Petco Animal Supplies Stores, Inc.

Filing 32

MEMORANDUM AND ORDER granting 19 Motion for Preliminary Injunction. Within 14 days of this Memorandum and Order, Petco will remit to the Clerk of Court security in the amount of $250,000.00. Upon motion to the Court, the Court may order disbursements from the funds deposited with the Clerk of Court to ensure payment of contractors. Ordered by Chief Judge Laurie Smith Camp. (Copy to Financial) (JSF)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
PETCO ANIMAL SUPPLIES STORES,
INC.,
8:14CV280
Plaintiff,
vs.

MEMORANDUM AND ORDER

THE FIVE FIFTY TWO CORPORATION, a
Nebraska corporation;
Defendant.

This matter is before the Court on the Motion for Preliminary Injunction (Filing No.
19) filed by Plaintiff Petco Animal Supplies Stores, Inc. (“Petco”). The parties have
submitted briefs and indexes of evidence supporting their respective positions, and a
hearing on Petco’s Motion took place on November 7, 2014. For the reasons discussed,
the Motion will be granted.
BACKGROUND
Defendant The Five Fifty Two Corporation (“The 552”) is the owner of a
commercial building, real property, and improvements located at 7110 Dodge Street,
Omaha, Nebraska (the “Leased Premises”). On or about August 21, 1997, Petco and
The 552 entered into a commercial lease (the “Lease”), with Defendant as the landlord
and Plaintiff as the tenant. Under the terms of the Lease, Petco was granted three
separate five (5) year renewal options (Filing No. 27-4 at ECF 7), the first of which
Petco exercised on or about September 25, 2012; thus, extending the term of the lease
to January 31, 2018. The Lease required Petco to “maintain and replace, as necessary”
the Leased Premises and its systems. (Filing No. 27-4 at 10.)

The 552 alleges that Petco defaulted under the terms of the Lease by failing to
comply with its maintenance and repair obligations, and by failing to timely cure those
defaults after notice of the defaults. The 552 also alleges that Petco has an ongoing
history of defaulting on its maintenance and tax payment obligations under the terms of
the Lease. Before January 2014, The 552 notified Petco on several occasions about its
failure to comply with maintenance obligations under the Lease.
On or about January 29, 2014, The 552 sent Petco a letter identifying four
specific grounds for default under the Lease and stated that Petco would be in default if
those four specific defaults were not cured within thirty days of the date of the letter
(“Notice to Cure”). (Filing No. 27-8.) The Notice to Cure explained that, in an effort to
obtain a quote from a casualty insurance company, The 552 had been informed that the
condition of the Leased Premises was in disrepair and there were several items
requiring immediate attention. The inspector noted (1) a crack in an outside wall, (2)
water damaged ceiling tiles, (3) damaged and/or missing floor tiles, and (4) possible
roof damage or leaks. (Filing No. 27-8 at 1-2.) The Notice to Cure stated that this list
was not intended to be all inclusive, and asked that Petco inspect the Leased Premises
for additional issues that might need to be addressed. (Id. at 2.) Although The 552
stated it was not obligated to provide Petco an additional cure period, it gave Petco 30
days from the date of the Notice to cure the defects.
The parties dispute whether Petco attempted to cure the defects. According to
The 552, Petco did not cure the defects, nor did Petco respond to the Notice to Cure.
(Filing No. 27-1 ¶ 27.) For this reason, on April 4, 2014, The 552 sent a letter to Petco
terminating the Lease (the “Termination Notice”). (Filing No. 27-9.) The Termination
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Notice stated that The 552 received no response to the Notice to Cure, and stated that
the Lease was terminated, effective June 15, 2014.
Petco claimed it attempted to cure the defects listed in the Notice to Cure. On
January 31, 2014, Petco issued work order 44540881 (“the Work Order”) to a third-party
contractor, allegedly to address the four specific items The 552 identified in the Notice
of Default. (Filing No. 21-2 at ECF 7.) Petco claims the purpose of issuing the Work
Order was to commence efforts to investigate and, where necessary, cure the specific
items identified in the Notice of Default. (Filing No. 27-2 ¶ 7). Petco claims that it
avoided default by contacting the contractor, because the Lease provides, in pertinent
part, that “Tenant shall not be deemed to be in default if Tenant has commenced curing
the default within the thirty (30) day period, and thereafter diligently pursues the
completion of such cure.” (Filing No. 27-4 at ECF 18.) Petco claims that it was not
required to notify The 552 of its curative efforts under the terms of the Lease.
On April 11, 2014, Petco sent The 552 a letter disputing any defaulted on the
Lease and detailing the efforts it undertook concerning the four specific items The 552
cited as bases for default under the Lease in the Notice to Cure. (Filing No. 1-5.) The
552 rejected Petco’s April 11, 2014, correspondence, however; and on or about April
21, 2014, sent Petco a letter, again asserting that the Lease would terminate effective
June 15, 2014. (Filing No. 1-6.) In response to The 552’s April 21, 2014,
correspondence, Petco sent The 552 a letter dated May 7, 2014, stating that pursuant
to the terms of the Lease there was no default nor valid termination. (Filing No. 1-7.)
The parties agreed to extend the date of the termination of the Lease to
September 30, 2014, to provide time for structural and electrical engineers for both
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parties to prepare reports. One of the inspection reports noted areas of distress on the
flooring tiles in the Leased Premises, water-staining on the ceiling tiles, and exterior
building cracks. (Filing No. 28-20.) In correspondence between the parties after the
Termination Notice, The 552 repeatedly stated that efforts by Petco to address the
maintenance issues would not cure the default, absent a signed writing from The 552.
(Filing Nos. 27-10, 27-11.)
During this period, Petco claims it made repeated requests that The 552
acknowledge there was no default under the Lease nor a basis to terminate the Lease.
The 552 denied these requests, and Petco argues that it became necessary for Petco to
file the Complaint for Declaratory and Injunctive Relief. On October 23, 2014, The 552
confirmed its intention to serve Petco “with a three day notice to leave the Premises” if
Petco did not file a motion for preliminary injunction. (Filing No. 22-1.) The 552 has
confirmed that if the Court denies Petco’s request for a preliminary injunction in this
case, The 552 will issue a three-day notice for Petco to leave the Leased Premises, and
file an action under Nebraska’s forcible entry and detainer statutes to regain possession
of the Leased Premises. (Filing No. 27-1 ¶ 37.)
STANDARD
A district court considers the four factors set forth in Dataphase Sys., Inc. v. C L
Sys., Inc., 640 F.2d 109, 114 (8th Cir.1981) (en banc), when deciding whether to issue
a preliminary injunction. Roudachevski v. All-Am. Care Ctrs., Inc., 648 F.3d 701, 705
(8th Cir. 2011) (citing Dataphase, 640 F.2d at 114). Those factors are: “(1) the threat of
irreparable harm to the movant; (2) the state of balance between this harm and the
injury that granting the injunction will inflict on other parties litigant; (3) the probability
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that movant will succeed on the merits; and (4) the public interest.” Dataphase, 640
F.2d at 114. “No single factor is determinative.” WWP, Inc. v. Wounded Warriors, Inc.,
566 F. Supp. 2d 970, 974 (D. Neb. 2008). The movant bears the burden of establishing
the propriety of the injunction. See Roudachevski, 648 F.3d at 705.
DISCUSSION
I.

Likelihood of Success on the Merits
“In deciding whether to grant a preliminary injunction, likelihood of success on the

merits is most significant.” S.J.W. ex rel. Wilson v. Lee's Summit R-7 Sch. Dist., 696
F.3d 771, 776 (8th Cir. 2012) (quoting Minn. Ass'n of Nurse Anesthetists v. Unity Hosp.,
59 F.3d 80, 83 (8th Cir.1995)). At this early stage of Petco’s action, however, “the
speculative nature of this particular inquiry militates against any wooden or
mathematical application of the [Dataphase] test.” United Indus. Corp. v. Clorox Co.,
140 F.3d 1175, 1179 (8th Cir. 1998). “Instead, ‘a court should flexibly weigh the case's
particular circumstances to determine whether the balance of equities so favors the
movant that justice requires the court to intervene to preserve the status quo until the
merits are determined.’” Id. at 1179 (quoting Calvin Klein Cosmetics Corp. v. Lenox
Lab., Inc., 815 F.2d 500, 503 (8th Cir.1987)).
Petco principally seeks a declaration that it is not in default under the terms of the
Lease. The 552 argues that Petco materially defaulted under the terms of the Lease by
repeatedly failing to comply with its maintenance and repair obligations under the
Lease; failing to timely cure or commence curing those defaults within thirty days after
Defendant provided notice to Plaintiff of the defaults; and failing to diligently pursue the

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completion of the cure, as required by paragraph 24(b) of the Lease. Paragraph 24(b) of
the Lease states:
There shall not be held to be a Tenant “Event of Default” unless there is:
...
(b) default by Tenant in the performance or observance of any covenant or
agreement of this Lease (other than a default involving the payment of
money), which default is not cured within thirty (30) days after the giving of
Notice thereof by Landlord; provided, however, that Tenant shall not be
deemed to be in default if Tenant has commenced curing the default
within the thirty (30) day period, and thereafter diligently pursues the
completion of such cure.”
(Filing No. 27-4 at ECF 18.)
In the Notice to Cure, The 552 identified four specific items it alleged as grounds
for default, while stating that the list was not intended to be all-inclusive.1 The 552
argues that the reports from engineers hired by both parties demonstrate that Petco
failed to commence curing or diligently pursuing a cure. Petco’s engineer performed an
inspection on May 30, 2014, that revealed 1) two “areas of distress” on the flooring tiles;
2) “three locations where water staining was observed on the ceiling tiles”; and 3)
exterior building cracks, some of which had recently been repaired with flexible caulk.
(Filing No. 28-20 at ECF 60.) On August 28, 2014, The 552’s engineer observed the
same deficiencies noted in the report from Petco’s engineer. (Filing No. 27-12 at ECF 34.) Based on this evidence, The 552 argues that Petco failed to perform its maintenance
obligation under the Lease, and was in default.
1

The parties appear to disagree as to whether the grounds for default must be limited to the four
specific items listed in the Notice to Cure. Petco claims that The 552 has not served Petco with additional
notices to cure with additional grounds for default. The 552 argues that it is not limited to the four items
listed in the Notice to Cure because the list was not intended to be all inclusive. Further evidence will be
needed to determine whether Petco was in default, and the Court will not decide at this juncture whether
The 552’s Notice is limited to the items listed.

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Petco argues that it cannot be in default because it commenced curing within
thirty days of the Notice to Cure. On January 31, 2014, Petco issued Work Order
4450881 to PVC Facility Management, Inc. (“PVC”) for the purpose of investigating and
curing the items identified by The 552 as bases for default under the Lease. (Filing No.
21-2 ¶¶ 6-7.) Petco argues that PVC investigated and cured some items listed in the
Notice to Cure by March 17, 2014. (Id. ¶ 8.) Petco submitted evidence that other items
identified in the Notice to Cure were addressed through ongoing repair and remodeling
work to the Leased Premises, and Petco secured financing in excess of $250,000 to
complete the work. (Id. ¶¶ 9-12.)
Significant factual questions remain as to whether Petco commenced curing the
default identified in the Notice to Cure within thirty days of January 29, 2014, and
whether Petco diligently pursued the completion of such cure since that date. Although
The 552’s evidence suggests that some issues remained uncured as late as August
2014, it does not definitively demonstrate that Petco failed to pursue a cure diligently
within the time required by the Lease. The repairs appear to be extensive in nature, and
it is plausible that securing a contractor and financing for such repairs could take
several months. At this early stage, and based upon the evidence on the record, the
Court cannot determine which party is likely to succeed on the merits. Accordingly, this
factor weighs neither for nor against issuance of a preliminary injunction.
II.

Threat of Irreparable Harm
The Court concludes that the evidence demonstrates a threat of irreparable harm

to Petco if The 552 is allowed to proceed with forcible entry and detainer proceedings.
“To succeed in demonstrating a threat of irreparable harm, ‘a party must show that the
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harm is certain and great and of such imminence that there is a clear and present need
for equitable relief.’” Roudachevski v. All–Am. Care Ctrs., Inc., 648 F.3d 701, 706 (8th
Cir. 2011) (quoting Iowa Utils. Bd. v. Fed. Commc'ns Comm'n, 109 F.3d 418, 425 (8th
Cir. 1996)). Sufficient showing on this second factor in the Dataphase analysis can be
made, for example, by showing that the movant has no adequate remedy at law. Baker
Elec. Co-op., Inc. v. Chaske, 28 F.3d 1466, 1473 (8th Cir. 1994).
Petco has shown, for purposes of this Motion, that the location of the Leased
Premises, near 72nd Street and Dodge Street in Omaha, is unique and valuable. (Filing
No. 21-2 ¶ 16.) Petco has actively marketed its location as recognizable and
convenient, and Petco’s loss of the location and associated good will would be difficult
to measure in money damages. (Id. ¶ 17.) Petco also has shown that it would be difficult
to transfer the value of the Leased Premises and its goodwill to a different location. (Id.
¶¶ 15-19.) Petco also has demonstrated an imminent threat to its rights in the Lease
Premises. The 552 has admitted that if this Court does not enter a preliminary
injunction, it will proceed to issue a three-day notice to quit the Leased Premises and
will file an action under Nebraska’s forcible entry and detainer statutes, Neb. Rev. Stat.
§§ 25-21,219 to 21,235 (Reissue 2008). While the outcome of the forcible detainer
proceedings is not certain, if Petco is wrongly ousted from the Leased Premises during
the pendency of this litigation, it would be difficult to restore Petco’s rights or
compensate Petco for its loss. Thus, for purposes of this Motion, Petco has
demonstrated an imminent threat of irreparable harm if a preliminary injunction is not
issued.

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The 552 argues that Petco has not shown irreparable harm because Petco will
have an adequate remedy at law to protect its rights through state court proceedings
under Nebraska’s forcible entry and detainer statutes. This argument ignores the fact
that Petco has invoked the Court’s diversity jurisdiction to have its rights determined
through a declaratory judgment action before this Court. The 552 does not challenge
the Court’s jurisdiction, and also invokes the Court’s diversity jurisdiction in its
counterclaim. (Filing No. 11 at 9.) “The diversity-of-citizenship requirement has a special
nature and purpose, to provide a federal forum for important disputes where state courts
might favor, or be perceived as favoring, home-state litigants.” CMH Homes, Inc. v.
Goodner, 729 F.3d 832, 837 (8th Cir. 2013) (internal marks and citations omitted).
Although the continued need for diversity jurisdiction might be subject to debate, Petco,
a foreign corporation, chose to have its rights determined in federal court. The mere fact
that an alternative forum exists for determining at least some of the rights between the
parties does not negate the potential irreparable harm to Petco. See Fed. R. Civ. P. 57.
(“The existence of another adequate remedy does not preclude a declaratory judgment
that is otherwise appropriate.”)
III.

Balance of the Harms
The balance of potential harms weighs in favor of issuance of an injunction. The

primary question when issuing a preliminary injunction is whether the “balance of
equities so favors the movant that justice requires the court to intervene to preserve the
status quo until the merits are determined.” Dataphase, 640 F.2d at 113. To determine
the harms that must be weighed, the Eighth Circuit has looked at the threat to each of
the parties' rights that would result from granting or denying the injunction. Baker Elec.
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Co-op., 28 F.3d at 1473. A Court also must consider the potential economic harm to
each of the parties and to interested third parties. Id.
The 552 will suffer little harm if a preliminary injunction is issued. There is no
evidence that The 552 is suffering economic harm because Petco is continuing to pay
rent.2 Nor has The 552 shown that Petco’s continued occupancy during the pendency of
this case harms The 552 or any third parties such that immediate possession is
necessary. Further, even if Petco makes the proposed improvements and repairs to the
Leased Premises, Petco still could be found to have defaulted on the Lease. In that
event, the Leased Premises would be in an improved state, and The 552 would have
established its rights to re-take possession of the Leased Premises.
In contrast, if a preliminary injunction is not issued, Petco has may suffer
substantial harm. As stated above, The 552 has represented to Petco and the Court
that if an injunction is not issued, it will immediately commence proceedings under the
forcible entry and detainer statutes. In such a case, Petco would be forced to defend a
parallel action in a state court. If Petco loses possession in forcible entry and detainer
proceedings, but is later found not to be in default, it may be unable to recover
possession of the Leased Premises. Because The 552 faces little harm, if any, the
balance-of-harms factor weighs heavily in favor of issuance of a preliminary injunction.

2

Although The 552 continues to accept rental payments from Petco, The 552 has not necessarily
waived its claims that Petco is in default. The Lease explicitly states “The receipt by Landlord of rent, with
knowledge of the breach of any covenant hereof, shall not be deemed a waiver of such breach.” (Filing
No. 27-4 at ECF 23.)

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IV.

Public Interest
The public interest factor weighs in favor of an injunction at this early stage. In

weighing this factor, the Court considers what public interests might be injured and what
public interests may be served by denying or granting a preliminary injunction. Sierra
Club v. U.S. Army Corps of Engineers, 645 F.3d 978, 997 (8th Cir. 2011). The Eighth
Circuit has stated that, “the determination of where the public interest lies is also
dependent on the determination of likelihood of success on the merits,” because it is in
the public interest to protect rights. Phelps–Roper v. Nixon, 545 F.3d 685, 690 (8th Cir.
2008), overruled on other grounds by Phelps-Roper v. City of Manchester, Mo., 697
F.3d 678 (8th Cir. 2012).
While the Court cannot determine at this early stage whether Petco defaulted on
the Lease, or cured any such default, the Court concludes that the public interest will
not be harmed if a preliminary injunction is granted. The public has an interest in
protecting a foreign corporation’s decision to have its rights determined in a federal
forum. Further, even if the Court eventually determines that Petco did default, the Court
may place conditions in a preliminary injunction to protect The 552’s rights during the
pendency of the litigation. Accordingly, the Court concludes that the public interest will
not be harmed by the issuance of a preliminary injunction.
V.

Bond Requirement
Rule 65 requires a movant to give security for the issuance of a preliminary

injunction. See Fed. R. Civ. P. 65(c). The Court must require an appropriate bond and
articulate its findings to support its determination. See Hill v. Xyquad, Inc., 939 F.2d
627, 632 (8th Cir.1991). “The bond posted under Rule 65(c) ‘is a security device, not a
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limit on the damages the defendants may obtain against [the plaintiff] if the facts warrant
such an award.’” Branstad v. Glickman, 118 F.Supp.2d 925, 944 (N.D. Iowa 2000)
(quoting Minnesota Mining & Mfg. Co. v. Rauh Rubber, Inc., 130 F.3d 1305, 1309 (8th
Cir. 1997)).
The 552 asks that Petco be required to continue to abide the terms of the Lease,
and that the Court expressly state that Plaintiff’s compliance with the Lease, including
the payment of rents and efforts to make improvements on the Leased Premises, not be
deemed a waiver by The 552 of its claim that Petco defaulted on the Lease. The Court
concludes that these conditions are reasonable, and will serve to maintain the status
quo. The 552 asks, in the alternative, that Petco deposit a cash bond sufficient to cover
the rents, real estate taxes, and other payments that may become due from Petco
during the pendency of this litigation; however, The 552 does not state a specific
amount it suggests be posted by Petco.
Petco estimates that the cost of curing the remaining defects in the Leased
Premises is approximately $250,000, and states that it has secured financing in that
amount. Accordingly, the Court finds that a bond in that amount is reasonable. Petco
will be ordered to deposit the bond with the Clerk of Court. Disbursements from the
deposited funds may be ordered as necessary for payment of contractors.
CONCLUSION
For the reasons stated, the Court finds that the Dataphase factors weigh in favor
of granting a preliminary injunction. Accordingly,
IT IS ORDERED:

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1.

The Motion for Preliminary Injunction (Filing No. 19) filed by Plaintiff Petco
Animal Supplies Stores, Inc., is granted, as follows:
a.

Defendant The Five Fifty Two Corporation is enjoined from
instituting eviction proceedings against Petco or otherwise taking
steps to gain possession of premises leased to Petco during the
pendency of the above matter;

b.

Petco will continue to pay Defendant rent and comply with all other
lease obligations, including but not limited to payment of real estate
taxes, during the pendency of this case;

c.

Petco’s payment of rent, its compliance with other lease
obligations, and its efforts to maintain or improve the leased
premises during the pendency of this case, shall not be deemed a
waiver by Defendant The Five Fifty Two Corporation regarding its
claim that Petco is in default of the Lease and that the Lease has
terminated;

2.

Within fourteen (14) days of this Memorandum and Order, Petco will remit
to the Clerk of Court security in the amount of $250,000.00; and

3.

Upon motion to the Court, the Court may order disbursements from the
funds deposited with the Clerk of Court to ensure payment of contractors.

Dated this 17th day of November, 2014
BY THE COURT:
s/Laurie Smith Camp
Chief United States District Judge

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