BILL ANALYSIS �
AB 2023
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Date of Hearing: May 6, 2014
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 2023 (Wagner) - As Amended: April 21, 2014
SUBJECT : Eminent Domain: Compensation: Loss of Goodwill
KEY ISSUES :
1)Should a Business owner who seeks compensation for loss of
goodwill as a result of an eminent domain action be required
to Provide evidence that goodwill existed prior to the taking
of the property?
2)should a recent court case, to the extent that it suggested
that goodwill must be shown by more than a preponderance of
evidence, be overruled by this bill?
SYNOPSIS
Under existing eminent domain law, the owner of a business that
is situated on property that is taken by eminent domain may seek
compensation for the loss of goodwill, provided that the owner
proves that the taking caused the loss of goodwill, that the
loss cannot reasonably be prevented by relocation of the
business, and that compensation is not already provided by some
other provision of law. This bill is quite similar to last
year's AB 374, by the same author, which was vetoed by the
Governor. Both last year's bill and the bill under
consideration would clarify what would seem to be implicit: in
order to recover for a loss of goodwill the owner would first
need to prove that goodwill existed before the taking. However,
this year's bill addresses an additional issue - the burden of
proof for establishing that goodwill existed prior to the taking
- by expressing legislative intent to overturn a decision that,
the author believes, could be construed to require proof of
goodwill beyond a preponderance of the evidence. In short, the
bill seeks to clarify that an owner must prove preexisting
goodwill in order to be compensated for loss of goodwill. At
the same time, however, the bill clarifies that the owner should
not be required to prove the existence of good will by some
higher standard than preponderance of the evidence. The bill is
sponsored by the Conference of California Bar Associations.
There is no opposition to this bill.
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SUMMARY : Requires a business owner, when his or her business
property is subject to an eminent domain proceeding, to
establish, as a threshold matter, that goodwill existed before
the taking of the property, and overrules a specified appellate
court decision to the extent that the decision requires an owner
to establish preexisting goodwill by more than a preponderance
of the evidence.
EXISTING LAW :
1)Prohibits the government from taking or damaging private
property for a public use without the payment of just
compensation, as ascertained by a jury unless waived.
(California Constitution Article 1 Section 19.)
2)Provides that the owner of a business conducted on the
property taken by eminent domain, 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;
a) The loss is caused by the taking of the property or the
injury of the remainder.
b) The loss cannot reasonably be prevented by relocation of
the business or by taking steps and adopting procedures
that a reasonably prudent person would take and adopt in
preserving the goodwill.
c) Compensation for the loss will not be included in
relocation payments, as specified.
d) Compensation will not be duplicated in the compensation
otherwise awarded to the owner. (Code of Civil Procedure
Section 1263.510 (a).)
3)Defines "goodwill," for purposes of the above, to include the
benefits that accrue to a business as a result of its
location, reputation for dependability, skill or quality, or
any other circumstances resulting in probable retention of old
or acquisition of new patronage. (Code of Civil Procedure
Section 1263.510 (b).)
4)Holds that a business owner is entitled to jury trial on the
amount of goodwill lost by a taking only if he or she first
establishes, as a threshold issue, that the business had
goodwill to lose. (People v. Dry Canyon Enterprises, LLC
(2012) 211 Cal. App. 4th 486.)
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FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
COMMENTS : This bill, like the author's AB 374 of last year, is
based on a seemingly non-controversial axiom: one cannot lose
what one does not have. This year's bill, which is sponsored by
the Conference of California Bar Associations, would require the
owner of a business situated on property that is taken by
eminent domain to provide "credible evidence" that goodwill
existed before the taking of the property, if the owner seeks
compensation for the loss of goodwill. Although existing law
requires the owner seeking such compensation to prove that the
loss of goodwill cannot be reasonably avoided by some other
means and that the loss is not otherwise compensated, the law
does not expressly require the owner to prove that goodwill
existed in the first place. The author contends that the
appellate courts have failed to establish a consistent standard
of what is required; this bill seeks to provide that standard.
In addition, unlike last year's AB 374, this bill purports to
overturn a 2012 appellate court ruling (discussed below), at
least to the extent that the decision implied that an owner
would need to establish preexisting goodwill by something
greater than a preponderance of the evidence.
Compensation for Loss of Goodwill: Whenever the state takes
property for a public use through its power of eminent domain,
the U.S. and California constitutions give the owner of the
subject property a right to "just compensation." Typically,
"just compensation" means the market value of the property at
the time of the taking. The constitutional right to "just
compensation" does not, however, include compensation for any
loss of goodwill that a business loses as a result of the
taking. Rather, the right to be compensated for loss of
goodwill is provided not by the constitution, but by statute.
Code of Civil Procedure Section 1263.510 provides that the owner
of a business that is conducted on the condemned property shall
be compensated for loss of goodwill if the owner proves (1) that
the loss is caused by the taking of the property; (2) that the
loss cannot reasonably be prevented by a relocation of the
business or other reasonable means; and (3) that the owner is
not already compensated under another provision of law (so that
there will be no double damages). Unlike the constitutional
right to just compensation, the statutory right to compensation
for loss goodwill is not restricted to the owner of the
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condemned property; it is also available to the owner of a
business that is conducted on that condemned property and is
forced to move because of the taking.
Traditionally, business "goodwill" has consisted of things like
a reputation for dependability and quality, or other
circumstances that help a business draw and maintain customers.
Most relevant to receiving compensation for the loss of goodwill
due to an eminent domain taking, the statutory definition of
goodwill includes "the benefits that accrue to a business as a
result of its location." Clearly, if a business is forced to
relocate, it may possibly lose established customers.
The Dry Canyon Case : While existing law does not expressly
state that the owner must provide evidence that goodwill existed
prior to the taking - as this bill would do - a number of courts
have held that such a requirement is necessarily implied. Most
recently, the California Court of Appeal for the Second District
held that "a business owner is entitled to a jury trial on the
amount of goodwill lost by taking only if he or she first
establishes, as a threshold matter, that the business had
goodwill to lose." (People v. Dry Canyon Enterprises (2012) 211
Cal. App. 4th 486, 491.) The court reasoned that this was "all
but compelled" by the language of the statute. (Id.) The
statute, after all, requires the owner to prove that the loss of
goodwill was caused by the taking, and presumably the owner
could only prove causation if there was goodwill to lose in the
first place. (See also Emeryville Redevelopment Agency v.
Harcros Pigments, Inc. (2002) 101 Cal.App.4th 1083, 1118, fn.
13, holding that if a business had no goodwill to lose it "would
preclude a finding of the . . . statutory preconditions to
recovery.") This bill would effectively codify this seemingly
sound reasoning by expressly stating that the owner shall be
compensated for goodwill if he or she proves, as a threshold
matter, that goodwill existed before the taking.
However, according to the author, another part of the Dry Canyon
decision suggested that an owner must establish goodwill by the
higher standard of "clear and convincing evidence" rather than
the usual civil standard of "preponderance of evidence." The
Committee does not necessarily agree with this reading of the
case. The author does not cite the specific language in the Dry
Canyon decision that leads him to this conclusion, but
apparently he is referring to the court's reliance on a prior
case which held that an owner could not rely upon the
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"cost-to-create" methodology of calculating loss of goodwill
unless there was "clear proof of preexisting goodwill." (Dry
Canyon, supra, at 494.) Whether or not "clear proof" has the
same meaning as "clear and convincing evidence" is unclear, but
it is important to stress that the court here did not hold, as a
general rule, that an owner must prove goodwill with "clear
proof." Rather, the court's more narrow holding was that there
must be "clear proof" only if the owner relied upon a particular
methodology - "cost-to-create" - to calculate the value of the
lost goodwill. Indeed, the court expressly stated that it was
not considering the broader question of required proof: "We
leave for another day precisely what burden [of proof] the
business owner bears . . . the question is not presented because
the trial court here found that [the defendant] did not present
any competent evidence of preexisting goodwill." (Id. at
492-493, emphasis in original.) Be that as it may, the
Committee concurs with the author that there is no harm in
clarifying this point, so that the case is not read to imply, as
a general rule, that an owner must prove pre-existing goodwill
by "clear and convincing" evidence before the issue can be
presented to the trier of fact. The usual burden of proof in
civil cases, as the author and sponsor note, is preponderance of
the evidence unless some special circumstance justifies
requiring "clear and convincing" evidence. This bill would only
require "credible evidence" of preexisting goodwill before the
question of compensation for loss of goodwill, along with the
other required statutory elements, would be submitted to the
trier of fact.
Response to Governor's Veto Message on AB 374 : The author's
similar AB 374 was vetoed by Governor Brown, who stated in his
veto message: "This measure would reverse several appellate
court decisions allowing judges, in eminent domain claims for
loss of goodwill, to decide facts before a jury decides on
compensation. In this case, I think appellate courts got it
right. Judges are in the best position to decide whether
businesses had goodwill to lose before proceeding to costly jury
trials."
However, this bill makes it clearer than did AB 374 that the
evidence of goodwill must be shown by credible evidence before
the question is submitted to the trier of fact. Last year's AB
374 would have required the owner to provide sufficient evidence
to "permit a jury" to conclude that goodwill existed prior to
the taking, suggesting that a judge could not require a showing
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of some evidence as a threshold matter before submitting it to
the jury. This year's bill, however, appears to address the
Governor's concern by making it clear that there must be
credible evidence of preexisting goodwill before the question is
submitted to a trier of fact, at which time it would be
considered along with the other required showings: the loss is
caused by the taking; the loss cannot be reasonably prevented by
a relocation or other preventative steps, as specified; and the
owner is not entitled to compensation under some other provision
of law.
ARGUMENTS IN SUPPORT : The Conference of California Bar
Associations (CCBA) argues that this bill will clarify that "if
the owner of a property taken by eminent domain demonstrates
that there is credible evidence that goodwill existed before the
taking, the issue of what compensation will be due to the owner
for the loss of goodwill shall be presented to the trier of
fact." CCBA notes that the bill also includes a statement of
legislative intent that the Dry Canyon case will be overruled to
the extent that it requires an owner to establish preexisting
goodwill by more than a preponderance of evidence. CCBA adds
that this bill respects the Governor's decision regarding AB
374, as it "proposes no change whatsoever in the authority to
determine whether or not goodwill exists. Instead, the bill
addresses a different problem raised by the Dry Canyon decision:
What is the standard that should be used for determining the
existence of goodwill." CCBA believes that this bill will
correct the court's "imprecise" language suggesting that
goodwill can only be determined when a business "clearly" had
goodwill to begin with.
REGISTERED SUPPORT / OPPOSITION :
Support
Conference of California Bar Associations (sponsor)
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334
AB 2023
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