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

Background

The Securities and Exchange Commission brought this case against Collector’s Coffee, Inc., Mykalai Kontilai, and other defendants. In May 2019, the court issued a temporary restraining order freezing defendants’ assets, funds, and property up to approximately $46.1 million. Kontilai later sought permission to use funds covered by the freeze to hire criminal-defense counsel, but the court denied that request because he had not made the required showing.

Debevoise & Plimpton, where Judge Schofield had previously worked, was not a party to this case. The firm had represented defendants during part of the SEC’s investigation and later became involved in discovery disputes as a recipient of a document subpoena. Judge Gorenstein, the magistrate judge assigned to general pretrial supervision, resolved those discovery issues.

In October 2020, Collector’s Coffee and other defendants filed a separate malpractice action against Debevoise & Plimpton in the District of Columbia. Kontilai later moved for Judge Schofield’s recusal under 28 U.S.C. § 455. He argued that the SEC considered the malpractice claims subject to the asset freeze, meaning the court might have to approve or restrict the defendants’ pursuit of those claims. He also argued that Judge Schofield’s former employment and relationships at Debevoise & Plimpton prevented an impartial decision.

Legal standard

Under 28 U.S.C. § 455(a), a federal judge must recuse herself when her impartiality might reasonably be questioned. The court described the inquiry as whether a fully informed, objective observer would have significant doubt that justice would be done without recusal. Section 455(b)(1) also requires recusal when a judge has personal bias or prejudice concerning a party. The court noted that unfavorable rulings alone generally do not establish a reasonable basis for questioning impartiality.

The court also considered whether Kontilai’s motion was timely. A recusal motion ordinarily must be made at the earliest possible time after the party learns the facts supporting it. Relevant considerations include the party’s participation in the proceedings, wasted judicial resources, whether judgment has already been entered, and the reason for any delay.

Analysis and ruling

The court first concluded that no actual conflict existed at that time. Debevoise & Plimpton was not a party, and its role in this case was limited to receiving a document subpoena. Judge Gorenstein had handled and would continue to handle discovery matters within his referral. The court also found that Kontilai had not identified specific rulings involving Debevoise & Plimpton and had not connected the listed adverse rulings or delays to a reason for questioning impartiality.

The court nevertheless granted the motion to avoid an appearance of impropriety. The SEC contended that defendants violated the asset freeze by filing the separate malpractice action without court approval and that the court would need to decide how and when defendants could pursue a claim subject to the freeze. The court reasoned that deciding whether the asset freeze barred defendants from pursuing a claim against Judge Schofield’s former law firm could cause an objective observer to question her impartiality. Judge Schofield stated that she had worked at Debevoise & Plimpton from 1988 through 2011, had been a partner during the last 20 years of that period, and knew the firm’s attorneys mentioned in the recusal motion.

Although the court found that Kontilai had delayed in filing the motion, it concluded that the delay did not require denial because judgment had not been entered and reassignment would not waste judicial resources or delay the case’s day-to-day proceedings. The court granted the recusal motion and ordered that the case be assigned to another judge through the court’s random selection process.