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What's A Business Worth? City Says Not Much; Court Disagrees

An appellate court has upheld the awarding of $200,000 for lost goodwill to a business owner whose shop was taken by the Inglewood Redevelopment Agency, even though the business had mostly lost money.

The court agreed that the owner of Auto Inn Lube and Oil deserved to recoup the losses he racked up while awaiting completion of a big-box center across the street. The business owner's expert called this the "cost to create" goodwill, and the court said it was an acceptable method of valuing goodwill lost because of the government's taking.

However, the court declined to throw out the city's eminent domain action or to award the business owner his litigation expenses.

Elias Aklilu opened Auto Inn in 1997 on West Century Boulevard. The business was profitable in 1998, but lost money the following four years while it endured road construction related to development of Marketplace at Hollywood Park, which contains Home Depot, Target and other stores. Once traffic flow returned to normal in 2003, the profitability of Aklilu's business also returned.

But in mid-2003, the Inglewood Redevelopment Agency adopted a resolution of necessity authorizing condemnation of the property on which Auto Inn was located to make room for a 180,000-square foot retail project. In October of that year, the agency filed an eminent domain complaint against the property owner, Aklilu and his subtenant, who ran a smog-check shop. The agency settled with the property owner for $700,000 and with the subtenant for $35,000. The agency offered Aklilu $35,000 for lost goodwill, but he demanded $239,000 for lost goodwill, $31,000 for improvements and $85,000 for "moveable equipment."

At trial, Aklilu's expert, Chris Pedersen, said Auto Inn had adjusted annual losses of $238,761 over six years, and that amount should be considered the "goodwill" that Aklilu had invested in what was likely to become a successful venture because of its location. The agency's expert testified that Auto Inn had no goodwill because it had not turned a profit. Ultimately, a jury awarded Aklilu $200,000 for lost goodwill. Los Angeles County Superior Court Judge Ricardo Torres also awarded Aklilu $4,265 of the $34,525 the agency had agreed to pay the property owner for fixtures and equipment. The judge declined to award attorneys fees or halt the city's condemnation action.

Both sides appealed, and a unanimous three-judge panel of the Second District Court of Appeal, Division Three, upheld the lower court.

Key to the decision was the valuing of lost goodwill. The agency contended the "cost to create" approach was impermissible because it was not based on past business performance, but instead speculated about future business success. The court, however, pointed to People ex rel. Dept. of Transportation v. Muller, (1984) 36 Cal.3d. 263, the only state Supreme Court decision to analyze compensation for lost business goodwill under Code of Civil Procedure 1263.510. In Muller, the court ruled, "[T]here is no single acceptable method of valuing goodwill."

"Pedersen testified a willing buyer would pay $238,716 for Auto Inn's goodwill," Presiding Justice Joan Klein wrote for the Second District. "The fact Pedersen appraised the value of this goodwill using a cost to create approach does not render Pedersen's valuation inadmissible. Rather, admission of Pedersen's testimony was consistent with Muller's interpretation of 1263.510 as a remedial statute to be construed liberally.'"

The court noted that the founder of the firm hired by the agency to determine valuation had written a handbook that said a cost to create approach was acceptable when the "excess profits" test produced a goodwill value of zero.

The court declined to overturn the agency's resolution of necessity, finding that Aklilu should have raised an objection during a public hearing when instead he endorsed the resolution under the mistaken belief the agency would find room for him in the new project. The court also upheld the trial court judge's determination that substantial evidence supported the city's resolution.

As for litigation expenses, Aklilu argued he was eligible because the jury's award of $200,000 was far beyond the city's offer of $35,000. But the court ruled that the mathematical relationship between the award and the offer was only one factor. The court noted that Aklilu made "unreasonable" demands for payment for fixtures and equipment he apparently did not own, and for "movable" equipment, which is not eligible for compensation. In addition, the agency's payment to Aklilu's subtenant also settled a suit the subtenant had filed against Aklilu.

The court also ruled that the agency could offset the interest it owed Aklilu against rent he owed for continuing to occupy the property after the agency gained actual possession.

The Case:
Inglewood Redevelopment Agency v. Aklilu, No. B185107, 07 C.D.O.S. 9041, 2007 DJDAR 11677. Filed and partially published July 30, 2007. Certified for full publication August 20, 2007.
The Lawyers:
For Inglewood: Royce Jones, Kane, Ballmer & Berkman, (213) 617-0480.
For Aklilu: Karen Larson, Century Law Group, (310) 642-6900.