Blue Bear bankruptcy swirls on

WINDSOR – Blue Bear Funding LLC might have more to deal with than simply a bankruptcy, reorganization and asset litigation.

David Karst, part owner and former manager of Blue Bear, has broken his silence regarding the bankrupt factoring company. In a statement given to the Business Report, Karst not only denies the claims made by Blue Bear and its lawyers – claims that hoist some blame upon Karst for the firm’s financial difficulties – but Karst also threatens to retaliate with his own lawsuits.

“As a result of Blue Bear officers and attorneys having made misleading, unfounded and false public accusations regarding my role at creditor meetings, public statements and in bankruptcy filings, it is anticipated that (forthcoming) claims will include libel, slander and defamation of character,” Karst wrote in an e-mail.

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To date, Karst has kept quiet about the nine-month-old bankruptcy case. The case has gained notoriety from its size – Blue Bear creditors and investors have made $20 million in claims against the Windsor-based company – and character – the investors range from prominent local businesspeople to churches and retirees.

Blue Bear, which lists just $2.9 million in assets, filed for protection from creditors in U.S. Bankruptcy Court in August 2005, less than two years after it started operations. The company intends to reorganize under Chapter 11 bankruptcy rules – a process that requires approval from both creditors and the bankruptcy court.

Among the litany of legal filings, Blue Bear’s lawyers have accused Karst and other defendants of actions that stripped value from the company.

 “(Some of the defendants) have been part of an elaborate shell game to loot Blue Bear of its performing assets for the benefit of insiders and a subclass of investors,” the filing states.

The accusation prompted Karst to speak out, he said.

Blue Bear, a factoring company founded in late 2003, is in the business of purchasing accounts receivable from cash-strapped companies. Factoring companies generally purchase the accounts for around 80 percent to 90 percent of total value, and then attempt to make money by collecting the entire amount owed.

Blue Bear’s organization set it apart from traditional factoring companies, however.

Blue Bear acted as an account broker for nine independent factoring companies, known as IFCs. The nine IFCs were set up for the purpose of attracting investment dollars that Blue Bear would leverage with factoring accounts. The IFCs were purported to have the right to approve all accounts before Blue Bear would finalize the deal.

Blue Bear’s latest filing claims that owners and investors in the company funneled money and performing assets out of Blue Bear through one of the nine IFCs. One such asset is already being disputed.

Assets in dispute

At the root of Blue Bear’s claim against Karst is the lawsuit filed by Silver Mountain Financial LLC against Blue Bear in March. Silver Mountain’s case is considered an adversary proceeding, because it’s a civil suit that arises from or is related to an ongoing bankruptcy case.

Silver Mountain claimed that it advanced a total of $666,750 to Blue Bear on Dec. 1, 2004, to fund a factoring agreement with Star Ryder Energy LLC, a company that operates oil wells. In exchange for the funding, the suit claims, Blue Bear transferred its right, title and property interest in the Star Ryder accounts to Silver Mountain.

However, the suit alleges that Blue Bear was not making payments to Silver Mountain even though Star Ryder was performing on its agreement.

Silver Mountain is seeking to recover all payments made by Star Ryder to Blue Bear, as well as an order requiring Star Ryder to continue payments to Silver Mountain and an order declaring Silver Mountain the “absolute owner of production revenue.”

Blue Bear answered the filing by denying most claims, including that Star Ryder is paying Blue Bear on its agreements.

“The Silver Mountain claim was for ownership rights to an account for which Silver Mountain funded and received a bill of sale transferring all rights and proceeds in that account,” according to the statement made by Karst. “While I’m not an attorney, it is my opinion that Silver Mountain and the other investors, including the factoring companies, have met the test of ownership and are the legal owners of the accounts, not Blue Bear.”

In response, Blue Bear filed an answer, a counterclaim and several cross-claims. Blue Bear’s claims list 16 defendants, including Karst; Virginia Brinkman, executive director of IFC Sierra Factoring; Gerald and Margaret Makey, also owners of Blue Bear, and numerous companies with ties to the four.

In its cross-claims, Blue Bear lays out a series of transactions between a group of people with various interests in the company.

Silver Mountain, the claim alleges, is managed by Brinkman and owned by a company called Five Point Ventures LLC. Five Point owners include Yelrug Investments LLC, formed by Key Connections, a company owned by the Makeys; Redhead Investments LLC, owned by Brinkman and her husband Mark; Parker & Associates, with Thomas and Dick Anderson listed as managing members; and Rick Anderson, according to the suit.

Blue Bear claims the Makeys, Sierra Factoring, Karst and his factoring company Nationwide Cash Flow Specialists, and the Andersons, acting through the Soapstone Grazing Association, stripped Blue Bear of cash and various assets using Silver Mountain and another entity, Grizzly Creek Leasing LLC. Grizzly Creek Leasing, the filing asserts, was formed by Karst, Brinkman and the Five Point ownership group on Jan. 6, 2005, as details of Blue Bear’s deteriorating financial state became apparent.

Complicated transactions

One such instance, according to the filing, involved the transfer of an account worth $130,000. The client was Ground Zero Engineering Group Inc., a company for which Karst was the “attorney in fact.”

Ground Zero was one of many client accounts transferred from Karst’s Nationwide Cash Flow Specialists to Blue Bear when Blue Bear was formed. When the transfer occurred in December 2003, the Ground Zero account was worth more than $627,700. The account had a value of $871,000 by Dec. 31, 2004.

On April 22, 2005, Ground Zero allegedly sold a Caterpillar D9 Bulldozer to Grizzly Creek Leasing for $130,000. As a result, according to Blue Bear’s cross-claim, the lien on the equipment as released “not for fair or reasonably equivalent consideration.”

The Ground Zero deal is only one of many outlined in Blue Bear’s cross-claim. Others deal with more real estate transfers, cash transactions and client account reassignments.

“I deny the claims made by Blue Bear and (the company’s attorney Doug) Jessup against myself and Nationwide Cash Flow Specialists,” Karst said in his statement. “The transactions listed in the claim were discussed with Blue Bear ownership and management including current management.”

Karst’s statement indicates his worry that “the current legal strategy will continue to perpetuate large legal fees.” As such, he hopes that the parties can come to a quick settlement.

Blue Bear’s claims ask for relief from transfer avoidance under the bankruptcy code, civil conspiracy, misrepresentation and more. The potential value of the suit for Blue Bear is not clear.

Bankruptcy code allows recovery of certain transfers made when a company is deemed insolvent – within 90 days of a bankruptcy filing – or when the transfers are done with the intent to hide assets from creditors. Blue Bear’s filing contains four avoidance claims for relief.

 “It’s hard to tell at this point what is out there,´ said Blue Bear attorney Alice White.

White expects that it will take a period of diligent discovery to uncover the actual value of the transactions that allegedly stripped Blue Bear.

Lawyers on both sides of the case are trying to untangle the events and associations involved.

“We have to do some discovery to find out what is true,´ said Silver Mountain attorney Ken McCartney. “There’s too much on the plate to sort out.”

McCartney said that he would need longer than the typical amount of time for Silver Mountain to respond to the counterclaim. He estimates he will request two extensions from the court.

“This is quite a house of cards,” he said, adding that he didn’t think the lawsuit would be so complicated when he first filed it. “I had no idea that when we pulled on the string we’d get the whole cloth on the table to sort through.”

Chapter 11 or Chapter 7?

As Blue Bear’s lawyers are busy trying to defend the company’s interests in other holdings, they are also trying to keep the courts from converting the proceeding to a Chapter 7 bankruptcy.

The U.S. Trustee for the bankruptcy court has filed to convert Blue Bear from a Chapter 11 bankruptcy into a Chapter 7. Such a conversion would put control of Blue Bear into the hands of a trustee to liquidate any remaining assets and distribute the proceeds.

Under Chapter 11, Blue Bear plans to continue operation as a factoring company. If the reorganization plan is confirmed later this year, the creditors will be issued stock in the company. They will then be issued payments when certain milestones occur.

According to the disclosure statement filed by Blue Bear under Chapter 11 reorganization requirements, unsecured creditors stand to recover about 19 percent of what they are owed. The same statement estimates that under Chapter 7, the return would likely be much lower – in the range of 1.45 percent to 6.35 percent.

However, the U.S. Trustee filed an objection to the disclosure statement that could affect the reported return amounts.

The objection, filed on May 17, indicates there might be several issues that could result in lower returns under Chapter 11 or higher under Chapter 7. For example, the objection claims that the disclosure statement overstates the commission paid to the Trustee under Chapter 7 by as much as $30,000 in some examples.

“The Trustee was the only entity that objected to the disclosure statement,´ said White.

It is not unusual for the Trustee’s Office to pursue a bankruptcy conversion, according to White. The entity is a watchdog of sorts in the bankruptcy world. However, it is not common practice for a conversion to be pursued in a case where a creditors’ committee has been appointed. Blue Bear’s creditors’ committee has put its support behind the proposed reorganization plan.

“For a U.S. Trustee to fight a creditor committee is unusual,” she said.

At a hearing on June 1, the trustee and the bankruptcy judge suggested certain amendments to the disclosure statement. The next hearing is scheduled for June 22, at which time the motion to convert to Chapter 7 and the objections will be discussed. White said, however, that the judge indicated that discussion of the conversion will likely be held off until the reorganization plan is voted upon.