Koffee Kup purchases Vermont Bread

On April 26, employees of Vermont Bread, a Brattleboro subsidiary of Burlington-based Koffee Kup, arrived at work to find themselves out of jobs. 

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BRATTLEBORO — An attorney for the defunct Koffee Kup Bakery is asking a federal bankruptcy judge to dismiss a petition for involuntary bankruptcy filed against her client by four companies that say it owes them more than $2 million.

In documents filed Tuesday afternoon, Alexandra Edelman characterized the petition as “a blatantly bad faith attempt” to get around a state court order directing payment of more than $838,000 in paid-time-off balances “earned from years of hard work by numerous former employees” of Koffee Kup in Burlington, Vermont Bread in Brattleboro and Superior Bakery in North Grosvenor Dale, Conn.

“[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 also wrote that attorneys for Bernadino’s Bakery, Ryder Truck Rental, Lily Transportation, and Hillcrest Bakery were in contact with the court-appointed receiver, Ronald Teplitsky, just days before filing the petition in federal court.

“Thus, the timing of the filing of the Petition ... unquestionably supports the conclusion that the filing was a litigation tactic to prevent the PTO from being paid, particularly considering the different treatment of the PTO Obligation under the Bankruptcy Code,” wrote Edelman.

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.

Just two weeks before the closure, American Industrial Acquisition Corporation purchased a majority share in Koffee Kup and its two affiliates.

Despite “very substantial efforts” to obtain additional financing or investors, wrote Jeff Sands, a “turnaround specialist” at Dorset Partners and a senior advisor in North America for AIAC, in a notice of closure, AIAC had not received offers that were acceptable to the senior lender, KeyBank.

“Because of this, continuing operations is no longer commercially reasonable or prudent,” wrote Sands in the notice.

“For each of the last four years Koffee Kup has suffered substantial financial losses and was unable to find a way out of their troubles,” stated Sands in a press release following the closure of the three bakeries.

In early June, Flowers Foods, based in Georgia, purchased all of the assets except the real estate, but stated it had no plans to reopen any of the bakeries at the time. The bakeries remain closed.

While the details of the sale have been kept confidential at the request of Flowers Foods, Edelman wrote that there are substantial additional funds, “in the multi-millions,” that are available for distribution to the creditors, including the former employees.

Following the sale of the assets, KeyBank and the Vermont Economic Development Authority received the $8 million that was owed to them by the bakery. And on July 15, Hoar ordered Teplitsky to pay the paid-time-off balances to the ex-employees. But Teplitsky ran into a problem with the payroll processing firm the next day and was unable to make the transaction. He signed up with a new processor, but the payments were not made prior to the filing of the petition for involuntary bankruptcy, which put a hold on the disbursement of any other funds.

“Despite the July 15 Order, [Teplitsky] inexplicably delayed payment of the PTO Obligation and then ultimately assured the [Koffee Kup entities] and Vermont Attorney General’s Office that payment of the PTO Obligation would be made no later than [Aug. 19],” wrote Edelman. “Coincidentally, Petitioners filed the Petition on August 16, 2021, just three days before the scheduled payment of the PTO Obligation.

“The Petitioners were well aware of the [paid-time-off] Order, were involved in the hearings leading up to that Order and when the Order was granted did not object to it or file an appeal,” wrote Edelman. “They were also in communication with [Teplitsky] regarding significant milestones in the Bank Action.”

In an affidavit filed with the federal court, Sands, who identified himself as the chief restructuring officer of KK Investment Company, wrote that starting with a new payroll processor “created ample time for the Petitioners to file the Petition ... just three days [emphasis included in document] before the PTO Obligation was to be satisfied ...”

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Sands also wrote that the financial claims by the creditors in the petition are “inconsistent” with an accounting provided by the former chief financial officer of Koffee Kup.

Edelman wrote that despite months of litigation and negotiation between Koffee Kup and its creditors, including those petitioning for involuntary bankruptcy, to facilitate an equitable distribution of remaining funds, the petitioners filed their motion “in a calculated effort to get an unfair advantage through the bankruptcy process over the substantial surplus funds that have unexpectedly resulted from the sale of the assets of not only [Koffee Kup], but also its affiliated operating entities, [Vermont Bread Company and Superior Baking] ...

“When considering the totality of circumstances around the Petition’s filing,” she continued, “the only conclusion that can be reached is that the Petition was filed in bad faith and, thus, should be dismissed.”

Edelman also noted that bankruptcy proceedings are not necessary in this case because neither Koffee Kup nor its related affiliates are in operation and there are sufficient funds to satisfy all creditors.

In her motion to dismiss the involuntary petition, Edelman wrote that the dissolution is properly before Chittenden Superior Court Judge Samuel Hoar, who has presided over the liquidation and sale of the Koffee Kup’s assets from the start. The receivership was recently transferred from Teplitsky to Linda Joy Sullivan, of Dorset, who was appointed by Hoar as dissolution receiver.

Sullivan told the Reformer that other than she and Sands living in the same town, “there is no business relationship or affiliation” between the two of them.

Sullivan, through her attorneys, Phillips, Dunn, Shriver & Carroll, also filed a motion to dismiss the petition.

“The KeyBank Receiver was appointed to protect the KeyBank Collateral but was not given authority to wind up the affairs of the three entities after the KeyBank Collateral had been liquidated.”

Her attorneys noted Ryder Truck and Lily Transportation are creditors of Koffee Kup, but not the other two entities. Bernadino’s and Hillcrest are creditors of both Koffee Kup and Vermont Bread, but not Superior Bakery, they also noted.

“Nothing in the Involuntary Petition states that Vermont Bread Company and Superior Bakery, Inc. are separate and distinct entities from Koffee Kup Bakery, Inc., or that petitioners Ryder Truck, Bernadino’s Bakery, and Hillcrest Food did not have claims against all three entities,” wrote Sullivan’s attorneys. “This is an inaccurate statement. Vermont Bread Company and Superior Bakery, Inc. are separate entities, not mere tradenames used by Koffee Kup Bakery, Inc. In essence, the Petitioners seek to treat three separate entities as one and to substantively consolidate the claims and assets of those three entities.”

Sullivan’s attorneys called the filing “an end run” around the law by filing the petition naming only one entity and then identifying the other entities as mere tradenames.

“Accordingly, there is no subject matter jurisdiction for the petition to the extent it alleges to include either Superior Bakery or Vermont Bread. Therefore, the entire petition should be dismissed.”

Last week, the Vermont Attorney General’s Office filed a motion to intervene in the federal court case, contending the petition was an attempt to “claw back” the paid-time-off owed to the employees.

“There can be no question here that the Petitioner-Creditors are attempting to affect the economic well-being of hundreds of Vermont employees, by stalling the payment of the employees’ PTO, and worse, apparently trying to reclaim the pool of PTO money for themselves, after they agreed to paying it out,” wrote Assistant Attorney General Justin Kolber.

On Tuesday, the petitioners asked the court to deny the AG’s motion to intervene, but Sullivan’s attorneys filed an additional motion asking the federal court to allow, if it agrees to let he petition go forward, the Attorney General’s Office to participate.

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