After 13 Months Of Crisis, Blue Star Donuts Lives On

Jeff Manning

WWR Article Summary (tl;dr) As Jeff Manning reports, "The pandemic year brought Blue Star a bankruptcy, a rescue plan from a controversial Portland investor and a legal spat with one of the city’s most prominent real estate investors."


When explaining the wreckage caused by the pandemic, Portland doughnut purveyor Katie Poppe trots out the old fable about the cow, the buffalo and the thunderstorm.

The cow, meek and not overly intelligent, runs from the storm, succeeding only in prolonging its time in the soaking rain and lightning.

The buffalo, on the other hand, charges into the worst of the storm and escapes to the sunny skies on the other side.

Poppe, 40, has been in full buffalo mode for a year now. Her company, gourmet baker Blue Star Donuts, was crushed by the pandemic. But Poppe charged into the unknown.

The pandemic year brought Blue Star a bankruptcy, a rescue plan from a controversial Portland investor and a legal spat with one of the city’s most prominent real estate investors.

Now, Poppe wonders, where’s the sun? Where’s the happy ending? Where’s the long-predicted herd immunity that will protect both the buffalo and the cows? Will there still be fancy doughnuts after the storm?

“This has just gutted our industry,” she said. “When I come across someone from the business they have this war-weary, battle-scarred look. I really look forward to this being over.”

Inspiration in France Poppe’s plunge into the pastry business came after a trip through France. “I was blown away by the quality of bread and pastries there,” she said. “The trip inspired the idea to make a...doughnut out of brioche - a very rich, buttery type of bread...a doughnut for grownups.”

The Clovis, Calif., native had plenty of experience in the business. She and her then-husband, Micah Camden, had started up and then sold the Little Big Burger chain. She formed Blue Star in 2012. Her first hire was Stephanie Thornton, an experienced pastry chef.

They opened their first store in a ground-floor space in the Indigo building in downtown Portland’s fast growing West End. They were routinely selling out by 10 a.m.

By 2019, Blue Star had 11 retail shops, 100 employees and total annual sales approaching $7 million. It was profitable, growing quickly, according to court filings.

Then COVID-19 arrived. On March 17, 2020, Governor Kate Brown issued Executive Order 20-07 prohibiting all restaurants and cafes from allowing customers to eat-in.

Blue Star shut down. Poppe laid off most of her employees.

“I was walking around this big, beautiful shop and tears were just flowing down my face,” she said. “I was worried about myself of course. But also, I had 100 people working for me. What was going to happen to them? I was terrified.”

A new business model Poppe regrouped. Blue Star got a $545,000 federal pandemic assistance loan in April. She and Thornton proceeded to reinvent Blue Star as a wholesale supplier to grocery stores, supplementing its diminished storefronts. It was a completely different model. They had to adapt their recipes to fit the needs of grocers.

Green Zebra and New Seasons quickly signed on as customers. But it would take time to rebuild under the new wholesale model. In May, sales hit $39,900. Back in normal times, monthly sales routinely exceeded half-a-million dollars.

Blue Star suddenly couldn’t pay its bills. Poppe went to all of her suppliers and landlords pleading for patience. Most proved highly sympathetic.

Angela Willis runs PrintSync, a Beaverton company that provided Blue Star with custom labeling for the cardboard doughnut boxes and other paper products. When Poppe asked for forbearance, Willis said she didn’t hesitate.

“This is a person who was going 10,000 miles a minute,” Willis said. “I figured if she was going to take this kind of risk, I’m standing by her.”

A falling out Not everyone was so forgiving. Morrison Development was arguably Blue Star’s most important landlord. The company, a holding of the prominent Menashe family, had leased space to Blue Star for its central kitchen and a retail store in a building at Southwest Morrison Street and 12th Avenue.

Things got hostile in a hurry.

Poppe began receiving unsettling messages from Menashe.

“What goes around, comes around,” Menashe allegedly emailed. The snippet was included in the Blue Star bankruptcy files.

“They seemed obsessed with this idea that we were trying to scam them somehow,” Poppe said. “I told them, we’re not. We’re just on the edge of going out of business just like every other restaurant in the country.”

Brown had prohibited commercial evictions in April. But Morrison was insistent. In late May, Morrison terminated Blue Star’s lease. It sued Blue Star for back rent two weeks later.

Jordan Menashe, the developer, said he’s not the bad guy in this story.

Landlords have their own bills to pay. Plus, he claims, while Blue Star was pleading for him to give them a break, the company abruptly moved out of the central kitchen building.

“They just left, no warning, no nothing,” Menashe said.

The lawsuit made some other Blue Star creditors nervous. The Commerce Bank of Oregon declared the company in default of a $300,000 line of credit.

Streamlined Chapter 11 Blue Star filed for bankruptcy protection on Aug. 26.

The company elected to reorganize under a new law passed by Congress in 2019 intended to streamline the process.

“Speed was critical, because the company was running out of cash,” said Oren Haker of Stoel Rives, the company’s Chapter 11 counsel.

But the bankruptcy filing did give Poppe some breathing room. And she made the most of it. She convinced her existing investors to re-up with an additional $550,000. And she cut a deal with another investor. Portland-based Sortis Capital agreed to invest $1 million for a one-third ownership stake in Blue Star.

“The company emerged from bankruptcy on Dec. 4th with $1.5 million in new investment that they say allowed it to satisfy their creditors in full - including Commerce Bank and Morrison Development - and invest in their new wholesale operation,” Haker said.

Poppe managed to maintain her majority control of the company, a rarity in bankruptcy reorganizations. And she granted an ownership stake to her senior management team that had stood by her and Blue Star.

“I wanted to carve out an equity portion for the senior management who had stuck with the company,” Poppe said. “I wanted to give them a seat at the table. I made that clear to our new investment partners and told them, I’m not coming without that.”

The rescue Last June, Sortis formed a new “Rescue Fund” specifically to invest in promising Pacific Northwest restaurants and other food and beverage companies laid low by the pandemic.

It is led by Paul Brenneke, an entrepreneur from a wealthy Portland family with a controversial past. A decade ago, he had a a falling out with investors in a high-profile local hotel project.

Brenneke says the problems were caused by the economic fall-out from 9/11. He’s moved on to many other successful projects since then, including Sortis. Besides Blue Star, Sortis has invested in several other local restaurants, including Bamboo Sushi. Last year, it cast itself as the white knight rescuing Rudy’s Barbershop from bankruptcy.

Brenneke said Blue Star was an easy call. “It’s a great brand,” he said. “It was hit by something that was totally unforeseen. When we heard about it, we agreed to step up.”

Poppe said she’s been impressed by Sortis and Brenneke. “They were able to understand a very complex situation and see the merits in my plan for the future,” she said. “A lot of funds would have stayed far away due to the uncertainty, the minefield of potential litigation. They did everything they said they were going to do.”

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