California Eminent Domain Report : a blog following condemnation, inverse condemnation, and regulatory takings written by attorneys with Nossaman LLP.

In Los Angeles Unified School District v. Casasola (Aug. 5, 2010), the Court of Appeal examined the interrelationship between recovery of lost business goodwill pursuant to Code of Civil Procedure section 1263.510 and recovery of relocation expenses pursuant to Government Code section 7267 et seq. 

My colleague, Gale Conner, prepared a good summary of the Casasola case detailing the facts and the Court's reasoning.  The bottom line is that the Court held that items that might be recoverable under the Relocation Act cannot be included in a claim for loss of business goodwill. 

At first glance, this does not seem surprising.  Section 1263.510 contains an express limitation that a goodwill award not be duplicative of relocation benefits.  And nearly 20 years ago, the court in Redevelopment Agency of the City of Emerville v. Arvery Corporation (1992) 3 Cal.App.4th 1357 held that expenses that could be recovered under the Relocation Act must be excluded from an award of business goodwill. 

But the Casasola opinion expands these concepts, holding that even if the expenses cannot be recovered under the Relocation Act, they are nonetheless precluded under the goodwill statute if they are the types of things that might have been recoverable under the Relocation Act. 

In Casasola, for example, the business owner spent over $1 million on business reestablishment costs to prepare the relocation site.  Since the Relocation Act caps such costs at $10,000, the court held that anything above that amount was not compensable -- under either the Relocation Act or as business goodwill.

The Casasola court concluded that it could not second guess the Legislature's decision to place a $10,000 cap on reestablishment costs by allowing the claim to come in under the guise of the goodwill statute. 

In my mind, this conclusion misses the mark.  Yes, the Relocation Act and section 1263.410 both deal, very generally, with the same subject matter.  But the policies behind the two statutory schemes are quite different, and the court's failure to understand this difference led it down the wrong path. 

Relocation benefits are available to every displaced business, whether that business is profitable or not.  The policy is that a government taking should not force someone out of business, even if the business is not economically viable.  However, the Legislature understandably wanted to draw some lines in this respect, and it capped some of what may be recovered as a relocation expenses (including the $10,000 cap on reestablishment costs). 

Loss of business goodwill is a whole different animal.  Not every business possesses goodwill, and not every displacement causes a business to lose goodwill.  But where a business does possess goodwill, and where the owner can prove that a displacement causes a loss of that goodwill, section 1263.510 makes that loss recoverable.  

The Legislature also placed limits on goodwill recovery, including an express requirement that the business owner take reasonable steps to mitigate the loss of goodwill.   And the goodwill statute contains no $10,000 cap on what the owner must spend in an effort to preserve goodwill.   

All one needs to do is flip the numbers from Casasola to see the problem with the Court's conclusion.  Instead of spending $1,300,000 to preserve $126,000 (as happened there), imagine a business that must spend $126,000 in order to preserve $1,300,000 in goodwill.  If the only viable relocation site for this $1,300,000 business requires $126,000 in reestablishment costs, the business must either (1) shut its doors, or (2) spend the $126,000.  Under section 1263.510, the owner clearly cannot opt to close the doors, claiming a total loss of goodwill; the owner would have failed to take reasonable steps to mitigate.

Thus, the owner must spend the money or its goodwill claim will be barred.  But the Relocation Act makes any such reestablishment costs over $10,000 non-compensable as relocation expenses.  And the Casasola opinion now also makes those costs non-compensable as lost business goodwill. 

Yet, the owner had to incur those costs, and they unquestionably lower the business' value.  (A hypothetical buyer facing $126,000 in relocation costs would clearly pay less than a hypothetical buyer not facing such costs.) 

Moreover, such relocations often do not proceed with such bright lines.  If the owner spends $126,000 out of pocket to render the site suitable, it is presumably an ineligible "reestablishment cost" (now barred under Casasola).  But if the landlord pays those costs as a tenant improvement allowance, subsuming the costs within the tenant's new rent, any increased rental expense qualifies as a classic example of something that impacts goodwill.  (Indeed, the obligation to pay higher rent at the replacement site was a fundamental issue in the first California Supreme Court opinion to address business goodwill claims under section 1263.510, People v. Muller.)  

Should recoverability really come down to whether the tenant pays the costs up front or gets them included within its rent?

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For anyone looking to spend more time on eminent domain issues, there are two upcoming events you may want to consider. 

• For those looking for a one-day commitment, I recommend the IRWA, Chapter 1 2010 Fall Education Seminar, which is taking place on October 26 at the Quiet Cannon in Montebello.  I don't have the full list of speakers yet, but it's always a good event, and my partner, David Graeler, is Chair again this year. I'll be talking about the interrelationship between goodwill and the Relocation Act, using the recent Casasola opinion as a jumping off point (look for a post about that later today). 
• For those looking for two full days of eminent domain excitement, CLE International is holding its 12th Annual Eminent Domain Conference October 28 and 29 at the Hotel Nikko in San Francisco.  I'll be speaking the morning of October 28 on a panel discussion of the Guggenheim regulatory takings case, and the entire schedule looks great. 

And don't forget, summer's drawing to a close, so your local IRWA chapter is likely about to start its regular meetings again.  I know that Chapter 67 (Orange County) has its meeting on September 14 and Chapter 57 (Inland Empire) has its meeting on September 1. 

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The California Court of Appeal issued an interesting unpublished decision yesterday addressing a number of eminent domain issues, ranging from right to take challenges, entitlement to goodwill, severance damages, and jury instructions.  The case, City of San Luis Obispo v. Hanson, garnered enough attention that several third parties filed Amicus briefs with the Court.

By way of background, the City of San Luis Obispo decided to realign a road partly in order to accommodate a newly approved Costco development.  The realignment required right-of-way acquisition from a property on which the Rose Garden Inn operated.  After Costco was unable to reach an agreement with the property's owner on the acquisition price, the City adopted an appraisal (which found no severance damages) prepared by an appraiser hired by Costco, made an offer based on that appraisal, and passed a resolution of necessity to acquire the property by eminent domain. 

The property owner's right to take challenge was unsuccessful, and the case proceeded to trial on compensation.  The trial court found the Inn was not entitled to lost business goodwill, and the jury returned a verdict finding only about a quarter of the amount of severance damages claimed by the owner.

On appeal, the following issues were decided:

• The Road Realignment Met the "Public Necessity" Test:  While the road realignment was partly caused by Costco's project, and Costco would clearly benefit from the realignment, the project still met the "public necessity" test in that the road was needed by the public and the City had considered realignment regardless of the Costco development.
• The City's Adoption of Costco's Appraiser's Value Was Appropriate:  The Court held that the City could adopt the opinion of the appraiser retained by Costco (instead of hiring its own appraiser to value the take), as long as the appraiser was independent and impartial, and the City was not required to turn over the full appraisal on which its offer was based (it was only required to provide a copy of the summary basis of appraisal).
• The City was not Precommitted to Taking the Property by Eminent Domain:  Even though the Costco project was already approved (which required the realignment), the City did not abuse its discretion in adopting the resolution of necessity because it was not precommitted to the taking; the City substantially debated the issue and ultimately could have modified the realignment had it chosen to do so.
• The City's Severance Damages Determination Was Appropriate:  The City's appraiser determined the severance damages suffered solely based on the cost to cure method of valuation, and it assumed that the City would build driveways on the remainder of the property.  The Court held that the appraiser was not required to value the remainder of the property before and after the taking, and that a condemning agency may agree to do work on the owner's property to reduce compensable damages (as long as it does not contradict the resolution of necessity).
• The Trial Court Appropriately Declined to Allow Testimony on the Business' Alleged Lost Goodwill:  The business' goodwill appraiser determined that the business possessed goodwill equal to ten percent of total income, and that all the goodwill would be lost because of the uncertainty of the project.  The court appropriately excluded this testimony because it was already part of the appraiser's calculation of severance damages the business would suffer, and because the appraiser's ten percent figure was arbitrary and could not be supported.
• The Jury Instruction Stating the Costs of the Acquisition Would be Borne by the Public Was Appropriate:  The jury was not told that Costco would be paying the ultimate costs of the acquisition, but instead that the public must pay the compensation.  The Court held this instruction was appropriate, as the jury need not be made aware of Costco's role, and ultimately, Costco may be partly reimbursed by the City if Costco paid more than its fair share of the roadway (since other property owners benefiting from the project must pay a portion as well through assessments/development impact fees).

In all, this was an exciting case for an eminent domain attorney, as it dealt with many issues that rarely occur in one case.  Although the case is unpublished, and therefore cannot be cited as law, it is useful to see how at least one Court of Appeal panel views these issues.

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The City of Laguna Woods had been leasing the building it used for City Hall on El Toro Road for a number of years.  In 2005, the City -- apparently tired of leasing the space -- decided to acquire the property by using its power of eminent domain.  After proceeding to trial, a jury determined this week that the fair market value the City is required to pay for the building was $6.43 million -- $2.78 million more than the City had initially offered.

According to an Orange County Register article, "Laguna Woods must pay $6.4 million to take City Hall," the issues that resulted in the valuation spread between the building's owner, Raintree Realty, and the City, included (1) whether the property decreased in value as a result of the City's taking over the site, and (2) the value of a parking lot easement the City was acquiring as part of the eminent domain action.

Ultimately, the City will be forced to pay nearly $3 million more than it thought for for the property, plus interest.  The City has stated that the proceeds will come from its reserve funds.

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On its face, the City of Rancho Cordova's eminent domain action to acquire a vacant parcel for redevelopment purposes is a familiar story. The government wants to seize private property in order to turn the property over to a third party for redevelopment.  This is the basic fact pattern that caused the national eminent domain uproar that started when the Supreme Court issued its 2005 Kelo decision.

Unlike in Kelo, however, in California the government typically cannot take such steps without making appropriate findings that the property being condemned is "blighted."  This requirement may not actually apply here, as the property's intended use may qualify as a public use.   But in any event, the property exists as a vacant, overgrown weed patch, so a blight finding doesn't seem to be much of a stretch.

Why, then, is the case getting so much media attention?  The controversy lies in the fact that the city intends to turn the property over to the Los Rios Community College District for construction of a satellite campus.  And even that might not raise eyebrows were it not for the fact that the property's owner had a signed contract to sell the property to Los Rios for the very same purpose. 

Specifically, Los Rios entered into a contract to buy the property for $8.6 million.  Then, allegedly just weeks after Los Rios walked away from the deal, the City moved forward with its plans to acquire the property in order to turn it over to Los Rios.  And (here's the important part), the city offered only about $4 million -- less than half the contract price. 

According to an August 10 Sacramento-area CBS news story by Mike Luery, On The Money: Land Grab?: Multi-Million Dollar Fight in Rancho Cordova, the courts will now need to sort out whether the city meets the requirements to condemn the property in light of the underlying facts. 

Not surprisingly, the property's owner is crying foul: 

"I had a contract with Los Rios," said Sam Fong. "And they (Rancho Cordova) interfered with the contract and they're taking the property for half the contract price."

I don't know nearly enough about the real facts here to offer a meaningful prediction about what might happen, but I do know that if the city in fact induced Los Rios to walk from its deal under a promise to get them the property for less than half the price, the owner may well have a legitimate complaint.

That said, even if the owner's allegations prove true, I'm not convinced it trumps the city's right to take the property.  Assuming that (1) the area is in fact blighted, (2) the city made a proper offer at the property's current fair market value, and (3) the city met the other procedural requirements for initiating an eminent domain action, they should get to proceed with the eminent domain action. 

And, unless the owner can prove a precondemnation damages claim, no reason exists that the city should have to pay more than the property's fair market value on the date of value.  (Note that a precondemnation damages claim is not out of the question here.  If the owner can prove the city's conduct qualifies as "unreasonable precondemnation conduct," this could support a precondemnation damages claim, even though the facts are not what one generally thinks of when analyzing precondemnation damages.) 

Apart from all of that, the city's potential liability outside the context of eminent domain is an entirely different question.  I see no reason the city could not be liable for tortious interference, for example, even if the court upholds its right to take.   In such case, the damages are pretty easy to identify:  the difference between the compensation awarded in the eminent domain case and the $8.6 million contract price.

And what about Los Rios?  I haven't seen any discussion about whether the owner might possess a breach of contract claim, but one could easily surmise that if Los Rios backed out of the deal simply because it knew the city would condemn it at a lower price, any stated basis for canceling the deal could be viewed as an ineffective pretext. 

On the other hand, Los Rios will presumably offer an explanation for why it was justified in backing out of the deal that has nothing to do with the city or eminent domain, and the city will argue that it is taking the property for unquestionably legitimate purposes, and that it should not penalized because it happens to be condemning at a time when market conditions have deteriorated. 

This will be a fun one to follow.

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The City of Glendale plans to vote tonight on a plan that would extend eminent domain authority in its central redevelopment area for an additional 12 years.  According to an August 10 article in the Glendale-News Press, "City Set to Extend Eminent Domain," the agency's eminent domain authority is currently set to expire next month. 

According to the Director of the Community Redevelopment & Housing Department, Philip Lanzafame, eminent domain is a key tool if redevelopment projects are to succeed:  "If you didn't have this, some property owners could hold the community hostage."

This action comes as Glendale is in the midst of efforts to acquire a key property needed for a planned expansion of the Museum of Neon Art.  So far, those efforts have been unsuccessful, and a representative of the property's owner has asked the city to hold off while he completes efforts to bring a national retail tenant to the space.  

Assuming Glendale does indeed extend its eminent domain authority, whether the property's owner is able to secure a major tenant may become moot, as the city's authority to condemn will trump any other plans the owner may have for the property.

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We've been following the City of Barstow's potential reinstatement of its redevelopment agency's power of eminent domain, most recently noting that a special hearing was set for August 5.  According to a Desert Dispatch article from over the weekend, "Eminent domain power reinstated for parts Riverside Drive and east Barstow," the reinstatement was only partly successful:  the redevelopment agency can now use eminent domain on commercial property in Project Area 1 (the eastern part of the City at the end of Riverside Drive near the sewer plant), but a deadlocked vote caused the City's reinstatement of its eminent domain power for Project Area 2 (the area near Home Depot) to fail.

This means that the redevelopment agency can use the power of eminent domain for non-residential properties lying in the area between Interstate 15 and the BNSF railroad along Interstate 40, as well as land surrounding Walmart.  Whether the remaining Project Area 1 land will be potentially subject to eminent domain is still under consideration, as several council members had potential conflicts of interest, as they either worked or lived within the project area.  The City hired an appraiser and economist to determine whether the reinstatement of eminent domain in Project Area 1 would impact the council members' homes or businesses, and the expert's opinion came back negative.  The council will re-vote on the issue at the August 16th meeting.

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We have reported several times on the City of Barstow's efforts to renew its Redevelopment Agency's eminent domain authority, but Barstow residents apparently remain skeptical.  A public meeting in April left many dissatisfied with the City's efforts, and the City's Council's effort to address the issue in May led to a deadlock. 

Now, the City has scheduled an additional public meeting for this week in anticipation of the City Council's August 5 special meeting on the issue. 

According to a July 25 article in the Desert Dispatch, "City to attempt second eminent domain meeting Wednesday," the City seeks to renew eminent domain authority

for the area encompassing the outlet malls, the area south of Rimrock Road between Barstow Road and Montara Road and the area west of Avenue L on West Main Street. The agency also seeks to reinstate eminent domain powers for the area between Interstates 15 and 40 near Walmart.

Residents want assurances, in writing, that the Redevelopment Agency will not use eminent domain to condemn residences or churches.   Others want a better understanding of how the City defines blight before supporting additional eminent domain rights. 

The meeting will be held at 6:00 p.m. on Wednesday, July 28, at the Barstow Church of God in Christ at 1375 Sage Dr.

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According to an article in the Californian, "Salinas mayor: Beat blight, grow tax base," the City of Salinas is slated to vote tonight on whether to expand three Salinas redevelopment zones.  The city is considering such a move in order to grow property tax revenues as assessed property values in the area rise.

The Mayor of Salinas, Dennis Donohue, believes business created in the redevelopment zones could bring an influx of between $5 million and $15 million annually in sales and occupancy taxes.  He is quoted as saying:  "We have to expand our tax base, and this is a possible tool to do it."  He goes on:  "This is an opportunity to attract investment into the community and then take part of the tax base that's created, put it back in the community and create a cycle of growth." 

Community members, on the other hand, are skeptical.  The President of the Salinas United Business Association said certain areas hadn't benefited enough from the program's dollars, and other city council members believe too few projects have been completed.

A feasibility study commissioned by the city also recommends reinstituting the power of eminent domain for some of the redevelopment areas, which has not been allowed since 2003.  Expansion of the zones' areas would require official blight findings and environmental reviews.  If the city decides to go down that route, it better make sure its blight findings are sufficient so as to avoid having them struck down, as was recently the case with the City of Glendora.

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