that
development or redevelopment of the property is scheduled to
begin within two years of its acquisition.
SB 1210 (Torlakson, Chapter 594, Statutes of 2006) requires a
noticed hearing process prior to issuance of an order of
possession in an eminent domain case, and requires a public
entity to pay for an independent appraisal ordered by a property
owner when requested in an eminent domain action.
SCA 20 (McClintock, 2006) would have constitutionally prohibited
public entities from acquiring private property by eminent
domain except for the public use specified by the public entity
during condemnation proceedings. The bill would have further
restricted private property from being taken or damaged without
the consent of the owner(s) for purposes of economic
development, increasing tax revenue, or for any other private
use, including maintaining the present use by a different owner.
In cases where the property was later sold or transferred, the
bill would have created a right for a former owner to reacquire
the property for fair market value. This bill failed passage
AB 374 (Wagner)
Page 9 of ?
out of the Senate Judiciary Committee.
SCA 15 (McClintock, 2005) would have constitutionally prohibited
public entities from acquiring private property by eminent
domain except for the public use specified by the public entity
during condemnation proceedings. In cases where the property
was later sold or transferred, the bill would have created a
right for a former owner to reacquire the property for fair
market value. Public entities would have been constitutionally
prohibited from taking or damaging private property for private
use. This bill failed passage out of the Senate Judiciary
Committee.
AB 237 (Papan, Chapter 428, Statutes of 2001) amended eminent
domain law to facilitate resolution of condemnation cases
without trial. Specifically, it allows parties to submit any
dispute in an eminent domain proceeding for mediation or
arbitration, requires appraisal summaries and offers of
compensation to contain detail sufficient to indicate the basis
for the appraisal or offer, and requires final offers and
demands to include all elements of required compensation,
including loss of goodwill.
AB 11 (McAlister, Chapter 1275, Statutes of 1975) amended
eminent domain law to require compensation for business losses
substantially in line with the Uniform Eminent Domain Code.
This bill provides compensation for loss of goodwill in both
whole and partial takings cases, but only to the extent such
loss could not reasonably be prevented by relocation or other
efforts by the owner to mitigate the loss.
Prior Vote :
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Floor (Ayes 75, Noes 0)
**************