United States Securities and Exchange Commission v. Collector's Coffee Inc.

Background

The court considered letters from defendant Mykalai Kontilai and the SEC concerning the briefing schedule for the SEC’s motion to hold Kontilai in contempt and impose sanctions. Kontilai requested an extension of his response deadline. He also appeared to seek discovery concerning the SEC’s interactions with an individual identified as “Mark Dougan,” additional time to consult another attorney, and permission to strike portions of the SEC’s filings.

Kontilai’s Requests

The court concluded that Kontilai had not shown why discovery was needed to respond to factual accusations concerning matters within Kontilai’s or his attorney’s knowledge. The court stated that Kontilai could deny the accusations under oath. It also explained that, if a hearing were held, Kontilai could cross-examine the SEC’s witnesses and call appropriate witnesses of his own. The court further found that the desire to consult another attorney did not justify delaying the briefing schedule.

The court denied Kontilai’s request to “strike” part of the SEC’s motion based on differences between the motion and an earlier letter. The court waived the pre-conference requirement for the other grounds. It also stated that Federal Rule of Civil Procedure 12(f), which addresses striking material from a pleading, did not apply because no pleading was at issue. Any challenges to the SEC’s supporting materials therefore had to be raised in Kontilai’s opposition to the motion rather than through a separate motion to strike.

Unclear Basis for the SEC’s Motion

The court found that the SEC’s papers did not clearly identify the legal authority supporting its request for “contempt and sanctions.” The motion cited authority concerning the court’s inherent power to impose sanctions, while the opening of the SEC’s brief discussed the elements of civil contempt. The SEC also sought “terminating sanctions,” meaning a default against Kontilai.

The court explained that civil contempt generally may be used to secure future compliance with court orders or compensate an injured party, but not as a purely punitive measure. It therefore questioned how civil contempt could support a default. The court noted that the SEC’s cited sanctions cases instead involved the court’s inherent power, discovery sanctions under Rule 37, or spoliation—the destruction or loss of evidence.

Because the requirements for relief differ depending on which authority is invoked, the court stated that the SEC and defendants were entitled to know which legal bases and sanctions the SEC was relying on. The court invited the SEC to withdraw its existing motion and file a replacement that identified the applicable doctrines, the remedies available under each doctrine, and the elements the SEC would need to prove for each basis.

Order

The court would not hold defendants to the previous response deadline, although it stated that they could continue preparing to address the factual allegations. On or before July 17, 2020, the SEC was required either to file a new motion and brief or to state by letter that it intended to rely on its previously filed papers. Defendants’ response was due July 31, 2020, and the SEC could file a reply within 14 days after the opposition. The parties could agree to extend those deadlines if they disclosed the agreement to the court by letter filed on the court’s electronic docket.

The court warned that, if the SEC did not clarify its motion, the motion might be denied in whole or in part for lack of clarity. The order addressed briefing, procedure, and the legal basis for the requested sanctions; it did not decide whether Kontilai committed contempt or whether sanctions were warranted.