Rest easy: this post, thankfully, is not about a certain disgraced Congressman, but is about the much more mundane (but interesting to us) issue of how “owner of a business” is defined in the California statute that allows recovery for loss of goodwill in eminent domain.
In Galardi Group Franchise & Leasing, LLC v. City of El Cajon, No. D056737 (June 7, 2011), the California Court of Appeal (4th District) held that Galardi — which authorized Bingham to operate a Wienerschnitzel restaurant via a franchising agreement — is not the “owner” of a business entitled to be compensated for loss of goodwill caused by a taking. See Cal. Code. Civ. P. § 1263.510. However, the court concluded that Galardi might be entitled to compensation as the assignee of the operator’s rights.
Galardi is a franchisor of Wienerschnitzel restaurants (which feature that quintessentially Southern California delicacy, the chili dog). In a long-standing agreement with Bingham, it subleased its property, location, and fixtures for a restaurant, which Bingham operated. The restaurant closed when the city notified Galardi that the property was slated for condemnation, and Galardi and Bingham’s efforts to relocate proved unsuccessful. Bingham then assigned any claim for compensation for business goodwill that he may have had to Galardi, which sued the city for inverse condemnation.
Galardi made two claims for business goodwill. It claimed it was the “owner” of the business and thus entitled to compensation by statute, but even if Bingham were the owner, it was entitled to compensation for goodwill as Bingham’s assignee. The trial court rejected both arguments, and agreed with the city that under Redevelopment Agency v. International House of Pancakes, Inc., 12 Cal. Rptr. 2d 358 (Cal. Ct. App. 1992), a nonowner franchisor is not an “owner.” It also held that Bingham’s assignment of its rights as the owner to Glardi accomplished nothing because Bingham had already waived his right to a condemnation award with a provision in the assignment that stated, “[i]f all or any part of the premises is condemned for public or quasi-public use, [Bingham] waives all right to or interest in any condemnation award of settlement.”
On appeal, Galardi argued that IHOP was distinguishable because IHOP admitted it was a franchisor, but the Galardi-Bingham relationship was different. The court rejected the argument, holding it was not merely IHOP’s status as franchisor that compelled the conclusion that it was not the owner. Rather, it was all of the details of the relationship between IHOP and its franchisee, with the most important factor being which party took the risks of ownership:
Like the claimant in IHOP, Galardi “established a method of operation intend[ing] to immunize or insulate itself from the risks and liabilities inherent in the ownership of [a] business, and has not explained how that same agreement can simultaneously make it an owner of the business for the sole purpose of these condemnation proceedings.”
Slip op. at 7. The court concluded that Bingham was the “owner,” not Galardi.
However, the court of appeals agreed with Galardi that it stepped into the shoes of the “owner” by virtue of the assignment of rights from Bingham, and the “waiver” provision was not intended by Bingham to forego his right to a goodwill condemnation award. “We conclude that the parties intended the waiver clause to define their respective rights to goodwill damages vis-a-vis one another.” Slip op. a 10. “It makes no sense that Galardi or [Bingham] intended the waiver clause to benefit a nonparty to the Agreement, and the City has not show this is what the parties intended.” Id. Besides, someone is entitled to goodwill compensation, and the court refused to interpret the waiver provision as urged by the city so that no one would have standing to claim it.