Business & Tech

Necco’s new owner sued for failing to make final purchase payments

Necco wafers on the production line in Revere.
John Tlumacki/Globe file photo
Necco wafers on the production line in Revere.

The sale of Necco has hit another sour patch.

Round Hill Investments LLC, which bought New England Confectionery Co. in dramatic fashion in May after the initial winner of a bankruptcy auction reneged on its bid, is now being sued for breach of contract and “unfair and deceptive business practices,” by the court-appointed trustee handling the bankruptcy case.

In a complaint filed in US Bankruptcy Court in Boston last week, trustee Harry B. Murphy accused Round Hill of trying to back out of a final payment of $1 million by claiming it was unaware of a warning issued to Necco by the Food and Drug Administration in May regarding “serious” code violations, including evidence of “widespread rodent activity” and excrement pellets “too numerous to count,” stemming from an inspection of Necco’s Revere plant late last year.

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Murphy’s complaint blasted Round Hill, an entity owned by billionaire C. Dean Metropoulos, and his sons Evan and Daren, for its “cynical conduct” and for contriving “a bad-faith, meritless allegation.”

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The complaint also said that prior to Necco’s May 23 bankruptcy auction, Murphy had informed Round Hill and the other bidders of the FDA’s warning letter and of the federal agency’s acknowledgment that Necco had taken corrective action, which the FDA still needed to review.

The complaint marks the latest twist in what has been a contentious few months for the struggling company, which traces its roots to 1847 and manufactures candies such as Necco Wafers, Sweethearts, and the Sky Bar.

Murphy filed the complaint July 3, after Round Hill missed a June 30 deadline to pay the first of four $250,000 installments as part of its $17.33 million purchase of Necco. Round Hill, which in 2013 also bought Twinkies maker Hostess Brands out of bankruptcy, made an initial cash payment of $16.33 million May 31 to purchase Necco under the entity Sweetheart Candy Co. LLC, named after Necco’s classic heart-shaped candies.

Last month, an attorney for Round Hill e-mailed Murphy, informing him of several “critical and unexpected matters that have had a significant impact on [Round Hill’s] ability to revive Necco and try to turn this struggling business around,” and referenced the unresolved FDA violations, according to Murphy’s complaint.

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In the e-mail to Murphy, according to the complaint, Round Hill said the “widespread, and national, negative press coverage . . . regarding Necco’s gross negligence with their facilities and operations, and possibly of its product contamination . . . was stunning and unprecedented and totally disrupted our financing commitments and plans for rebuilding a Necco platform.”

Murphy’s complaint revealed that Necco temporarily shut down for seven business days starting May 29 for “cleaning and remediation.” He stated in the filing that Round Hill “knew of the shutdown because it had authorized and directed the shutdown,” but that in its e-mail to him, Round Hill said it was unaware that the plant had been closed.

In a follow-up June 27 letter quoted in the complaint, Round Hill informed Murphy it had spent more than $600,000 to address the FDA violations. As of the July 3 court filing, Round Hill estimated the expenses exceeded $1 million.

After missing the June 30 installment payment of $250,000, Round Hill sent another letter to Murphy, informing him that because of the unexpected expenses it had incurred, it is excused from its obligation to pay any of the four remaining installment payments totaling $1 million.

Murphy declined to comment, citing the pending lawsuit. Round Hill did not return calls and e-mail seeking comment through its public relations firm and local attorney. Round Hill had not filed a response to Murphy’s complaint as of Thursday.

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Round Hill was one of four bidders for Necco’s assets at auction after the wholesaler filed for Chapter 11 bankruptcy protection in April, in response to a petition filed by three creditors trying to force it into an involuntary bankruptcy, claiming they were owed more than $1.6 million.

After the May 23 auction, it appeared that Necco would be taken over by family-owned Spangler Candy Co. of Ohio, makers of Dum Dums lollipops and the orange marshmallow Circus Peanuts candy. It had a winning bid of $18.8 million, beating out Round Hill’s $18.6 million. A day later, Spangler informed Murphy that it was “unwilling to close [the sale] without a substantial price reduction.”

In a scramble to complete the sale before the end of May — the deadline set by Necco to find a new buyer in order to avoid laying off its entire workforce — Murphy asked Spangler and Round Hill to make one last bid. Only one came in — Round Hill’s $17.33 million.

But Murphy’s lawsuit contends that immediately after taking over Necco’s assets, Round Hill “neglected to open an operating account,” which impaired production at Necco.

He is seeking damages, including the $1 million payment from Round Hill as well as legal fees and costs, according to the lawsuit.

The future of the country’s oldest continuously operating candy company remains uncertain beyond November, when its lease at its Revere headquarters is scheduled to expire. According to Murphy’s complaint, however, Round Hill reportedly stated that “closing down for unplanned days” to address the FDA violations resulted in Round Hill having to “extend our production schedule until mid-December.”

Katheleen Conti can be reached at kconti@globe.com. Follow her on Twitter @GlobeKConti.