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BRATTLEBORO — If the involuntary petition for bankruptcy filed by creditors of Koffee Kup Bakery is allowed to go forward, nearly 500 former employees who have been waiting almost six months for more than $800,000 in paid-time-off balances might only get to split a little more than $12,000.

Under federal bankruptcy law, employee wages and benefits are considered unsecured claims, and those claims are fourth in the pecking order to receive compensation.

But, in documents filed Friday by Vermont Assistant Attorney General Justin Kolber, the only claim the employees can make under bankruptcy law is wages and benefits earned “within 180 days before the date of the filing of the petition or the date of the cessation of the debtor’s business ...”

“If Petitioner Creditors succeed in their gamesmanship here, then that will mean a neartotal loss of the employee PTO, from $821,862 (excluding interest) to merely $12,044,” wrote Kolber.

On April 26, nearly 500 employees of Koffee Kup, including about 100 at its affiliate, Vermont Bread Company in Brattleboro, arrived to work to find themselves locked out and without jobs. Though they received their final paychecks, they did not receive payment for their paid time off.

In early June, Flowers Foods, based in Georgia, purchased all of the assets except for the real estate of Koffee Kup in Burlingtion, Vermont Bread in Brattleboro, and Superior Bakery in North Grosvenor Dale, Conn., but stated it had no plans to reopen any of the bakeries at the time. Even though Flowers Foods recently purchased the real estate as well, the bakeries remain closed.

In mid-July, Chittenden Superior Court Judge Samuel Hoar approved the payment of the paid-time-off balances but attorneys for Ronald Teplitsky, who was then the receiver of Koffee Kup’s assets, told the court he ran into a problem with the payroll processing firm and was unable to make the transaction. He signed up with a new processor, but three days before the payments were to be made, creditors who say they are owed more than $2 million, filed a petition for involuntary bankruptcy, freezing Koffee Kup’s assets.

Alexandra Edelman, attorney for Koffee Kup’s assets, which include proceeds from the sales to Flowers Foods and accounts received after closure, noted in court filings that there are substantial additional funds, “in the multi-millions,” available for distribution to the creditors, including the former employees.

The petition for involuntary bankruptcy was filed by attorneys for Bernadino’s Bakery, Ryder Truck Rental, Lily Transportation, and Hillcrest Bakery. During the hearings before Hoar, the petitioners did not object to the judge’s decision to pay the PTO balances.

“The Attorney General’s Office is shocked by the about-face of Petitioner Creditors,” wrote Kolber. “Petitioner Creditors gallingly argue that ‘the prior consent of the Petitioning Creditors is hardly relevant.’”

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The involuntary petition, wrote Kolber, is being used “as a sword to undo what they agreed to in the state court ...”

Under federal bankruptcy law, if the petition goes forward, only paid time off earned in 2021 would be available to the employees, wrote Kolber, which adds up to $12,044.

“This would result in a gross miscarriage of justice for hardworking Vermont employees,” he wrote. “Thus, this matter is one of the strongest examples of unclean hands, and Petitioner Creditors’ action should not be permitted here.”

Kolber also noted that because the creditors agreed to not oppose payment of the PTO in state court, they shouldn’t be allowed to use a federal proceeding to block the disbursement.

The “hiccup” in making the payment, “does not change the ‘scope of responsibilities’ placed on the Receiver to fulfill his state court ordered duty,” wrote Kolber.

In the filing, Kolber also dismissed the petitioners’ reading of labor law that states Vermont employers are not legally obligated to pay vacation or PTO.

“The Guidance merely explains that Vermont employers are not legally obligated to pay any vacation or paid time off,” he wrote. “However, and this is the critical distinction, once an employer elects to pay vacation time as a benefit, then those benefits are legally required to be paid ... In this case, Petitioner Creditors tellingly omit the fact that Koffee Kup Bakery elected to pay time off as PTO wages. ... That company policy is now considered a legal debt to the employees and is immediately owed and payable upon termination,” and within 72 hours of termination.

Even if the federal court allows the petition to go forward, which the AG’s Office opposes, the former employees should receive their PTO balances as orderd by Judge Hoar, wrote Kolber.

Edelman wrote that the Koffee Kup entities also oppose the involuntary bankruptcy. She submitted to the federal court a proposed motion allowing full payment of the PTO balances to the employees.

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