Governor Brown Vetoes Eminent Domain Bill, But I'm Not Sure Why

by Nossaman LLP

Earlier this week, Governor Brown vetoed AB 374, a bill to amend Code of Civil Procedure section 1263.510, the statute governing recovery of loss of business goodwill in an eminent domain case.  But it's not the veto that caught my eye so much as the veto message, which really left me scratching my head until I looked more carefully at what was going on (or at least what appeared to be going on). 

Some history:  last year, the Court of Appeal issued the decision in People ex rel. Department of Transportation v. Dry Canyon Enterprises 211 Cal.App.4th 486 (2012).  The case purported to make some new law, requiring a business owner to prove that the business possessed goodwill before the taking (i.e., in the before condition) in order to seek recovery for loss of business goodwill. 

Even that had me scratching my head, because section 1263.510 already required an owner to prove that "the loss [of business goodwill] is caused by the taking of the property or the injury to the remainder."  Silly me, I had always assumed that to lose something, one had to have it to lose. 

But still, Dry Canyon clarified things, holding that the business did in fact have to possess goodwill in order to lose goodwill as part of satisfying the entitlement factors (along with proving the loss was caused by the taking, the loss could not be prevented by reasonable mitigation measures, and compensation for the loss would not be duplicated through another form of recovery).  Fair enough. 

Then AB 374 came along, presumably seeking to codify the Dry Canyon result by adding specific language to section 1263.510, so that the introduction would now read:

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 adduces sufficient evidence to permit a jury to find that goodwill existed prior to the taking and proves all of the following: . . . 

So to the extent proving the existing of pre-taking goodwill was ever really a problem -- and the Dry Canyon opinion itself didn't solve it -- this really makes things clear.  Or does it? 

Governor Brown then vetoed AB 374.  Does that mean that he believes that a business owner need not prove that goodwill existed in order to recover for loss of goodwill?  I don't think so.  In fact, the Governor's veto message makes clear that he agrees with the Dry Canyon decision:

I am returning Assembly Bill 374 without my signature.

This measure would reverse several appellate court decisions allowing judges, in eminent domain claims for loss in business goodwill, to decide facts before a jury decides on compensation. In this case, I think the appellate courts got it right. Judges are in the best position to decide whether businesses had goodwill to lose before proceeding to costly jury trials.

So if he agrees with Dry Canyon, why the veto?  It turns out that AB 374 actually muddied the issue, rather than clarifying it (at least in Governor Brown's view).  Since goodwill first became compensable in California in 1975, courts have interpreted section 1263.510 as creating a series of threshold showings the owner must make before being entitled to present a goodwill claim to a jury.  This has often resulted in an "entitlement" hearing before the judge, deciding whether the owner could prove the items listed in section 1263.510. 

But the new introductory language proposed in AB 374 would have thrown a potential wrench in the works, since it provides that the owner must "adduce[] sufficient evidence to permit a jury to find . . . "  And this is apparently the basis for the veto.  AB 374 seems to shift the entitlement findings from the judge to the jury. 

But I'm not convinced that's what AB 374 really intended.  Indeed, the language AB 374 attempted to add to section 1263.510 mirrors language from the Dry Canyon opinion.  Indeed, AB 374 seems designed to resolve an issue the Dry Canyon court left unresolved.  Is the standard by which the court should measure this "new" entitlement requirement:

  1. Whether the owner proved to the court that a reasonable jury could conclude that the business possessed goodwill in the before condition; or
  2. Whether the owner proved to the court that the business in fact possessed goodwill in the before condition.

These standards appear quite similar, but the difference can be crucial.  Is the court merely a "gatekeeper" charged with ensuring the owner meets some minimum evidentiary threshold in order to get to the jury, or is the court the actual fact-finder on this issue?  Under AB 374, the Legislature sought to codify the first option, rather than the second. 

So in the end, it's not that Governor Brown thinks an owner can recover for lost goodwill despite not being able to prove that the business possessed goodwill in the first place.  It's that Governor Brown thinks this determination properly lies with the judge, not the jury.  

And I'll admit it.  I missed this nuance in AB 374 until I read what I thought was a pretty strange veto message.  As always, the devil's in the details.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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