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

Background

In May 2019, the Securities and Exchange Commission brought civil fraud claims against Mykalai Kontilai and Collectors Coffee, Inc. The case was referred to Magistrate Judge Gabriel Gorenstein for general pretrial matters.

The court also allowed SDJ Investments, LLC, Adobe Investments, LLC, and Darren Sivertsen, collectively called the Holders, to file a complaint in intervention. The Holders alleged that they lent $6 million to Collectors Coffee, secured by original contracts signed by Jackie Robinson. The SEC alleged that Collectors Coffee falsely represented that it owned those contracts.

The Holders’ amended complaint sought declarations that they were first-position perfected creditors in the contracts and that Collectors Coffee had clear title to the contracts when the loan was made. The Jackie Robinson Foundation was named as an intervenor-defendant because it claimed to be the true owner of the contracts.

Motion and Report and Recommendation

Collectors Coffee and Kontilai moved for judgment on the pleadings or, alternatively, to stay the intervention action and compel arbitration. They argued that the court lacked supplemental jurisdiction because the intervention action and the SEC action did not share a common set of operative facts. They also relied on a settlement agreement that they said required arbitration.

Magistrate Judge Gorenstein recommended denying judgment on the pleadings because the court had subject-matter jurisdiction. He recommended staying the Holders’ claims against Collectors Coffee and Kontilai pending arbitration, while allowing the Holders’ claim against the Jackie Robinson Foundation to proceed.

Collectors Coffee, Kontilai, and the Jackie Robinson Foundation objected. Collectors Coffee and Kontilai challenged both the jurisdiction ruling and the partial stay. The Foundation challenged the partial stay and argued that Collectors Coffee was necessary to resolving the ownership claim.

Court’s Analysis

The court held that supplemental jurisdiction existed under 28 U.S.C. § 1367(a). Supplemental jurisdiction allows a federal court to hear related claims that form part of the same constitutional case or controversy. The court explained that both actions depended, at least in part, on determining who owned the Jackie Robinson contracts during the relevant period. The SEC’s fraud claim relied on an allegation that Collectors Coffee did not own the contracts, while the Holders’ creditor claims depended on Collectors Coffee’s ownership when the loan transactions occurred.

The court rejected the argument that the settlement agreement eliminated subject-matter jurisdiction or required immediate dismissal. It explained that an arbitration agreement does not determine whether a federal court has jurisdiction. The agreement could affect the Holders’ creditor-status claim as a contractual matter, but that issue had to be addressed first by an arbitrator. The court therefore agreed that the claims against Collectors Coffee and Kontilai should be stayed for arbitration.

The court also approved a partial stay rather than staying the entire intervention action. Count I involved Collectors Coffee and Kontilai and was stayed pending arbitration. Count II involved only the Jackie Robinson Foundation and sought a declaration concerning ownership of the contracts. The court found no sufficient basis to stay Count II. It reasoned that Collectors Coffee could protect its interests in the SEC action, where it would have an opportunity to argue that it owned the contracts, and that the two actions were being considered in the same proceeding.

Disposition

The court adopted Magistrate Judge Gorenstein’s Report and Recommendation in its entirety. It denied the objections of Collectors Coffee, Kontilai, and the Jackie Robinson Foundation. The result was that the court retained supplemental jurisdiction, the claims against Collectors Coffee and Kontilai were stayed in favor of arbitration, and Count II against the Jackie Robinson Foundation was allowed to proceed.