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The People Ex Rel. Department of Transportation v. Dry Canyon Enterprises

November 28, 2012

THE PEOPLE EX REL. DEPARTMENT OF TRANSPORTATION, PLAINTIFF AND RESPONDENT,
v.
DRY CANYON ENTERPRISES, LLC, DEFENDANT AND APPELLANT.



(Super. Ct. No. CV098192) Martin J. Tangeman, Judge Superior Court County of San Luis Obispo

The opinion of the court was delivered by: Hoffstadt, J.*fn2

CERTIFIED FOR PUBLICATION

(San Luis Obispo County)

When the State exercises its power of eminent domain over a parcel of land occupied by a business, the business owner has a right to have the jury determine the amount of "business goodwill" lost due to the taking. (Code Civ. Proc., § 263.510.)*fn1 Here we decide whether the owner is entitled to a jury determination when the judge has determined, as a matter of law, that the business had no goodwill to lose in the first place. We are surprised to learn that no court has squarely decided this question. We are not surprised by the answer: Any determination on the loss of goodwill is not required when there was no goodwill to lose.

FACTS AND PROCEDURAL HISTORY

Dry Canyon Enterprises, LLC (Dry Canyon) makes wine. Dry Canyon blends its wines mostly from grapes purchased from other vineyards and, to a lesser extent, from grapes grown on land it owns in Madera and Paso Robles, California. In its business plan, Dry Canyon planned to develop a flagship wine--an estate cabernet to be made from grapes grown on the Paso Robles land and to be marketed under the label "Chumeia." By 2009, Dry Canyon had blended and sold a few vintages of its Chumeia label wine, but had encountered persistent financial difficulties and had yet to turn any profit.

In 2009, the State Department of Transportation (State) initiated eminent domain proceedings against a strip of Dry Canyon's Paso Robles property abutting Highway 46. The State needed the land as part of its project to widen the highway. That strip was home to 1,466 (or approximately 21 percent) of the cabernet vines Dry Canyon was growing for its estate cabernet. The State agreed to compensate Dry Canyon for the value of the land and vines, and cut a check for $203,500.

The parties went to trial before a jury on the only remaining issue--the amount by which the taking diminished Dry Canyon's business goodwill. The State's expert on goodwill valuation recounted that Dry Canyon was not profitable, and that its liabilities exceeded its assets. In light of these dire straits, the expert concluded that Dry Canyon never had any goodwill prior to the taking and accordingly experienced no loss of goodwill.

Dry Canyon's expert calculated the value of Dry Canyon's lost goodwill as $240,000. The expert reached this figure by averaging the results provided by two different methodologies.

The first methodology was the "cost-to-create" methodology. Using this methodology, the expert viewed Dry Canyon's lost goodwill as the cost it incurred to create that goodwill in the first place. Rather than calculate the cost to create the 1,466 cabernet vines that were lost, however, the expert added up the sum total of every expense Dry Canyon had incurred during the first four years of its operations in both Madera and Paso Robles; the expert then divided those costs by four because Dry Canyon took one-fourth of the vines destined for the estate cabernet. He opted to use all of Dry Canyon's costs because, in his view, all of the company's operations were "aimed at" cultivating the estate cabernet.

The second methodology was one the expert invented himself. He called it "premium pricing." The expert estimated that Dry Canyon's estate cabernet would one day fetch a premium price of $10.62 more per bottle than a hypothetical but inferior, Madera-grown wine. The expert then multiplied this lost premium by his estimation of the number of bottles of estate cabernet that could no longer be produced in the next 15 years because of the taking. He called the total "lost goodwill."

After the parties rested, the State moved for a non-suit on the ground that Dry Canyon had not proven it had any business goodwill to lose. Treating the motion as a motion for judgment, the trial court agreed with the State. In reaching this conclusion, the court rejected the testimony of Dry Canyon's expert. The court found the cost-to-create methodology to be a reliable measure of lost goodwill only when a business "clearly had goodwill" to start with, and when the taking caused a "total loss of goodwill." Neither fact was present in this case. The court viewed the premium pricing methodology as little more than "a disguised attempt to seek lost profits from a single product which is assessed in a vacuum." Because Dry Canyon presented no other evidence of pre-existing goodwill, the court granted judgment for the State.

DISCUSSION

Dry Canyon argues that the trial court's ruling is wrong for two reasons. First, the court erred in taking the case away from the jury because the existence of pretaking goodwill is never a question for the court. Second, the court erred in rejecting Dry Canyon's expert testimony, which amply ...


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