Former Hope bakery owner sues East Baking for $5.6 million over unpaid sale note, rent and supplies

HOPE, Ark. – The Indiana company that sold the Hope bakery to East Baking Company in 2023 is suing East Baking and its Hope subsidiary in federal court, saying the buyers never paid off the note on the plant’s equipment, stopped paying rent on the building and still owe more than $2 million for packaging and ingredients they used in the months after the sale.

Southern Bakeries LLC and its parent, Harlan Bakeries LLC of Avon, Ind., filed the breach-of-contract suit Friday in U.S. District Court in Texarkana, Ark., against East Baking Company Inc. of Holyoke, Mass., and Hope Baking Company Inc. The companies are asking for at least $5.23 million under the sale agreement and a separate $403,451 under the lease on the plant at 2700 E. Third St., plus attorney’s fees. They have demanded a jury trial.

The suit also asks the court to declare that Southern Bakeries holds a first-priority lien on everything Hope Baking owns and to order the assets turned over so they can be sold to pay the debt. The complaint says the equipment is likely worth less than what is owed.

Hope Baking closed the plant July 25, putting about 250 people out of work. Two former employees have already sued the companies in the same court under the federal WARN Act, saying they got one week’s notice instead of the 60 days the law requires. The companies have denied violating the law, saying “dire financial circumstances” excused them from giving full notice.

How the sale was structured

The complaint and the 120-page sale agreement attached to it lay out terms that had not previously been made public.

Southern Bakeries had owned and operated the Hope plant since about 2005. In the fall of 2022, Harlan and East Baking began negotiating a sale, and East Baking took over management of the plant on Jan. 1, 2023. The asset purchase agreement was signed Jan. 16, 2023, and the sale closed March 29, 2023, with Hope Baking, a new Arkansas corporation formed for the deal, taking on East Baking’s obligations.

The agreed price was $5.75 million: $2.25 million for the business assets and $3.5 million for the real estate. East Baking paid $750,000 in cash at closing. Hope Baking signed a $1.5 million promissory note for the rest of the equipment price, at 7 percent interest, due in full by March 31, 2025. East Baking guaranteed the note.

The agreement also gave the sellers 90 days to repair three leaking storage silos. If they did, the price would go up by $750,000, added to the note. The complaint says the repairs were made, putting the note’s principal at $2.25 million.

The real estate was never transferred. Instead, Hope Baking leased the plant from Southern Bakeries for $20,500 a month, with annual cost-of-living increases, under a lease that contemplated a later closing on the property once environmental conditions were met.

What the sellers say is owed

According to the complaint, Hope Baking never paid the note when it came due in March 2025 and has not made any of the monthly interest payments in 2026. As of Sept. 8, the unpaid interest was $79,222.

The largest single claim is for packaging and ingredients. Under the sale terms, Southern Bakeries agreed to let Hope Baking keep using its inventory of bags, labels, boxes and ingredients for at least six months after closing, with Hope Baking counting what it used each month and paying for it. The complaint says Hope Baking used about $3.07 million worth of that inventory from March through September 2023 and paid about $825,000, leaving $2,244,815 unpaid. In September 2023, Southern Bakeries sent representatives to Hope to count inventory with Hope Baking’s staff present, and the complaint says Hope Baking agreed with the numbers at the time.

The suit also claims:

$216,429 in payments from customers that went to Hope Baking for goods Southern Bakeries had sold, after Hope Baking “took steps to transition customers” to itself before and after the closing.
$244,690 for products Hope Baking made for its own customers in early 2023, before the sale closed, using Southern Bakeries’ workers, production line and ingredients. The complaint says the products were destroyed and never sold.
$73,591 for continued access to Southern Bakeries’ computer, warehouse and accounting systems and the staff who ran them during the transition.
$46,619 for a vendor check that should have gone to Southern Bakeries but that Hope Baking cashed.
$26,262 for finished goods Southern Bakeries produced that were sold to East Baking.
$48,743 for a purchase-price adjustment under the sale agreement.

On the lease, the complaint says Hope Baking stayed in the building through the end of July but paid no rent for its last seven months, a total of $143,500, and left $259,951 in property taxes unpaid.

The complaint says the sellers’ lawyers notified the companies’ lawyers of the claims before filing and that nothing was paid.

A Tennessee judgment, too

Court orders attached to the complaint show the two companies have already lost a related case in Tennessee.

In a dispute in Hamilton County Chancery Court in Chattanooga that began with a flour supplier’s suit over a bakery account, Southern Bakeries brought claims against Hope Baking and East Baking. According to a May 15 order, the companies’ lawyers were allowed to withdraw in March, the companies were ordered to hire new counsel by April 9 and did not, and they had already been held in contempt for failing to pay money into the court’s registry, failing to answer post-judgment discovery and failing to produce East Baking owner Danny Z. Serra for a deposition. The order says court staff were sent into the hallway to look for the companies’ representatives before the final pretrial conference went forward without them.

Chancellor Jeffrey M. Atherton dismissed the companies’ counterclaims and entered a default judgment of $685,000 against them in favor of Southern Bakeries. In July, he ordered them to pay an additional $427,880 in Southern Bakeries’ attorney’s fees.

What comes next

The case has been assigned to U.S. District Judge John Thomas Shepherd, who also has the WARN Act case. No lawyer had entered an appearance for East Baking or Hope Baking as of Friday evening, and the companies have not yet responded to the complaint.

Southern Bakeries and Harlan Bakeries are represented by Charles T. Coleman of Wright, Lindsey & Jennings in Little Rock and Paul D. Vink of Bose McKinney & Evans in Indianapolis.

Hope Baking was sued by at least three creditors over unpaid bills beginning in 2023, and each of those cases ended in a default judgment, TXKtoday reported in July. The plant had announced a $37 million expansion in January 2024 that was expected to add 266 jobs.