Lessor Of Business Not Entitled To Lost Goodwill Compensation Because It Did Not Own The Business

In Galardi Group Franchise & Leasing, LLC v. City of El Cajon, (— Cal.Rptr.3d —-, Cal.App. 4 Dist., June 7, 2011), a court of appeal considered whether the lessor of a business was entitled to compensation for lost goodwill in an inverse condemnation proceeding. The court of appeal held the lessor could not recover compensation for lost goodwill because it did not own the business on the condemned property.

Facts

Galardi Group Franchise & Leasing, LLC (“Galardi”), is a franchisor doing business under the name Wienerschnitzel. Galardi offers two different types of franchises—a “full franchise” (where an “individual or legal entity purchases, leases or subleases a location and fixtures and equipment”), or a “limited franchise” (where an “individual or legal entity leases a location and fixtures and equipment on a month-to-month basis”). Galardi subleased a limited franchise in the City of El Cajon (“City”) to Mark D. Bingham (“Operator”), who controlled the restaurant pursuant to a written Operator Agreement (“Agreement”). Galardi received notice that this property would be taken by eminent domain and the restaurant eventually closed after the City acquired it for use as a police facility. Galardi and Operator unsuccessfully attempted to relocate the restaurant to preserve the goodwill.

Galardi and Operator executed an “assignment whereby the Operator assigned any claim it had for lost goodwill compensation to Galardi.” The next week, Galardi commenced a lawsuit against the City for inverse condemnation. Galardi “alleged that it was entitled to lost goodwill compensation because it owned the Restaurant; however, to the extent the Operator may have been the owner of the Restaurant, it alleged that the Operator had assigned its rights to lost goodwill compensation to Galardi and thus it was also entitled to compensation as an assignee of the Operator.” The case was bifurcated with the trial court first determining whether Galardi was entitled to any goodwill compensation.

During trial, the City relied on Redevelopment Agency v. International House of Pancakes, Inc. (1992) 9 Cal.App.4th 1343 (“IHOP”) for its position that Galardi was not entitled to compensation for lost goodwill as a “nonowner franchisor.” City further asserted the Operator was the owner but it “had no obligation to pay the Operator for lost goodwill compensation based on paragraph 15 of the Agreement whereby the Operator ‘waive[d]’ its right to any condemnation award.” The City argued that “the assignment of the right to receive goodwill compensation that Galardi obtained from the Operator was ineffectual because the Operator had already waived its right to receive any condemnation award from any condemning authority, and thus had nothing to assign.” The trial court found in favor of the City concluding that the Operator was the business’s owner. The trial court also found that Operator had no interest to assign to Galardi as the assignment was “ineffectual.”

Decision

Galardi first argued the trial court erred when it found it was not a business owner within the purview of the Code of Civil Procedure section 1263.510 “because it used an operator to run the Restaurant.” Galardi attempted to distinguish the IHOP case because the parties in that case had a franchisor-franchisee relationship as opposed to the relationship between Galardi and Operator. The trial court in IHOP granted summary judgment based on the fact the franchisor was not the “owner of a business conducted on the property taken.” The court of appeal affirmed finding the statutory language stated that only the “‘owner of a business conducted on the property taken’ may claim compensation for loss of goodwill, and that the franchisor’s activities in overseeing, assisting, and controlling the operation of the restaurant did not entitle it to compensation for loss of goodwill.”

The court of appeal in the present case found the Agreement to be similar to the franchise agreement in IHOP. Galardi allowed Operator to use the Wienerschnitzel system, trademark and trade name. When operating the restaurant, Operator had to comply with the Wienerschnitzel Operations Manual as well as any supplement issued by Galardi. Operator was further required to only purchase supplies from Galardi or its approved suppliers. The Agreement also stated Galardi “had no right to control the management of the business, and that the relationship between the parties was not a partnership, joint venture or agency.”

The court of appeal found Galardi’s focus on the franchisor-franchisee relationship between the IHOP parties is improper as the IHOP claimant was not precluded from recovering goodwill damages due to its franchisor status. Instead, the IHOP court reviewed the agreement to determine whether the claimant owned the business “or whether an agency, joint venture or partnership relationship existed showing some indicia of ownership.”

In this case, there was no indication of Galardi’s ownership of the business. Moreover, the Agreement required the Operator to “indemnify Galardi from any and all claims or liabilities related to the Premises, and any losses suffered by the Operator, Galardi or third parties related to the Operator’s use of the Premises.” Similar to the IHOP claimant, Galardi “established a method of operation intend[ing] to immunize or insulate itself from the risks and liabilities inherent in the ownership of [a] business, and has not explained how that same agreement can simultaneously make it an owner of the business for the sole purpose of these condemnation proceedings.” The court of appeal thus concluded Galardi was not the owner of the business within the purview of section 1263.510.

The Agreement also contained a waiver provision stating the following: “[i]f all or any part of the premises is condemned for public or quasi-public use, Operator waives all rights to or interest in any condemnation award or settlement.” The trial court determined this to mean that the Operator waived “any condemnation recovery from a condemning agency.” The trial court reasoned that “[b]ecause the Operator had no right to recovery from a condemning agency” the “later executed assignment purporting to give Galardi the Operator’s right to any condemnation recovery was ineffectual because the Operator had nothing to assign.” For this reason, the trial court found the City did not have a duty to pay lost goodwill compensation to Galardi or the Operator.

Galardi, on the other hand, argues it intended for the waiver provision to benefit it, not the condemning agency, and thus the trial court’s interpretation was against standard contract law. The rules for interpretation of contracts require that in order to assist in determining the meaning of disputed contract words, “the trial court will provisionally receive extrinsic evidence that is relevant to show whether the contract is reasonably susceptible to a particular meaning.”

The court of appeal agreed with Galardi’s argument finding that there was no indication the trial court relied on any extrinsic evidence when interpreting the waiver provision and neither party cited to such evidence in their briefs. Thus, the court of appeal found a review of the record revealed the Operator presented the sole testimony regarding the waiver provision. However, such testimony did not address “whether the parties intended the Operator to surrender his right to a condemnation award to a condemning agency, or assign his right to any condemnation award to the other party to the transaction.”

The court of appeal concluded that after a review of the record and actions by the parties, it is more likely the “parties were defining their respective rights to goodwill damages vis-à-vis one another, rather than benefiting a nonparty to the Agreement.” The appellate court stated that to interpret the provision as proposed by the City “would unjustly allow it to avoid paying any compensation for lost goodwill for its taking of the premises.”

Thus, the appellate court found that on remand the trial court must determine whether Galardi has proven the other “statutory elements showing entitlement to compensation for lost goodwill as an assignee, and if so, empanel a jury to determine the amount of any compensation for lost goodwill.” The court of appeal reversed the order of the trial court and remanded for further proceedings.

Questions

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