Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-00393/USCOURTS-caed-2_07-cv-00393-13/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1331 Fed. Question: Breach of Contract

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

QWEST COMMUNICATIONS No. 2:07-cv-00393-MCE-KJM

CORPORATION,

Plaintiff,

v. MEMORANDUM AND ORDER

HERAKLES, LLC, et al,

Defendants.

----oo0oo----

Through the present action, Plaintiff Qwest Communications

Corporation (“Qwest”) seeks damages from Defendants Herakles, LLC

(“Herakles”), Sandy Beaches I LP (“Sandy Beaches”), Riptide I LP

(“Riptide”), Capital Lease Funding, Inc., and Capital Lease

Funding, LP for deceptive advertising, breach of contract,

constructive fraud and breach of fiduciary duty, statutory and

common law unfair competition, tortious interference with both

prospective economic advantage and with contract, unjust

enrichment, civil conspiracy, and aiding and abetting. 

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Case 2:07-cv-00393-MCE -KJM Document 96 Filed 03/20/08 Page 1 of 13
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 This section is derived from the allegations in 1

Plaintiff’s Complaint, and is largely identical to that included

within the Court’s concurrently filed Memorandum and Order

adjudicating the Motions to Dismiss filed on behalf of the other

Defendants to the instant lawsuit. It is repeated here for

purposes of clarity. 

2

Pursuant to Federal Rule of Civil Procedure 12(b)(6), Defendants

Capital Lease Funding, Inc., and Capital Lease Funding LP

(hereinafter collectively referred to as “CapLease Defendants”)

filed the present Motion to Dismiss all Counts for failure to

state a claim. As set forth below, that Motion will be granted.

BACKGROUND1

This action arises from the circumstances surrounding the

performance of three contracts, which governed the construction,

occupation, and management of a Data Center in Sacramento,

California. Originally, Qwest and Wavve Telecommunications, Inc.

(“Wavve”) contemplated entering only one agreement to achieve the

same purpose. However, when the now defunct Wavve was unable to

obtain financing from the CapLease Defendants, the parties

restructured their arrangement via the three current contracts. 

First, Qwest leased the Data Center from Sandy Beaches (“Lease”).

Next, Qwest subleased a portion of the Data Center to Riptide

(“Sublease”), and then Qwest entered a Real Estate Services

Agreement (“RESA”) with Wavve for the management of Qwest’s

portion of the Data Center. 

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3

Riptide subsequently assigned its rights in the Sublease to

Herakles. Wavve assigned its rights in the RESA to Surferr LLC,

an entity alleged to be related to Herakles, Sandy Beaches, and

Riptide. Surferr LLC then assigned its rights in the RESA to

Riptide, who subsequently re-assigned those rights to Herakles. 

Qwest alleges that Herakles is now both its competitor and

sublessor tenant, as well as the manager of Qwest’s portion of

the Data Center.

The Lease terms extend for a period of ten years, with the

option to renew for another nine. Qwest uses the leased space to

provide co-location, data center, telecommunications, internet

access, content hosting, network management, and internet

security services. The Lease provides for a “Tier IV data

center” with 99.999% operational availability and contains a

confidentiality clause, which, according to Qwest, Sandy Beaches

has violated. 

Qwest alleges that the RESA requires Herakles to act as

Qwest’s “exclusive agent” in managing the Data Center and Qwest

further alleges that the parties agreed that the Data Center

manager would be the “face of Qwest” to Qwest’s customers and

potential customers. However, Qwest now claims that, instead,

Herakles, as the current manager, diverted customers from Qwest

to itself, in its separate capacity as Qwest’s sublessor. 

Qwest also claims that Herakles engaged in deceptive

advertising by making statements purporting to be the Data Center

owner on the Herakles website and within the Data Center. 

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4

Additionally, Qwest alleges that Herakles misrepresented the

property in Data Center sign-in sheets by omitting Qwest’s name

on the logs and that Herakles took Qwest’s proprietary customer

and potential customer information.

Qwest further states that Herakles has failed to perform

certain construction work as obligated under the RESA and that,

in its capacity as sublessor, Herakles has failed to hire a

required third-party manager for its own portion of the Data

Canter. Instead, despite being a competitor of Qwest, Herakles

allegedly manages both the Qwest facility and its own facility,

to save itself added management costs. 

Finally, Qwest alleges that Herakles, Riptide, Sandy Beaches

and the CapLease Defendants are alter egos of one another. Qwest

alleges that the Defendants have common ownership, use one

company as a conduit for another, and share offices, employees,

and bank accounts. Qwest alleges that this practice enables

Herakles to breach its contract without liability, all the while

collecting Qwest’s rent payments through Sandy Beaches and

diverting customers to itself. 

The CapLease Defendants have filed the present Motion to

Dismiss Qwest’s Complaint pursuant to Rule 12(b)(6), on five

distinct grounds:

1. Allegations against unspecified “defendants” do not

state a claim against CapFunding Defendants.

2. Qwest fails to adequately plead alter ego liability

against the CapFunding Defendants.

3. Many of the claims involve contracts to which the

CapFunding Defendants are not a party.

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5

4. Disclosure of confidential information is required by

federal securities law.

5. Qwest does not establish a fiduciary duty in support of

its claim for constructive fraud and/or breach of duty.

STANDARD

A. Motion to Dismiss under Rule 12(b)(6)

On a motion to dismiss for failure to state a claim under Rule

12(b)(6), all allegations of material fact must be accepted as

true and construed in the light most favorable to the nonmoving

party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th

Cir. 1996). Rule 8(a)(2) requires only “a short and plain

statement of the claim showing that the pleader is entitled to

relief” in order to “give the defendant fair notice of what

the...claim is and the grounds upon which it rests.” Bell Atl.

Corp. v. Twombly, --- U.S. ----, 127 S. Ct. 1955, 1964 (2007)

(quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). While a

complaint attacked by a Rule 12(b)(6) motion to dismiss does not

need detailed factual allegations, a plaintiff's obligation to

provide the “grounds” of his “entitlement to relief” requires

more than labels and conclusions, and a formulaic recitation of

the elements of a cause of action will not do. Id. at 1964-65

(internal citations and quotations omitted). Factual allegations

must be enough to raise a right to relief above the speculative

level. 

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Id. at 1965 (citing 5 C. Wright & A. Miller, Federal Practice and

Procedure § 1216, pp. 235-36 (3d ed. 2004) (“The pleading must

contain something more...than...a statement of facts that merely

creates a suspicion [of] a legally cognizable right of action”)).

A court granting a motion to dismiss a complaint must then

decide whether to grant leave to amend. A court should “freely

give[]” leave to amend when there is no “undue delay, bad

faith[,] dilatory motive on the part of the movant,...undue

prejudice to the opposing party by virtue of...the amendment,

[or] futility of the amendment....” Fed. R. Civ. P. 15(a); Foman

v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is

denied only when it is clear the deficiencies of the complaint

cannot be cured by amendment. DeSoto v. Yellow Freight Sys.,

Inc., 957 F.2d 655, 658 (9th Cir. 1992).

B. General Pleading Requirements

“Rule 8(a)(2)...requires a ‘showing,’ rather than a blanket

assertion of entitlement to relief. Without some factual

allegation in the complaint, it is hard to see how a claimant

could satisfy the requirements of providing not only ‘fair

notice’ of the nature of the claim, but also ‘grounds’ on which

the claim rests.” Id. at 1965 n.3. (Factual allegations

necessary to plead “grounds” on which claim rests.) 

A pleading must contain “only enough facts to state a claim

to relief that is plausible on its face.” Id. at 1974. If the

“plaintiffs...have not nudged their claims across the line from

conceivable to plausible, their complaint must be dismissed.” 

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Id. Nevertheless, “[a] well-pleaded complaint may proceed even

if it strikes a savvy judge that actual proof of those facts is

improbable, and ‘that a recovery is very remote and unlikely.’”

Id. at 1965.

ANALYSIS

A. The CapLease Defendants’ Alter Ego Liability

“A basic tenet of American corporate law is that the

corporation and its shareholders are distinct entities.” Dole

Food Co. v. Patrickson, 538 U.S. 468, 474 (2003). However, alter

ego liability provides a means to pierce the corporate veil for

purposes of imposing liability on a defendant for an underlying

cause of action. See Dion LLC, v. Infotek Wireless, Inc., 2007

WL 3231738 at *3 (N.D. Cal. Oct. 30, 2007) (quoting Local 159 v.

Nor-Cal Plumbing, Inc., 185 F.3d 978, 985 (9th Cir. 1999)). 

The alter ego determination is an equitable one within the

province of the trial court. Assoc. Vendors, Inc., v. Oakland

Meat Co., Inc., 210 Cal. App. 2d 825, 837 (1st Dist. 1962). 

Decisions are necessarily fact-dependent and “vary according to

the circumstances in each case.” Id. (internal quotations

omitted). Nevertheless, the general requirements for proving

liability are “1) that there be such unity of interest and

ownership that the separate personalities of the corporation and

the individual no longer exist, and 2) that, if the acts are

treated as those of the corporation alone, an inequitable result

will follow.” Id. at 813. 

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“Bad faith in one form or another is an underlying consideration

and will be found in...those cases wherein the trial court was

justified in disregarding the corporate entity.” Id. at 838.

Among the factors supporting a “unity of interest” finding

are “financial issues (e.g., was the corporation adequately

capitalized?); corporate formality questions (e.g., was stock

issued, are minutes kept and officers and directors elected, are

corporate records segregated?); ownership issues (e.g., what is

the stock ownership picture?); commingling issues (e.g., are

corporate assets commingled, does the parent company merely use

the corporate shell of the subsidiary to obtain goods and

services for the parent company?); etc.” Tomaselli v.

Transamerica Ins. Co., 25 Cal. App. 4th 1269, 128 n.13. (citing

Assoc. Vendors, Inc. at 837-842). Notably, “[t]he mere fact of

sole ownership and control does not eviscerate the separate

corporate identity that is the foundation of corporate law.” 

Katzir’s Floor and Home Design, Inc. V. M-MLS.com, 394 F.3d 1143,

1149 (9th Cir. 2004)(citing Dole Food Co. at 475). 

Under the second prong of the doctrine, “[a]lter ego

is...invoked only where recognition of the corporate form would

work an injustice to a third person.” Id. (quoting Tomaselli at

1285). “The injustice that allows a corporate veil to be pierced

is not a general notion of injustice; rather, it is the injustice

that results only when corporate separateness is illusory.” 

Katzir’s Floor and Home Design at 1149. 

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Facts relevant to the “injustice” inquiry include “inadequate

capitalization, commingling of assets, [a] disregard of corporate

formalities...[and] any other facts which demonstrate the

critical element: that an inequitable result would have

followed.” Tomaselli at 1285. 

Conclusory allegations are not sufficient to support an

alter ego finding. Hokama v. E.F. Hutton & Co., Inc., 566 F.

Supp. 636, 647 (D.C. Cal. 1983); Maganallez v. Hilltop Lending

Corp., 505 F. Supp. 2d 594, 607 (N.D. Cal. 2007). In Brennan v.

Concord EFS, Inc., the Northern District determined that a

statement alleging only that “Bank One exercised such dominion

and control over Bank One, NA and Bank One Arizona that it [was]

liable according to the law for the acts of Bank One” was an

inadequate legal conclusion. 369 F. Supp. 2d 1127, 1136 (N.D.

Cal. 2005). 

Similarly, in Nordberg v. Trilegiant Corp., the Northern

District granted a motion to dismiss, stating that allegations of

“routine control by a parent [were] insufficient to support the

contention that a subsidiary is a mere instrumentality.” 445 F.

Supp. 2d 1082, 1102 (N.D. Cal. 2006). Additionally, in Long v.

Postorivo, the plaintiffs’ allegations “that Postorivo was the

founder and former CEO and president of National...that Postorivo

worked ‘in close coordination’ with National, ... that Postorivo

personally assured [plaintiff] of the success of their business

transactions,” and that defendant sold off corporate assets to

prevent recovery were “only slightly beyond conclusory” and

insufficient to withstand defendants’ motion for judgment on the

pleadings. 2007 WL 2990457 at *1-2 (N.D. Cal. 2007). 

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Other plaintiffs, however, have met the minimum factual

pleading threshold. In Maganallez v. Hilltop Lending Corp., the

Northern District found the following allegations sufficient to

allege alter ego liability: 

“[Hilltop Lending] was inadequately capitalized, failed

to maintain corporate formalities and was designed to

limit the liability of Nguyen. There was such a unity

of interest and ownership between Nguyen and [Hilltop

Lending] that the individuality and separateness of

Nguyen and [Hilltop Lending] has ceased to exist and

adherence to the fiction of the separate existence of

[Hilltop Lending] would sanction fraud and promote

injustice.” 

505 F. Supp. 2d 594, 607 (N.D. Cal. 2007). 

Likewise, in In re Napster, Inc. Copyright Litigation, the

allegation that the defendant exercised “essentially full

operational control” over Napster was sufficient to withstand a

motion to dismiss. 354 F. Supp. 2d 1113, 1122 (N.D. Cal. 2005). 

Furthermore, in Dion LLC v. Infotek Wireless, Inc., the plaintiff

successfully alleged that 

“[t]he unity of interest and ownership between [the

defendants]...prevented the two from functioning as

separate entities...[The two companies] conduct[ed] the

same type of business, shared the same office space,

used the same business address, and had the same

bookkeeper, lawyers and CPA...[I]t would be inequitable

to allow [the defendant] to now assert a distinction

between the corporations to avoid liability.” 

2007 WL 3231738 at *3 (N.D. Cal. 2007). 

Plaintiff’s allegations against the CapLease Defendants fall

well short of the necessary mark to survive a motion to dismiss. 

The totality of Qwest’s independent allegations against the

CapLease Defendants are as follows: 

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The CapLease Defendants were, during all times

relevant to the Complaint, the agent, alter ego,

subsidiary and/or division of Herakles, Sandy Beaches,

and/or Riptide. Compl., ¶ 9. 

Wavve needed to obtain additional financing from

the Capital Lease Funding Defendants, which resulted in

a change to the contemplated arrangement between Qwest

and Waave. Compl., ¶ 14. 

The Capital Lease Funding Defendants then

disclosed or caused to be disclosed th[e] information

in numerous filings with the United States Securities &

Exchange Commission, including in its Form S-11,

Registration Statement, and Amendments thereto, filed

in 2003 and 2004, as well as its Prospectus, dated

March 19, 2004, and at least one Prospectus for assetbacked securities offered by First Union Commercial

Mortgage Securities, Inc. Compl., ¶ 49. 

The Defendants share common officers and

directors...As a[n]...example, William Pollert and

Shawn Seal of Capital Lease Funding Defendants are also

officers of Riptide...On information and belief, the

Defendants use the same offices and employees. For

example, on information and belief, some of the senior

managers of the Capital Lease Funding Defendants are

part owners of the Data Center. Compl., ¶ 53.

Herakles’ responsibilities as a fiduciary of Qwest

also extend to each of Herakles’ alter egos, Defendants

Sandy Beaches, the Capital Lease Funding Defendants,

and Riptide. Compl., ¶ 84.

In support of its alter ego argument, Plaintiff has alleged

only that some of the senior managers of CapLease are part owners

of the Data Center and that two CapLease officers are also

officers of Riptide. This is insufficient to suggest that

Plaintiff will plausibly be able to prove that the CapLease

Defendants no longer exist as separate entities from Herakles,

Sandy Beaches, and Riptide. Indeed, even allegations of sole

ownership would not be enough. Plaintiff has pled no other facts

indicating financial issues, corporate formality questions,

sufficient ownership issues, or commingling issues. 

///

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To the contrary Plaintiff has alleged only that the CapLease

Defendants provided financing to the various other defendants

when Wavve became defunct. Hence, this Court finds that

Plaintiff’s complaint fails to adequately allege alter ego

liability as to the CapLease Defendants. 

B. Qwest’s Claims Against the CapLease Defendants

Since Plaintiff did not successfully allege any alter ego

liability as to the CapLease Defendants, all of Plaintiff’s

claims against these Defendants that necessarily depend on

Qwest’s alter ego theory must fail. 

“Under California law, only a signatory to a contract may be

liable for any breach.” Clemens v. American Warranty Corp., 193

Cal. App. 3d 444, 452 (2d Dist. 1987). Therefore, because the

CapLease Defendants were not party to the Lease, Sublease, or

RESA, nor were they alter egos of the actual parties, Qwest fails

to state a claim against them for any breach of contract or

breach of any duty arising from such a contract. 

Additionally, Plaintiff’s remaining factual allegations are

too sparse to support any of its remaining claims, including

those Counts that allege the CapLease Defendants conspired with

or aided and abetted any of the remaining defendants. 

Qwest’s minimal factual allegations against the CapLease

Defendants are insufficient to state a claim under all Counts. 

Hence, the CapLease Defendants’ Motion to Dismiss Counts I-IX,

and Counts XI-XIII are well-taken.

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 Because oral argument will not be of material assistance, 2

the Court orders this matter submitted on the briefing. E.D.

Cal. Local Rule 78-230(h). 

13

CONCLUSION

Pursuant to Rule 12(b)(6), Defendant’s Motion to Dismiss

Counts I-IX, and Counts XI-XIII is GRANTED with leave to amend.2

Plaintiff is directed to file a Second Amended Complaint, should

it choose to do so, not later than thirty (30) days following the

date of this Order.

IT IS SO ORDERED. 

Dated: March 20, 2008

____________________________

_

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

 

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