Blue Bear fights to reorganize

As it struggles toward reorganization, Blue Bear Funding LLC has become more of a black-and-blue bear.

The Windsor-based factoring firm is fighting through adversary filings, disapproval from the U.S. Trustee and objections from two of its former directors on its final push toward approving a new plan for operation.

Blue Bear filed for protection from creditors in U.S. Bankruptcy Court in August 2005, less than two years after it started operations. The company, which has sought protection under Chapter 11 of the U.S. Bankruptcy Code, filed plans to reorganize, which requires both creditor and court approval.

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The hearing on the reorganization plan began on Aug. 2 and was scheduled to last as long as Aug. 4, after this publication went to press.

At the hearing, objectors to the reorganization plan were able to present their comments and eligible creditors were able to vote on whether to accept the reorganization plan.

Blue Bear started business in late 2003 as 1st American Factoring LLC. According to contracts dated 2004, Blue Bear – then 1st American – was run by David Karst, managing partner, with assistance from local consultant Russell Disberger. Companies controlled by the two men remain part owners in Blue Bear.

Factoring is the business of purchasing accounts receivable from cash-strapped companies. The factoring companies generally purchase the accounts for around 80 percent to 90 percent of total value, then attempt to make money by collecting the entire amount owed.

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.

The exact cause of the financial woes that resulted in Blue Bear’s demise is still being debated through court documents filed as part of the bankruptcy proceeding.

On paper, creditor claims against the company total $39 million. However, this figure contains a number of duplicate filings. The executive directors of the IFCs originally filed for the total amount of investments made through them at the end of 2005; in 2006, those claims were broken down into the amounts owed to individual investors and refiled. Consequently, the actual amount of claims against Blue Bear is more in the $20 million realm, said Blue Bear attorney Alice White.

Plan to pay back creditors

Blue Bear’s reorganization plan was created jointly between the company, the Committee of Unsecured Creditors and attorneys for both sides. The main purpose of the plan is to find a mechanism for paying back the creditors.

According to the plan submitted March 17 to the U.S. Bankruptcy Court in Denver, Blue Bear hopes to convert to a Subchapter C corporation from a limited liability company. Under the plan, all investors with more than $4,000 invested would receive one share of stock in the new corporation for every $1,000 they are owed.

Before the unsecured creditors – the class made up of individual investors – can be paid, any secured claims, taxes and other priority claims must be discharged. According to the bankruptcy filing, four are claimants asserting to be secured creditors. If the court finds that all of them are actually secured, Blue Bear will have to pay out almost $1.2 million. The plan asserts that such payments will be made quarterly for up to 10 years.

To do so, the plan indicates Blue Bear will continue to operate, purely as a factoring company, in hopes of earning back the lost investments.

Doug Jessop, another attorney for Blue Bear, explained that the reorganized Blue Bear would really have two separate avenues for returning investors’ funds. In addition to continuing its factoring business, Jessop said, the company is and will continue to try to collect on accounts and loans Blue Bear made prior to bankruptcy.

Even if the plan is approved by the voting creditors, the court could decide against it. In weighing his approval, the bankruptcy judge is likely to take into account objections, of which there are three in the Blue Bear case – filed by the U.S. Trustee assigned to Blue Bear’s bankruptcy, one of the IFC’s and David Karst as an individual.

Objections by the U.S. Trustee

The U.S. Trustee has been suggesting for several months that the case should be converted from a Chapter 11 to a Chapter 7 bankruptcy. Conversion to Chapter 7 would put control of Blue Bear into the hands of a trustee to liquidate any remaining assets and distribute the proceeds, rather than allow it to continue doing business.

On July 28, the trustee filed an objection to the pending confirmation of Blue Bear’s plan. The objection lists numerous reasons why the plan should not be approved, but most prominently expresses doubt about Blue Bear’s ability to recover funds.

“The trend in its revenues appears to be stable at best and perhaps downward despite the infusion of funds from post-petition borrowing which were to be used to ‘grow’ the business,” trustee Charles McVay writes in his objection.

Blue Bear’s revenues have declined steadily from $136,000 in February to $14,300 in June, according to the objection. The trustee indicates that the reorganization plan’s reliance on additional funding to meet cash requirements and the growing amount of administrative claims also don’t bode well for the investors.

The company’s June monthly operating report lists more than $1 million owed in administrative claims, including $720,000 to Blue Bear’s attorneys, $275,000 for the Committee of Unsecured Creditors’ attorney and $20,000 to accountants. As of June 30, Blue Bear’s cash balance was slightly more than $28,000.

The trustee also calls out Blue Bear’s past as a reason that the plan should not be allowed.

“The debtor’s operations were, at least partially, fraudulent pre-petition,” according to the trustee’s objection.

The filing continues to assert that the plan might not have been proposed in “good faith.” The trustee cites specifically a deposition from Karst in which he testifies that “at least some persons still with the company had knowledge of the fraudulent nature of some of these activities.”

More objections

In addition to the trustee’s objection, Sierra Factoring – the IFC directed by Virginia Brinkman – and David Karst have also filed objections.

Karst’s objection filing was not available for review in time for publication of this story; however, in an interview, Karst said that his objection would be similar to that of the trustee’s in the assertion that the proposed plan isn’t economically feasible.

“We feel it has insufficient capital to work,” Karst said.

Sierra’s objection focuses largely on the IFC’s claims to still own the interest in certain receivables for which it has not received compensation.

“The plan has not been proposed in good faith and relies upon means forbidden by law,” states Sierra’s objection. “For example, the receivables purchased by Sierra Factoring from (Blue Bear) are not property of the estate.”

The Sierra objection also indicates that the IFC has a post-petition claim against Blue Bear “for costs and attorneys’ fees incurred in connection with its defense of frivolous and vexatious claims asserted in (an adversary proceeding.)”

Both Karst and Brinkman are named as defendants in cross-claims filed by Blue Bear in suits against the company.

Silver Mountain Financial LLC, a Wyoming-based factoring company, filed an adversary proceeding against Blue Bear in March. The case is considered an adversary proceeding, because it’s a civil suit that arises from or is related to the 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.

In response, Blue Bear filed an answer, a counterclaim and several cross-claims listing 16 defendants, including Karst; Brinkman; Gerald and Margaret Makey, also owners of Blue Bear, and numerous companies with ties to the four. Blue Bear recently dismissed the claim against the Makeys, after further discussion and investigation, according to White.

In its cross-claims, Blue Bear lays out a series of transactions between a group of people with various interests in the company, and asserts that these transactions stripped Blue Bear of its performing assets.

Both Karst and Brinkman have filed for dismissal in the Silver Mountain case. A decision is pending, with Blue Bear still able to file a statement in response to the motions for dismissal.

Alternative reorganization plan?

In his request for dismissal, Karst defends himself from accusations, instead turning the blame onto the company.

“Conveniently, the single common denominator to every illegal or unwise act is Blue Bear. Even its own creation is blamed on others with no one person ever being identified as responsible as Blue Bear,” the filing states. “In fact, it is its own albatross. It sinks from its own weight. It has unclean hands in every single transaction.”

Karst said he is working out an alternative reorganization plan. The particulars are not yet ironed out, but he said it would involve cash payouts to the creditors and better capitalization of the company.

However, Karst might have a hard time getting a plan before the court, let alone approved. He attended a creditors’ meeting on July 18 with his lawyer.

“I’m also a creditor in this,” Karst said. “I wanted to hear about the plan.”

However, Karst said he was given no opportunity to speak, an assertion backed by White.

“We had a pretty good turnout,” White said.

She added that many of the approximately 200 in attendance “got excited” when Karst’s lawyer was trying to speak. She recalled booing, hissing and calls of “how dare you.”

“I feel that Blue Bear and its attorneys have set the stage against me by making accusations and claims that I feel are unfounded and unfair,” Karst said. “They’ve poisoned the atmosphere for any plan I might propose.”

Even without the uphill battle of gaining the trust of Blue Bear’s creditors, Karst’s plan may not have a chance.