LA Unif. School Dist. V. San Miguel Meat Dist.

Filed 3/15/07 LA Unif. School Dist. V. San Miguel Meat Dist. CA2/3

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION THREE

APPEAL from a judgment of the Superior Court of Los Angeles County, Victor H. Person, Judge. Reversed and remanded with direction.

Century Law Group, Karen A. Larson and Daniel A. Woodford for Defendant and Appellant.

Nossaman, Guthner, Knox & Elliott, Karen McLaurin and David Graeler for Plaintiff and Respondent.

INTRODUCTION

In this eminent domain proceeding, following trial, a jury awarded defendant and appellant San Miguel Meat Distributors, Inc. (San Miguel), damages in the amount of $333,000 against plaintiff and respondent Los Angeles Unified School District (the District), to compensate San Miguel for loss of goodwill for the Districts taking of property which San Miguel leased for its chicken processing business.^[1] San Miguel relocated its business to a new location. In a second trial, the trial court determined that the taking caused San Miguels relocation and loss of goodwill.

The trial court then granted the Districts post-trial motions, vacating the jurys award of damages for alleged loss of goodwill. Specifically, the trial court granted the Districts motion to set aside the judgment. The trial court found that the taking did not cause San Miguels alleged loss of goodwill, concluding that San Miguel moved its business location prior to the taking.

The trial court also concluded that the expert testimony of San Miguels goodwill valuation expert, Chris Pedersen, should have been excluded at trial. After striking this expert testimony, the trial court concluded that San Miguel did not present substantial evidence to support the alleged loss of goodwill.

Finally, the court reduced San Miguels damages for lost improvements at the original business location from $118,580 to $94,080, finding that the parties had reserved this issue for later determination based upon additional evidence. The court concluded that the additional evidence required the reduction in compensation for lost improvements.

We reverse and remand for entry of judgment in favor of San Miguel consistent with this opinion. San Miguel presented substantial evidence showing that the taking caused the alleged loss in goodwill. In addition, the trial court erred by striking the testimony of Pedersen, San Miguels expert on goodwill valuation. Pedersens methodology was reasonable. Contrary to the trial courts finding, Pedersen relied upon San Miguels financial information to compare the actual pre-taking goodwill with the actual post-taking goodwill. Finally, as to the lost improvements, the parties stipulated that the only issue left for the court was whether San Miguel was entitled to the amount of $6,205 for moveable equipment left at the Atlantic property. Thus, the trial court erred by reducing the award for lost improvements beyond $6,205.

FACTUAL AND PROCEDURAL BACKGROUND

Because this appeal emanates from the granting of the Districts motions for judgment notwithstanding the verdict and motion to vacate the judgment, we review the record in the light most favorable to San Miguel. (Begnal v. Canfield & Associates, Inc. (2000) 78 Cal.App.4th 66, 72-73.)^[2]

1. San Miguels Business Operation

Nereo Perez (Perez) is the owner of San Miguel, a chicken processing, packaging, and distribution plant. San Miguel is licensed by the United States Department of Agriculture (USDA). Perez has been in the meat processing business since 1977.

In May 1994, Perez purchased a meat processing business located on South Atlantic Boulevard in Los Angeles County (the Atlantic property), formerly called Moomjean Meat. The Atlantic property is the subject of the eminent domain proceedings at issue in this case.

San Miguel conducted deboning, processing and packaging of chicken parts at the Atlantic property. San Miguel also had a distribution warehouse located in Vernon, California (the Vernon property). Vernon is the primary distribution center for meat-processing in Los Angeles. According to Perez, 70 to 80 percent of the meat distributors in Los Angeles are located in Vernon.

The Atlantic property was 6.5 miles from the Vernon property. The Atlantic property had highway access, allowing efficient access to the Vernon property. The Atlantic property had limited truck access, however, allowing only smaller types of trucks to make deliveries to and from the facility. San Miguels trucks made, on average, four trips a day between the Atlantic and Vernon properties.

San Miguel leased the commercial space on Atlantic for approximately $4,000 per month. A non-party, Mr. Moomjean, was the owner of the Atlantic Boulevard real property. He entered into two lease agreements with San Miguel. The second lease had a 10-year term, which commenced on July 1, 1996 and was scheduled to expire on June 30, 2006.

2. San Miguel Expands Its Operations at the Atlantic Property

Originally, in 1994, San Miguel occupied only a portion of the Atlantic property. As San Miguels business grew and other tenants in the Atlantic property moved out, San Miguel leased and renovated four additional sections of the building in compliance with USDA regulations.

In the first renovation, San Miguel constructed a loading dock and drainage system. In the second and third renovations, San Miguel constructed walls, roofs, drainage, and refrigeration. The third renovation required sinks, additional drainage, and updated electrical installations.

With respect to the fourth renovation, San Miguel intended to use additional space to reduce the temperature of the chicken before shipment. Pursuant to USDA standards, San Miguel installed special insulation under the cement to prevent cold-related breakage. It also covered the floor in epoxy to prevent contamination. In 2001, San Miguel added a freezer/storage room in the fourth section. San Miguel also added two tumblers for preserving and freezing the chicken. The USDA approved all four renovations.

By early 2001, San Miguel had completed the four-stage renovation of the Atlantic property. The business expanded from less than 800 square feet to a total of 5,444 feet, with 2,378 square feet devoted to chicken processing. By this point in time, the owner of the Atlantic property, Moomjean, had agreed to sell the real property to Perez.

3. The District Considers the Atlantic Property as a Potential Site

In early 2001, the District placed a letter under the door of the Atlantic property advising San Miguel that it was considering condemning the Atlantic property to build a school. On behalf of San Miguel, Perez attended public meetings. At this time, the District advised him that there was a 50/50 chance that it would condemn the Atlantic property. Perez had not decided to relocate San Miguel.

In July 2001, Al Mockus, a District representative, sent San Miguel a letter, which included a commercial relocation brochure. On August 29, 2001, the District introduced the project site, including the Atlantic property, as the preferred project site at a community meeting.

In September 2001, Tony Solis, San Miguels relocation consultant, learned that the District considered the Atlantic property to be a preferred site for an elementary school.

On October 9, 2001, the Districts board authorized feasibility studies for the preferred site, and authorized the District to enter into negotiations for the acquisition of properties.

In November 2001, Perez met with relocation consultant Solis to discuss a possible relocation of San Miguels Atlantic property operations. Solis testified that at this time, he knew the property was under threat of eminent domain.

4. San Miguel Finds a New Location

On December 12, 2001, Perez made a $5,000 deposit on a relocation property to avoid losing the property to a competitor. The site was located in La Puente, California, 19.88 miles from the Vernon distribution center (the La Puente property), and already had USDA approval.

Perez testified that the new processing plant had to remain in close proximity to the Vernon distribution center and needed similar attributes to the Atlantic property. Because of USDA regulations, it was not feasible to consolidate the operations at the Atlantic property with the operations in the Vernon facility.

Perez testified that prior to leasing the La Puente property, a representative from the District informed him that it was almost a 100 percent chance that the District would condemn the Atlantic property.

Perez also testified that he made the option payment because of the complexity of his business and because it is difficult to obtain USDA licensing for a meat processing plant. The relocation plant had prior USDA approval, which would assist with his licensing. He testified that he would have walked away from the $5,000 deposit in an instant had the District terminated the eminent domain proceeding. Perez was willing to take the risk to ensure that his business was not shut down. If the District abandoned the project, Perez testified that he would have moved back to the Atlantic property.

Beginning in June or July 2002, San Miguel began to perform USDA modifications and upgrades to the La Puente property necessary for issuance of a conditional USDA permit. San Miguel received the permit in September 2002, which permitted San Miguel to relocate. San Miguel began some operations at the La Puente property in September 2002 in order to maintain the USDA approval and prevent it from lapsing.

On October 8, 2002, the Los Angeles Unified School District governing board approved the project to be located on the Atlantic property.

Perez testified that his license could not be operative at two locations. He was anxious to move. On October 22, 2002, Perez advised representatives of the District, including Kim Boss, the person in charge of the Districts relocation efforts, that he had found suitable property for relocation. Boss advised Perez that the District would make offers to property owners within one week.

Perez also informed the Districts relocation consultant, Rudy Romo, of the status of the La Puente property and San Miguels anticipated relocation. In December 2002, Romo authorized Perez to relocate. Legal counsel for San Miguel advised Boss of San Miguels relocation site and inquired when the District would take steps to commit to the project.

On December 6, 2002, San Miguel entered into a lease with the owner of the La Puente property. The agreement contained an option to purchase. Rent was $8,000 a month for the first year, $10,000 a month for the second year and $12,000 a month for the third year.

On December 16, 2002, the District made an offer to purchase the Atlantic property from Moomjeam. The offer was contingent on environmental testing and the District board adopting a resolution of necessity. The District could not buy the property without a resolution of necessity.

On December 19, 2002, District representative, Boss, advised the Districts relocation consultant, Romo, that San Miguel had identified a relocation site. Boss instructed Romo that San Miguels move was a high priority for the District. Boss asked Romo to expedite San Miguels relocation. Boss also asked Romo to provide San Miguel with the Districts Notice of Eligibility for Relocation Benefits and explain it to Perez in Spanish.^[3] Neither Boss nor Romo instructed Perez not to move until after the District passed a resolution of necessity or commenced litigation.

On December 26, 2002, Romo met with San Miguels legal counsel and relocation expert at the relocation site, the La Puente property. By this point, Romo had confirmed that the improvements at the Atlantic property belonged to San Miguel. Perez testified that after Romo conducted a physical inspection of the La Puente property and learned of the complexity of moving a business like San Miguel, Romo informed Perez that San Miguel would be eligible for benefits if it moved to the La Puente property. By December 2002, Perez had invested $130,000 in the La Puente property.

On December 31, 2002, the District sent Perez a General Information Notice. It provided: Please be advised that this is not a notice to vacate the premises and you should not move now.

On January 15, 2003, San Miguel moved its operations to the La Puente location. San Miguel was able to conduct the relocation without interruption of its business operations. Neither Romo nor Boss instructed Perez not to move until the District adopted a resolution of necessity. In fact, Romo testified: No, we dont -- we dont tell them not to move before the resolution of necessity.

5. The District Adopts a Resolution of Necessity

On February 11, 2003, the District adopted a resolution of necessity. This authorized the commencement of an eminent domain action against the Atlantic property.

6. The District Files Suit

On May 27, 2003, the District filed a complaint in eminent domain. By its answer, San Miguel sought damages for lost goodwill and for improvements pertaining to realty. The District obtained an order for immediate possession, with a possession date of September 5, 2003.

San Miguel continued to pay rent at the Atlantic property after the District filed suit. San Miguel tendered the keys to the District in October 2003.

7. Perez Purchases La Puente Property

In December 2003, Perez purchased the La Puente property. San Miguel entered into a lease agreement with Perez in January 2004. San Miguel paid $9,625 a month to Perez to lease the Atlantic property.

8. Pre-Trial Conference Scheduling Motions in Limine

At the pre-trial conference on October 3, 2003, the trial court notified the parties that all motions in limine shall be filed not later than 60 days before a compensation trial. The trial was scheduled to commence on May 3, 2004.

9. Expert Reports on Value of Goodwill

In March 2004, the parties exchanged expert reports on the valuation of goodwill. Chris Pedersen prepared the report on behalf of San Miguel. Singler Valuation Consulting prepared the report on behalf of the District.

10. Trial Court Grants the Districts Motion to Exclude the Testimony

of San Miguels Goodwill Expert

San Miguel and the District filed motions in limine to exclude the other partys expert witness on goodwill from testifying at trial. The District asserted that Pedersens expert opinion on goodwill was inadmissible pursuant to City of San Diego v. Sobke (1998) 65 Cal.App.4th 379 (Sobke).

On May 6, 2004, the trial court granted the Districts motion to exclude Pedersen from testifying based upon the written report. The court found that Pedersen did not use an acceptable method for valuing lost goodwill. Approximately one month later, the trial court granted San Miguels request for an Evidence Code section 402 hearing on the admissibility of Pedersens testimony.

11. Following the Evidence Code Section 402 Hearing, the Trial Court

Permitted Pedersen to Testify Before the Jury

Following a two-day Evidence Code section 402 hearing, the trial court concluded that Pedersen could testify as to valuation of goodwill. The court found that Pedersen used an acceptable method for calculating lost goodwill.

12. Stipulation Regarding Valuation of Improvements

On June 21, 2004, the parties filed a joint stipulation regarding improvements to the Atlantic property. The parties stipulated that the findings of the Districts expert witness, Richard Hodges, were not in dispute and were established for purposes of trial. Hodges estimated the value of Leasehold Improvements to be $98,320; the value of Improvements to the Realty to be $14,055; and the value of moveable equipment left at the Atlantic property to be $6,205. The parties stipulated that [t]here are remaining legal issues for the Court only pertaining to . . . [the Districts] contention that the moveable equipment left at the [Atlantic] Property was abandoned and therefore non-compensable.

13. Jury Trial on Issue of Goodwill

On June 22, 2004, the trial court commenced a jury trial on the issue of goodwill valuation. Pedersen testified as San Miguels expert on goodwill valuation.

Pedersen testified that he had performed business appraisal work for 25 years and was a certified appraiser. On appeal, the District makes no objections to Pedersens qualifications.

Pedersen testified that he became involved with San Miguel in late 2001. Pederson met with the owner of San Miguel, Perez, and a relocation consultant named Tony Solis. The purpose of the meeting was to explain to Perez the procedure of eminent domain.

a. Summary of Pedersens Comparison of the Atlantic

and La Puente Sites

Pedersen noted that his first step in preparing an appraisal was to gain an understanding of the business sufficient to describe it to a potential investor. Pedersen testified that in assessing the value of a business, he must consider the functionality of the business process, how it operates, its efficiencies and inefficiencies.

Pederson evaluated the operations of San Miguel, its customer base, delivery systems, product and processing, and the applicable USDA requirements. Pedersen prepared charts showing the physical layout and floor plans of the Atlantic and La Puente facilities. The charts allowed Pedersen to make a comparison of the general utility of the two properties. He testified that the two facilities were functional equivalents.

The Atlantic property had a better layout. It was contiguous, which worked well to stop potential contamination. The Atlantic property was also in state of the art condition and had excellent freeway access.

Pedersen testified that the Atlantic property had positive attributes. It was a USDA approved site. It was also a large facility. Pedersen testified that of all the possible sites he inspected, the La Puente property provided a relocation without disruption of business.

As for negative attributes of the La Puente facility, Pedersen testified that it was further away from the Vernon warehouse, over 20 miles, and that there were additional operation expenses. Pedersen also noted that the La Puente facility had traffic problems compared to the Atlantic property. Moreover, San Miguel had to make modifications to the La Puente property to accommodate its business. San Miguel also had to change the types of trucks it used to ship chicken parts to the Vernon facility.

As to delivering the product to the Vernon facility, Pedersen opined that the two facilities were functionally equivalent. Pedersen explained that the La Puente facility, although further away, accommodated larger trucks, so San Miguel was required to make fewer trips to the Vernon distribution center.

Pedersen also analyzed the different square footage including outside area, for each facility. He noted that the Atlantic facility had total square footage of 5,444. The La Puente facility had total square footage of 11,630. Pederen noted that the La Puente facility had a sub-lessee, Dbran. Including the sub-lessees space, the La Puente facility was 20,000 square feet. Pedersen testified, however, that the La Puente facility had 237 less processing square footage than the Atlantic facility.

b. Market Forces

Pederson also testified that he conducted research into the chicken parts commodity market. He noted that such a market requires daily price adjustments and careful market monitoring. Pedersen noted that market factors impacted the business valuation. He testified that these market factors caused San Miguels net income to increase and decrease.

c. Pedersens Review of San Miguels Financial Information

Pedersen then assembled San Miguels financial information for the past five years to determine how the business was doing. Pedersen noted that information older than five years was usually too distant and far removed for conducting an appraisal. Pedersen noted that San Miguels fiscal period runs from April 1 to March 31 of the following year.

Pedersen reviewed tax returns from 1998 to 2002 and general ledgers from April 1, 2002 to March 31, 2003. An example of San Miguels general ledger is contained in the record on appeal. It shows daily deposits and withdrawals and sales and expenses for each month of the fiscal year.

Pedersen also reviewed comparative financial statements, comparing the 2001 to 2002 year with the 2002 to 2003 year. Pedersen prepared a statement of revenues and expenses for San Miguel for the years 1999 to 2003. He prepared this document to show net profits for the years 2001 to 2002, and 2002 to 2003 fiscal years. Pedersen also calculated the gross sales for each month based upon the general ledgers.

Pedersen testified that his charting of income and expenses showed that San Miguels business grew steadily for years until the 2002 to 2003 fiscal year. At that point, the business leveled off. Pedersen examined the lease amounts San Miguel paid for the two properties.

Pedersen explained that San Miguels relocation and uninterrupted business allowed San Miguel to retain its customer base. Pedersen testified that his review of San Miguels purchasing invoices for the two locations confirmed that the customer base did not change. Pedersen prepared a list of customers to make the comparison.

d. Pedersens Evaluation of Alleged Lost Goodwill

Pedersen testified that the date of valuation for the San Miguel business was June 4, 2003. He testified that he valued San Miguel by a method used by investors, based upon income and other factors. Pedersen testified that he used the excess earnings approach to valuing lost goodwill. Pedersen explained that excess earnings are earnings attributable to the goodwill of the business, not attributable to the owners labor.

Pedersen testified that the three key factors are: (1) gross sales from year to year; (2) the percentage of costs of goods to sales; and (3) net profit. Pedersen testified that San Miguels financials showed that from 1999 there was an upward trend in sales, and then a leveling off. Pedersen testified that profits (after owner compensation) were $21,099 in the first year (1998-1999), dropped in 1999, 2000, and 2001, then started climbing again in 2002 and 2003. By 2003, profits were up to $50,000. Pedersen explained that the drop in profits was due to additional restrictions imposed by the USDA, including additional recordkeeping, and cooler storage.

Pederson explained that San Miguel moved its facilities in January 2003. Thus, he noted that the fiscal period ending March 2003, included operations at both facilities. Pedersen concluded that his review of the financial statements showed that during the relocation in 2003, when the processing business was at two locations, there was not an increase or decrease in sales, and there was not an increase or decrease in customers. Pedersen concluded that sales were unaffected by the relocation.

Pedersen also testified that other than a change in payroll, there was no change in the cost of goods after the move from the Atlantic to the La Puente property.^[4] Pedersen testified that he focused only upon the expenses that permanently changed as a result of the relocation.

Pedersen testified, however, that he considered the operating expenses and revenue for both locations. He further testified that in creating his appraisal, he was required to look at before value and after value, stating: You have to valuate the business in both locations, to the totality of the effects of the relocation.

After collecting and reviewing the financial information, Pedersen created what he called a pro forma for the business. Pedersens comparison of the two locations, showed two changes, rent and payroll.^[5] Pedersen also testified that the Atlantic and La Puente properties had consistent sales and that the market had stabilized. Pedersen explained that there were no other permanent systemic changes to the business or the needs of the business. He noted that from month to month, payroll and the number of employees may fluctuate, but that was not a permanent change caused by the relocation. Such fluctuations would have occurred at either location.

Pederson then created two documents, one for each location, which were exhibit Nos. 40 and 41 at trial. These exhibits represented the alleged goodwill for the Atlantic property and La Puente property during the 2002 to 2003 fiscal year.

The before-relocation exhibit showed net profit of $43,098. Pedersen then added depreciation ($35,845), amortization ($9,600) and moving expenses ($23,000) to calculate adjusted excess income of $111,543. He then capitalized the adjusted excess income by a rate of 8 percent to calculate a total enterprise value of $1,394,000.^[6] From the total enterprise value he subtracted $388,000 in net assets^[7]for a goodwill total of $1,006,000. Pedersen testified that adjusted excess income is the cash flow available to the owner of the business in addition to owner compensation. He used an 8 percent capitalization rate based upon bond rates, explaining that the chicken commodity market is a well-run, well-managed, and well-capitalized business. He also stated that because it was a commodity with no guarantees, there was some risk and thus the bond rate was appropriate.

The after-relocation exhibit (No. 41), incorporated the only two differences between the two locations, increased annual rent of $45,600^[8]and increased annual labor of $14,560. Incorporating these two additional expenses showed an adjusted excess income of $51,383, an enterprise value of $642,000, minus $388,000 in net asset value for a goodwill total of $254,000.

Pederson then subtracted the $254,000 after-relocation goodwill from the before-relocation goodwill of $1,006,000 to arrive at a loss of goodwill in the amount of $752,000.

Pedersen also examined a number of other expenses, such as utilities, gardening, advertising, alarm, cold storage, telephone, internet and office supplies. Pedersen indicated that none of these other expenses changed when San Miguel moved locations.

Pedersen testified that he reviewed San Miguels general ledgers of expenses. He used the ledgers to examine the expenses, compare the before and after-relocation expenses, and exclude one-time expense items, such as moving expenses.

e. The District Cross-Examined Pedersen

Counsel for the District cross-examined Pedersen. Counsel questioned Pedersen about the comparative layout of the two buildings and Pedersens calculations of square footage. Pedersen explained that the La Puente property had more cold storage space and landing areas.

Counsel also cross-examined Pedersen about San Miguels relationship with the sub-lessee, Dbran, at the La Puente location. Counsel cross-examined Pedersen about a second kind of capitalization model which yielded a before-relocation goodwill of $538,000, as well as Pedersens selection of the 8 percent rate of capitalization.

The Districts counsel cross-examined Pedersen about the fact that the 2002 to 2003 fiscal year included income from both locations. Pedersen testified that he did not estimate the dollar value of the chicken produced at the La Puente site from late August 2002 to January 15, 2003, when the move occurred. Pedersen also explained that San Miguels sales fluctuated, with the most sales in July, and the fewest in the winter. Pedersen stated that San Miguel did not reduce any expenses when it moved operations to the La Puente facility. Pedersen explained that the different bone and skin disposal processes at each location did not result in additional costs.

Pedersen further testified that because of the additional costs at the La Puente site, the business was now more vulnerable to a market downturn.

The Districts counsel cross-examined Pedersen about his examination of the world chicken market. He stated that 2002 was a down year, while in 2003, the market returned to normal.

f. The Districts Expert Witness

The District also presented expert testimony on the issue of goodwill evaluation. Noa Singler testified that there was no loss of goodwill. Singler concluded that San Miguel was doing better at the La Puente location.

14. Jury Awards San Miguel Damages

On July 8, 2004, the jury awarded San Miguel $333,000 in damages for lost goodwill. San Miguel requested the court enter judgment, asserting the District had waived its right to a court trial on the issue of causation whether the eminent domain caused San Miguels relocation. The trial court requested briefing. The trial court granted the Districts request for a second trial on the issue of causation.

15. The Causation Court Trial

In August 2004, the trial court commenced trial on the issue of causation. A number of witnesses testified.

16. The Trial Court Rules on Causation

On March 8, 2005, the trial court ruled in favor of San Miguel on the issue of causation. The trial court found there was no evidence that Perez planned to move prior to the Districts announcement of intention to condemn. The trial court further found that Perez had made a substantial investment in fixtures in the Atlantic property, and that the owner, Moomjean, had promised to sell the property to Perez.

On the other hand, the trial court explained that San Miguel was fully operational at the new site before the Districts formal declaration of necessity. The trial court concluded that pursuant to Barthelemy v. Orange County Flood Control Dist. (1998) 65 Cal.App.4th 558 (Barthelemy), if the district had abandoned the project, San Miguel would not have been entitled to any loss of goodwill damages.

Based upon the fact that the District ultimately condemned the Atlantic property, and did not abandon the eminent domain, the trial court found that the condemnation was the cause of San Miguels alleged loss of goodwill. On the issue of waiver, the trial court stated: The Court could very well decide this case on the failure of the [District] to bring [a request for a causation trial] at least 60 days prior to [the compensation] trial under the statutory scheme.

The trial court ordered judgment be entered for San Miguel in the amount of $333,000 for loss of goodwill and for $118,580 for value of lost improvements to the Atlantic property.

17. Trial Court Entered Judgment for San Miguel

On April 11, 2005, the trial court entered judgment in favor of San Miguel based upon the jury verdict on damages and the court order on causation.

18. The Districts Post-Trial Motions

On June 16, 2005, the District filed three post-judgment motions, a motion for judgment notwithstanding the verdict, a motion to set aside the judgment, and a motion for new trial.

19. Trial Courts Order on LAUSD Post-Trial Motions

On August 1, 2005, the trial court granted the Districts motion for judgment notwithstanding the verdict and motion to set aside the judgment. The trial court denied the motion for new trial.

As to the motion to set aside the judgment, the court concluded that the loss of goodwill, if any, was not caused by the taking. The court noted that under former Code of Civil Procedure section 1255.420, San Miguel could have sought an extension of the 90-day time statutory time period to vacate the property to relieve it of the alleged hardship in relation to moving a USDA regulated business. The court concluded: Based upon the need for a bright line rule in this area and the Legislatures formal recognition in some cases that the 90 day period can cause a substantial hardship, this Court finds that San Miguels loss of goodwill, if any, was not caused by the taking within the statutory scheme.

As to the judgment notwithstanding the verdict, the trial court found that San Miguels goodwill expert, Pedersen, used a flawed methodology in comparing the before-relocation and after-relocation value of San Miguels business. The trial court ruled that it should have excluded Pedersen from testifying. The court then explained that without the testimony of Pedersen, San Miguel did not present substantial evidence upon which the jury could find an amount for the alleged loss of goodwill.

Lastly, the trial court ruled that it erred by awarding San Miguel the amount of $118,580 for improvements to the Atlantic real property. The court stated that counsel had expressly agreed to reserve this issue and that the court had not received all of the evidence when it entered judgment. To reflect prior credits and property removed from the Atlantic property, the trial court awarded San Miguel the reduced amount of $94,080. San Miguel timely filed a notice of appeal.

CONTENTIONS

San Miguel contends the trial court erred by (1) finding that the taking did not cause the alleged loss in goodwill, (2) striking the testimony of Pedersen, and (3) reducing the amount of damages for the lost improvements.^[9]

DISCUSSION

1. Introduction to Lost Goodwill in Eminent Domain Proceedings

Historically, business goodwill was not an element of damages under eminent domain law. . . . But in 1975, the Legislature enacted a comprehensive revision of Californias eminent domain law, which, among other things, authorize[d] compensation for the loss of business good will. (Community Development Com. v. Asaro (1989) 212 Cal.App.3d 1297, 1301, fn. omitted.) A tenant may possess goodwill as a business owner. (Sobke, supra, 65 Cal.App.4th at p. 388.)

In 1975, the Legislature enacted Code of Civil Procedure section 1263.510 to provide compensation for loss of goodwill in an eminent domain proceeding. Section 1263.510 provides in pertinent part: (a) The owner of a business conducted on the property taken, or on the remainder if the property is part of a larger parcel, shall be compensated for loss of goodwill if the owner proves all of the following: [] (1) The loss is caused by the taking of the property or the injury to the remainder. [] (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) Compensation for the loss will not be included in payments under Section 7262 of the Government Code. [] (4) Compensation for the loss will not be duplicated in the compensation otherwise awarded to the owner.

Subdivision (b) of section 1263.510 of the Code of Civil Procedure defines goodwill broadly: Within the meaning of this article, goodwill consists of 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.

Summarizing Code of Civil Procedure section 1263.510, in Sobke, supra, 65 Cal.App.4th at page 395, the court explained: In order to be awarded compensation for goodwill, [a condemnee is] required to prove that its alleged loss of goodwill was caused by the taking, could not be prevented by relocation, would not include relocation expenses, and would not be duplicated by compensation otherwise awarded to [the condemnee]. However, according to Code of Civil Procedure section 1260.210, subdivision (b), neither the plaintiff nor the defendant has the burden of proof on the issue of compensation.

In Barthelemy, supra, 65 Cal.App.4th 558, the court also explained that Code of Civil Procedure section 1263.510 requires owners of property to take steps to mitigate the loss of goodwill. Such mitigation expenses may be recovered as lost goodwill. (65 Cal.App.4th 558.)

In People ex rel. Dept of Transportation v. Muller (1984) 36 Cal.3d 263 (Muller), the Supreme Court explained that Code of Civil Procedure section 1263.510 was a remedial statute, stating: The remedial purpose of the statute under consideration is evident. . . . The section was enacted in response to widespread criticism of the injustice wrought by the Legislature's historic refusal to compensate condemnees whose ongoing businesses were diminished in value by a forced relocation. [Citations.] The purpose of the statute was unquestionably to provide monetary compensation for the kind of losses which typically occur when an ongoing small business is forced to move and give up the benefits of its former location. (36 Cal.3d at p. 270.)

The Muller court also set forth considerations for construing statutes which are remedial: A statute which is remedial in nature and in the public interest is to be liberally construed to the end of fostering its objectives . . . . The rule of law in the construction of remedial statutes requires great liberality, and wherever the meaning is doubtful, it must be so construed as to extend the remedy. [Citation.] . . . Moreover, the contrary rule requiring strict construction of statutes which impose new liability [citation] does not apply where strict construction would thwart the palpable intent of the Legislature to impose a new liability consonant with new conditions.   (Muller, supra, 36 Cal.3d at p. 269.)

2. San Miguel Presented Substantial Evidence that the Alleged Loss of

Goodwill Was Caused by the Taking

In this case, San Miguel asserts that the trial court erred by granting the Districts motion to set aside the verdict on the basis that the taking did not cause the loss of goodwill. The District responds that the eminent domain proceedings did not cause San Miguel to relocate and that it moved voluntarily. Thus, according to the District, San Miguel is not entitled to compensation for alleged loss of goodwill.

We conclude that on this record substantial evidence shows that the Districts taking of the Atlantic property caused the alleged loss in goodwill. The chronology of events supports this conclusion. The uncontradicted testimony of Perez, the owner of San Miguel, also supports this conclusion.

a. Chronology

The chronology shows that by late 2000 and early 2001, San Miguel completed a four-stage renovation of the Atlantic property. At this point in time, Perez was negotiating with the owner of the property, Moomjean, to purchase the real estate which would have reduced San Miguels rental obligation further.

In the winter of 2001, Perez learned that the District was considering condemning the Atlantic property. Perez attended public meetings where District representatives told him it was a 50/50 chance that they would condemn the Atlantic property.

In July 2001, the District provided San Miguel with a commercial relocation brochure. One month later, in August 2001, the District informed the community at a public meeting that the Atlantic property was the preferred project site for the school. In October 2001, the Districts board authorized feasibility studies for the preferred site and authorized the District to negotiate for the purchase of the properties.

At some point in 2001, a District representative told Perez that there was a 100 percent chance that the District would condemn the Atlantic property. At that point, in December 2001, Perez made a $5,000 deposit on a USDA approved site, the La Puente property, to avoid a competitor from obtaining the site.

Perez testified without contradiction that the $5,000 sum was insignificant and that he would have walked away from the deposit had the District abandoned the Atlantic property project. Perez also testified that securing a suitable property in light of the difficulty and complexity of relocating a business needing USDA approval was well worth the risk of losing the deposit.

San Miguel then waited until June or July 2002 to begin the process of remodeling the La Puente property. In September 2002, San Miguel obtained a USDA permit to operate from the La Puente property. To prevent the permit from lapsing, San Miguel commenced limited operations at the La Puene facility.

Notably, on October 8, 2002, the Districts governing board approved the project to be located on the Atlantic property. Following this approval, Perez contacted the District person in charge of the project, Kim Boss. Boss testified that on October 22, 2002, she learned that San Miguel had found a relocation property. She advised Perez that the District would make offers to property owners within one week at the Atlantic Boulevard site.

On December 6, 2002, San Miguel entered into a lease with the owner of the La Puente property. Perez informed District representative Romo of the La Puente property and San Miguels anticipated relocation. Romo authorized San Miguel to relocate.

On December 16, 2002, the District made an offer to purchase the Atlantic property from Moomjean. Three days later, District representative Boss advised Romo that San Miguel had found a relocation property and that its move was a high priority. Boss instructed Romo to expedite the move. Romo later provided Perez with the Districts notice that San Miguel was eligible for relocation benefits.

During a December 26, 2002 meeting at the La Puente property, Romo learned of the complexities of San Miguels business operations. During the meeting, Romo informed Perez that San Miguel would be entitled to benefits if it moved to the La Puente property.

On January 15, 2003, San Miguel completed the relocation to the La Puente property without interruption of its business. One month later, the District adopted the resolution of necessity. On this point, neither Boss, Romo, nor any of the written notices informed San Miguel not to move its business location prior to the adoption of the resolution of necessity. At trial, Romo conceded that the District does not tell condemnees not to move before the resolution of necessity is adopted.

b. Testimony of Perez

There is no evidence to support the Districts suggestion that San Miguel moved voluntarily because it wanted a larger facility. The owner of San Miguel, Perez, testified at trial that he moved the business because the District told him to move. He also testified that as a businessman, he would not have made the substantial investment into the Atlantic property had he intended to move.

Perez also testified that the Atlantic site was more functional than the La Puente site because it was closer to the Vernon distribution center and because it was more efficient with respect to the chicken processing. Perez also noted that the La Puente property cost him at least $50,000 more per year in rent than the Atlantic property. He testified that Moomjean had promised to sell him the Atlantic property, which would have further reduced his rental obligation at the Atlantic property for an additional yearly savings.

Thus, had Perez completed the deal to purchase the Atlantic property, he would have lowered his rent and maintained a larger processing capacity than the capacity of the La Puente facility. He had every intention of remaining at the Atlantic property and would have moved back and walked away from his investment in the La Puente facility had the District abandoned the project.

In addition, Perez testified that the production capacity at the Atlantic property was greater than the production capacity at the La Puente property. Thus, according to Perez, the Atlantic property could have accommodated an increase in sales and production which occurred at the La Puente property. On this issue, the evidence shows that the increased production was not the result of increased patronage at the La Puente property, but instead, was the result of market forces creating a greater demand for chicken. In other words, San Miguels customer base was ordering more chicken and the Atlantic property could have handled the increased production better than the La Puente facility.

c. The Districts Response

The District asserts, however, that two of its notices explicitly instructed Perez that it did not have to move. The first notice in December 2002 came as part of a notice of eligibility and advised Perez that San Miguel was not required to move as a result of this notice and that it would be given 90 days written notice. The second notice, provided to Perez on December 31, 2002, advised that it was not a notice to vacate and that San Miguel should not move.

We reject the Districts suggestion that these two written notices show that San Miguel voluntarily moved its business location. Before Perez received the notices, a District representative told him there was a 100 percent chance of eminent domain. In addition, in December 2002, District representatives Boss and Romo made representations to Perez authorizing the relocation of San Miguel and making the relocation a high priority for the District. In mid-December 2002, Romo delivered to Perez a notice that San Miguel was eligible for relocation benefits. At trial Romo testified that upon delivery of a notice of eligibility, he expected businesses to take steps to move. At this time, Romo had observed the changes that San Miguel had made to the La Puente property and understood the complexities of moving a business like San Miguels. At no point did Romo or Boss instruct Perez not to move the business or it would be considered voluntarily for which it would not be entitled to benefits or damages for loss of goodwill.

The District also suggests that a taking does not occur until some specific event occurs, such as the filing of a complaint, the Board adopts a resolution of necessity, or when an agency obtains early possession of the property. The District cites Redevelopment Agency v. Gilmore (1985) 38 Cal.3d 790 (Gilmore) in support of this argument.

We decline to issue a bright line rule in this case to designate a specific date upon which the taking occurred for purposes of awarding good will. The applicable statute, Code of Civil Procedure section 1263.510, subdivision (a), requires the business owner to prove the loss was caused by the taking. In Muller, the Supreme Court stated that section 1263.510 is a remedial statute to be liberally construed. (Muller, 36 Cal.3d at p. 269.) The Muller court also explained that wherever the meaning of the statute was doubtful, it was to be construed to extend the remedy. (Ibid.) Imposing a bright line rule would be inconsistent with the wording and remedial nature of the statute.

In addition, the Gilmore case is irrelevant to the issue presented in this case. There, the court was addressing the issue of what interest rate should apply in a case of eminent domain to compensate a condemnee. (Gilmore, supra, 38 Cal.3d at p. 809.)

d. The Duty to Mitigate

In addition, Code of Civil Procedure section 1263.510, subdivision (a)(2), requires a business owner to prove that it took reasonably prudent business action to mitigate its damages. San Miguel presented substantial evidence of mitigation.

The District appears to suggest that San Miguel should have waited until the filing of formal condemnation proceedings in court before seeking to relocate. According to Perez and Pedersen, who also served as San Miguels relocation consultant, San Miguel would have had to shut down operations if it had waited and not secured the La Puente property. This testimony is not contradicted. Perez was able to move his business operations without interruption.

On this record, Perez took reasonable steps to mitigate loss of goodwill. He prevented the complete closure of San Miguels business, which would have displaced approximately 45 employees.

The fact that the Legislature has imposed a duty upon business owners to take steps to mitigate damages in the face of eminent domain proceedings further supports the conclusion that a bright line rule as to when a taking occurs is inappropriate. This duty places the condemnee in a difficult position. If the condemnee relocates too early, the taking may not have caused the loss of goodwill. If the condemnee waits too long to relocate, it may be concluded that the condemnee did not reasonably mitigate damages. Thus, the issue of whether the taking caused the alleged loss of goodwill and whether the condemnee took reasonable steps to mitigate do not appear to be susceptible to a bright line rule, but instead appear more suited for resolution by the trier of fact.

In conclusion, based upon the foregoing, San Miguel presented substantial evidence that the taking caused it to relocate from the Atlantic property to the La Puente property. Thus, the trial court erred by granting the motion to set aside the verdict on the basis that the taking did not cause the alleged loss of goodwill.

3. The Trial Court Erred by Striking the Testimony of San Miguels

Goodwill Valuation Expert

The trial court concluded that the methodology used by San Miguels goodwill expert was flawed. The court entered an order striking the testimony. Reviewing for abuse of discretion (Sobke, supra, 65 Cal.App.4th at p. 395), we conclude that the trial court abused its discretion.

a. Methodologies for Valuing Goodwill

In Redevelopment Agency of San Diego v. Attisha, supra, 128 Cal.App.4th 357, the court explained that [g]oodwill value is a transferable property right which is generally defined as the amount a willing buyer would pay for a going concern above the book value of the assets. (Id. at p. 367.) In Sobke, the court explained:  [Code of Civil Procedure] [s]ection 1263.510 provides a statutory right to compensation for loss of business goodwill, but remains silent on the question of how to properly value the loss of goodwill. (Sobke, supra, 65 Cal.App.4th at p. 388.)

As to how to value the loss of goodwill, in Muller, supra, 36 Cal.3d at page 271, the Supreme Court stated: Courts have long accepted that goodwill may be measured by the capitalized value of the net income or profits of a business or by some similar method of calculating the present value of anticipated profits. In a footnote, the Muller court continued: Goodwill must, of course, be measured by a method which excludes the value of tangible assets or the normal return on those assets. [Citation.] However, the courts have wisely maintained that there is no single acceptable method of valuing goodwill. [Citation.] Valuation methods will differ with the nature of the business or practice and with the purpose for which the evaluation is conducted. [Citation.] Nothing in this opinion is intended to restrict litigants in eminent domain actions from using other valuation methods than the one employed here. (Id. at p. 271, fn. 7.)

Likewise, the Sobke court explained: [T]he Legislature did not specify any particular method for valuing loss of goodwill. [Citation.] After reviewing statutory and case law, we did not discern any hard and fast rule that there is an exclusive method for determining the value of the loss of goodwill in eminent domain proceedings. . . . [E]ach case must be determined on its own facts and circumstances and the evidence must be such as legitimately establishes value.  (Sobke, supra, 65 Cal.App.4th at pp. 388-389.) The court noted that other cases had noted approval of the capitalization of excess earnings approach and a fair market value analysis. (Id. at p. 390.)

In addition, Evidence Code section 823 provides that the value of property for which there is no relevant, comparable market may be determined by any method of valuation that is just and equitable.

b. The Testimony of Pedersen

Pedersen testifed about his qualifications, his research into San Miguel, its two locations, the world chicken market, and the documents he reviewed in preparing his analysis of the alleged loss of goodwill.

Pedersen testified that he used the excess earnings approach to value San Miguels lost goodwill. In Muller, the Supreme Court provided a definition of the excess earnings approach: The capitalization of excess earnings approach values goodwill as follows. First, the net earnings of the business are computed by subtracting expenses and reasonable officers salaries from gross earnings. Next, a percentage return which would normally be expected from the value of the tangible assets of the business is calculated and then subtracted from the net earnings. The remaining figure, if any, is the excess earnings of the business and is attributable to intangible assets, usually goodwill. The capitalized present value of the excess earnings is computed by dividing the excess earnings figure by a percentage which reflects current interest rates. (Muller, supra, 36 Cal.3d at p. 266, fn. 2.)

Pedersen used an excess earnings approach similar to the approach presented in the Muller case. Pedersens charts showed pre-taking goodwill of $1,006,000; and post-taking goodwill of $254,000. Pedersen testified as to a detailed examination of San Miguels financial data to arrive at his conclusions. He testified that he used the general ledger and discussions with Perez to make separate calculations of profits and expenses for both locations.

Pedersen acknowledged that the 2002 to 2003 fiscal year (used to calculate post-taking goodwill) included data from both locations. He testified, however, that his review of the actual financial data on a month-to-month basis, including income and expenses,