Central Grocers Bankruptcy Trustee Files Suit Against Ex-Directors

The Chapter 7 bankruptcy trustee of Central Grocers Inc. (CGI), a nearly century-old Joliet, Ill.-based company and once one of the nation’s largest grocery cooperatives, filed suit on Nov. 19 against the former directors and officers of the company, seeking more than $80 million in damages.

Howard B. Samuels, the trustee for the bankruptcy estate of CGI, as well as those of Strack and Van Til Super Market, Inc. and SVT LLC, additionally filed 12 related lawsuits against stores owned by the former directors, seeking $30 million-plus in damages allegedly related to money taken from and/or owed to CGI in the final months before The Coca-Cola Co., General Mills Inc., Mars Financial Services and Post Consumer Brands filed a Chapter 7 involuntary bankruptcy suit in pursuit of debt payments in May 2017. 

According to the lawsuit: “CGI’s former directors ignored or consciously disregarded their fiduciary duties to CGI because of a fundamental misalignment of interests. Every CGI director owned and/or managed retail grocery stores that were CGI customers. The directors were thus, in effect, CGI’s customers, and they treated CGI like a buying club that existed solely to provide their stores with groceries at the cheapest price, rather than like a legal corporate entity with rights and interests independent from their own interests in acquiring cheap groceries. The directors treated [SVT LLC] — CGI’s retail subsidiary — as simply a tool to leverage lower prices for their stores, regardless of what was in SVT’s best interests. The officers acted to advance their own interests and the directors’ interests, not the debtors’. The defendants’ conflicted decisions, gross negligence and conscious disregard for the debtors’ interests cost the debtors tens of millions of dollars in damages.”

As reported by legal publication Law360, the complaint additionally alleges that the directors were also acting in their own interests when they approved a massive “patronage rebate”– which the suit characterized as “really, a dividend” – to CGI’s members, including their own businesses, rather than investing or paying down debt, and that the directors failed to require the wholesaler’s customers to maintain buying deposits, which CGI could have recourse to if a customer failed to pay for groceries it had purchased. 

Since those accounts were “woefully underfunded,” CGI was saddled with millions in unpaid accounts when it went bankrupt, the suit claims.

Samuels’ lawsuit goes on to blame decreased sales at SVT, CGI’s largest customer, managed by Strack and Van Til Super Market Inc., for CGI’s fatal decline, about which the directors did “virtually nothing,” according to the trustee, who says of directors: “They generally saw the declines at SVT as a Strack problem, not a CGI problem. But it was the sales decline at CGI’s largest customer that ultimately caused CGI’s bankruptcy.”

Three directors named in the suit who were appointed to Strack wouldn’t pursue a sale of SVT in 2016 so that it would keep buying groceries from CGI, although a sale could have enabled the company to pay off Strack’s creditors and shareholders, the suit contends, adding that “the SVT retail stores ultimately sold in bankruptcy for far less than SVT's outstanding liabilities [left] tens of millions of dollars in unpayable creditor claims because the CGI appointees willfully or recklessly neglected Strack's interests.”

Further, some CGI officers sought and approved more than $3 million in stock redemptions at an inflated price and in violation of the grocer's bylaws, the suit alleges. According to the complaint, they were able to get their shares redeemed in a cash lump sum instead of a five-year promissory note by leaving the company when they "knew the CGI ship was sinking."

The named defendants in the suit, which was filed in U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, are John Coari, John Cortesi, Anthony Dal Pra, James Dremonas, Tony Ingraffia, Maria Kamberos, John Kotara, Timothy Kubis, Joseph Kumkoski, Frank Kumkoski, John Lagestee, Kerry Lavelle, Robert Lee, Alfredo Linares, Kenneth Nemeth, Robertino Presta, John Regas, James Robertson, John Sullivan and Lavelle Law Ltd.

In July 2017, members of Strack & Van Til's founding families, including current President and CEO Jeff Strack, successfully bid on 20 Strack & Van Til supermarkets in a bankruptcy auction, buying them back from bankrupt CGI.