NEW YORK — Old HB, Inc. (Hostess Brands, Inc.) and five affiliated debtors and debtors in possession filed a lawsuit on Aug. 7 in the U.S. Bankruptcy Court for the Southern District of New York against Salt Lake City-based Papa Pita Bakery alleging defects in the latter’s manufacturing, baking and/or packaging of product led to a recall of 43,695 units of bread and losses of nearly $158,000 for Old HB.

According to the Aug. 7 filing, Old HB and Papa Pita entered into a one-year agreement on Feb. 8, 2012, under which Papa Pita agreed to bake Kirkland Signature Multigrain Rounds for Old HB to be resold to Costco stores. Kirkland Signature is the house brand of Costco.

Papa Pita was “responsible for the manufacturing, baking and packaging of the multigrain bread, all pursuant to the recipe and other specifications and requirements of Costco.” In addition, Papa Pita was required to fill Old HB’s bread orders by “manufacturing orders at Papa Pita’s Salt Lake City County, Utah, facility; and delivering such orders to I.B.C.’s Ogden, Utah, location or Henderson, Nevada, location, as requested by I.B.C., five days a week, each product in each such order shall have at least nine days of shelf life remaining at the time of delivery to I.B.C.”

The bread also was to be “free from defects in workmanship and materials, and (would) comply with applicable Food and Drug Administration laws,” according to the agreement.

Between Feb. 7 and Feb. 21, 2012, Old HB said it purchased 88,793 units of multigrain bread from Papa Pita, and between Feb. 21 and March 6, 2012, Old HB paid Papa Pita $267,266.93 for the bread.

But according to Old HB, Costco lodged several complaints regarding the delivered packages of bread, citing defects such as “dark, burnt, thin, cracking, crumbling and tearing multigrain bread.” Costco’s complaints also related to Papa Pita’s failure to seal the internal packaging, which could dry out and the bread and cause it to crumble, Old HB said in the lawsuit.

On Feb. 21, 2012, the companies decided to institute a recall of the defective multigrain bread, leading to the recall of 43,695 units. Old HB said it then expended “significant resources” to pick up the recalled product from Costco stores and have it either disposed of or shipped back to the delivery locations for pickup and examination by Papa Pita.

In total, Old HB said it suffered at least $131,521.95 in direct losses. The company said it paid Papa Pita for the products but was unable to obtain payment from Costco due to the defective nature. Old HB said it suffered at least an additional $26,467.98 in lost profits — Old HB bought the bread for $3.01 per unit from Papa Pita but planned to sell it to Costco for $4.20 per unit, a $1.19 gross profit margin.

Lastly, Old HB said it has been damaged by Papa Pita’s refusal to return a $72,882.41 deposit credit.
In total, Old HB is seeking about $230,000 from Papa Pita.

Old HB said it has exchanged several letters with Papa Pita to resolve the dispute, but refusal to comply led the company to file the lawsuit.

Papa Pita did not respond to requests for comment from