Testing Minnesota Statute 117.186 as It Relates to Business Damages (Loss of Going Concern) in Condemnation – By Scot A. Torkelson

Introduction

On September 9, 2008, a Court-appointed Commission recognized an important threshold of damages in the area of condemnation law. The decision (State of Minnesota v. Parcel 212 Kindercare) came thirteen months after the Interstate 35W bridge collapse which precipitated the condemnation and taking of the subject real estate. The taking closed and, ultimately, destroyed a thriving day care business. This ruling is significant because it is in stark contrast to past interpretations of Minnesota Statute 117.186 (Compensation for Loss of Going Concern).

Briefly, the power of eminent domain states that: Any property may be condemned and taken by the U. S. Government for public purpose. However, the owner of that property must be paid fair market value under the Takings Clause of the Fifth Amendment to the United States Constitution. Article 1, Section 13 of the Minnesota Constitution describes an even broader scope of government responsibility by guaranteeing that, “private property shall not be taken, destroyed, or damaged for public use without just compensation.” In this case, determining the fair market value of the property (for purposes of just compensation) was complicated by the fact that the taking destroyed the business itself. In the State of Minnesota, fair market value historically includes only the real estate because it is assumed that the business itself could easily move to another location. Thus, it was quite rare that the facts of a case warranted an award for loss of going concern.

Summary of Facts

In light of recent changes, what happens when a business cannot relocate?

In 2006, the State Legislature revised Minnesota Statute 117.186 and expanded the traditional interpretation of loss of going concern, stating as follows within Subdivision 2:

“If a business or trade is destroyed by a taking, the owner shall be compensated for loss of going concern, unless the condemning authority establishes any of the following by a preponderance of the evidence:

• the loss is not caused by the taking of the property or the injury to the remainder;
• the loss can be reasonably prevented by relocating the business or trade in the same or a similar and reasonably suitable location as the property that was taken, or by taking steps and adopting procedures that a reasonably prudent person of a similar age and under similar conditions as the owner, would take and adopt in preserving the going concern of the business or trade;
• compensation for the loss of going concern will be duplicated in the compensation otherwise awarded to the owner.”

The bridge collapse of August 1, 2007 created the circumstances for the test case of compensation for loss of going concern when the subject business is, in fact, destroyed. Numerous properties in the area of the bridge collapse required immediate condemnation action; one of those properties was a day care located on the north side of the Mississippi River, near 10th Avenue.

As a result of the taking of the real estate rented by Kindercare Day Care Center, the operating day care business was destroyed. Minnesota Statute 117.186 became the basis for recovering damages for the loss of going concern, with the plaintiff arguing that all of the above criteria for just compensation were met.

Opposing Viewpoints

In its brief, the State took a narrow view of the use of the word ‘destroyed’ in the Statute, claiming that to destroy meant, “to ruin completely,” “tear down or break up, demolish,” “to do away with or put an end to,” etc. Under this strict interpretation the State argued that the criteria of the Statute were NOT met.

The State further noted that 26% of the affected clients were transferred to other facilities operated by Kindercare and provided evidence that the facility could reasonably be relocated in its market area.

On behalf of Kindercare, Shenehon Company argued that the nature and immediacy of the closing; the difficulty of placing the children in other facilities; the fact that the building was demolished within a very short time frame of the taking; and the significant obstacles to relocating a day care (including the zoning restrictions, planning time to get a day care approved, the need for sufficient play area for outside activities, finding a facility that met all licensing requirements, etc.), placed Kindercare in an impossible situation. In fact, the business could not reasonably relocate and was completely destroyed.

Commission’s Findings

The Commission determined that the transfer of some students to other facilities did not preclude recovery of damages for the taking of a very desirable location. Additionally, it found that the incidental increase in revenue at other locations did not relieve the State from its obligation to compensate the owner for the loss of its location under the statute’s business damage compensation provisions.

After hearing evidence from both sides, the Commission ruled that the Kindercare Day Care business was, in fact, destroyed by the taking and awarded the defendants full damages. Therefore, under the revised provisions of Minnesota Statute 117.186, the State is liable for the loss of going concern and must pay the owner just compensation.

As it relates to loss of going concern, the Commission determined that Minnesota Statute 117.186 requires that a taking must demonstrate: (1) that the going concern value will in fact be destroyed as a direct result of the condemnation; and (2) the business either cannot be relocated as a practical matter or that relocation would result in irreparable harm. In this case, the Commission awarded a considerable compensation package to Kindercare.

Summary

According to the findings of the Commission, for businesses that rely heavily on carefully selected locations (such as day care facilities) or are subject to significant regulatory or licensing hurdles in the development of the business, demonstrating a reasonable inability to relocate is sufficient to justify payment for damages due to loss of going concern.

The case is currently being appealed by the State of Minnesota.