Redevelopment Agency v. International House of Pancakes, Inc.

• Decision Date: 28 September 1992
• Docket Number: No. A055648,A055648
• Citation: 12 Cal.Rptr.2d 358,9 Cal.App.4th 1343
• Court: California Court of Appeals Court of Appeals
• Parties: REDEVELOPMENT AGENCY OF THE CITY OF CONCORD, Plaintiff and Respondent, v. INTERNATIONAL HOUSE OF PANCAKES, INC., Defendant and Appellant.

Page 358

12 Cal.Rptr.2d 358

9 Cal.App.4th 1343

REDEVELOPMENT AGENCY OF THE CITY OF CONCORD, Plaintiff and Respondent, v. INTERNATIONAL HOUSE OF PANCAKES, INC., Defendant and Appellant.

No. A055648.

Court of Appeal, First District, Division 1, California.

Sept. 28, 1992.

Review Denied Dec. 17, 1992.

Erickson, Beasley, Hewitt & Wilson, John H. Erickson, Alice M. Beasley, San Francisco, for defendant and appellant.

Latham & Watkins, Jerrold A. Fadem, George Kimball, Marcia Bobb, Los Angeles, for amicus curiae International Franchise Ass'n on behalf of appellant.

Goldfarb & Lipman, Lee C. Rosenthal, Peter Franklin, Michael Berry, San Francisco, for plaintiff and respondent.

STRANKMAN, Presiding Justice.

Section 1263.510 of the state's Eminent Domain Law (Code Civ.Proc., § 1230.010 et seq.) provides that upon proof of certain facts, the "owner of a business conducted on the property taken" shall be compensated for loss of goodwill caused by the taking. ¹ The narrow question in this case is whether a franchisor who granted a franchise for operation of an International House of Pancakes restaurant on property later taken in eminent domain proceedings was entitled to claim compensation under section 1263.510, even though there was no partnership, joint venture, or agency relationship between the franchisor and the franchisee. The trial court concluded that the franchisor was not an owner within the meaning of the statute; we agree and affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

a. The Franchise Agreement

Appellant is the International House of Pancakes, Inc., a Delaware corporation. Appellant owns and controls certain formulas and processes for the preparation of pancakes, which it promotes, sells, and merchandises through restaurants operating according to a standard plan under the name, "The International House of Pancakes." Respondent is the Redevelopment Agency of the City of Concord (the Agency). ²

Appellant leased land and improvements in Concord from a private party in 1970. Appellant then subleased the property and entered into a franchise agreement with the sublessee authorizing the latter's operation of an International House of Pancakes restaurant on the premises. ³ The sublessee assigned and transferred the sublease, franchise agreement, and a related restaurant equipment lease to Towru's, Inc., a California corporation (Towru's).

According to the franchise agreement, appellant retained ownership of its trade name, goodwill, and trade secrets, but granted Towru's a franchise to use those intangibles in the operation of the restaurant at the specified location. Towru's was obligated to operate the restaurant in compliance with standard procedures established by appellant for such matters as accounting, quality control, appearance of the premises, hours of operation, merchandise sold, employees' appearance and demeanor, personnel standards and training, preparation and service of foods and beverages, and advertising. Towru's was also required to buy its food products, supplies, and materials only from appellant or its approved suppliers.

At the same time, however, the agreement provided that in all matters pertaining to operation of the restaurant, appellant and Towru's were independent contractors; neither's employees were the employees of the other. The agreement stated: "Nothing in this agreement or in the relationship of the parties shall be construed to create a partnership, joint venture or agency between Franchisor and Franchisee." Subject to the provisions of the agreement, sublease, equipment lease, and standard operating procedures, Towru's was authorized "to operate said restaurant in such manner as it be determined by the Franchisee."

Towru's was required to pay an "initial fee" of over $50,000, plus rent as provided in the sublease and equipment lease. Towru's was also obligated to pay appellant: (1) the greater of 5.2 percent of gross sales each week or $100 per week, as a service charge for appellant's training, inspection, supervision, research, development, and record-keeping services; and (2) 1 percent of its gross sales each week as a service charge for advertising, public relations, and promotion.

Under the agreement, appellant was entitled to terminate the franchise only for certain specified reasons, such as the franchisee's repudiation of its payment obligations or its repeated violations of standard operating procedures remaining uncured after notice and request to cure.

b. The Eminent Domain Proceedings

Respondent acquired the fee interest in the property from the lessor for a street-widening project in 1988, subject to appellant's lease. Respondent filed an eminent domain complaint in 1990 to acquire appellant's leasehold interest and Towru's subleasehold interest. Respondent, appellant, and Towru's reached a settlement relating to compensation for the leasehold, leasehold improvements, and personal property. Specifically excluded from the settlement were issues of compensation for precondemnation losses, loss of goodwill, or relocation expenses.

Respondent then moved for summary judgment or summary adjudication of the issues against appellant, seeking a determination that appellant was not the owner of a business conducted on the property taken within the meaning of section 1263.510, and was therefore not entitled to any compensation for loss of goodwill.

After reviewing the franchise agreement and other exhibits submitted by the parties, the trial court granted the motion. It explained, "the franchisor in your case ... goes to great lengths ... to disassociate [itself] from ownership because there would be all sorts of--if you indeed were the owner there might be all sorts of adverse consequences to you in the area of taxation and the area of labor relations and all sorts of areas, and indeed one of the reasons why people ... choose franchising as a way of marketing their product as an alternative in other ways is they can avoid all those problems." The court also said, "And [appellant] has plenty of remedies and may already have a remedy. In future contracts--in future situations it will certainly take care of it by way of a contract. It will provide that it will get a piece of the goodwill in the future. [It] may already be able to do that with the existing--[it] can argue that the goodwill payments are really payments in fact and get a share...."

Judgment was entered in favor of respondent and against appellant, and this appeal followed. ⁴

DISCUSSION

A summary judgment motion "shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." (§ 437c, subd. (c).) Summary judgment is often characterized as a drastic remedy which must be used with caution. (Molko v. Holy Spirit Assn. (1988) 46 Cal.3d 1092, 1107, 252 Cal.Rptr. 122, 762 P.2d 46.) Nevertheless, if there is no material fact to be tried and the sole question is whether the claim of the moving party is tenable on the undisputed facts, the trial court's obligation is to determine that issue of law. (Pittman v. Pedro Petroleum Corp. (1974) 42 Cal.App.3d 859, 862, 117 Cal.Rptr. 220.) On appeal, the reviewing court determines de novo whether an issue of material fact exists and whether the moving party was entitled to summary judgment as a matter of law. (Homestead Savings v. Darmiento (1991) 230 Cal.App.3d 424, 430, 281 Cal.Rptr. 367.)

The provisions of the state and federal Constitutions which mandate just compensation for the taking of private property for public use do not require compensation for the loss of business goodwill. (Community Redevelopment Agency v. Abrams (1975) 15 Cal.3d 813, 831-832, 126 Cal.Rptr. 473, 543 P.2d 905; Community Development Com. v. Asaro (1989) 212 Cal.App.3d 1297, 1301-1302, 261 Cal.Rptr. 231.) But section 1263.510, enacted in 1975 as part of a comprehensive legislative revision of the state's eminent domain law, does authorize at least some compensation for loss of goodwill. The Supreme Court has explained that section 1263.510 "was enacted in response to widespread criticism of the injustice wrought by the Legislature's historic refusal to compensate condemnees whose ongoing businesses were diminished in value by a forced relocation. [Citations.] The purpose of the statute was unquestionably to provide monetary compensation for the kind of losses which typically occur when an ongoing small business is forced to move and give up the benefits of its former location." (People ex rel. Dept. of Transportation v. Muller (1984) 36 Cal.3d 263, 270, 203 Cal.Rptr. 772, 681 P.2d 1340.)

Goodwill within the meaning of section 1263.510 is broadly defined; it consists of "the benefits that accrue to a business as a result of its location, reputation for dependability, skill or quality, and any other circumstances We preface our analysis by clarifying what is not at issue in this case. Appellant concedes that Towru's was entitled to claim at least some compensation under section 1263.510, and then argues that it had goodwill in the restaurant separate and distinct from that of Towru's, based on its own involvement in operation of the restaurant as franchisor. To reinforce that argument, appellant points out that under the terms of the franchise agreement, it expressly retained ownership of its own trade secrets, trade name, and goodwill. But as the trial court recognized, a determination of appellant's rights as against its franchisee under that agreement was outside the scope of this eminent domain action. Moreover, for purposes of respondent's summary judgment motion, consideration of whether appellant actually had its own business goodwill which was adversely affected by the condemnation would have been premature. The trial court did not reach that issue, and it need not be decided in this appeal. Instead, the trial court was confronted with a...