People ex rel. Dep't of Transp. v. DRY Canyon Enters., LLC

211 Cal.App.4th 486

149 Cal.Rptr.3d 601

2012 Daily Journal D.A.R. 15,967

The PEOPLE ex rel. DEPARTMENT OF TRANSPORTATION, Plaintiff and Respondent,

v.DRY CANYON ENTERPRISES, LLC, Defendant and Appellant.

No. B234198.

Court of Appeal, Second District, Division 6, California.

Nov. 28, 2012.

See 8 Witkin, Summary of Cal. Law (10th ed. 2005) Constitutional Law, § 1245 et seq.

Century Law Group, LLP, Edward O. Lear and Daniel A. Woodford, Los Angeles, for Defendant and Appellant.

Ronald W. Beals, Chief Counsel, David Gossage, Deputy Chief Counsel, Lucille Baca, Assistant Chief Counsel, Helen Cramer and Stephen A. Silver for Plaintiff and Respondent.

HOFFSTADT, J.^*

When the State exercises its power of eminent domain over a parcel of land occupied by a business, the business owner has a right to have the jury determine the amount of “business goodwill” lost due to the taking. (codE civ. proc., § 263.510.) ¹ here we decide whether the owner is entitled to a jury determination when the judge has determined, as a matter of law, that the business had no goodwill to lose in the first place. We are surprised to learn that no court has squarely decided this question. We are not surprised by the answer: Any determination on the loss of goodwill is not required when there was no goodwill to lose.

FACTS AND PROCEDURAL HISTORY

Dry Canyon Enterprises, LLC (Dry Canyon) makes wine. Dry Canyon blends its wines mostly from grapes purchased from other vineyards and, to a lesser extent, from grapes grown on land it owns in Madera and Paso Robles, California. In its business plan, Dry Canyon planned to develop a flagship wine—an estate cabernet to be made from grapes grown on the Paso Robles land and to be marketed under the label “Chumeia.” By 2009, Dry Canyon had blended and sold a few vintages of its Chumeia label wine, but had encountered persistent financial difficulties and had yet to turn any profit.

In 2009, the State Department of Transportation (State) initiated eminent domain proceedings against a strip of Dry Canyon's Paso Robles property abutting Highway 46. The State needed the land as part of its project to widen the highway. That strip was home to 1,466 (or approximately 21 percent) of the cabernet vines Dry Canyon was growing for its estate cabernet. The State agreed to compensate Dry Canyon for the value of the land and vines, and cut a check for $203,500.

The parties went to trial before a jury on the only remaining issue—the amount by which the taking diminished Dry Canyon's business goodwill. The State's expert on goodwill valuation recounted that Dry Canyon was not profitable, and that its liabilities exceeded its assets. In light of these dire straits, the expert concluded that Dry Canyon never had any goodwill prior to the taking and accordingly experienced no loss of goodwill.

Dry Canyon's expert calculated the value of Dry Canyon's lost goodwill as $240,000. The expert reached this figure by averaging the results provided by two different methodologies.

The first methodology was the “cost-to-create” methodology. Using this methodology, the expert viewed Dry Canyon's lost goodwill as the cost it incurred to create that goodwill in the first place. Rather than calculate the cost to create the 1,466 cabernet vines that were lost, however, the expert added up the sum total of every expense Dry Canyon had incurred during the first four years of its operations in both Madera and Paso Robles; the expert then divided those costs by four because Dry Canyon took one-fourth of the vines destined for the estate cabernet. He opted to use all of Dry Canyon's costs because, in his view, all of the company's operations were “aimed at” cultivating the estate cabernet.

The second methodology was one the expert invented himself. He called it “premium pricing.” The expert estimated that Dry Canyon's estate cabernet would one day fetch a premium price of $10.62 more per bottle than a hypothetical but inferior, Madera-grown wine. The expert then multiplied this lost premium by his estimation of the number of bottles of estate cabernet that could no longer be produced in the next 15 years because of the taking. He called the total “lost goodwill.”

After the parties rested, the State moved for a nonsuit on the ground that Dry Canyon had not proven it had any business goodwill to lose. Treating the motion as a motion for judgment, the trial court agreed with the State. In reaching this conclusion, the court rejected the testimony of Dry Canyon's expert. The court found the cost-to-create methodology to be a reliable measure of lost goodwill only when a business “clearly had goodwill” to start with, and when the taking caused a “total loss of goodwill.” Neither fact was present in this case. The court viewed the premium pricing methodology as little more than “a disguised attempt to seek lost profits from a single product which is assessed in a vacuum.” Because Dry Canyon presented no other evidence of preexisting goodwill, the court granted judgment for the State.

DISCUSSION

Dry Canyon argues that the trial court's ruling is wrong for two reasons. First, the court erred in taking the case away from the jury because the existence of pretaking goodwill is never a question for the court. Second, the court erred in rejecting Dry Canyon's expert testimony, which amply established that Dry Canyon had preexisting goodwill. We reject both arguments.

I. The Court May Determine A Business Has No Goodwill To Lose

When the State condemns property, its owner has a constitutional right to “just compensation.” (U.S. Const., amend. V; Cal. Const., art. I, § 19.) That right does not, however, provide compensation for the loss of goodwill. ( Hladek v. City of Merced (1977) 69 Cal.App.3d 585, 589, 138 Cal.Rptr. 194.) To remedy this perceived unfairness, our Legislature in 1975 created a statutory right for business owners to obtain recompense for loss of goodwill. (§ 1263.510.)

The Legislature defined “goodwill” as “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.” (§ 1263.510, subd. (b).) A business owner has the right to a jury determination on the amount of goodwill lost. ( Redevelopment Agency of San Diego v. Attisha (2005) 128 Cal.App.4th 357, 367, 27 Cal.Rptr.3d 126( Attisha ).) However, this right attaches only if the owner first meets “the qualifying conditions for such compensation. [Citation.]” ( City of Santa Clarita v. NTS Tech. Systems (2006) 137 Cal.App.4th 264, 270, 40 Cal.Rptr.3d 244.)

The qualifying conditions that establish the owner's entitlement to a jury trial on the amount of compensation are set forth in section 1263.510, subdivision (a). 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 ). ( Ibid.;City of San Diego v. Sobke (1998) 65 Cal.App.4th 379, 395, 76 Cal.Rptr.2d 9( Sobke ).)

Here we decide whether we should add proof of preexisting goodwill to this list of qualifying conditions. Because this is a question of statutory interpretation, our review is de novo. ( Bruns v. E–Commerce Exchange, Inc. (2011) 51 Cal.4th 717, 724, 122 Cal.Rptr.3d 331, 248 P.3d 1185.) For the reasons described below, we hold that 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, as a threshold matter, that the business had goodwill to lose.

This conclusion is all but compelled by the language of section 1263.510, subdivision (a). Each of the qualifying conditions enumerated in that section refers to loss of goodwill. Because “a finding that the [business] had no goodwill to lose would preclude a finding of the ... statutory preconditions to recovery” ( Emeryville Redevelopment Agency v. Harcros Pigments, Inc. (2002) 101 Cal.App.4th 1083, 1118, fn. 13, 125 Cal.Rptr.2d 12( Emeryville )), the existence of goodwill itself is necessarily an implicit, but essential, precondition to recovery. We now make it a precondition.

Our conclusion is reinforced by the canons of statutory construction. We are mindful that remedial statutes like section 1263.510 are to be construed liberally to effectuate their purpose. ( People ex rel. Dept. of Transportation v. Muller (1984) 36 Cal.3d 263, 269, 203 Cal.Rptr. 772, 681 P.2d 1340( Muller ).) However, that maxim gives way to the mandate that we may not construe statutes in a way that reaches absurd results. ( Pineda v. Williams–Sonoma Stores, Inc. (2011) 51 Cal.4th 524, 533, 120 Cal.Rptr.3d 531, 246 P.3d 612.) In our view, it makes no sense to hold a jury trial on the amount of goodwill lost if there was no goodwill to lose. (See Sobke, supra, 65 Cal.App.4th at pp. 398–399, 76 Cal.Rptr.2d 9 [observing that “actual pretaking goodwill” is an essential ingredient for any valuation methodology “evaluating loss of goodwill”].)

Dry Canyon argues that this reading of section 1263.510 is inconsistent with our Supreme Court's decision in Metropolitan Water District of Southern California v. Campus Crusade for Christ (2007) 41 Cal.4th 954, 62 Cal.Rptr.3d 623, 161 P.3d 1175( Campus Crusade ). We disagree. To begin with, Campus Crusade addressed compensation under the constitution—not compensation under the procedures of section 1263.510. Even within the context of takings under the Constitution, however, Campus Crusade reaffirmed the trial court's gatekeeping role in deciding whether the party whose land is taken has adduced “sufficient evidence to permit the...