Cal App Finds Goodwill For Donuts: Shop Owner Entitled To Loss Of Goodwill Damages, Even Where It Has Not Mitigated The Entire Loss
Who among us doesn't possess a lot of goodwill for doughnuts? We know we sure do.
So when we think of "Los Angeles," what comes to mind: sunshine, beaches, Hollywood, and sprawl? No. What comes to mind are chili, hot dogs, and doughnuts. Those items -- more precisely, the roadside architecture which establishments that hawk these foods employ -- just sing "LA" to us. Especially doughnuts.
So the California Court of Appeal's recent opinion in Los Angeles County Metro. Transit Authority v. Yum Yum Donut Shops, Inc., No. B276280 (Feb. 26, 2019) grabbed our attention. And not just for its spelling of "donut," because the case involved a donut shop, and the recovery in eminent domain for the loss of business goodwill, two things we love.
There, the MTA condemned a doughnut -- donut -- shop in central LA. Store 58 to be precise, a freestanding building which had operated for 30 years and which owned a long-term lease. And here's where it gets interesting. We never paid that much attention to the location of donut shops. Because to us, if you just build a donut shop, they will come, right? I mean, these things sell themselves, don't they?
Well not quite, and it turns out that donut shops have detailed location requirements. Lots of them. Things like "[l]ocated on the morning traffic side of the street," near a freeway, with easy in-and-out, and parking, in a "lower to middle income community." And more. Twelve criteria, in all. Who knew? See the opinion at page 4 for the details.
But MTA was building a new light rail line, so it took Store 58. It looked for other locations to which to relocate Store 58, but Yum Yum concluded that none of the three candidates met all of the 12 requirements. No relocation, so off to trial the parties went, with the issue being the amount of compensation owed for the loss of Yum Yum's goodwill.
The MTA's expert testified that the goodwill was worth $620,000, and if it moved to one of the three relocation sites MTA suggested, Yum Yum would "recapture $202,000, $138,000, or $340,000 in goodwill, respectively." Slip op. at 5. He also testified that Yum Yum would have "preserved" some goodwill at any of these sites, but also admitted that the shop would have lost some goodwill if it moved.
Which teed up the issue the court of appeal considered: was Yum Yum entitled to recover its loss of goodwill under California's goodwill statute even though it did not mitigate its damages by relocating to one of the alternate sites MTA suggested? The MTA argued that it owed nothing because Yum Yum was being too picky, and it unreasonably rejected the three relocation alternatives presented by MTA. Once a property owner is deemed to be unreasonable, it argued, there's no duty at all to pay goodwill. The trial court agreed.
The court of appeal was not so harsh. It concluded that to recover goodwill damages, the property owner must do so in two steps. First, prove that they are entitled to some recovery of goodwill. Not all of it as MTA was arguing, mind you. Just some of it. Slip op. at 12-13. Thus, in a situation like this, where the evidence all pointed to Yum Yum losing some goodwill even if it had accepted MTA's alternate sites, it was entitled to recover something:
As MTA argues, the language of section 1263.510 is unambiguous. The statute’s unambiguous plain language provides that a condemnee must show it cannot prevent a loss of goodwill by relocating or otherwise taking reasonable steps to prevent that loss to be entitled to a jury trial on the amount of that unavoidable loss. A fortiori, if the condemnee would lose goodwill—even if it relocated its business or otherwise reasonably mitigated the loss—the condemnee satisfies its threshold burden. Nothing in section 1263.510’s language provides that the condemnee is entitled to no compensation at all for lost goodwill if the condemnee fails to mitigate a portion of that loss.
Slip op. at 10.
The second step would be to have the jury determine how much; generally, the amount which could not be avoided even with mitigation. Because the trial court hadn't reached the second step, the court of appeal sent the case back for a determination of how much goodwill Yum Yum lost from having Store 58 condemned.
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