Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-00393/USCOURTS-caed-2_07-cv-00393-9/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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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

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

CORPORATION, a Delaware 

corporation,

Plaintiff,

v. MEMORANDUM AND ORDER

HERAKLES, LLC, a Delaware

limited liability corporation,

d/b/a HERAKLES DATA; SANDY

BEACHES I LP, a California

limited partnership; RIPTIDE I

LP, a California limited

partnership; CAPITAL LEASE

FUNDING, INC., A Delaware

corporation; CAPITAL LEASE

FUNDING, LP, a Delaware

limited partnership,

Defendants.

----oo0oo----

Through the present action, Plaintiff Qwest Communications

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

LLC, Sandy Beaches I LP, Riptide I LP, Capital Lease Funding,

Inc., and Capital Lease Funding, LP (collectively, “Defendants”)

for deceptive advertising in violation of the Lanham Act, 15

U.S.C. § 1125, as well as pendant state law claims. 

Case 2:07-cv-00393-MCE -KJM Document 69 Filed 08/08/07 Page 1 of 8
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Presently before the Court is Defendants’ Capital Lease Funding,

Inc., and Capital Lease Funding LP (“CapFunding Defendants”)

Motion to Stay Discovery pending resolution of the CapFunding

Defendants’ Motion to Dismiss.

BACKGROUND

This action arises from a contract between Qwest and Wavve,

a now defunct company who assigned its rights to Defendant

Herakles LLC (“Herakles”), for the construction and management of

a data center in Sacramento. Under the terms of the contract,

Qwest leased the data center from Sandy Beaches I LP (“Sandy

Beaches”). Herakles was to act as the “exclusive agent” of Qwest

in managing the data center. Riptide I LP (“Riptide”) subleased

a portion of the data center from Qwest, and operates its section

in competition with the Plaintiff. The CapFunding Defendants

arranged for the financing involved with the data center. 

Qwest leased the data center for a period of ten years, with

the option to renew for another nine. Qwest used the space to

provide co-location, data center, telecommunications, internet

access, content hosting, network management and internet security

services. The lease agreement provided that the center would be

a “Tier IV data center” guaranteeing 99.999% operational

availability. A service agreement between Qwest and Wavve, later

assigned to Herakles, provided that Herakles would manage the

data center, providing security and maintenance.

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 The CapFunding Defendants collect a monthly advisory fee 1

connected to originating the data center loan of approximately

$66,000.00 per month, through November of 2010. This fee is

collected out of rent payments made by Qwest. 

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In its Complaint, Qwest alleges that Herakles, Riptide,

Sandy Beaches and the CapFunding Defendants are alter egos of one

another. Qwest claims that Herakles breached the contract by

diverting customers from Qwest to their related entity Riptide, a

subtenant competitor in the data center. Qwest claims that

Herakles engaged in deceptive advertising by purporting to own

the data center, and that Herakles further misrepresented the

property in sign-in sheets by omitting Qwest’s name. 

In support of alter ego liability, Qwest alleges that the

Defendants have common ownership, share offices, employees and

bank accounts and use one company as a conduit for another. 

Qwest alleges that this practice enables Herakles to breach its

contract without liability, all the while diverting customers to

Riptide and collecting Qwest’s rent payments through Sandy

Beaches and the CapFunding Defendants.1

The CapFunding Defendants have filed a Motion to Dismiss

Qwest’s Complaint pursuant to F. R. Civ. P. 12(b)(6), alleging

failure to properly state a claim for alter ego liability, among

other things. This Motion to Dismiss is scheduled for hearing in

this Court on September 14, 2007. Presently before the Court is

the CapFunding Defendants’ Motion to Stay Discovery pending

resolution of the Motion to Dismiss. For the reasons stated

below, CapFunding Defendants’ Motion to Stay Discovery is DENIED. 

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STANDARD

The district courts have broad discretion to stay discovery

in a case while a dispositive motion is pending. Orchid

Biosciences, Inc. v. St. Louis Univ., 198 F.R.D. 670, 672 (S.D.

Cal. 2001) (citing Data Disc, Inc. v. Sys. Tech. Associates,

Inc., 557 F.2d 1280 (9th Cir. 1977)). A district court's

decision to allow or deny discovery is reviewable only for abuse

of discretion. Munoz-Santana v. INS 742 F.2d 561, 562 (9th Cir.

1984).

Motions to stay discovery may be granted upon a showing of

good cause by the moving party or where "justice requires to

protect a party or person from annoyance, embarrassment,

oppression, or undue burden or expense." See Fed. R. Civ. P.

26(c)(4), GTE Wireless, Inc. v. Qualcomm, Inc., 192 F.R.D. 284,

285-86 (S.D.Cal. 2000). Generally, however, such motions are

disfavored because discovery stays may interfere with judicial

efficiency and cause unnecessary litigation in the future. 

O’Neal v. NCO Fin. Sys. Inc. 2006 U.S. Dist. Lexis 83505 at 5

(S.D. Cal. 2006).

In deciding whether to grant a protective order staying

discovery before other pending motions can be heard, the Court

must apply a two-prong analysis:

1) The pending motion must be potentially dispositive

of the entire case, or at least dispositive on the

issue at which discovery is directed.

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2) The Court must determine whether the pending

dispositive motion can be decided absent

additional discovery.

See Pac. Lumber Co. v. Nat’l Union Fire Ins. Co., 220 F.R.D. 349,

352 (N.D. Cal. 2003) (citing Church of Scientology of San

Francisco v. IRS, 991 F.2d 560, 563 (9th Cir. 1993). 

If the Court answers these two questions in the affirmative,

a protective order may issue. However, before issuing a

protective order, the Court must first “peek” at the merits of

the pending dispositive motion in order to assess the validity of

the stay of discovery motion. Seven Springs Ltd. P’ship v. Fox

Capital Mgmt. Corp., 2007 U.S. Dist. LEXIS 32068 at *5-6 (E.D.

Cal. 2007). 

ANALYSIS

As a preliminary matter, the Court must determine if

Plaintiff’s Motion to Stay Discovery satisfies the two-pronged

threshold analysis. The pending dispositive Motion to Dismiss

certainly satisfies the second prong, as such a Motion tests the

sufficiency of the allegations themselves and does not require a

factual inquiry. Whether the Motion to Dismiss is truly

dispositive so as to satisfy the first prong is a closer

question.

When considering the dispositive nature of a Motion to

Dismiss, the Court notes the likelihood that leave to amend will

be granted. 

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The 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 only denied when it is clear that

the deficiencies of the complaint cannot be cured by amendment. 

DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir.

1992).

In the instant case, the Court finds no undue delay or

dilatory tactic on the part of Qwest, nor does it find undue

prejudice to the CapFunding Defendants should leave to amend be

granted. In considering whether Qwest could cure deficiencies in

its alter ego pleadings, the Court notes that Qwest has already

alleged several elements of alter ego liability. If the Court

dismissed Qwest’s Complaint, it is likely that Qwest would have

little difficulty satisfying the requirements of alter ego

liability, predisposing the Court to grant leave to amend. 

Although this points to the probability that the Motion to

Dismiss would in fact not be dispositive, it is unnecessary to

definitively pass upon the issue, as the validity of the Motion

to Stay Discovery is questionable given the apparent strength of

Qwest’s Complaint. 

Assuming the CapFunding Defendants have indeed passed the

threshold inquiry, the Court next “peeks” at the merits of the

Motion to Dismiss to assess the validity of the Motion to Stay

Discovery. If the Motion to Dismiss is completely devoid of

merit, it will not stand to bar discovery. 

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 Alter ego liability is established by proving 1) such 2

unity of ownership and interest that the separate personalities

of the corporations do not exist, and 2) if the acts are treated

as those of separate corporations, an inequitable result will

follow. See SEC v. Hickey, 2003 U.S. App. LEXIS 13563 at *11

(9th Cir. 2003). 

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On the other hand, if the motion will surely be granted, this

Court would properly exercise its discretion to block discovery

and prevent the wasting of resources and time. Seven Springs

Ltd. P’ship, 2007 U.S. Dist. LEXIS 32068 at *5-6 (E.D. Cal.

2007). The parties do not agree as to the proper outcome should

the merits of the Motion to Dismiss fall somewhere between these

two extremes.

Plaintiff advances the theory that a Motion to Stay

Discovery is only granted where the court is certain that the

plaintiff has not stated a claim, citing Wood v. McEwan, 644 F.2d

797 (9th Cir. 1981). Plaintiff would hence have this Court grant

the CapFunding Defendant’s Motion only if it the success of the

pending dispositive motion is a virtual certainty. The

CapFunding Defendants support a lesser threshold, arguing that

the Court may stay discovery where granting the pending motion is

“clearly possible,” citing the GTE Wireless court’s reasoning. 

This Court does not believe that the CapFunding Defendants’

Motion to Dismiss rises to either level of certainty, and

therefore does not pass upon this unsettled area of the law.

The CapFunding Defendants move to dismiss Qwest’s Complaint

on grounds that alter ego liability is not sufficiently pled. A 2

review of the claims, as outlined by Qwest, paints a different

picture. Qwest makes several factual allegations regarding the

alter ego nature of the Defendants. 

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Qwest alleges a unity of interest and ownership, giving examples

of corporate officers common to both Riptide and the CapFunding

Defendants, joint ownership of the data center by the CapFunding

Defendants and shared office space and employees between the

various Defendants. In contending that injustice would result

from protecting the corporate shell as crafted by Defendants,

Qwest alleges that the Defendants use one company as the conduit

for another, with one entity accepting payment for the benefit of

the others. This type of arrangement, where one part of the

company holds the assets and another part of the company holds

the liabilities could result in injustice if Defendants are

treated as separate corporate entities. These allegations would

appear to satisfy the requirements for alter ego liability.

Given the strength of Qwest’s alter ego allegations, the

Court cannot say that the CapFunding Defendants have at least a

fifty percent chance of succeeding on their Motion to Dismiss,

and certainly do not meet the standard advanced by Qwest. 

Accordingly, the CapFunding Defendants’ Motion to Stay Discovery

is DENIED. 

CONCLUSION

For the reasons stated above, the CapFunding Defendants’

Motion to Stay Discovery is DENIED.

IT IS SO ORDERED.

Dated: August 7, 2007

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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