Judge: Crumbs-Branded Cupcakes Can Stay in Stores for Now

As Crumbs Bake Shop Inc. began its final descent into bankruptcy late last year, the cupcake maker’s newly appointed chief executive, Ed Slezak, implemented a new strategy to help boost the company’s revenue: Sell Crumbs-branded products at everyday stores like Target and BJ’s Wholesale Club.

Crumbs collaborated with companies to create mass-market cupcakes and bake-at-home Crumbs mixes, but the new ventures had only been rolling a few months when Crumbs abruptly closed all its stores and sought Chapter 11 protection in July.

Now, with the majority of Crumbs’ assets sold to a partnership between CNBC reality show host Marcus Lemonis and Dippin’ Dots owner Fischer Enterprises that plans to relaunch Crumbs stores, the companies that struck those licensing agreements are left wondering: What about us?

A bankruptcy judge in New Jersey considered that question Monday in response to an urgent request from Houston-based Coastal Foods Baking, a commercial bakery that said the Lemonis-Fischer group sent it a cease-and-desist letter Sept. 23 to prevent it from fulfilling new orders for Crumbs-branded baked goods.

With hundreds of cupcakes already in the process of being made at the time the letter came, Coastal Foods President and Chief Executive William Evans said in a court filing that it will “have to destroy the food product” and eat $45,850 in costs if Lemonis-Fischer doesn’t back down.

U.S. Bankruptcy Judge Michael Kaplan told Coastal Foods during a contentious hearing Monday that it could fill the two new cupcake orders, though any further production must wait until the parties determine whether Coastal Foods still has any rights under the licensing agreement and whether the licensing agreements were included in the bankruptcy sale.

The judge also ruled that $6,668 in expected royalties from the new orders—10% of the price Coastal earned on the sales—be held in an escrow account until the court decides who deserves the money.

An attorney for the Crumbs bankruptcy estate tried to distance himself from the royalties during the hearing, saying the estate no longer has claim to them. But an attorney for Lemonis-Fischer also wouldn’t take ownership of the money. In addition to Coastal Foods, the licensing dispute affects several other companies that created and sold Crumbs products.

In court papers filed last week, Mr. Evans said he tried to resolve the dispute with Lemonis-Fischer by negotiating a new licensing agreement, but the talks quickly soured when Mr. Lemonis proposed raising the royalty rate.

Judge Kaplan told all sides to come back on Halloween to try to resolve the issues. “Bring candy,” Judge Kaplan said as he scheduled the hearing. “Or cupcakes.”

Write to Sara Randazzo at [email protected]. Follow her on Twitter at @sara_randazzo.