BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 2023 (Wagner)
As Amended June 15, 2014
Hearing Date: June 24, 2014
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 if an owner produces evidence tending to show
that goodwill existed before a taking, such evidence shall be
presented to the trier of fact.
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. Amend. 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
comprehensive revision of eminent domain law in the state,
(more)
AB 2023 (Wagner)
Page 2 of ?
adopting in substance certain provisions of the Uniform Eminent
Domain Code. (See 13 Cal. Law Revision Com. Rep. (1975) pgs.
1218-1219.) 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. Business goodwill may
potentially be lost through a range of eminent domain actions,
spanning minor condemnations such as the acquisition of coastal
rights-of-way for public use, to major public infrastructure
projects like the construction of California's High Speed Rail
System. 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).)
AB 2023 (Wagner)
Page 3 of ?
Existing law sets out a number of qualifying conditions that
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). (People ex rel. Dept. of Transp. v. Dry Canyon
Enterprises, LLC (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 through the production of
evidence.
Appellate courts have articulated different evidentiary
standards for this threshold burden that must be met before the
issue is presented to the jury. Some require an owner to adduce
AB 2023 (Wagner)
Page 4 of ?
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 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 eliminate the
court's threshold role in determining whether a business owner
has presented sufficient evidence to show that goodwill existed
before a taking by providing that if an owner produces evidence
tending to show that goodwill existed before a taking, such
evidence shall be presented to the trier of fact, which in this
context would be the jury.
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
AB 2023 (Wagner)
Page 5 of ?
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. 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. Dept. of Transp. v. Dry Canyon Enterprises, LLC
(2012) 211 Cal.App.4th 486, 491.)
Existing case law holds that all issues except the sole issue
relating to compensation, are to be tried by the court. (People
v. Ricciardi (1943) 23 Cal.2d 390, 402.)
This bill would provide that if an owner produces evidence
tending to show that goodwill existed before a taking, that
evidence shall be presented to the trier of fact.
COMMENT
1. Stated need for the bill
The author writes:
AB 2023 would amend �1263.510 of the Code of Civil Procedure
to provide that if the owner of a property taken by eminent
domain [produces evidence tending to show] that goodwill
existed before the taking, the issue of what compensation will
be due the owner for the loss of goodwill shall be presented
to the trier of fact. The [court's decision in People ex rel.
Dept. of Transp. v. Dry Canyon Enterprises, LLC. (2012), 211
Cal.App.4th 486] was imprecise in its determination in
determining the existence of goodwill, but its language
suggesting that the value of goodwill can be determined only
when a business "clearly had goodwill" to start with, and when
the taking caused a "total loss of goodwill" is extremely
disconcerting, in that it suggests the evidentiary threshold
is quite possibly as high as clear and convincing evidence.
This is inconsistent with both case and statutory law, both of
which set the threshold standard for determining the existence
of goodwill much lower.
2. Standard for determining when showing of preexisting goodwill
has been satisfied
California courts, and particularly the trial courts, perform a
AB 2023 (Wagner)
Page 6 of ?
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. The statute does not specify whether the
owner need only adduce enough evidence to enable a jury to find
that goodwill existed prior to the taking, or whether the owner
must prove its existence to the court's satisfaction."]
[citations omitted].)
This bill would establish that "evidence tending to show"
preexisting goodwill before a taking must be presented to a jury
in an eminent domain case. Staff notes that requiring the
presentation of all possible evidence of prior-existing goodwill
to a jury would, in practical effect, eliminate the court's role
in deciding the threshold legal issue of entitlement to loss of
goodwill. Such a sea-change in California's Eminent Domain Law
would run contrary to a century of judicial precedent, which has
held that "only the 'compensation,' the 'award,' which our
AB 2023 (Wagner)
Page 7 of ?
constitution declares shall be found and fixed by a jury. All
other questions of fact, or of mixed fact and law, are to be
tried, as in many other jurisdictions they are tried, without
reference to a jury." (People v. Ricciardi (1943) 23 Cal.2d
390, 402.) (See also Vallejo & N. R. Co. v. Reed Orchard Co.
(1915) 169 Cal. 545, 555.) Establishing a statutory standard
requiring presentation of all evidence of loss of business
goodwill to a jury necessarily constrains the discretion
historically afforded to courts in this area, and would
undermine the traditional role of the judge in "admitting or
rejecting evidence of value" in eminent domain suits. (County
Sanitation Dist., 17 Cal.App.4th at 1282.)
SHOULD JUDICIAL DISCRETION IN ADMITTING EVIDENCE IN EMINENT
DOMAIN SUITS BE CONSTRAINED?
3. Governor Brown's Veto of AB 374
This bill is similar to the enrolled version of AB 374 (Wagner).
In vetoing AB 374, Governor Brown stated:
This measure would reverse several appellate court decisions
allowing judges, in eminent domain claims for loss in business
goodwill, to decide facts before a jury decides on
compensation. In this case, I think the 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.
As noted above in Comment 2, AB 2023 is likely to constrain the
historic discretion normally afforded judges hearing eminent
domain cases in deciding threshold questions of entitlement to
compensation. Consequently, this bill likely does not address
the Governor's concern that judges maintain their traditional
role of deciding whether loss of business goodwill claims ought
to proceed to jury trial.
Support : None Known
Opposition : None Known
HISTORY
Source : Conference of California Bar Associations
AB 2023 (Wagner)
Page 8 of ?
Related Pending Legislation : None Known
Prior Legislation :
AB 374 (Wagner, 2013) would have provided that an owner of a
business must adduce sufficient evidence to permit a jury to
find that goodwill existed prior to a taking before the owner is
entitled to receive any compensation for the loss of goodwill.
This bill was vetoed by Governor Brown.
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
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
AB 2023 (Wagner)
Page 9 of ?
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 Floor (Ayes 78, Noes 0)
Assembly Committee on Judiciary (Ayes 10, Noes 0)
**************