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RUTLAND — Koffee Kup’s dissolution has been difficult. Last week, it got $16 million harder.

Recent bankruptcy court filings indicate that Leonard Levie, the founder of an acquisition firm with $1.6 billion in annual global revenue that bought the bakery on April 1 and shut it down 25 days later, believes he is owed $14 million of Koffee Kup’s remaining assets.

The court filings also raise concerns over “a certain secured promissory note in the approximate amount of $2 million” being held by Jean-Francois Morin, Koffee Kup’s former CEO.

The documents were filed by creditors who say they are owed, in total, more than $3.7 million, and by Linda Joy Sullivan, the Dorset accountant appointed by a state judge to oversee the dissolution of the bakery’s assets.

The creditors, according to their filing, “reasonably fear” that Levie, who founded American Industrial Acquisition Corp., a private equity firm in New York City in 1996, will receive the majority of Koffee Kup’s remaining assets “even though he made little or no investment in Koffee Kup and paid at most nominal consideration for the claim.”

The creditors also have raised concerns about Sullivan’s appointment as dissolution receiver, contending she was “selected by Koffee Kup alone.”

The owner’s ability to choose the receiver who will evaluate his $14 million claim “raises substantial questions as to the fairness of the Dissolution Receivership,” wrote attorneys for the creditors.

Involuntary bankruptcy filing

The dissolution process found its way into federal court after the creditors filed a motion for involuntary bankruptcy on Aug. 16. According to court documents, the creditors include Lily Transportation, which says it is owed $660,000; Bernadino’s Bakery, at $690,000; Hillcrest Foods, at $176,000; and Ryder Truck Rental, at $2.2 million.

Since the closure of Koffee Kup and its subsidiaries, Vermont Bread in Brattleboro and Superior Bakery in Connecticut, the only entities to receive payment on debts owed were KeyBank, Koffee Kup’s primary lender, which has received $7.6 million, Vermont Economic Development at $213,000, and Continental Indemnity, an insurance company, at $84,000.

On Sept. 7, Sullivan filed a motion to dismiss the involuntary petition, stating the creditors acted in bad faith in an attempt to stop the payment of more than $830,000 in paid time-off balances to former employees of Koffee Kup and its subsidiaries. The motion to dismiss was supported by Koffee Kup through its attorney, Alexandra Edelman, of Primmer Piper Eggleston & Cramer PC, who wrote that the filing of the involuntary bankruptcy petition appeared “calculated, suspicious, collusive and malicious” and also appeared to be “a litigation tactic to prevent the [paid time off] from being paid.”

Federal Bankruptcy Judge Colleen Brown eventually authorized the payment of the time off balances, but the process has been plagued with glitches, meaning some employees still haven’t received anything and others have received incorrect amounts.

Sullivan told the Reformer earlier this month she is establishing a process to expedite the claims but has been hindered by the failure of the KeyBank receiver, Ronald Teplitsky, to turn over all the necessary documentation, which includes the closing documents from the Flowers deal as well as the Quickbooks and contracts entered into by Teplitsky, as well as other contracts under his custody and control and also approved by him.

“Teplitsky chose selected creditors to sign the confidentiality agreement as to the Flowers purchase agreement,” Sullivan told the Reformer. “Only Teplitsky and those who signed are parties bound to the confidentiality agreement. I am not bound by that agreement.”

Another challenge facing Sullivan is the fact Teplitsky, instead of establishing a distinct account for Koffee Kup’s assets, placed millions of dollars into his own personal corporate account.

“As of to date, we have not received copies of the bank statements with detailed deposit slips, canceled checks and the details of transaction activity,” Sullivan told the Reformer on Nov. 2. “Without the turnover of these records, we are not able to identify what has actually transpired as of yet in this corporate account.”

900 boxes of documents

On Nov. 12, in advance of a Dec. 12 hearing on whether the proceeding should continue in federal court, the creditors appeared before Judge Brown, contending Sullivan hasn’t complied with a request for a trove of documents in her possession.

Sullivan’s attorney, David Dunn, of Phillips, Dunn, Shriver and Carroll in Brattleboro, told the court that, while Sullivan has promised to provide all the documents requested by the creditors, she has more than 850 boxes of documents to catalogue, and is still opening a large amount of mail.

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On Saturday, Sullivan told the Reformer she has since received 50 boxes of documents and is expecting more. She has also not received access to some databases necessary to reconcile Koffee Kup’s books. In an earlier filing, Sullivan noted that some of the information necessary to complete the dissolution might have existed on servers that were wiped clean and sold without her knowledge.

Documents requested by the creditors include all communications between Koffee Kup, Levie and Morin, and any “concerning a business or personal relationship” between Sullivan and Jeff Sands, also a Dorset resident, who helped orchestrate the acquisition by American Industrial Acquisition Corp. of Koffee Kup and its subsidiaries.

“They are just grasping at straws,” Sullivan said. “This involuntary bankruptcy petition is creating a financial burden on the [Koffee Kup] estate, with only the petitioning creditors’ attorneys making money.”

In Sullivan’s response to the creditors’ request for documents, Dunn wrote that any of the transactions involving Levie, Morin and Sands preceded her involvement as dissolution receiver, and that the information requested “may or may not be” contained in one of the hundreds of boxes of documents she is in the process of combing through to find those pertinent to the dissolution.

Sullivan told the Reformer on Saturday that the creditors had two months between her being named dissolution receiver to the time she took over the process to object to her appointment. She said none of the creditors did so.

“I intend to continue treating all creditors equitably and working with my attorney to assess the legalities of their claims,” she said. “Bottom line, shame on these particular creditors’ attorneys and whoever they have been working with to delay the work in the state court to the detriment of all creditors.”

Sullivan also said that the only knowledge she has of Levie and other shareholders has come through her appointment as the dissolution receiver.

‘Entirely unreasonable’

During the Nov. 12 hearing, Brown appeared to have no patience for arguments presented by the creditors who not only want immediate access to all the documents presented, but to also prevent Sullivan from presenting any documents after the Nov. 16 deadline Brown scheduled into the hearing calendar.

“[T]hey need to produce what’s relevant, what’s responsive, because it’s very likely ... what they’re going to produce is what we’re going to want to use,” said Lily Transportation’s attorney, Andrew Levin, on behalf of all the creditors during the hearing on Friday. “[T]hey’re essentially completely refusing to take that step.”

“That is not how I read the papers from either the receiver or Koffee Kup,” said Brown.

“The reality is it is impossible to review all of those boxes by Nov. 16,” said Dunn, adding the creditors can have access to all the documents in Sullivan’s possession and can make copies of those documents at their own expense.

“May I just raise one more issue, your honor,” interjected Levin.

“No,” responded Brown. “I am persuaded by the liquidating receiver’s position that the request for preclusion is, in my word, draconian and unfair. ... They’ve offered to provide access to to all of the documents and to continue their review of all of the documents ... I’m not sure what more they can do and I think under the circumstances of this case, the petitioning creditors position is, frankly, entirely unreasonable.”

Brown encouraged all of the parties to provide information to each other “as quickly and expeditiously as possible with hopes that there won’t be any need for further motions. ... In addition to the fact that these are obviously distracting counsel from actually reviewing the documents and making them available, they do cause additional expense in the case.And obviously the goal here in the bankruptcy court is to have the estate maximise the distribution to creditors.”

Brown issued an order late on Friday, ordering Sullivan to produce all the requested documents by Nov. 16. However, wrote Brown, any documents discovered and turned over after that date that are determined by the creditors to be relevant to the proceeding need to be brought to the attention of the court by Dec. 13.

Brown also ordered Teplitsky to “deliver all materials, records and documents in his control and possession, which relate to Koffee Kup Bakery, to Ms. Sullivan as soon as possible.”

Teplitsky’s attorney, Heather Cooper, indicated to the Reformer that her client had “reasonably complied with all prior requests for information,” and “that he will continue to respond to reasonable and necessary requests from the dissolution receiver for information within his custody or control.”

Levie did not respond to a request for comment. Morin’s attorney declined a request to comment.

Bob Audette can be contacted at raudette@reformer.com.