The Interrelationship Between Goodwill, Relocation, and Reestablishment

IRWA Chapter 12010 Fall SeminarOctober 26, 2010

The information contained herein does not constitute a legal opinion and should not be relied upon by the reader as legal advice or be regarded as a substitute for legal advice.

© Copyright, 2009 Nossaman LLP. All Rights Reserved.

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The Legal FrameworkJust Compensation / Fair Market Value

California Const., art. I, sec. 19

The Relocation Act

Gov. Code § 7260 et seq.

Business Goodwill

Code Civ. Proc. § 1263.510

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Fair Market Value DefinitionThe fair market value of the property taken is the highest price on the date of valuation that would be agreed to by a seller, being willing to sell but under no particular or urgent necessity for so doing, nor obliged to sell, and a buyer, being ready, willing, and able to buy but under no particular necessity for doing so, each dealing with the other will full knowledge of all the uses and purposes for which the property is reasonably adaptable and available.

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Fair Market Value for Businesses?

Businesses can possess real property claims:

• Improvements

• Furniture, fixtures, and equipment

• Leasehold bonus value

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The Relocation Act: History and Policy Goals

Fundamental goal is to ensure that a public project does not force someone out of business

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Relocation Act: Policy StatementsEnsure “uniform, fair and equitable treatment” so businesses “shall not suffer disproportionate injury as a result of action taken for the benefit of the public as a whole.”(Cal. Code Regs., tit. 25, § 6002, subd. (b)(1).)

Recognition that “displacement of businesses often results in their closure,” and “[m]inimizing the adverse impact of displacement is essential to maintaining the economic and social well-being of communities.”(Gov. Code, § 7260.5(a)(3)-(4).)

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The Relocation Act: Policy

Business entitled to relocation assistance without regard for profitability (or whether it even makes sense to relocate)

Legislature understandably wanted to create some limitations, especially for things other than the actual cost of the move

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Relocation Benefits: Eligibility

Relocation Act applies to any person displaced by a public improvement project

Eligibility determined by whether person relocated as a result of the project

Typically, eligibility questions only arise where:Business moves too early;

Project is canceled after relocation occurs; or

Agency claims relocation not caused by the project

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Relocation Benefits: What are they?

Actual out of pocket costs incurred to accomplish the move itself

Value of some personal items that cannot be relocated economically

Costs associated with locating a relocation site

Costs associated with reestablishing the business at the new site

Work on site to render it suitable for business

Stationary, business cards, advertising, etc.

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Relocation Benefits: Caps

Actual Moving Expenses: No Limit

Value of Personal Property: No Limit

Finding a Site: $1,000

Reestablishment: $10,000

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Reestablishment Cap

$10,000 limit has some exceptions

No specific limit on reestablishment costs for:

modifying the machinery, equipment, or other personal property to adapt it to the replacement location or to utilities available at the replacement location or modifying the power supply.

25 Cal. Code Regs § 6090(b)(1)

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Relocation Benefits: How do you get them?

Each agency has an administrative proceeding, typically managed by relocation consultants

If no disputes arise, payments processed through relatively simple paperwork

If disputes arise, owner can seek administrative review

If administrative review does not resolve dispute, owner can file a Petition for Writ of Mandate in Superior Court

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Loss of Business Goodwill: History and Policy Goals

Courts have long held that recovery of business losses not guaranteed by the constitution

Until fairly recently, recovery of goodwill not allowed under California law

Remedial purpose: prevent project from taking someone’s hard-earned business value

Legislature created barriers to entry to ensure claimants possess goodwill before project

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Loss of Business Goodwill: Eligibility

Must possess business goodwill

Loss of goodwill must be caused by the project

Owner must take reasonable steps to preserve goodwill

Compensation must not be included in relocation payments

Compensation must not be duplicative of any other award (i.e., real property)

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Business Goodwill: What is it?

Generally, a business’ intangible value Value above and beyond the value of the fixed assistsStatutory definition:

“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”

NOTE: Not all businesses possess goodwill (in fact, many small businesses do not)

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Loss of Business Goodwill: Caps

Loss of Goodwill: Limited to goodwill value in the “before condition”

Mitigation Costs: Must be reasonable, and arguably also limited by value of goodwill in the “before condition”

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Loss of Business Goodwill: How do you get it?

Typically arises in an eminent domain case (though owner can sue in inverse condemnation)

Defendant business owner makes a claim for compensation in the action

Owner bears the burden of proving entitlement factors to the Court

Assuming Court finds owner entitled to recover, jury determines the amount of the loss, if any

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The Interaction Between Relocation and Goodwill

Key relationship is goodwill statute’s prohibition on recovering as goodwill anything that owner received as a relocation benefit

Conventional wisdom: Owner could elect remedy,but had to ensure no duplicative recovery

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Choosing Between Relocation and Goodwill

Owner might choose to ignore contested relocation payments and seek to recover as lost goodwill

– Already in a lawsuit over goodwill issues; no desire to file a separate lawsuit on relocation issues

Owner might choose to pursue through a writ proceeding

– No burden to prove goodwill entitlement; cleaner proceeding

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Redevelopment Agency v. Arvery Corp. (1992) 3 Cal.App.4th 1357• Issue involved situations in which an expense

qualifies as either a reestablishment expense under the Relocation Act or lost business goodwill.

• Held: No choice of remedies. If item recoverable under Relocation Act, owner had to pursue that remedy exclusively.

• Impact: Owners denied relocation benefits now forced to file writ action, rather than including claim within existing eminent domain action.

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LAUSD v. Casasola (2010) 187 Cal.App.4th 189

• Owner possessed $126,000 in goodwill

• Spent $1.3 million to mitigate loss of goodwill

• Money used to render replacement site suitable

• Owner sought to recover as lost goodwill

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LAUSD v. Casasola (2010)187 Cal.App.4th 189 (con’t)

• Owner distinguished Arvery on the grounds that Relocation Act’s $10,000 cap meant the costs were not recoverable under the Act

• Owner argued that because costs not recoverable under the Relocation Act, recovery as goodwill not precluded under Arvery

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LAUSD v. Casasola (2010) 187 Cal.App.4th 189 (Holding)• Anything that might fall within the Relocation Act’s

scope – even if noncompensable under the Act’s provisions – must be excluded from goodwill claims

• Since Casasola’s expenses fell within the scope of reestablishment expenses, they could not be included within the goodwill claim

• Court acknowledged that this left Casasola with no remedy, but explained that it was for the Legislature, not the courts, to set limits recovery, and Legislature chose $10,000

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What Does this Mean for Business Owners?• Must take great care before expending money on

relocation

• May need to forego a relocation site if reestablishment costs too high

• If business chooses site with identical rent but $500,000 in reestablishment costs, it has no remedy

• If business chooses site with $500,000 in additional rent but no reestablishment costs, recoverable as goodwill

(See People v. Muller (1984) 36 Cal.3d 263)

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What if Owner Cannot Afford to Relocate?• In order to state a claim for loss of business

goodwill, owner must make reasonable efforts to mitigate?

• Is it reasonable to require mitigation efforts that result in massive noncompensable expenditures?

(See Valencia v. Shell Oil Co. (1944) 23 Cal.2d 840, 846; Berge v. International Harvester Co.(1983) 142 Cal.App.3d 152, 163)

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Avoiding the Casasola Rule

• Reestablishment expenses not recoverable, but increased rent is recoverable

• All owner needs to do is work with landlord to incorporate reestablishment expenses into the rent (i.e., have landlord fund the work as part of a “tenant improvement allowance”)

Query: Why should it matter how these things are classified?

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Possible Solution: Lift the Caps

Relocation Act’s caps could be lifted:

$10,000 is insignificant sum when relocating a major facility

If reestablishment costs are necessary to avoid putting someone out of business, expanding relocation benefits can save agency money in the long run

BUT: Does this reflect sound policy?

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Possible Solution: Change the law

The real problem: Casasola is bad law arising from bad facts

Easy to see how the court got where it did when owner spent $1.3 million in an effort to preserve $126,000

No reason business owner should suffer if their form of loss comes in the form of reestablishment costs as opposed to, for example, higher rent

Courts can change this rule, but a Legislative solution makes more sense

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Ethical Obligations: Another Reason to Try to Help Business Owners

Gov. Code, § 7267.5 -- prohibits coercive action by public entity City of Los Angeles v. Decker (1977) 18 Cal.3d 860 – agency lawyer must seek “impartial justice”County of Santa Clara v. Superior Court (2008) 161 Cal.App.4th 1140 – government representation must be “absolutely neutral”

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Rick RaylNossaman, LLP18101 Von Karman Ave., Suite 1800Irvine, CA 92612949-833-7800rrayl@nossaman.com

www.CaliforniaEminentDomainReport.com

Questions?