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

Background

The Securities and Exchange Commission (SEC) moved for contempt and other sanctions against Mykalai Kontilai. This order addressed only the SEC’s request for discovery sanctions under Federal Rule of Civil Procedure 37(b)(2)(A). The court stated that a separate report and recommendation addressed sanctions based on the court’s contempt powers and inherent authority.

A July 6, 2020 order had found Kontilai’s objections to requests for production and interrogatories improper. It gave him seven days to submit new responses that complied with the order and the Federal Rules of Civil Procedure. If he did not do so, his remaining objections would be waived, and the required responses would be due three business days later. The July 6 order also required new responses to requests for admission and stated that failure to provide them would waive the objections and make the responses due three business days later. The deadline was later extended to July 20, 2020.

Kontilai did not submit the required responses by the deadline. The SEC asserted that he never responded to the outstanding document requests and responded to the requests for admission more than two months late. Kontilai did not dispute missing the deadline. He argued that difficulties involving the withdrawal of former counsel, access to his litigation file and documents, insurance approval of new counsel, overseas travel, and limited internet access excused his noncompliance. He also argued that the requests for admission should not automatically be treated as admitted because he eventually submitted responses.

Requests for Admission

The court rejected Kontilai’s interpretation of the July 6 order. It held that the order required new responses, not merely supplemental versions of the earlier responses. Because Kontilai did not submit new compliant responses by the deadline, his prior objections were waived and the requests for admission were deemed admitted under Rule 36(a)(3).

The court further stated that the requests would be deemed admitted even if the court treated Kontilai’s September 2020 responses as timely. Those responses repeated objections the court had already found improper, did not satisfy the July 6 order, and supported sanctions under Rule 37(b)(2). The court concluded that a lesser sanction would be ineffective given what it described as Kontilai’s unmistakable and culpable failure to comply. Accordingly, all requests for admission were deemed admitted.

Requests for Production

The court found that Kontilai inexcusably violated the July 6 order by failing to respond to the SEC’s document requests. It found that his explanations focused on the dispute involving former and current counsel but did not explain why he remained unable to respond for the following months or what efforts he made to overcome the obstacles. The court also noted that new counsel had appeared on August 25, 2020, and that Kontilai had not sought an extension of the July 20 deadline after obtaining new counsel.

Rule 37(b)(2)(A) permits sanctions for failing to obey a discovery order, including establishing designated facts and prohibiting a party from supporting or opposing claims or defenses or introducing specified evidence. The SEC asked the court to establish certain facts and prevent Kontilai from making particular arguments or presenting particular evidence. The court stated that such sanctions could be warranted, and that a lesser sanction would be ineffective given the duration of Kontilai’s noncompliance.

The court nevertheless denied the SEC’s application for those document-production sanctions without prejudice. It found that the SEC had not fully explained what information the requests sought, how that information related to the specific facts the SEC wanted established, or how those facts related to the claims in the case. The ruling left the SEC free to submit a new application with a more complete explanation.

Disposition and Classification

The order deemed all requests for admission admitted. It denied the SEC’s application for sanctions concerning the requests for production without prejudice. Because the order resolved discovery-sanctions issues rather than deciding the underlying securities claims, it is classified as a procedural order.