Sherwood bakery fights foreclosure by bank.

An 80-year-old bakery in Sherwood is battling a foreclosure suit while trying to get its financial house in order.

In the May lawsuit, Mercantile Bank says Koehler Bakery, Koehler's Kitty Kitchens and members of the Koehler family defaulted on a 1998 promissory note for which they pledged the bakery property at 5902 Warden Road as collateral. The bank wants to use the property to recoup $599,988 in unpaid principal plus interest.

The Koehlers challenged Mercantile's claims in a June answer and motion for dismissal of the foreclosure filing, saying the claims should be barred for several reasons, including usury and impairment of collateral. The Koehlers also accused Mercantile of a "breach of good faith and fair dealing."

However, company president Walter Koehler Jr. says an out-of-state bank recently has approved a loan that should halt the foreclosure and keep the bakery in business. He declines to provide further details but says the loan is "extremely important" to the bakery and should be funded in about two weeks.

Bob Birch, president of Mercantile Bank of Arkansas, also declined comment on the lawsuit and the Koehlers' answer. Asked in general how often a bank seeks a foreclosure, Birch replied: "Foreclosure is used as a remedy for collection when all other opportunities for payment are exhausted."

According to the complaint by Mercantile, Koehler Bakery executed a promissory note at 10 percent interest for $500,000 in July 1991. In October 1998, a final renewal of the note was executed for $649,988.

The note then came due on Jan. 3, 1999. In its further court filings, Mercantile points out that it did not seek foreclosure until almost five months later.

The bank says it sent "demand and/or notification letters" to the bakery in March.

When contacted following the June answer, Walter Koehler still would say little about the foreclosure suit. He says the bakery paid the bank $100,000 in October 1998 and in March made an offer of a payment plan - which was refused.

It's not a question of business being bad though, Koehler said in June. After a few tough years, "Now we've got more business than we can handle."

The bakery was working day and night to meet orders from vendors and other clients, he said then.

Koehler Bakery, which makes more than 200 different items from pies to cakes and cookies, was started in 1919 by Walter Koehler Sr. After operating in North Little Rock, the bakery moved to Sherwood in 1971.

The Sherwood plant has since grown to 76,000 SF and employs about 100. According to the court filings, a 1997 appraisal valued the plant and property at $1.3 million.

The foreclosure is not the only suit filed against the bakery in 1999. In March, Ed's Supply Company of Little Rock was awarded a default judgment by Pulaski Circuit Judge John Ward in its suit against Koehler Bakery seeking $12,134 for equipment ordered by the bakery.

The bakery did not challenge the judgment within the 20-day time limit. Koehler says the bill was paid.

In the months since the foreclosure filing, lawyers for both sides have traded requests for documents and made the usual inquiries for in formation related to the complaint or in support of the accusations made in the answer.

Although Koehler's attorney, James Dowden, seeks records on all transactions between the bakery and Mercantile since 1990, Phil Campbell, Mercantile's attorney, objects to providing information unrelated to the specific note at issue in the foreclosure.

As of July 14, Mercantile was seeking $611,823 from Koehler Bakery and the others involved, according to court documents. Of that figure, the bank says $11,835 in interest is continuing to accumulate at about $165 a day.

Pulaski County Chancery Judge Robin L. Mays has not set a court date in the foreclosure case.