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

Filing 1013

DECISION AND ORDER: Accordingly, for the reasons stated above, it is hereby ORDERED that, substantially for the reasons set forth in the Report and Recommendation of Magistrate Judge Gabriel Gorenstein ("R&R," Dkt. No. 988), the Cou rt adopts the R&R in its entirety as the Court's decision on the matter, and it is further ORDERED that Defendants Mykalai Kontilai and Collector's Coffee Inc.'s objections to the R&R (Dkt. Nos. 991, 996) are DENIED, and it is further ORDERED that the case is returned to Magistrate Judge Gabriel Gorenstein to effectuate the ruling. (Signed by Judge Victor Marrero on 5/6/2022) (ate)

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 1 of 11

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------X
UNITED STATES SECURITIES AND
:
EXCHANGE COMMISSION,
:
:
Plaintiff,
:
:
19 Civ. 04355 (VM)
- against :
:
COLLECTOR’S COFFEE INC., et al.
:
DECISION AND ORDER
:
Defendants.
:
-----------------------------------X
VICTOR MARRERO, United States District Judge.
In May 2019, the United States Securities and Exchange
Commission (the “SEC”) brought civil fraud charges against
Mykalai Kontilai (“Kontilai”) and Collector’s Coffee Inc.
(“CCI,” and collectively with Kontilai, “Defendants”). The
matter was referred to Magistrate Judge Gabriel Gorenstein to
oversee

general

pretrial

issues,

including

scheduling,

discovery, non-dispositive pretrial motions, and settlement.
(See Dkt. No. 51.)
On October 29, 2021, the SEC filed a motion to enforce
the Court’s May 15, 2019 order (see “Asset Freeze,” Dkt. No.
12) in connection with Defendants’ continued litigation and
settlement activities in connection with two lawsuits. (See
“Motion to Enforce,” Dkt. No. 970.) On February 10, 2022,
Magistrate

Judge

Gorenstein

submitted

a

Report

and

Recommendation recommending that the Court grant the SEC’s
Motion

to

Enforce.

(See

“R&R,”
1

Dkt.

No.

988

at

19-26.)

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 2 of 11

Magistrate Judge Gorenstein combined the R&R with an opinion
and

order

addressing

Kontilai’s

motion

(“Clarification

Motion,” Dkt. No. 958) to clarify the terms of the Court’s
Asset Freeze. 1 (See “Clarification Order,” Dkt. No. 988 at
13-19.) On February 24, 2021, the Court received Defendants’
objections

to

Magistrate

Judge

Gorenstein’s

R&R.

(See

“Objections,” Dkt. No. 991.) The SEC opposed the Objections
on March 10, 2022. (See “Opposition” or “Opp’n,” Dkt. No.
995.) Defendants replied to the Objections on March 17, 2022.
(See “Reply,” Dkt. No. 996.)
I.

BACKGROUND

A. Factual and Procedural Background
As

background,

the

Asset

Freeze

provides

that

the

“assets, funds, or other property held by or under the direct
or indirect control of Defendants Collectors Café of Mykalai
Kontilai

.

.

.

wherever

located,

up

to

the

amount

of

$46,121,649.68, are frozen.” (Asset Freeze ¶ I.A.) Pursuant
to the Asset Freeze, Defendants are required to “hold and
retain within their control, and otherwise prevent any . . .

The Court notes that Kontilai’s Clarification Motion was properly before
Magistrate
Judge
Gorenstein
for
final
disposition
because
the
clarification motion seeks a ruling regarding the parties’ interim
settlement as to the SEC’s motion for a preliminary injunction, and the
parties have consented to disposition of that motion and related motions
before Magistrate Judge Gorenstein. (See Dkt. No. 59.) The Court does not
address Defendants’ objections that pertain solely to the Clarification
Motion.
1

2

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 3 of 11

disposal whatsoever” of any funds or assets presently held by
them up to $46,121,649.68. (Id. ¶ I.B.) Further, Defendants
may not take any actions that may interfere with the asset
freeze, including “the filing of any lawsuits . . . to impact
the property and assets subject to this order.” (Id. ¶ I.D.)
However, “any party or non-party may seek leave from this
order upon a proper showing.” (Id.) The parties stipulated to
these requirements in the Asset Freeze pending a hearing on
a preliminary injunction. (See Dkt. No. 174). This hearing
has yet to occur due to the parties’ interim settlement.
Following the parties’ stipulation, Kontilai filed a
letter motion seeking clarification as to whether the Asset
Freeze “cover[ed] untainted funds acquired by Kontilai after
the asset freeze was entered,” specifically future payment he
expected from his deceased mother’s estate in a wrongful death
action that he intended to use for his criminal defense. (See
Dkt. No. 612 at 3.) Judge Schofield, who was then assigned to
the case, denied Kontilai’s motion, concluding, among other
things, that Kontilai had not shown that the funds he sought
to acquire were untainted.

(See 658 at 4-5.)

Kontilai then filed his Clarification Motion on October
1, 2021, seeking clarification as to whether he could continue
two lawsuits, one related to his mother’s wrongful death
action (the “Wrongful Death Action”) and one related to legal
3

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 4 of 11

malpractice claims (the “Legal Malpractice Action”). 2 The SEC
filed a combined opposition to Kontilai’s request and a Motion
to Enforce, arguing, among other things, that the right to
file a lawsuit is an asset and pursuant to the Asset Freeze,
Kontilai should have requested leave of this Court to continue
to litigate the two Actions. (See Motion to Enforce at 12.)
In addition to an order of enforcement, the SEC requested
ancillary relief for Kontilai’s alleged violation of the
Asset Freeze, including judicial monitoring of the Wrongful
Death Action. (See id. at 13-15.) Defendants opposed the
Motion to Enforce on the basis that the filing of a lawsuit
is not an asset covered by the Asset Freeze and the SEC’s
requested ancillary relief is already provided for by the
Asset Freeze Order. (See Opp’n at 3-5.)
B. The Report and Recommendation
Underlying

the

recommendation

to

enforce

the

Asset

Freeze are the conclusions in Magistrate Judge Gorenstein’s
Clarification Order. The Clarification Order held that the
right to file a lawsuit is a property interest, and the plain
language of the Asset Freeze, which Defendants stipulated to,
contemplated

freezing

Kontilai’s

two

lawsuits

since

the

claims arose before the issuance of the Asset Freeze and
The R&R describes at length the details of these Actions. (See R&R at
4-10.)
2

4

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Kontilai wielded at least indirect control or has an indirect
beneficial interest in the Actions. Accordingly, Magistrate
Judge

Gorenstein,

parties’

consent,

pursuant
(see

to

Dkt.

his

No.

jurisdiction

59),

granted

on

the

Kontilai’s

Clarification Motion, clarifying that the Asset Freeze “does
not permit the Defendants to pursue lawsuits based on claims
that arose before the issuance of the [Asset Freeze] without
obtaining relief from the ‘freeze’ imposed by the [Asset
Freze].” (Clarification Order at 13.)
Turning to the Motion for Enforcement, Magistrate Judge
Gorenstein,

having

found

that

the

lawsuits

qualified

as

frozen assets, recommended that the Asset Freeze be enforced
against Defendants in connection with the Actions. Magistrate
Judge Gorenstein recommended that despite this enforcement,
the SEC should not be granted its requested relief. (See R&R
at 26.) Instead, Magistrate Judge Gorenstein directed the
parties to “attempt to agree on the specific terms of an order
to

effectuate

the

ruling”

if

this

Court

adopts

the

recommendation to enforce the Asset Freeze. (See R&R at 26.)
Defendants

raise

two

objections

to

the

combined

Clarification Order and R&R. 3 First, in relation to the
Clarification Order, Defendants argue that Magistrate Judge
Defendants note that out of an “abundance of caution,” they include
their objections to the Clarification Order with their objections to the
R&R since the issues are “inextricably intertwined.” (Id. at 2.)
3

5

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 6 of 11

Gorenstein erred by not clarifying whether the Asset Freeze
Order applies to after-acquired assets, such as “funds from
employment, loans or gifts.” (Objections at 3-4). Specific to
the R&R, Defendants argue that Magistrate Judge Gorenstein
erred in holding the Court has the power to freeze untainted
assets, such as the proceeds from the Wrongful Death Action.
(See id. at 4-7; see also Reply at 7-10.)
The SEC opposes Defendants’ objections, arguing that the
Court has already ruled the Wrongful Death Action proceeds
are subject to the Asset Freeze, these proceeds are not
necessarily untainted, and regardless, courts have statutory
authority pursuant to 15 U.S.C. Section 78u(d) to freeze
untainted assets in connection with securities violations.
II.

LEGAL STANDARD

A district court evaluating a Magistrate Judge’s report
may adopt those portions of the report to which no “specific,
written objection” is made, as long as the factual and legal
bases supporting the findings and conclusions set forth in
those sections are not clearly erroneous. See Fed. R. Civ. P.
72(b); Thomas v. Arn, 474 U.S. 140, 149 (1985); Greene v. WCI
Holdings Corp., 956 F. Supp. 509, 513 (S.D.N.Y. 1997). “Where
a

party

makes

‘[fourteen]

days

a

‘specific

after

being

written
served

objection’

with

a

copy

within
of

the

[Magistrate Judge’s] recommended disposition,’ however, the
6

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 7 of 11

district court is required to make a de novo determination
regarding those parts of the report.” Cespedes v. Coughlin,
956 F. Supp. 454, 463 (S.D.N.Y. 1997) (quoting United States
v. Raddatz, 447 U.S. 667, 676 (1980)). A district court may
accept, reject, or modify, in whole or in part, the findings
and recommendations of the Magistrate Judge. See DeLuca v.
Lord, 858 F. Supp. 1330, 1345 (S.D.N.Y. 1994); Walker v. Hood,
679 F. Supp. 372, 374 (S.D.N.Y. 1988).
III. DISCUSSION
Defendants’ Objections to the R&R challenge the Court’s
authority

to

freeze

untainted

assets

prejudgment.

(See

Objections at 4-7.) Defendants argue that Magistrate Judge
Gorenstein’s

analysis

relies

on

cases

that

are

either

inapplicable or otherwise no longer good law.
First, the Court agrees with Magistrate Judge Gorenstein
that Defendants stipulated to the relief in the Asset Freeze
freezing “any of their funds or other assets or things of
value presently held by them, under their control or over
which they exercise actual or apparent investment.” (Asset
Freeze

¶

I.B.)

Thus,

Defendants

agreed

to

a

freeze

of

untainted assets, as Judge Schofield previously clarified in
this action. (See Dkt. No. 658 at 4 (finding that the “Asset
Freeze Order covers all of ‘[t]he assets, funds, or other
property held by or under the direct or indirect control of
7

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 8 of 11

Defendants’”).) Judge Schofield also found Defendants had not
made

out

a

proper

showing

that

the

expected

funds

from

Kontilai’s mother’s estate were untainted assets, (see id. at
5), which Defendants have not done here either.
Second, even if Defendants had not stipulated to the
relief, and Defendants could show the Action proceeds are
untainted,
untainted

the

Court

assets

has

statutory

prejudgment

in

authority

securities

to

freeze

actions.

In

support of their objection, Defendants rely on the holding of
Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund,
Inc., 527 U.S. 308 (1999). 4 In Grupo Mexicano, the Supreme
Court held that a court does not have authority to freeze
assets to preserve them for potential money damages, but
distinguished

actions

seeking

money

damages

from

actions

seeking equitable relief. Id. at 324-25, 333. Accordingly,
this holding “does not bar equitable prejudgment remedies in
a case that claims equitable relief as well as money damages.”
S.E.C. v. Babikan, No. 14 Civ. 1740, 2014 WL 2069348, at *3
n.3

(S.D.N.Y.

Apr.

21,

2014);

see

also

S.E.C.

v.

ETS

Payphones, Inc., 408 F.3d 727, 734 (11th Cir. 2005) (adopting

Defendants also cite to S.E.C. v. FTC Cap. Markets, Inc., No. 09 Civ.
4755, 2010 WL 2652405, at *7 (S.D.N.Y. June 30, 2010) for the proposition
that frozen funds must be traceable to fraud. The case is inapposite to
the circumstances here because in FTC Capital the defendant used the
proper channels of seeking leave to use frozen funds, which she
demonstrated were untainted, for the specific purposes of her criminal
defense.
4

8

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 9 of 11

reasoning of Fourth Circuit and concluding Grupo Mexicano did
not control outcome of case because “the SEC seeks equitable
relief (disgorg[e]ment), not just money damages.”). Here, the
SEC seeks equitable relief in the form of injunctions and
disgorgement.
Moreover, Grupo Mexicano held that any enlargement of
district courts’ equitable powers, so as to permit them to
issue

prejudgment

preliminary

injunctions

freezing

defendants’ unencumbered assets, “should be conducted and
resolved where such issues belong in our democracy: in the
Congress.” 527 U.S. at 333. The Second Circuit has long
recognized that Congress authorized courts to freeze assets
unconnected to the fraud pursuant to 15 U.S.C. Section 78u(d).
See S.E.C. v. Unifund SAL, 910 F.2d 1028, 1035, 1041 (2d Cir.
1990) (upholding asset freeze extending to funds in amount
“sufficient to cover not just the profits that might have to
be disgorged but the civil penalty, equal to three times the
profits.”). The Court therefore finds persuasive Magistrate
Judge Gorenstein’s conclusion that Grupo Mexicano does not
alter the grant of statutory authority provided for by 15
U.S.C. Section 78u(d). (See R&R at 16 n.6.; see also id. at

9

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 10 of 11

16

(collecting

cases

post-Grupo

Mexicano

freezing

assets

untainted by fraud pursuant to Unifund). 5
Having carefully considered Defendants’ Objections and
the R&R’s analysis and conclusions, the Court is persuaded
that

the

Asset

Freeze

is

enforceable

as

it

pertains

to

Defendants’ untainted assets. As such, the Court is persuaded
by Magistrate Judge Gorenstein’s conclusion that Defendants’
participation in the Actions violated the Asset Freeze.
As

to

the

remaining

portions

of

Magistrate

Judge

Gorenstein’s R&R unobjected to, having conducted a review of
the full record, including, among other things, the R&R and
applicable legal authorities, the Court concludes that the
factual

findings,

reasoning,

and

legal

support

for

the

recommendations made by Magistrate Judge Gorenstein in the
R&R are not clearly erroneous or contrary to law. The Court
will therefore, substantially for the reasons set forth in
the R&R, adopt Magistrate Judge Gorenstein’s recommendations
as to those matters as the Court’s decision.
IV.

ORDER

Accordingly, for the reasons stated above, it is hereby

Defendants note that no post-Grupo Mexicano case cited by the SEC
mentions Grupo Mexicano, so the cases “are of no analytical value.” (Reply
at 9.) Considering Grupo Mexicano does not apply to those cases, it comes
as no surprise that Grupo Mexicano would not be mentioned in those
opinions.
5

10

Case 1:19-cv-04355-VM-GWG Document 1013 Filed 05/08/22 Page 11 of 11

ORDERED that, substantially for the reasons set forth in
the Report and Recommendation of Magistrate Judge Gabriel
Gorenstein (“R&R,” Dkt. No. 988), the Court adopts the R&R in
its entirety as the Court’s decision on the matter, and it is
further
ORDERED that Defendants Mykalai Kontilai and Collector’s
Coffee Inc.’s objections to the R&R (Dkt. Nos. 991, 996) are
DENIED, and it is further
ORDERED that the case is returned to Magistrate Judge
Gabriel Gorenstein to effectuate the ruling.
SO ORDERED.
Dated: New York, New York
06 May 2022

11