Mitigation of Damages in Business Tort Claims

By: Nevin Sanli and Jeffrey Z. B. Springer

Compensation for loss of business goodwill caused by eminent domain is provided for in Section 1263.510 of the California Eminent Domain Law. Under the law, compensation for goodwill requires the business owner to first prove by the preponderance of the evidence certain required elements. The business owner must prove that the loss is caused by the taking, that he or she exercised reasonable efforts to preserve goodwill and that there is no duplication of payment with relocation benefits and payments for leasehold interests. The use of experienced goodwill appraisers to form and express opinions about these required elements can provide an effective and straightforward way to resolve these issues.

Duty to Mitigate

Surprisingly, agency counsel and goodwill appraisers often overlook these elements as proper subjects of opinion testimony. When this happens, usually the business owner will be the only witness to express opinions on these issues. In this event, the business owner will almost always prevail. The code specifically states:

The owner of a business conducted on the property taken, or on the remainder if such property is part of a larger parcel, shall be compensated for if the owner proves all the following :

(1) . . .

(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) . . .

(4) . . .

Eminent domain case law clearly supports the conclusion that a condemnee claiming lost goodwill must mitigate. In general, a condemnee is obliged to mitigate damages, Albers v. County of Los Angeles, (1965), 62 C2d 250, 269, and must take reasonable steps to mitigate the loss of goodwill, Redevelopment Agency of Emeryville v. Arvey Corp., (1992), 3 CA 4th 1357, 1361.

The duty to mitigate loss of goodwill as expressed in Section 1263.510 is quite similar to the reasonable efforts the law requires a plaintiff in a tort or contract action to take to mitigate his or her damages.

For example, the duty to mitigate damages in a tort or contract action is stated as follows:

“A person whose property has been damaged by the wrongful act of another is bound to exercise reasonable care and diligence to avoid loss and to minimize damages, and may not recover for losses which could have been prevented by reasonable efforts or by expenditures that might reasonably have been made.” BAJI 14.68

It is certainly appropriate to apply a similar standard in an eminent domain action. After all, in a tort or breach of contract action, the plaintiff must mitigate even though the defendant has engaged in wrongful conduct. In an eminent domain action, a governmental body is simply exercising eminent domain power for the legitimate interests of the community, an action which is not “wrongful” in any sense. From this standpoint, it makes perfect sense to require a condemnee to use reasonable efforts to avoid loss and to minimize his or her damages.

Appraisers’ Duties and Responsibilities

Very few goodwill appraisers express opinions on the mitigation issue. In fact, most appraisers simply express an opinion of total goodwill without any consideration to the amount that is or will actually be lost. Such appraisals are arguably incomplete and not responsive to the statutes which say that only goodwill loss is compensable. An incomplete appraisal could possibly even be excluded from the court as being misleading evidence. In the event of such a strategic disaster, the agency would be confined to the unenviable position of solely defending and rebutting a claim versus presenting its own version of the facts.

When an appraiser has solely analyzed total goodwill, the determination of the loss, i.e., what should be paid to the business owner, is left to the negotiators (attorneys or city officials) who must now wrestle with an issue as to which they do not possess expertise. Numerous conversations and meetings with the appraisers will likely ensue yielding answers of questionable use such as “...I am not sure...it is difficult to tell...the business owner is in the best position to comment about that...”

Accordingly, an appraisal which directly addresses the ultimate question (i.e. the amount of the lost goodwill) is not only more legally acceptable but also of more practical use.

Calculating Loss of Goodwill

Most people assume that the most difficult part of a goodwill loss assignment is the determination of total goodwill. However, this is frequently not the case.

Where the business has relocated, the determination of loss is usually straightforward: first, compute total goodwill at the site that is being condemned and then compare that number with the business’ goodwill after relocation. If goodwill at the relocation site is less than goodwill at the condemned site, and the reduction in goodwill is due to the condemnation action, then the amount of the reduction is compensable.

Unfortunately, many businesses do not relocate. The failure to relocate may be the result of practical and financial considerations flowing from the condemnation. For example, a relocation site may not be financially feasible because a combination of lost patronage and increased operating expenses will result in a total goodwill loss.

However, the inability may also be self imposed in order to support a loss claim. In addition, some business owners also contend that any potential new site that would allow successful operations would, in actuality, constitute a new business opportunity and not a relocation site.

Because differing explanations give rise to different conclusions as to compensability, it is necessary to conduct an objective analysis in order to support a conclusion.

It is the business appraiser’s responsibility to investigate the factual position of the business and advise the agency on the feasibility of a relocation. The appraiser must exercise great care in determining whether potential relocation sites exist and, if so, the extent to which goodwill can be preserved at those sites. A detailed analysis of the business’ sales before and after relocating will indicate whether sales would be affected by other factors that would have occurred regardless of condemnation. These other factors might include economic or industry downturns and increased competition. Likewise, proper research and diligence procedures must be performed to assess the full future impact of relocation on operating expenses. In some cases, relocation may create operational efficiencies. Such situations can exist when a business relocates to more spacious and organized facilities or obtains new and more efficient equipment. These may result in increased sales and lower expenses.

A key claim to analyze is whether the business will lose its current patronage. The definition of goodwill in 1263.510 (b) provides guidance in this situation. The statutes indicate that replacing old patronage with new preserves goodwill:

Within the meaning of this article, goodwill consists of the benefits that accrue to a business as result of its location, reputation for dependability, skill or quality, and other circumstances that result in probable retention of old or acquisition of new patronage.

Goodwill loss valuations can be prepared to address the ultimate issue in an eminent domain case. Even when a business fails to relocate, it may be possible to show that reasonable steps could have been taken in order to preserve all or most of the goodwill. The study of reasonableness of efforts may include extensive relocation searches, costs analyses, income projections, market and competition research and substantial industry and economic reviews. Well researched and well supported goodwill loss opinions have been received by courts and may be used to resolve these important issues.

A Success Story: MTA v. Pose With The Stars - Presentation at CRA Conference

A recent notable success for redevelopment and government agencies was obtained by the authors of this article in Los Angeles County Metropolitan Transportation Authority vs. Pose With The Stars, et. al. (LASC No. BC 105 203). In this matter, the MTA condemned on Hollywood Boulevard, adjacent to the Mann’s Chinese Theater, property on which the defendant, Regency Outdoor Advertising, Inc. (“Regency”), operated two billboards. Regency claimed substantial loss of goodwill. The MTA argued that Regency could have successfully relocated its bulletin boards elsewhere on Hollywood Boulevard so as to preserve all of Regency’s goodwill. After listening to extensive expert testimony and legal arguments by both sides, the judge ruled in favor of MTA. A detailed and very informative presentation of this matter using direct and cross examination techniques (between attorney and expert) with slides and supporting data will be presented by Messrs. Sanli and Springer at the upcoming CRA Conference in Long Beach. Please look for “Redevelopment - Doing It Right”, on March 6, 1997 at 2:15 PM.

Conclusion

Calculating lost goodwill due to condemnation is one of the most challenging engagements for business appraisers. The assignment involves the valuation of both goodwill before and after relocation if relocation has occurred; estimating the impact on business operations of possible relocations when there is no relocation; and the determination of whether the business owner has engaged in reasonable efforts to preserve and mitigate the loss.

Careful analysis of business operations, market opportunities, and due diligence are required for appraisal reports to be relied upon in court or for settlement. Our experience indicates that judges and juries understand and give weight to mitigation efforts.

About the Authors:

Mr. Sanli

Mr. Nevin Sanli, ASA, is President of Sanli Pastore & Hill, Inc., a business valuation firm specializing in the valuation of compensable goodwill loss. Mr. Sanli is an Accredited Senior Appraiser (ASA), business valuation discipline, of the American Society of Appraisers. Mr. Sanli is the official trainer of the Redevelopment Institute of the CRA. He regularly speaks, teaches and testifies on the subject of goodwill loss valuation. SP&H offers a four course curriculum leading to the designation of Certified Government Goodwill Appraiser (CGGA).

Mr. Sanli can be reached at (310) 837-6678 or by E-mail at nsanli@sphvalue.com.

Mr. Springer

Mr. Jeffrey Z. B. Springer is a member of the law firm of Demetriou, Del Guercio, Springer, & Moyer, LLP, Los Angeles, California. Mr. Springer is a frequent author and speaker on Eminent Domain topics, and emphasizes his practice in the areas of: eminent domain, redevelopment, inverse condemnation, CEQA, contaminated property liability and CERCLA cost recovery matters.

Mr. Springer can be reached at (213) 624-8407.