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BURLINGTON — A federal judge has authorized payment of nearly $850,000 in paid-time-off balances to former employees of Koffee Kup.

The funds were scheduled to be disbursed on Aug. 19, but three days before, attorneys for Bernadino’s Bakery, Ryder Truck Rental, Lily Transportation and Hillcrest Bakery, who are owed more than $2 million, filed a petition for involuntary bankruptcy against Koffee Kup, preventing the payment.

In mid-July, Chittenden Superior Court Judge Samuel Hoar approved the payment of the paid-time-off balances after the creditors stated they had no objection to the payment. Ronald Teplitsky, the bank-appointed receiver attempted to make the payment, but he told the court he ran into a problem with the payroll processing firm. He signed up with a new processor, but the payment was not made prior to the filing of the petition in federal court, in which the creditors stated they now objected to the payment of PTO.

U.S. Bankruptcy Judge Colleen A. Brown, in an order published Friday, Sept. 17, concluded the paid time off was not part of the bankruptcy proceeding because the state court had already made a final determination prior to the filing of the petition.

On April 26, about 440 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.

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After the creditors filed the petition for involuntary bankruptcy on Aug. 16, the Vermont Attorney General’s Office accused the creditors of attempting to ”claw back” money owed to the more than 440 employees. Alexandra Edelman, attorney for Koffee Kup, characterized the petition as “a blatantly bad faith attempt” to get around a state court order directing of money “earned from years of hard work by numerous former employees” of Koffee Kup.

“[T]he timing of the Petition appears calculated, suspicious, collusive and malicious given that it was filed on [Aug. 16] ... just one business day after the final portion of the sale of the [Koffee Kup] assets — the closing on the real estate — occurred, allowing for the release of a substantial amount of funds that were being held back until the sale was fully consummated, and just three business days before payment of the [paid-time-off] Obligation was scheduled,” wrote Edelman.

She had previously noted in state court that the proceeds from the sale to Flowers Foods and accounts received after closure, that there were substantial additional funds, “in the multi-millions,” available for distribution to the creditors, including the former employees.

On Friday, the petitioners backed off on their request to withhold payment, filing a document in conjunction with the Attorney General’s Office stating they did not object to a release of the funds.

“This is significant since the Petitioning Creditors had previously opposed the Receiver’s immediate payment of the PTOs,” wrote Brown.

Brown had scheduled a hearing for Tuesday, but in the order issued on Friday, postponed it until Teplitsky can finish disbursing the PTO and turn over responsibility to the dissolution receiver, Linda Joy Sullivan.

Bob Audette can be contacted at