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

Background

The Securities and Exchange Commission sued Collector’s Coffee Inc., doing business as Collectors Café, and Mykalai Kontilai, alleging violations of federal securities laws involving investor fraud. This opinion addressed only Kontilai’s motion to withdraw admissions made under Federal Rule of Civil Procedure 36.

The SEC served Kontilai with 19 requests for admission in May 2020. Kontilai initially served objections that the court found improper. The court gave him additional time to submit new responses, but he missed the extended deadline. Under Rule 36(a)(3), the requests therefore became automatically admitted. Kontilai later submitted untimely responses denying 16 requests and stating that he lacked enough information to admit or deny three others, but the court had already ruled that the requests were admitted.

The admissions concerned Kontilai and Collector’s Coffee’s dealings with investors Chris and Mary Palos and with Edwin McLaughlin and Kirk Jensen. Four requests concerned Kontilai’s compensation and his wife Veronica Kontilai’s compensation. The court had previously denied Kontilai’s request for reconsideration but noted that he could seek relief under Rule 36(b).

Legal standard

Rule 36(b) permits a court to allow withdrawal or amendment of an admission if doing so would promote presentation of the action’s merits and would not prejudice the requesting party in maintaining or defending the action on the merits. The decision is discretionary, meaning the court may deny relief even when both considerations favor the moving party.

The court explained that presentation of the merits is generally aided when leaving an admission in place would nearly eliminate a party’s ability to present its case. Relevant prejudice means more than requiring the party that obtained the admission to prove the matter; it concerns special difficulty in proving the case, such as losing access to witnesses or needing to obtain evidence unexpectedly.

Court’s analysis

Kontilai argued that the admissions went to the heart of the case, would undermine his defenses, and would not prejudice the SEC because the SEC had other opportunities to obtain evidence. The court found that his briefing did not explain what his defenses were, how the admissions related to those defenses, or how the admissions related to the elements of the SEC’s claims. The court also noted that Kontilai did not specifically respond to the SEC’s arguments that some admissions were not central to its claims, had already been admitted in Kontilai’s answer, or were consistent with testimony obtained during the case.

The court held that Kontilai had not met his burden of showing that withdrawal would promote presentation of the merits. It also observed that the court might have considered withdrawal if Kontilai had provided evidence that the admissions were factually incorrect, but he provided no such evidence.

The court did not decide whether the requests were admissible at trial or whether they were vague or ambiguous. It stated that those issues could be addressed through an evidentiary ruling at trial or in response to a motion seeking to limit evidence. If the requests were materially vague or ambiguous, the court said, they would have no evidentiary value and would not be admitted at trial.

Disposition

The court denied Kontilai’s motion to withdraw admissions, docket number 851. The ruling concerned discovery and did not decide the SEC’s underlying securities-fraud allegations.