Bankruptcy judge keeps Blue Bear operating

Blue Bear lives.

U.S. Bankruptcy Judge Bruce Campbell on Aug. 4 confirmed the Windsor-based factoring company’s reorganization plan, meaning Blue Bear Funding LLC will continue to operate despite repeated objections from the U.S. Trustee appointed to oversee the case.

As part of a hearing held in Denver, unsecured creditors were asked to vote on the reorganization plan.

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Creditor Donald LeFever didn’t vote to approve the plan – putting him in the minority.

Like many unsecured creditors, LeFever attended a meeting on July 18 in hopes of getting answers about the proposed reorganization plan for the bankrupt company. LeFever, a retired rancher and former president of the Colorado Cattlemen’s Association, felt the presentation regarding the financials of the plan was less than satisfactory.

“He (the presenter) did a good job of confusing everyone,” LeFever said.

Confusion has surrounded Blue Bear almost from the beginning.

Blue Bear started business in late 2003 as 1st American Factoring LLC. Factoring companies generally purchase accounts receivable from cash-strapped companies for around 80 percent to 90 percent of total value, then attempt to make money by collecting the entire amount owed. As Blue Bear, the company acted as an account broker for nine independent factoring companies, known as IFCs, purported to have the right to approve all accounts.

Where exactly Blue Bear ran into trouble is up for debate. Many early investors reported that their money was accruing interest at around 12 percent; most left those earnings invested with the company. Around May 2005, Blue Bear’s investors stopped receiving a return.

LeFever had invested in his IFC, Provision Factoring, for only a few months before the company went bankrupt. His agreement with Provision, dated April 28, 2005, provided for a fixed return of 12 percent for one year, he said.

By June, LeFever received a letter warning of potential issues with some of Blue Bear’s accounts. He promptly pulled out about $50,000 – half of his original investment. He said he would have pulled it all out, but he feared that if he asked for it all he would get none.

Although LeFever voted against the plan, preferring to see the Blue Bear bankruptcy converted to a Chapter 7 liquidation, the response from those in favor of continued operations under Chapter 11 was overwhelming. Of the 298 unsecured creditors who turned in valid ballots, only four voted against the reorganization plan. The creditors voting to accept the plan represented $15.5 million in claims, while those rejecting the plan represented $344,000. In order to be considered approved, more than 50 percent of the voting creditors holding more than two-thirds of the claim amounts must vote in favor of it.

Judge Campbell confirmed the reorganization plan despite objections from the U.S. Trustee and two other individuals – David Karst and his company NCFS and Virginia Brinkman. Karst was a part-owner of Blue Bear and operated the company pre-bankruptcy. Brinkman was the director of IFC Sierra Factoring.

During the hearing, the objection from Brinkman’s Sierra Factoring was settled, according to Blue Bear attorney Alice White, with a minor adjustment to the wording of the plan.

Trustee not satisfied

U.S. Trustee Leo Weiss was not prepared to back down from his objection, though.

“It’s a hope and a prayer that these investors are getting,” he said in his opening statement.

He continued by blasting the company’s current operating results. In testimony at the hearing, John Davis, chief operating officer of Blue Bear, said that the company currently had $23,000 in cash in its operating account.

“It’s a lousy business, and it’s likely to continue to be a lousy business,” he said. “It’s a leaky dinghy.”

However, Weiss had an uphill battle in light of the overwhelming acceptance of the plan by the unsecured creditors. White said that the judge took a 45-minute recess before confirming the plan.

Blue Bear’s reorganization plan calls for the company to convert to a Subchapter C corporation. Under the plan, all unsecured creditors with more than $4,000 invested would receive one share of stock in the new corporation for every $1,000 they are owed.  

Secured creditors, as determined by the court, would receive payment in full on a payment schedule, while the owners would receive nothing for their interest in the company. The ownership group includes Blue Bear Financial Inc., owned by Russell Disberger and Steven Short; KFG LLC, owned by Karst; DKD Connections LLC, owned by Kris and Don Donahoo, and Key Connections LLC, owned by Peggy and Gerry Makey.

Four claimants assert 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. Under the plan, such payments will be made quarterly for up to 10 years.

Also on Aug. 4, the judge approved a settlement agreement between seven of the nine IFCs and Blue Bear. The agreement allows for the transfer of about $630,000 of the IFCs funds to Blue Bear. The plan indicated that $500,000 would be set aside to fund targeted litigation, according to White. She added that the company’s board of directors would make such decisions.

Potential targets

Blue Bear’s lawyers filed a long list of potential litigation targets as an exhibit to its disclosure statement. The list includes Karst.

In an e-mail sent to the Business Report, Karst indicated that he hopes to avoid the complications and costs of any possible litigation.

“Prior to the hearing on the plan, my attorney had initiated settlement talks with Blue Bear attorneys and those talks will continue now that the decision has been made,” he said.

Karst opposed Blue Bear’s plan based on its financial position.

“While I have doubts about the assumptions and viability of the plan, the overall creditor support for the plan was the biggest factor in its approval, and I hope for their sake that Blue Bear can perform according to the plan,” he wrote.

Even the plan’s supporters know it is going to be an uphill battle.

The company’s cash flow has been erratic and intermittent at best. Collections have been slow because some companies are delaying payment in order to see what will happen to Blue Bear.

Davis also testified that he thought it was possible to turn the company around. He estimates that stockholders could begin receiving money from operations by 2010 and was optimistic that the entire amount lost could be paid back by 2012.

But that might not be soon enough for some of the creditors.

“I may not live 10 years,´ said LeFever, who is in his 70s.