LAWSUIT—99 Cents Only Fights Eminent Domain Battle

Plans that Lancaster city officials had to dump one retailer for another that would generate more sales tax revenue may have backfired. Last summer, the Lancaster City Council voted to use its eminent domain power to evict a 99 Cents Only store from a popular retail center so a Costco outlet next door could expand. The only hitch: 99 Cents Only was not going to go quietly. That’s because the feisty discount retailer sidestepped California’s well-oiled eminent domain process and filed suit in federal court, alleging violations of its property rights under the U.S. Constitution. The city filed a motion in federal court hoping to have the lawsuit dismissed, arguing that the issue is really a state, not a federal, matter. But a judge in late October rejected the city’s plea and scheduled the matter for trial Feb. 6. As the trial date nears, the dispute over a seemingly insignificant retail space is shaping up as a battle royale, with potentially far-reaching implications over a city’s ability to evict a profitable business in the name of redevelopment. “When eminent domain was created, it was designed to prevent blight and be for the public good: building a library, a road, a park,” said Russell Wolpert, general counsel for 99 Cents Only Stores Inc. “But now it’s been so distorted and perverted. We don’t think the city should be able to select a preferred retailer and kick out the competition.” To that, the city’s attorney says a public good is being served by removing 99 Cents Only. If Costco Wholesale Corp. can’t get the space it needs to update its store at the Valley Central Shopping Center, the company has indicated it might pack up and move to Palmdale. “This is a classic example of redevelopment,” said David McEwen, the Newport Beach attorney hired to represent the city. “We’re trying to prevent a center from having its major tenant go dark. Should Costco leave, the city could lose $400,000 to $500,000 in sales tax revenue a year. The 99 Cents store produces not even a tenth of that.” Heavy hitters The lengths Lancaster has been willing to go to to retain Costco illustrates the enormous clout large retailers wield. Cities such as Lancaster depend on sales tax revenue from the Costcos and Wal-Marts of the world to pay for everything from street cleaning to police protection. So when Costco made noise about leaving, the city was quick to offer up $3.9 million in subsidies. The money would be used to buy the site of the smaller discount store, as well as two other parcels. The land would then be leased back to Costco for $1 a year. The Lancaster City Council, acting as the city’s redevelopment agency, voted June 27 to begin the eminent domain process. At the time, City Manager Jim Gilley predicted 99 Cents Only would be out by December, the deadline for turning the property over to Costco. But Lancaster may have underestimated 99 Cents Only, a publicly traded company with the resources and resolve to put up a fight. Under California’s eminent domain laws, a redevelopment agency can simply take a property and haggle over the compensation later in state court, if a “fair market value” can not be mutually agreed upon. However, 99 Cents Only threw a wrench in the process when it filed suit in federal court in July, arguing that the city is violating its constitutional rights. Under the Fifth Amendment, government must show there is a public purpose served by taking someone’s private property and, in this case, the city can’t demonstrate that, said Wolpert. “This (99 Cents Only) store isn’t blighted. It’s in Lancaster’s premier shopping center,” he said. “Where’s it going to end? Are you going to have a McDonald’s kicked out to put in a Burger King, a Texaco kicked out to put in a Unocal?” 99 Cents Only is seeking an injunction to stop eminent domain, but the company is not asking for any damages. “We’re not looking for any money. We don’t want to shake the city down,” said Wolpert. “We just want to run a business.” Broad constitutional implications Gideon Kanner, outside counsel for 99 Cents Only and an authority on eminent domain, said the dispute between his client and Lancaster has broad implications for property rights. “If you’re going to allow the taking of private property based on someone making more money from it, the right to own private property disappears,” he said. “What makes 99 Cents’ case fascinating and different is that, to the best of my knowledge, there’s no pretense of any kind that a public purpose is being served,” said Kanner, a former professor at Loyola Marymount Law School. “It’s simply a case of Costco wanting to expand.” McEwen said that is simply wrong. He doesn’t believe 99 Cents Only has a case in federal court because, technically, the city’s redevelopment agency hasn’t taken the company’s property yet. The whole deal could fall apart anyway if other tenants at the mall don’t give the nod to Costco’s expansion plans, as required by terms of a CC & R; at the mall. Home Base, in particular, has been slow in responding to Costco’s request for permission to expand, said McEwen. “There hasn’t been a taking yet,” he said. “I think they (99 Cents Only) have gotten way ahead of themselves.” Besides, the city offered to relocate 99 Cents Only, an offer the retailer essentially snubbed, McEwen added. Wolpert said his company chose the site in the first place because it is Lancaster’s best-performing retail center. “We didn’t pick this by throwing a dart on the map,” he said. In addition, the store is one of his company’s top moneymakers. 99 Cents Only often uses it to demonstrate to Wall Street that it can not only survive but thrive in a shopping center that has both a Costco and a Wal-Mart. McEwen concedes that so far it’s unclear what Costco will do now that the city can’t make good on its promise to deliver the space by the December deadline. “I don’t know what Costco’s plans are at this point, and I wouldn’t begin to speculate,” he said. Costco officials did not return phone calls. The fact that Costco hasn’t pulled up stakes indicates to Wolpert that the larger retailer was bluffing from the start. “The idea that Costco would close a successful store that’s already up and running just doesn’t make sense,” he said. Costco’s motives The whole issue raises questions about Costco’s motives in the first place, he said. “It wasn’t until April of 1998, after we opened up, that Costco all of a sudden had to expand. And they just had to have 15,000 square feet right where our store is,” said Wolpert. “We do compete on certain items, and you don’t have to buy a gallon tub of some product to get a great deal (at 99 Cents Only).” Wolpert sees the flap with Lancaster as evidence that the redevelopment process has run amuck and, in this case, the city has tangled with the wrong customer. “What happens in these situations is the government usually runs roughshod over the merchants,” he said. “And they can do it because it’s usually some guy with a doughnut store or a shoe store that can’t put up a fight. “We’re nowhere near the size of Costco, their market cap is 15 or 20 times bigger, but we’re big enough,” he concluded. “They’re not going to steamroll us.”