OWC Santa Cruz Mfg LLC v. Lochhead

Background

OWC Santa Cruz Mfg LLC asserted nine California-law claims against Monterey Storage Solutions LLC, Ben Rewis, Christopher W. Lochhead, Gil Spencer, Shakuntala Atre, and Nisha Atre. The claims arose from OWC’s 2019 investment in Interstitial Systems, a cannabis-processing start-up developing a manufacturing and distribution facility in Santa Cruz, California.

OWC purchased a 27.5% membership interest in Interstitial, with an option to increase its interest to 42.5%. Monterey Storage Solutions held the remaining interest. After Tushar Atre died, Monterey Storage Solutions appointed Ben Rewis, Christopher Lochhead, and Gil Spencer as managers of Interstitial. OWC later exercised an option to purchase Monterey Storage Solutions’ interest, but the parties were unable to agree on the terms of the purchase agreement and promissory note. OWC also submitted a creditor claim to Tushar Atre’s Estate, which rejected the claim.

OWC originally alleged federal jurisdiction based on diversity of citizenship and an amount in controversy exceeding $75,000. During the litigation, OWC discovered that its sole member, Openroads Wealth Capital, LLC, had between 75 and 100 members. Two of Openroads’ members were closely held limited liability companies whose sole members resided in California and New York.

Jurisdictional ruling

For diversity jurisdiction, opposing parties must be citizens of different states, and the amount in controversy must exceed $75,000. The court explained that a limited liability company has the citizenship of all of its owners or members. Although the amount-in-controversy requirement remained satisfied, the court found that complete diversity did not exist.

OWC provided declarations stating that two members of Openroads were citizens of California and New York. The defendants did not dispute that Ben Rewis and Christopher Lochhead were California citizens or that Shakuntala Atre and Nisha Atre were New York citizens. Instead, they argued that OWC’s declarations lacked sufficient support and foundation. The court rejected those objections, finding that the declaration from an Openroads part-owner was competent proof and that the defendants identified no authority requiring more precise identification of the limited liability company’s members or declarations from those individual members.

Because OWC could not establish complete diversity, the court granted OWC’s motion to dismiss for lack of subject matter jurisdiction. The court dismissed OWC’s second amended complaint without prejudice. The court expressly stated that the dismissal was not a ruling or comment on the merits of the action.

Sanctions and other motions

The defendants asked the court to retain jurisdiction so they could seek monetary sanctions against OWC and its counsel. The court concluded that the record did not sufficiently show an improper purpose, such as harassment, unnecessary delay, or needless litigation costs. It also found that OWC’s jurisdictional error was the type of technical error courts traditionally allow parties to correct. The court therefore denied the defendants’ sanctions request.

The court also denied as moot OWC’s motion to dismiss Monterey Storage Solutions’ counterclaims, the motion by Gil Spencer, Ben Rewis, and Christopher Lochhead to dismiss the second amended complaint, and the motion by Shakuntala Atre and Nisha Atre to dismiss the second amended complaint. The defendants’ later conditional application for leave to file a sanctions motion was denied as well. The clerk was directed to close the file.