Is it rational to spend in excess of $1,000,000 to move and reestablish a business worth only $126,000? Putting aside the rhetorical nature of this question, the owners of a catering truck supply company who spent more than $1.3 million to move and reestablish their business, learned the hard way that it is not.
In Los Angeles Unified School District v. Rudy Casasola (opinion filed August 5, 2010), the Court of Appeal for the Second Appellate District waded into the murky relationship between the Eminent Domain Law (CCP §§1230.010, et seq.), which provides compensation for lost business goodwill in eminent domain actions, and the Relocation Assistance Act (Gov. Code §§7260, et seq.), which provides recovery for moving and reestablishment expenses caused by public projects in a separate administrative proceeding. The Casasola decision expanded on the statutory distinctions between relocation expenses and loss of business goodwill. As a result, despite the fact that many of the expenses incurred by the business owners were non-compensable under the Relocation Assistance Act, the Casasola court concluded that they were not recoverable in the eminent domain action either.
To understand how the Casasolas found themselves in this predicament, one must understand the interplay between the Eminent Domain Law and the Relocation Assistance Act. Under the Eminent Domain Law, the owner of a business conducted on property taken must take such steps as a "reasonably prudent person" would take to mitigate the loss of goodwill (C.C.P. §1263.510(a)(2)). This often involves a relocation of the business, for which compensation may be sought under the Relocation Assistance Act. Such compensation is, however, "independent of the condemnation proceedings." (Baldwin Park Redevelopment Agency v. Irvine (1984) 156 Cal.App.3d 428, 438.) But a business owner's effort to mitigate the loss of goodwill – such as relocating the business – may also become part of the claim for lost goodwill. (People Ex Rel. Dept. of Transportation v. Muller (1984) 36 Cal.3d 263, 271-272.)
Whether the Eminent Domain Law (§1263.510(a)) requires that moving and related expenses be paid only under the Relocation Assistance Act, or whether it merely prohibits double payment for expenses that could potentially be recouped under either statute, was addressed by the Court in Redevelopment Agency of the City of Emerville v. Arvery Corporation (1992) 3 Cal.App.4th 1357. The Arvery Court concluded that expenses which may be characterized as moving or reestablishment expenses under the Relocation Assistance Act are recoverable solely thereunder, and not in an eminent domain action. Thus, a business owner seeking compensation for mitigation expenses as part of a loss of goodwill claim must prove that such expenses are not recoverable under the Relocation Assistance Act. (Id. at 1364)
In Casasola, the business owners conceded that the expenses for which they claimed reimbursement were "relocation" expenses. That is, they were expenses incurred to relocate their catering business from the condemned property to the relocation site. A significant amount of these expenses were in the nature of "reestablishment expenses," meaning costs associated with setting up the new location to match the business' needs. Under the Relocation Assistance Act, compensation for such expenses are capped at $10,000. (Gov. Code §7260(a)(4).) For this and other reasons, the School District disallowed the $1.3 million claim, while paying only $224,252 for relocation and reestablishment expenses.
In an attempt to circumvent the Arvey decision, the Casasolas argued that since their $1.3 million in relocation expenses were not compensable under the Relocation Assistance Act, and were actually and reasonably incurred to mitigate loss of goodwill, they were compensable as mitigation expenses under Muller and §1263.510.
The courts in both the Arvey and Casasola cases wrestled with the fact that although the goodwill code section and the Relocation Assistance Act were codified in separate codes, they concern related subject matters. Both address compensation for a business forced to move when property is taken by eminent domain. In an effort to harmonize these statutes, the Arvey court concluded that a displaced business owner could not recover under the Eminent Domain Law expenditures expressly recoverable under the Relocation Assistance Act. The Casasola court took this analysis one step further. It concluded that a displaced business owner may not recover under the Eminent Domain Law expenditures expressly deemed nonrecoverable under the Relocation Assistance Act, either because they are part of a class of nonrecoverable expenses or because they exceed the $10,000 cap on reestablishment expenses.
The Casasola court acknowledged an apparent disconnect between the Legislature's decision to make moving expenses fully compensable while capping reestablishment expenses at $10,000. However, the Court noted that it could not second guess the way in which the Legislature fashions a statutory remedy. Thus, the Court concluded, the Casasolas' interpretation of the goodwill code section as permitting compensation for all actual and reasonably incurred, but otherwise uncompensated relocation expenses, "would render meaningless the carefully drawn statutory distinction between these categories of expenses."
The Casasola court left the door open for recovery of expenses incurred to mitigate loss of goodwill. However, if the "mitigation" expenses are in fact "relocation" expenses, they will either be compensable under the Relocation Assistance Act or not at all.
Gale Connor is a Partner in the Eminent Domain Practice Group. He has a distinguished practice encompassing many aspects of real property law and is experienced in eminent domain, commercial leasing, acquisition and disposition of improved and unimproved properties, real estate finance, and litigation of environmental, title, land use, construction, condemnation, and inverse condemnation cases. Gale can be reached at (415) 438-7240 or gconnor@nossaman.com.