In re Koffee Kup Bakery, Inc.

In re: Koffee Kup Bakery, Inc., Putative Debtor.

No. 21-10168

United States Bankruptcy Court, D. Vermont

January 14, 2022

Chapter 7

Alexandra Edelman, Esq., and Ryan Long, Esq. Primmer Piper Eggleston & Cramer Burlington, VT For the Putative Debtor

David Dunn, Esq. Phillips, Dunn, Shriver & Carroll, PC Brattleboro, VT For Linda Joy Sullivan

Barbara Ruth Blackman, Esq. Lynn, Lynn, Blackman &amp Manitsky, PC Burlington, VT For Lily Transportation, Inc. (Local Counsel)

Andrew Levin, Esq. and David Reier, Esq. Arent Fox LLP Boston, MA For Lily Transportation, Inc.

Timothy Netkovick, Esq. The Royal Law Firm Springfield, MA For Bernardino's Bakery, Inc.

John T. Carroll, Esq. Cozen O'Connor Wilmington, DE For Ryder Truck Rental, Inc.

Tavian Mayer, Esq. Mayer & Mayer South Royalton, VT For Hillcrest Foods, Inc.

MEMORANDUM OF DECISION MEMORIALIZING BENCH RULING GRANTING MOTIONS TO DISMISS INVOLUNTARY PETITION

Colleen A. Brown United States Bankruptcy Judge

The Petitioners filed an involuntary chapter 7 case against the Putative Debtor and, in response, the Putative Debtor and the receiver in the Putative Debtor's state court dissolution proceeding each filed a motion to dismiss that petition. At the conclusion of an evidentiary hearing on the petition and motions to dismiss, the Court entered a bench ruling finding the petition to be insufficient and dismissing the case.

The Court enters this memorandum of decision to memorialize the findings of fact and conclusions of law it articulated in its bench ruling, and to explain its rationale in greater detail.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference entered on June 22, 2012. This is a core proceeding arising under Title 11 of the United States Code as defined in 28 U.S.C. § 157(b)(2)(A) and (O), over which the Court has authority to enter a final judgment.

PROCEDURAL HISTORY

Petitioning Creditors Bernardino's Bakery, Inc. ("Bernardino's"), Lily Transportation Corp. ("Lily"), Hillcrest Foods, Inc. ("Hillcrest"), and Ryder Truck Rental, Inc. ("Ryder") (collectively, the "Petitioners"), filed this involuntary chapter 7 case against Koffee Kup Bakery, Inc. (the "Putative Debtor") on August 16, 2021 (doc. # 1).^[1]

On August 27, 2021, the State of Vermont, through the Office of Attorney General Thomas J. Donovan, Jr. (the "AGO"), filed a motion for leave to file a memorandum of law, as intervenor or alternatively as amicus curiae, seeking an order permitting the receiver in the state court KeyBank action, Ronald Teplitsky to pay the Putative Debtor's employees the paid time off ("PTO") they were owed (doc. # 7, the "Motion to Intervene"). On September 7, 2021, the Petitioners filed a response to the Motion to Intervene (doc. # 22) arguing inter alia that §§ 362 and 543 prohibited Mr. Teplitsky from disbursing any funds other than to the duly appointed trustee in this bankruptcy case following entry of the order for relief.^[2] The Petitioners did not take a position on the AGO's request to intervene in this case.

Also on September 7, 2021, the Putative Debtor filed a motion to dismiss the involuntary position with a memorandum of law (doc. # 23) seeking dismissal pursuant to §§ 105 and 303, or in the alternative abstention pursuant to § 305, as well as costs, attorneys' fees, and damages pursuant to §303(i), and an order directing the Petitioning Creditors to post a bond pursuant to § 303(e). Linda Joy Sullivan, the receiver in the state court dissolution proceeding, also filed a motion to dismiss the involuntary position with a memorandum of law (doc. # 24) seeking dismissal pursuant to § 303, or in the alternative, abstention under § 305 in the form of dismissal, or suspension of all proceedings in this case pending resolution of the state court actions.

Also on September 7^th, Ms. Sullivan filed a response in support of both the Motion to Intervene and the AGO's underlying request that this Court permit Mr. Teplitsky to make the PTO payments (doc. # 25), as did the Putative Debtor (doc. # 26). The Putative Debtor also requested the Court adjudicate its pending motion to dismiss the involuntary petition prior to considering turnover under § 543, asserting the latter issue would be moot if the Court granted dismissal of this case (doc. # 26, p. 2).

On September 10, 2021, Ms. Sullivan filed a reply (doc. # 27) requesting the Court grant the Motion to Intervene, permit Mr. Teplitsky to pay the PTO, and excuse both receivers from complying with any § 543 turnover requirements pending a decision on dismissal or abstention. The AGO filed a reply (doc. # 28) joining the motions to dismiss and requesting the Court either dismiss the petition or permit Mr. Teplitsky to pay the PTO. The Putative Debtor likewise filed a reply (doc. # 29) requesting dismissal or abstention.

On September 15, 2021, the Court entered an order (doc. # 30) granting the Motion to Intervene. The Court treated the portion of the AGO's filings requesting this Court permit Mr. Teplitsky to make the PTO payments (and related filings pertaining to the PTO) as a request for a determination by this Court whether the PTO constitutes property of the estate such that the § 362 automatic stay applies and, if so, whether relief from the automatic stay is warranted (the "Automatic Stay Matter"), and set a schedule on resolution of the Automatic Stay Matter and the portion of the Putative Debtor and Ms. Sullivan's filings requesting suspension or abstention with respect to all proceedings in this case under § 305 (the "Suspension/Abstention Matter"). The Court deferred resolution of the request for turnover under § 543 (the "Turnover Matter") and adjudication of the petition and dismissal under §§ 105 and 303 (the "Adjudication/Dismissal Matter") until after resolution of the Automatic Stay and Suspension/Abstention Matters, and deferred a decision on the Putative Debtor's request for sanctions under § 303(i) or the posting of a bond under § 303(e) until after a trial on adjudication of the petition. Finally, the Court determined Mr. Teplitsky and Ms. Sullivan were exempt from the duty to turnover any funds or other alleged property of the estate, pursuant to § 543, until after the Court's resolution of the Turnover Matter.

The Court entered an order on September 17, 2021 (doc. # 35), which it subsequently clarified (doc. # 41), permitting Mr. Teplitsky to pay the PTOs, thus resolving the Automatic Stay Matter. With respect to the Abstention/Suspension Matter, the Court temporarily suspended bankruptcy proceedings to allow Mr. Teplitsky to complete his responsibilities as receiver in the state court KeyBank action, after which the Court would establish a schedule to address the Turnover, Abstention/Suspension, and Adjudication/Dismissal Matters. Mr. Teplitsky was later discharged as receiver in the state court KeyBank action and the Court excused him from further participation in this case (doc. # 79).

On November 1, 2021, the Court entered a stipulated discovery and pre-trial scheduling order (doc. # 62), which set the evidentiary hearing to commence on December 20, 2021. Pursuant to that scheduling order, the Petitioning Creditors filed their opposition to the pending motions to dismiss on November 5, 2021 (doc. # 71), and Ms. Sullivan and the Putative Debtor filed replies on November 12, 2021 (doc. ## 85, 87).

Pursuant to the Court's December 10, 2021 scheduling order (doc. # 98), on December 13, 2021, the parties filed a joint notice of evidentiary hearing (doc. # 100) and the Petitioners filed a memorandum regarding certain discovery issues (doc. # 101). The Court held a final pre-trial conference on December 15, 2021 and issued its final pre-trial scheduling order on December 16, 2021 (doc. # 102). Pursuant to that order, the parties filed a stipulation regarding the remote appearance of certain witnesses (doc. ## 103, 124), which the Court granted (doc. ## 115, 130). The parties also filed a stipulation regarding remote witness oaths (doc. # 125), as well as a stipulation more specifically articulating which aspects of Petitioners' claims the Putative Debtor and Ms. Sullivan alleged were the subject of a bona fide dispute (doc. # 126). Additionally, the parties filed exhibits lists that included a stipulation as to which exhibits they agreed were admissible at trial (doc. ## 106-113, 117, 123).^[3]

On December 17, 2021, the Petitioners filed a memorandum of law in support of their argument, which had been raised for the first time in the joint notice of evidentiary hearing, that the Putative Debtor and Ms. Sullivan lacked standing to oppose entry of an order for relief or to file motions to dismiss (doc. # 105). On the same date, the Putative Debtor and Ms. Sullivan each filed a responsive memorandum of law (doc. ## 118, 119), and the Court issued an order rejecting the Petitioners' standing argument and indicating the trial would proceed as scheduled (doc. # 120).

The Court held a two-day trial on December 20 and 21, 2021, at which it heard remote testimony from Eric Bromage on behalf of Lily, Michael Mandell on behalf of Ryder, Carmen Pascuito on behalf of Hillcrest, Sergio Goncalves on behalf of Bernardino's Bakery, and Justin Heller as state court counsel for Mr. Teplitsky, as well as in-person testimony from Ms. Sullivan. The Court admitted all exhibits into evidence at the evidentiary hearing.^[4] At the conclusion of the hearing, the Court entered its bench ruling granting the motions to dismiss pursuant to §§ 303(b)(1) and 305(a)(1). After a recess, the parties indicated they had reached a tentative agreement that the Putative Debtor would withdraw its request for sanctions under § 303(i) in exchange...