A reorganization plan for bankrupt USA Capital, which has several thousand investors around the country, is in jeopardy of blowing up because a dissident group of investors obtained a temporary freeze in the $962 million bankruptcy case.

The Lenders Protection Group, which is represented by attorney Alan Smith of Reno, persuaded a two-judge appellate panel of the 9th U.S. Circuit Court to grant a temporary stay Wednesday of the bankruptcy reorganization plan until Feb. 20 or further action by the panel. Smith and Janet Chubb, another attorney pursuing the appeal, were not immediately available for comment Thursday.

Earlier this month, Smith explained that his group of 300 investors wanted the ability to cancel loan servicing agreements that Compass Partners of New York agreed to buy along with assets from the USA Capital First Trust Deed Fund for $67 million.

In the worst case scenario, USA Capital may run out of money and be forced into Chapter 7 bankruptcy, which calls for liquidation of assets, said Mark Olson, chief operating officer for USA Capital. Advocates of the reorganization plan believe Chapter 7 would result in larger losses for many investors and also lead to numerous lawsuits.

"We don't have the money to continue operations," Olson said. "We could end up in Chapter 7."

At the least, the stay could delay the effective date of the reorganization and the sale of some assets and loan servicing rights to Compass, he said.

The interim management team was ready to mail checks from December loan payments, Olson said, but those distributions will be delayed and probably so will checks for collections in January.

Marc Levinson, an attorney representing investors in the USA Capital Diversified Trust Fund, said he and others who support the reorganization plan were surprised the dissident group took their appeal directly to the two-judge appellate panel. Reorganization plan advocates were stunned that the panel froze the case without hearing from supporters of the reorganization.

"It was a shock that (the Lenders Protection Group) did it, and it was more of a shock that they got away with it," Levinson said.

Although bankruptcy appeals panel did not hear arguments from advocates of the reorganization plan, the issue appears to be moving to a federal district court in Las Vegas which was expected to be asked to void the stay.

The federal judge then may send the matter back to bankruptcy Judge Linda Riegle for a decision, which then could be appealed to federal district court.

Attorneys who crafted the reorganization plan previously were unconcerned about the prospect of an appeal because they did not think a stay would be issued, and they thought the reorganization plan could proceed.

If that were to happen, the USA Capital case could be resolved, and the appeal, even if successful, would not affect the outcome in USA Capital.

An estimated 6,000 hard-money investors were affected when USA Capital declared bankruptcy on April 13.