Court filing
First-Day Declaration of Deborah Rieger-Paganis in Support of Chapter 11 Petitions — In re KServicing
Record facts
| Court | U.S. Bankruptcy Court for the District of Delaware |
|---|---|
| Filed | 2022-10-04 |
U.S. Bankruptcy Court for the District of Delaware · No. 22-10951 · Doc. 13 · 2022-10-04 · Docket on CourtListener
Summary
A first-day declaration of Deborah Rieger-Paganis, a Managing Director at AlixPartners LLP and restructuring advisor to the debtors, filed October 4, 2022 as Doc 13 in In re Kabbage, Inc. d/b/a KServicing, et al., Case No. 22-10951, in the U.S. Bankruptcy Court for the District of Delaware. Made under 28 U.S.C. § 1746 and dated October 3, 2022, it supports the chapter 11 petitions and the first-day pleadings. It is organized in five sections covering an overview of the debtors, the business and its history, the corporate and capital structures, the circumstances leading to the filings, and a summary of the first-day pleadings. It states the company is an online loan servicer founded in 2008 that is winding down after selling substantially all of its assets to affiliates of American Express in October 2020. The 52-page declaration attaches a corporate structure chart as Exhibit A.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
Full text
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
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In re
:
Chapter 11
:
KABBAGE, INC. D/B/A KSERVICING, et al., :
Case No. 22-10951 ( )
:
:
(Joint Administration Requested)
Debtors.1
:
------------------------------------------------------------ x
DECLARATION OF DEBORAH RIEGER-PAGANIS IN SUPPORT
OF THE CHAPTER 11 PETITIONS AND FIRST-DAY PLEADINGS
I, Deborah Rieger-Paganis, pursuant to 28 U.S.C. § 1746, hereby declare under
penalty of perjury that the following is true and correct to the best of my knowledge, information,
and belief:
1.
I am a Managing Director at AlixPartners LLP (“AlixPartners”) and have
served as a restructuring advisor to Kabbage, Inc. d/b/a KServicing (the “Company” or
“KServicing”) and its affiliated debtors in the above-captioned chapter 11 cases (the “Chapter 11
Cases”), as debtors and debtors-in-possession (collectively, the “Debtors”) since April 2022.
2.
I have overseen (and continue to oversee) the services provided by
AlixPartners, which include: designing, negotiating and implementing a restructuring strategy
designed to maximize enterprise value; evaluating the Debtors’ cash-flow projections and
identifying liquidity-enhancing opportunities; contingency planning; developing a revised wind
down plan and other related forecasts and financial analyses; coordinating and providing
1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification
number, as applicable are: Kabbage, Inc. d/b/a KServicing (3937); Kabbage Canada Holdings, LLC (N/A); Kabbage
Asset Securitization LLC (N/A); Kabbage Asset Funding 2017-A LLC (4803); Kabbage Asset Funding 2019-A
LLC (8973); and Kabbage Diameter, LLC (N/A). Kabbage is a trademark of American Express used under license;
Kabbage, Inc. d/b/a KServicing is not affiliated with American Express. The Debtors’ mailing and service address
is 925B Peachtree Street NE, Suite 383, Atlanta, GA 30309.
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administrative support for developing the Debtors’ chapter 11 plan of liquidation; preparing the
necessary components of a disclosure statement and chapter 11 plan; assisting with electronic data
collection; and assisting with vendor payments. In my capacity as the Debtors’ financial advisor,
I am generally knowledgeable and familiar with the Debtors’ day-to-day operations, business and
financial affairs, books and records, and the circumstances leading to the commencement of these
Chapter 11 Cases. I am authorized to submit this declaration (the “Declaration”) on behalf of the
Debtors.
3.
I have been employed by AlixPartners since 2002 and have served as a
Managing Director of AlixPartners since 2015. I have more than 30 years of experience serving
in a variety of roles, including as interim Chief Financial Officer for various chapter 11 debtors,
Vice President of Restructuring for the wind down estate of JCPenney, senior Vice President of
Financial Planning and Analysis at MasterCard, and Vice President of Finance at Ann Taylor
corporate. I have a Bachelor of Science in accounting from State University of New York at
Albany and am a certified public accountant in the State of New York.
4.
AlixPartners has assisted, advised, and provided strategic advice to debtors,
creditors, bondholders, investors, and other entities in numerous chapter 11 cases of similar size
and complexity to the Debtors’ chapter 11 cases, including recent filings in this District: In re MD
Helicopters, Inc., No. 22-10263 (KBO) (Bankr. D. Del. Apr. 25, 2022); In re Alto Maipo Delaware
LLC, No. 21-11507 (KBO) (Bankr. D. Del. Dec. 16, 2021); In re Riverbed Tech., Inc., No. 21-
11503 (CTG) (Bankr. D. Del. Dec. 8, 2021); In re Alpha Latam Mgmt., LLC, No. 21-11109 (JKS)
(Bankr. D. Del. Sept. 15, 2021); In re Nine Point Energy, LLC, No. 21-10570 (MFW) (Bankr. D.
Del. Apr. 20, 2021); In re HighPoint Res. Corp., No. 21-10565 (CSS) (Bankr. D. Del. Apr. 13,
2021); In re Mallinckrodt plc, No. 20-12522 (JTD) (Bankr. D. Del. Nov. 19, 2020); In re RGN-
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Grp. Holdings, LLC, No. 20-11961 (BLS) (Bankr. D. Del. Sept. 15, 2020); In re Skillsoft Corp.,
No. 20-11532 (MFW) (Bankr. D. Del. July 23, 2020); In re Celadon Grp., Inc., No. 19-12606
(KBO) (Bankr. D. Del. Jan. 3, 2020); In re Bumble Bee Parent, Inc., No. 19-12505 (LSS) (Bankr.
D. Del. Dec. 26, 2019); In re Hexion Holdings LLC, No. 19-10684 (KG) (Bankr. D. Del. May 1,
2019; In re David’s Bridal, No. 18-12635 (LSS) (Bankr. D. Del. Dec. 18, 2018); In re Mattress
Firm, Inc., No. 18-12241 (CSS) (Bankr. D. Del. Nov. 7, 2018); In re Am. Tire Distribs., No. 18-
12221 (KJC) (Bankr. D. Del. Nov. 1, 2018); In re The Bon-Ton Stores, Inc., No. 18-10248 (MFW)
(Bankr. D. Del. Mar. 6, 2018; In re Charming Charlie Holdings, Inc., No. 17-12906 (CSS) (Bankr.
D. Del. Jan. 20, 2018); and In re Prospector Offshore Drilling S.à r.l., No. 17-11572 (CSS) (Bankr.
D. Del. Oct. 2, 2017).
5.
On the date hereof (the “Petition Date”), the Debtors commenced with this
court (the “Bankruptcy Court”) voluntary cases under chapter 11 of title 11 of the United States
Code (the “Bankruptcy Code”). Except as otherwise indicated herein, the facts set forth in this
Declaration are based upon my personal knowledge, my review of relevant documents and the
Debtors’ books and records, information provided to me by the Debtors, or advisors to the Debtors,
and/or my opinion based upon my experience, knowledge, and information concerning the Debtors
and the small-business loan-originating and servicing industry. If called upon to testify, I would
testify competently to the facts set forth in this Declaration.
6.
I submit this Declaration to apprise the Bankruptcy Court and parties in
interest of the circumstances that compelled the commencement of these Chapter 11 Cases and in
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support of the motions and applications that the Debtors have filed with the Bankruptcy Court,
including the “first-day pleadings” (the “First-Day Pleadings”).2
7.
This Declaration is divided into five sections:
(a)
Section I provides an overview of the Debtors and these Chapter 11 Cases;
(b)
Section II describes the Debtors’ business, its history, and its current
operations;
(c)
Section III summarizes the Debtors’ corporate and capital structures;
(d)
Section IV describes the circumstances that led to the commencement of
these Chapter 11 Cases; and
(e)
Section V provides a summary of the First-Day Pleadings, the factual bases
for the relief requested therein, and other information related to these
Chapter 11 Cases.
8.
The Debtors have requested various relief in the First-Day Pleadings to
ensure uninterrupted business operations throughout the Chapter 11 Cases. I am familiar with the
contents of each First-Day Pleading, and I believe the relief sought therein is necessary to enable
the Debtors to effectuate a seamless transition into and out of these Chapter 11 Cases. I further
believe that the relief requested in the First-Day Pleadings will preserve the value of the Debtors’
estates and therefore maximize value for all parties in interest.
I.
PRELIMINARY OVERVIEW
9.
The Company, an online loan servicer founded in 2008, is in the process of
winding down its business after the sale of substantially all of its assets to affiliates of American
Express (“AmEx”) in October 2020 (the “AmEx Transaction”),3 and now files these Chapter 11
2 Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the
respective First-Day Pleadings.
3 The legacy entities remaining after the close of the AmEx Transaction are the Debtors in these Chapter 11 Cases.
Notably, no directors or executive officers remain today from the pre-sale entity, and an entirely new leadership
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Cases to implement the wind down of these businesses pursuant to a chapter 11 plan and the
Bankruptcy Code. Following the AmEx Transaction, the Company’s business solely consists of
servicing its loan portfolio, which, as of the Petition Date, contains (a) loans issued to small
businesses under the Paycheck Protection Program (the “PPP” and the loans provided thereunder,
the “PPP Loans”) during the height of this country’s public health and economic crisis caused by
COVID-19, with an aggregate outstanding principal amount of approximately $1.3 billion, and (b)
a relatively small portfolio of non-PPP small business loans (the “Legacy Loans” and, together
with the PPP Loans, the “Loan Portfolio”), with an aggregate outstanding principal amount of
approximately $17 million. The loans in the Loan Portfolio are scheduled to mature by 2026.
10.
With over a decade of experience building and operating a sophisticated
online platform to lend to, and service loans for, small- and mid-sized businesses, the Company
was uniquely positioned to fulfill the U.S. government’s urgent need to quickly distribute billions
of dollars of aid to small businesses during the pandemic. Indeed, the Company was an established
lender for small businesses for years before getting involved in the PPP. The U.S. Small Business
Administration (the “SBA”) launched the PPP in April 2020 shortly after the U.S. government’s
initial directive under the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”) to distribute emergency funds to small businesses. The SBA needed lending
partners for the PPP and the Company, with a proven track record and experience with the exact
target demographic, provided an optimal pairing.
11.
The Company became an authorized PPP lender pursuant to an agreement
with the SBA on April 9, 2020. Like similarly situated participating institutions, the Company
team and board, including independent directors, is in place today. As used herein, the “Company” shall refer to
either the pre-sale or post-sale entity, as applicable.
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was willing to participate in the PPP because of two very important features of the program.
Specifically, the PPP requires the SBA to (a) forgive PPP Loan amounts that borrowers have spent
on payroll and other eligible expenses (“Loan Forgiveness”), and (b) fully guarantee PPP Loans
and purchase them upon certain borrower delinquency events—including borrower nonpayment
(“Guaranty Purchase”). The Company and other lenders were also inclined to participate in the
PPP because the SBA made it abundantly clear that a relaxed underwriting process was to be
applied and, so long as the process guidelines were adhered to, the lenders would have no liability.
The Company would not have participated in the PPP absent the “minimal review” involved in
processing PPP Loan applications, each lender’s ability to rely on borrower certifications and
representations, the express written assurances from the SBA that the U.S. government will not
challenge action by PPP lenders that conform to the SBA’s guidance, and the SBA’s Guaranty
Purchase obligation―all of which mitigated the risks attendant in quickly processing loan
applications and distributing funds in furtherance of the government’s mandate.
12.
In committing to partner with the SBA and participate in the PPP, the
Company restructured its lending platform and developed new automated systems to expeditiously
collect, analyze, verify, and approve PPP Loan applications consistent with the U.S. government’s
public mandate to quickly get funds in the hands of borrowers in the midst of a pandemic. The
new system allowed the Company to execute the SBA’s minimal underwriting process which was
expressly limited to: (a) confirming receipt of borrower certifications; (b) confirming receipt of
information demonstrating that a borrower had employees for whom the borrower paid salaries
and payroll taxes on or around February 15, 2020; (c) confirming the dollar amount of average
monthly payroll costs; and (d) following applicable Bank Secrecy Act requirements (collectively,
“Borrower Diligence”). From April 2020 to September 2021, the Company delivered more than
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$7 billion in PPP Loan funds to more than 300,000 borrowers, making it the second largest PPP
lender in the nation by application volume.4
13.
Unequivocally, the Company provided a lifeline to small businesses, sole
proprietors, and non-employer firms that historically have had difficulty accessing capital, and for
which such access was made even more challenging during the COVID-19 pandemic. Unlike
institutional lenders and other servicers that limited PPP relief to existing borrowers (or marginally
participated in the PPP because of the relatively nominal fees associated with originating or
servicing PPP loans and the low interest rate of PPP Loans, among other reasons),5 approximately
98 percent of the Company’s PPP Loans consisted of borrowers without an existing relationship
with the Company. Despite constantly changing rules and guidance from the SBA in the midst of
a global pandemic, the Company met the SBA and U.S. government’s demands to distribute the
emergency relief as quickly and widely as possible to eligible borrowers. As the nation witnessed
the disastrous impact of COVID-19, the Company was instrumental in getting necessary funds to
small businesses as quickly as the SBA desired and as a result preserved hundreds of thousands of
jobs.
14.
Of the over $7 billion of PPP Loans the Company originated, as of the
Petition Date, the Company has successfully serviced approximately 80 percent, by aggregate
principal amount; meaning, borrowers either repaid their respective PPP Loans, Loan Forgiveness
4 The Company participated in the first two rounds of the PPP. The first round of the PPP, each of which occurred
in response to Congress’s decision to increase the amount of funds available to provide necessary relief to small
businesses. The first round of the PPP will be referred herein as “Round 1”. The second round of the PPP will be
referred herein as “Round 2”.
5 The SBA paid lenders the following fees for processing PPP Loans: five percent for PPP Loans of not more than
$350,000; three percent for PPP Loans of more than $350,000 and less than $2,000,000; and one percent for PPP
Loans of at least $2,000,000. The interest rate on PPP Loans is one percent. Lenders were not otherwise allowed
to collect any fees from borrowers.
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applications were successfully processed, or the PPP lenders were otherwise paid through
Guaranty Purchase. As of September 30, 2022, the Company’s Loan Portfolio contains
approximately 48,000 PPP Loans with an aggregate outstanding principal amount of
approximately $1.3 billion. Although the successful processing of over 270,000 PPP Loans by a
new management team and the materially leaner workforce put in place following the AmEx
Transaction is a testament to the Company’s capabilities and good faith participation in the PPP,
processing the remaining PPP Loans has presented a number of challenges for the Company,
particularly in light of the extreme administrative and cost burden placed on the Company due to
issues discussed herein.
15.
Initially heralded for staving off the potentially deleterious effects of
COVID-19 health measures on small businesses, the now-concluded PPP faces scrutiny due to
lender confusion with deciphering unclear and frequently-evolving SBA guidance, or lack thereof,
limited information technology systems, and incidents of borrower misrepresentations. To varying
degrees, PPP lenders encountered challenges with, among other things, (a) discrepancies in
borrower-submitted data, (b) difficulties in accounting for federal, state, and local taxes when
calculating a borrower’s overall payroll costs—which in turn determines the maximum allowable
loan amount (the “SALT Issue”), (c) delayed processing of Loan Forgiveness and Guaranty
Purchase applications currently held in abeyance due to being identified by the SBA, the U.S.
Department of Justice, or loan servicers for potential borrower fraud prior to the scheduled
maturity date, and (d) failures with the SBA’s electronic application system, E-Tran, in tracking
and assigning loan numbers to each PPP Loan as a means to avoid the issuance of duplicate loans
(the “E-Tran Issue”). Although limited to a relatively small fraction of the population of the
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overall PPP Loans it has serviced, the Company is confronted with many of these same challenges
experienced by other lenders that participated in the PPP.
16.
In addition to the operational hurdles in processing the balance of its Loan
Portfolio, the Company is currently embroiled in a number of discussions and disputes related to
its participation in the PPP—nearly all of which are vigorously disputed by the Company—
including, but not limited to: (a) investigations by the Department of Justice offices in the District
of Massachusetts (the “MA DOJ”) and the Eastern District of Texas (the “Texas DOJ” and
together with the MA DOJ, the “DOJ”), the United States House of Representatives Select
Subcommittee on the Coronavirus Crisis (the “Congressional Subcommittee”), and the Federal
Trade Commission (the “FTC”) into the Company’s PPP Loan program; (b) allegations by the
SBA that the Company should be held liable for any loan amounts paid to borrowers that were in
excess of what they were statutorily entitled to receive and that the SBA’s Guaranty Purchase
obligation would not apply to certain PPP Loans and/or excess loan amounts;6 (c) a dispute
between the Company and Customers Bank (“CUBI”), one of the two lenders the Company
services PPP Loans on behalf of, in connection with the Company’s demand for CUBI to remit
approximately $65 million in loan referral and servicing fees contractually owed to the Company
before the Company commenced providing services and which remains unpaid, and CUBI’s
allegations that the Company – despite not being paid the funds to perform its service obligations
– failed to service CUBI’s PPP Loans in adherence to certain PPP guidelines; (d) allegations by
Cross River Bank (“CRB” and, together with CUBI the “Partner Banks”), the other lender the
Company services PPP Loans on behalf of, that the Company did not adhere to certain PPP
6 Generally, the PPP caps the loan amount at 2.5 times a borrower’s monthly payroll and caps eligible salaries at
$100,000 per employee. Any amounts disbursed over this statutory cap is referred to as an “excess loan amount.”
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guidelines; (e) allegations by the Partner Banks that loan numbers the SBA produced but later
deleted or re-assigned without knowledge of the Company are liabilities of the Company; (f) a
class action lawsuit filed by certain PPP borrowers alleging that the Company did not properly
process Loan Forgiveness applications; and (g) AmEx’s refusal to honor its obligations under a
Transition Services Agreement (the “AmEx TSA”) between the Company and AmEx entered into
in connection with the AmEx Transaction, which has affected the Company’s ability to perform a
number operational functions (collectively, the “Disputes”).7
17.
Despite adherence to express SBA guidance, the Company is embroiled in
government investigations, litigations, and stakeholder disputes related to the PPP program. The
hindsight investigations and misdirected scrutiny severely hamper the Company’s ability to
accomplish its mission of servicing the balance of the PPP Loans in its Loan Portfolio and have
caused significant additional costs to winding down its business. The overall impact of the
Disputes on the Company’s operations is compounded by the Company’s limited go-forward cash
flows,8 inability to originate any new loans due to non-compete covenants contained in
documentation associated with the AmEx Transaction, inability to obtain certain accommodations
needed to address the expiration of applicable Loan Forgiveness and Guaranty Purchase
7 The Company’s board of directors (the “Board”), with the assistance of the Company’s restructuring counsel,
Weil, Gotshal & Manges LLP (“Weil”), has been reviewing the AmEx Transaction to evaluate whether there any
viable causes of action with respect to the AmEx Transaction. Postpetition, the Board will continue to review the
AmEx Transaction and determine appropriate action with respect thereto.
8 The Company received all of its servicing fees for the Partner Bank PPP Loans as a percentage of loan principal at
or near the time of origination, with the exception of certain outstanding receivables from CUBI, as discussed herein.
The Company’s sole remaining sources of cash flow are the interest received on its Pledged PPPLF Loans and the
principal and interest received on its KS PPP Loans and Legacy Loans, which collectively are insufficient to support
the Company’s ongoing operations.
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application deadlines that can only be granted by the SBA,9 and a substantially new workforce in
place following the AmEx Transaction that has limited firsthand knowledge of the Company’s
legacy operations.
18.
Prior to commencing these Chapter 11 Cases, the Debtors, led by a new
management team and board that were put in place at various times following the AmEx
Transaction, expended substantial time addressing information requests and subpoena demands,
engaged with all stakeholders party to a Dispute in an attempt to reach workable resolutions, settled
the SALT Issue with the SBA for $30 million in 2021, and allocated millions of dollars of its finite
working capital to engage various professionals to address DOJ and SBA concerns of the
Company’s loan approval practices. Despite the Debtors’ best efforts, nearly all of the Disputes
remain pending and the Debtors forecast that given their limited resources (the Debtors have
approximately $11 million of unrestricted cash on-hand) they will be unable to service their
remaining Loan Portfolio until the latest maturity, which occurs in 2026.
19.
With limited options, the Debtors have engaged in good faith negotiations
with their constituents prior to filing these Chapter 11 Cases and have filed a chapter 11 plan
contemporaneously herewith that addresses two potential scenarios. First, the proposed chapter
11 plan provides for the servicing of the Loan Portfolio throughout the Chapter 11 Cases in the
following ways and at the option of each of the Partner Banks and the Federal Reserve Bank of
San Francisco (the “Federal Reserve”): (a) the Company continues to service the remaining Loan
Portfolio after the plan effective date, but with each applicable Partner Bank and the Federal
Reserve paying post-effective date servicing costs; or (b) the Company and each applicable Partner
9 The deadline to submit a Loan Forgiveness application is the maturity date of the loan. Further, the SBA is not
obligated to honor the Guaranty Purchase if a PPP lender does not apply within 180 days following maturity. Loan
maturities can be extended with cooperation from the SBA.
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Bank and the Federal Reserve work cooperatively to transfer after the plan effective date servicing
to a third-party loan servicer, including contribution and payment of transfer costs by the Partner
Banks and the Federal Reserve, as applicable. Alternatively, the proposed chapter 11 plan provides
that if the Debtors are unsuccessful in securing funding through negotiations with the Federal
Reserve and CUBI in the early days of the Chapter 11 Cases, and thus are unable to service the
Loan Portfolio for the duration of the Chapter 11 Cases, the Debtors’ proposed chapter 11 plan
provides for (a) the rejection of the servicing agreements with the Partner Banks, and (b) servicing
its PPPLF Portfolio (as defined below), and on the contemplated plan effective date, the Debtors
will transfer the PPPLF Collateral (as defined below) to the Federal Reserve in satisfaction of its
claims under the PPPLF Documents (as defined below). Notably, at the time of filing these
Chapter 11 Cases, the Debtors were quite close to an agreement with the Federal Reserve, and
discussions with CUBI had progressed significantly in the days leading up to filing these Chapter
11 Cases. Further, in both scenarios, any costs associated with the transfer of servicing obligations
will not be borne by the Debtors, and the Debtors will make commercially reasonable efforts to
assist the Partner Banks and the Federal Reserve, as applicable, with such transfer of the Debtors’
servicing obligations to a third-party loan servicer prior to the applicable transfer date.
20.
As noted above, the Debtors, an experienced lender to small businesses
before the launch of the PPP, successfully distributed billions of dollars to the vulnerable
population of small businesses with the expediency desired by the SBA, and as a result saved
hundreds of thousands of businesses and jobs. The Debtors relied on the SBA underwriting
guidelines and the Guaranty Purchase, among other things, to support their decision to participate
in the PPP. Nevertheless, the Debtors find themselves the target of hindsight investigations and
scrutiny which threaten their ability to accomplish the PPP mission. Given the Debtors’ financial
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distress, they are utilizing the bankruptcy process to obtain a respite from having to constantly
defend against the Disputes, to provide a single forum to address the Disputes, and to hopefully
emerge in a position to complete their wind down efforts for the benefit of tens of thousands of
remaining borrowers and the Debtors’ stakeholders that provided those loans to the borrowers.
II.
THE DEBTORS’ BUSINESS
A.
The Debtors’ Legacy Business10
21.
The Company began as an online lending platform for small businesses in
2008, using machine-learning algorithms, data from public profiles, and other factors to quickly
and efficiently evaluate the financial health of loan applicants, significantly shortening loan
approval and disbursement processes as compared to traditional banks. Over the years, the
Company added several lines of business, providing, among other things, access to flexible lines
of credit, business checking accounts, online bill payment, cash flow visualization tools, and e-gift
certificates through its website and app. In October 2020, AmEx acquired a substantial majority
of the Company’s business for approximately $750 million.11 The AmEx Transaction specifically
excluded a small portfolio of Legacy Loans and the Company’s PPP business. Today, all Legacy
Loans the Company services are owned by Celtic Bank (“Celtic”) and governed by the Legacy
Loan Agreement.12 As of September 30, 2022, there were approximately 3,400 Legacy Loans
10 The Company historically operated its legacy business through KServicing and each of the other Debtor entities. As
of the Petition Date, KServicing is the only entity with legacy operations remaining. The other Debtor entities had
various purposes, including loan securitization vehicles, or were otherwise formed but never conducted business.
11 Approximately $38 million of the purchase price is currently held in escrow (the “AmEx Escrow Fund”) for the
benefit of the selling shareholders and, to the Debtors’ knowledge, remains subject to certain unresolved claims by
AmEx under the documents related to the AmEx Transaction.
12 “Legacy Loan Agreement” means the Program Management Agreement, dated March 20, 2014, by and between
Kabbage and Celtic, as amended.
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remaining in the Loan Portfolio with approximately $17 million in aggregate outstanding principal
amount.
22.
As a non-Federal Deposit Insurance Corporation insured financial
institution, the Company partnered with Celtic in an arrangement whereby: the Company
processed Legacy Loan borrower applications, funded the Legacy Loans through the purchase of
participation interests in loan receivables (the “Participation Interests”)—effectively acquiring
the rights to retain borrower principal and interest payments, with Celtic remaining as the lender
of record—and subsequently serviced the Legacy Loans.13 The Company’s servicing obligations
involved marketing the Legacy Loans and conducting diligence on loan applicants to ensure
compliance with Celtic’s screening procedures. On account of the services rendered, the Company
earned a fee calculated as a percentage of the principal amount of the underlying Legacy Loan
upon origination (the “KS Legacy Fee”). Instead of collecting the servicing fee upfront, the fees
were set off against the Participation Interest fees (the “Celtic Legacy Fee”) that the Company
paid to Celtic in connection with its purchase of Participation Interests. On a monthly basis, if the
KS Legacy Fees exceeded the Celtic Legacy Fees, Celtic would remit the net amount to the
Company. If the Celtic Legacy Fees exceeded the KS Legacy Fees, the Company would remit the
net amount to Celtic.14
23.
As of the Petition Date, all such marketing fees, servicing fees, and monthly
premiums have been paid, loans are no longer being originated pursuant to the Legacy Loan
Agreement, and the Company is no longer purchasing Participation Interests from Celtic.
13 Following the purchase of Participation Interests under the Legacy Loan Agreement, the Company sold certain of
the Participation Interests to third parties. The Company continues to service these loans and receives servicing
fees on a monthly basis.
14 All KS Legacy Fees and Celtic Legacy Fees have been paid. Therefore, these monthly remittances no longer occur.
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Amounts collected from the Participation Interests accounted for 70 percent of the Company’s
year-to-date cash flow15 through September 30, 2022, but that percentage is set to significantly
decline as borrowers pay down their loans and the loans mature on a rolling basis. The Company’s
sole source of continuing cash flow from the Legacy Loan Portfolio is the Legacy Loan receivables
that the Company retains on account of its Participation Interests. As collateral security for the
Company’s remaining servicing obligations under the Legacy Loan Agreement, Celtic currently
holds approximately $2 million in an escrow account, the remaining amount of which Celtic is
obligated to remit to the Company within five business days of the termination of the Legacy Loan
Agreement.
B.
The Debtors’ PPP Business
24.
Responding to the country’s desperate need for private lenders to participate
in the PPP, the Company partnered with the SBA to originate and service PPP Loans. The
Company’s participation in the PPP can be separated into three distinct categories:
(a)
PPP Loans that the Company originated and pledged to the Federal
Reserve’s Paycheck Protection Program Liquidity Facility (the “PPPLF,”
the portfolio of loans, the “PPPLF Portfolio,” and the loans thereunder, the
“Pledged PPP Loans”);
(b)
PPP Loans owned by the Partner Banks, which the Company services for
the Partner Banks (the “Partner Bank Portfolio” and the loans thereunder,
the “Partner Bank Loans”); and
(c)
PPP Loans originated, funded, and serviced by the Company for its own
account (the “KS PPP Portfolio” and the loans thereunder, the “KS PPP
Loans”).
25.
The following table summarizes the Company’s PPP participation for each
of its PPP Loan portfolios and the approximate outstanding amounts. As of September 30, 2022,
15 As used herein, “cash flow” does not include amounts that the Company collects and subsequently remits to third
parties.
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only 20 percent of the Company’s Round 1 PPP Loans and 8 percent of the Company’s Round 2
PPP Loans, by aggregate outstanding principal amount, remain outstanding.
PPP Loan Summary*
PPP Loans at Origination
PPP Loans Outstanding
Round 1
Round 2 Total
Round 1
Round 2
Total
Pledged PPPLF
Principal
$1,519 M $104 M
$1,623 M
$534 M
$8 M
$541 M
Loan Count
86,000
11,000
97,000
21,000
1,000
22,000
CUBI
Principal
$1,767 M $818 M
$2,585 M
$111 M
$70 M
$181 M
Loan Count
58,000
41,000
99,000
3,000
4,000
7,000
CRB
Principal
$3,048 M -
$3,048 M
$604 M
-
$604 M
Loan Count
122,000
-
122,000
20,000
-
20,000
KS PPP
Principal
$9 M
$ <1 M
$9 M
$2 M
$ <1 M
$2 M
Loan Count
< 1,000
< 1,000
< 1,000
< 1,000
< 1,000
< 1,000
Total
Principal
$6,343 M $923 M
$7,266 M
$ 1,250 M
$78 M
$1,328 M
Loan Count
267,000
52,000
319,000
44,000
4,000
48,000
* Principal amounts are rounded to the nearest million and loan counts are rounded to the nearest
thousand.
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26.
The following table summarizes Loan Forgiveness and Guaranty Purchase
statuses of the PPP Loans in the Company’s Loan Portfolio according to the Company’s records,
as of September 30, 2022.
Completed Loan Processing to Date*
Total Origination
Principal and Loan
Count
Forgiven or Guaranty
Purchased Loans
Percentage Forgiven or
Guaranty Purchased
Pledged PPPLF
Principal
$1,623 M
$1,011 M
62.3%
Loan Count
97,000
74,000
76.3%
CUBI
Principal
$2,585 M
$2,342 M
90.6%
Loan Count
99,000
91,000
91.5%
CRB
Principal
$3,048 M
$2,328 M
76.4%
Loan Count
122,000
99,000
81.1%
KS PPP
Principal
$9 M
$ <1 M
5.0%
Loan Count
< 1,000
< 1,000
11.7%
Total16
Principal
$7,266 M
$5,682 M
78.2%
Loan Count 319,000
264,000
82.8%
* Principal amounts are rounded to the nearest million and loan counts are rounded to the nearest
thousand.
27.
On April 9, 2020, to support the effectiveness of the PPP, the Board of
Governors of the Federal Reserve System, with the concurrence of the U.S. Treasury, authorized
the establishment of the PPPLF, pursuant to which PPP-eligible lenders could enter into
agreements with the Federal Reserve to obtain funding for PPP Loans. To obtain PPPLF financing,
the Company entered into the Paycheck Protection Program Liquidity Facility Letters of
Agreement (the “PPPLF Letter Agreement”), dated May 12, 2020 and amended as of January
16 Approximately $256 million of the principal from the “Total Origination Principal and Loan Count Column” has
been reduced on account of borrower payments of principal in the ordinary course.
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14, 2021, with the Federal Reserve. The PPPLF Letter Agreement incorporates the Federal
Reserve Banks Operating Circular No. 10, dated July 16, 2013 (the “Operating Circular,” and
together with the PPPLF Letter Agreement, the “PPPLF Documents”), which sets forth the
universal terms and conditions for any party who obtained advances from, incurred liabilities to,
or pledged collateral to, the Federal Reserve, and includes terms such as advance payment
mechanics, requirements for collateral, and maintenance of lending documents.
28.
Under the PPPLF Documents, the Company was authorized to request
advances (the “PPPLF Advances”) from the Federal Reserve that were secured by certain PPP
Loans originated by the Company. Pursuant to the PPPLF Documents, the PPPLF Advances are
fully secured by the underlying PPP Loans that the Company originated using funding from the
PPPLF (the “PPPLF Collateral”), and mature on the respective maturity dates of the pledged PPP
Loans. Historically, the Company repaid the PPPLF Advances by making weekly remittances to
the Federal Reserve for all payments received on account of the Pledged PPPLF Loans, including
borrower payments and payments received from the SBA on account of Loan Forgiveness and
Guaranty Purchase, including the 0.35 percent of interest per annum on the Pledged PPPLF Loans
received from the SBA, but not including the remaining 0.65 percent of interest per annum on the
Pledged PPPLF Loans received from the SBA. The Federal Reserve has asserted that various
defaults have occurred under the PPPLF Documents and memorialized its position in a
correspondence sent to the Company on October 1, 2022 (the “Default Notice”).
29.
In September 2022, pursuant to its rights under the PPPLF Documents, the
Federal Reserve initiated a change in the remittance procedures whereby the SBA will begin
making payments on the Pledged PPPLF Loans directly to the Federal Reserve (the “SBA Direct
Payment Processing”). Although the Debtors and the Federal Reserve initiated the SBA Direct
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Payment Processing prepetition, the coordination process remains ongoing with the SBA and the
parties are still in the process of documenting an agreement. Once the SBA Direct Payment
Processing is in place, the Federal Reserve will receive payments on account of the Pledged PPPLF
Loans directly from the SBA, but the Company will still receive and remit borrower payments on
account of the Pledged PPPLF Loans to the Federal Reserve. In connection with the SBA Direct
Payment Processing, the Company and the Federal Reserve have been in discussions regarding the
treatment of the Company’s allocation of interest received from the SBA on account of Pledged
PPPLF Loans, among other portions of the SBA remittances.
(i)
The Partner Bank Portfolio
30.
Between April 2020 and February 2021, the Company entered into various
PPP Loan-related agreements with its Partner Banks. While there are nuanced differences in,
among other things, how the underlying PPP Loans are originated—some were originated by the
Company and sold to the Partner Banks, while others were originated by the Partner Banks— and
how servicing fees are calculated, as well as the Company’s servicing obligations related to Loan
Forgiveness and Guaranty Purchase, the ultimate relationship established between the Company
and each of its Partner Banks is fundamentally the same. Under the CUBI Agreements17 and the
CRB Agreements18 (together, the “Partner Bank Agreements”), the Partner Banks funded the
PPP Loans and the Company services the loans as described below. On account of the services it
provides, the Company was to receive all of its servicing fees at or near the time of origination of
17 “CUBI Agreements” means (i) the CUBI Processing and Servicing Agreement, dated April 27, 2020, by and
between Kabbage and CUBI (together with its amendments, the “CUBI PSA”); (ii) the CUBI Sale and Servicing
Agreement, dated February 2, 2021, by and between Kabbage and CUBI (the “CUBI SAS”); and (iii) the CUBI
SaaS Services Agreement, dated April 24, 2020, by and between Kabbage and CUBI (together with its
amendments, the “CUBI SaaS”).
18 “CRB Agreements” means (i) the CRB Loan Program Agreement, dated April 13, 2020, by and between Kabbage
and CRB (together with its amendments, the “CRB LPA”); and (ii) the CRB Sale and Servicing Agreement, dated
May 6, 2020, by and between Kabbage and CRB (the “CRB SAS”).
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the underlying PPP Loan. To date, the Company continues to service the CUBI PPP Loans, and
CUBI has not paid approximately $65 million (plus any applicable interest) of loan referral and
servicing fees owed to the Company, despite the fact that the Company has processed more than
90 percent of CUBI’s PPP Loan portfolio. As of the Petition Date, the Company has set off
approximately $34 million from amounts that would be payable to CUBI as reasonable
compensation for the Company performing services for which CUBI has not paid.
31.
Customers Bank. On April 24, 2020, the Company and CUBI entered into
the CUBI SaaS, pursuant to which the Company is obligated to provide SaaS Services to facilitate
CUBI’s PPP Loan program. Three days later, the Company and CUBI entered into the CUBI PSA,
pursuant to which the Company is obligated to: (a) market CUBI’s PPP Loan program; (b) provide
funding
reports
to
CUBI
to
facilitate
CUBI’s
origination
of
PPP
Loans
(the “CUBI Originated Loans”); (c) subservice PPP Loans originated by CUBI; (d) process PPP
Loans as CUBI’s agent, including performing Borrower Diligence in accordance with the CARES
Act and SBA guidelines, assisting borrowers in their submissions for Loan Forgiveness, and
assisting CUBI in its submissions for Guaranty Purchase; and (e) submit reports regarding loan-
level data and complaints, among other things. On February 2, 2021, the Company and CUBI
entered into the CUBI SAS, pursuant to which the Company sold certain PPP Loans it originated
(the “CUBI Sold Loans,” and together with the CUBI Originated Loans, the “CUBI Loans”) to
CUBI and is obligated to subservice those CUBI Sold Loans.
32.
Cross River Bank. On April 13, 2020, the Company and CRB entered into
the CRB LPA, pursuant to which the Company is obligated to (a) market CRB’s PPP Loan
program; (b) provide funding reports to CRB to facilitate CRB’s origination of PPP Loans; (c)
subservice PPP Loans originated by CRB (the “CRB Originated Loans”); (d) process PPP Loans
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as CRB’s agent, including performing Borrower Diligence in accordance with the CARES Act
and SBA guidelines, assisting borrowers in their submissions for Loan Forgiveness, and assisting
CRB in its submissions for Guaranty Purchase; (e) submit reports regarding loan-level data and
complaints, among other things; and (f) provide SaaS Services to facilitate CRB’s PPP Loan
program. On May 6, 2020, the Company and CRB entered into the Sale and Servicing Agreement
CRB SAS, pursuant to which the Company sold certain PPP Loans it originated (the “CRB Sold
Loans,” and together with the CRB originated Loans, the “CRB Loans”) to CRB and is obligated
to subservice those loans.
(ii)
The KS PPP Portfolio
33.
In addition to the PPPLF Portfolio and Partner Bank Portfolio, the Company
originated, funded, and currently services approximately 80 KS PPP Loans with approximately
$1.6 million in outstanding loan amount. The KS PPP Loans makes up less than one percent of
the Company’s PPP Loans by aggregate outstanding principal amount.
III.
CORPORATE AND CAPITAL STRUCTURE
A.
Corporate Structure
34.
KServicing owns 100% of the ownership interest in each of the other
Debtors. KServicing owns 100% of the ownership interest in Kabbage Financial Services Limited
(“Kabbage UK”), which owns 99.9% of the ownership interest in Kabbage India Private Limited
(“Kabbage India”). Kabbage UK and Kabbage India are the only non-Debtor affiliates of the
Debtors. The corporate structure chart, attached hereto as Exhibit A, illustrates the Debtors’
organizational structure as of the Petition Date.
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B.
Management
35.
The following table sets forth the names of KServicing’s current executive
officers:
Name
Position
Laquisha Milner
President and CEO
David Walker
Interim CFO
Donna Evans
Vice President of Operations
Holly Loiseau
General Counsel, Chief
Compliance Officer, Chief
Privacy Officer, Secretary
Salim Kafiti
Deputy General Counsel,
Assistant Secretary
Ian Cox
BSA/AML and OFAC Officer19
C.
Prepetition Capital Structure
36.
PPPLF Advances. The total amount of PPPLF Advances borrowed by
KServicing pursuant to the PPPLF Documents is approximately $1.6 billion. As of September 30,
2022, approximately $541 million in PPPLF Advances remain outstanding. KServicing’s
obligations under the PPPLF Documents mature on the maturity date of the underlying PPP Loan.
The PPPLF Advances are not guaranteed by any of KServicing’s Debtor or non-Debtor affiliates,
although the Federal Reserve also has recourse against the Company under the PPPLF Documents
subject to the terms thereof and as described below.
37.
The PPPLF Advances and all obligations under the PPPLF Documents are
secured in accordance with the PPPLF Documents, pursuant to which the Federal Reserve was
granted first-priority liens on the underlying PPP Loans and all proceeds thereof. In the event
KServicing fails to repay a PPPLF Advance on the applicable maturity date, the Federal Reserve
must first seek repayment on a non-recourse basis, by realization on the PPPLF Collateral absent
19 “BSA” means Bank Secrecy Act. “AML” means Anti-Money Laundering. “OFAC” means the Office of Foreign
Assets Control.
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a default. Notably, the Federal Reserve may pursue payment directly from KServicing—if: (a) in
its sole discretion the Federal Reserve deems KServicing to have engaged in any fraud or
misrepresentation in connection with any Advance or any request to obtain an Advance, or
(b) KServicing fails to meet any of the requirements of the PPPLF Documents, including, but not
limited to, breaches of any representations, warranties, or covenants. The Federal Reserve has
notified KServicing it has determined such events have occurred pursuant to the Default Notice.
38.
Equity Ownership. As of the Petition Date, the outstanding shares of
common stock, par value $0.001 per share, of KServicing (the “KS Common Stock”) are held
(either directly or through subsidiaries or affiliates) as follows:
Holder
Outstanding KS Common Stock (%)
Softbank Vision Fund (AIV M2) L.P.
14.62%
Blue Run Ventures IV, L.P.
13.60%
MDV IX, L.P.
12.08%
Thomvest Ventures Ltd.
11.47%
SoftBank PrinceVille Investments, L.P.
5.17%
Less than 5% holders
43.06%
Total
100%
39.
KServicing does not have any other classes of stock outstanding.
IV.
CIRCUMSTANCES LEADING TO THESE CHAPTER 11 CASES
40.
The Debtors are filing these Chapter 11 Cases to implement and complete
the wind down of their business, which has been well underway since the October 2020 AmEx
Transaction. The benefits and protections of chapter 11 are critical to achieving the Debtors’ goals
of maximizing creditor recoveries, providing for an equitable distribution to their stakeholders,
and, perhaps most importantly, insulating the good-faith PPP Borrowers from any repercussions
of the Disputes—primarily, interruptions to loan servicing—to the greatest extent possible. Given
the Company’s finite resources, limited liquidity and revenue generating ability, and numerous
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ongoing investigations and related demands, absent a capital injection or significant reduction in
operations, the Company cannot sustain its businesses through the duration of the wind down.
A.
Lack of Clarity in SBA Guidance
41.
Speed was the watchword of the PPP. Delays in processing and funding
loans would undermine the efficacy of the “stay at home” posture that public health authorities
believed was the most effective means of slowing the spread of a disease that threatened millions
of lives. To induce lenders to make hundreds of billions of dollars in unsecured loans to small and
mid-size businesses (many of which had ceased operating due to government mandates), the
CARES Act provided that all PPP Loans would be backed by a 100% SBA guaranty of repayment,
and participating lenders were directed to forego the typical underwriting process, in favor of
“minimal review” of PPP Borrower calculations in which lenders (per published SBA guidance)
were permitted to rely on PPP Borrower representations, including specific representations as to
“amounts required to be excluded” from PPP Borrower calculations of qualifying payroll costs.
42.
However, there was a distinct lack of clarity and guidance from the SBA
during the PPP’s initial rollout. New rules and guidance were issued on a near daily basis during
the first few months of the PPP Loan Program. In the first month of the PPP Loan Program, the
government published six interim final rules and 42 FAQs. In the first two months of the program,
those numbers increased to 14 interim final rules and 48 FAQs. Despite this lack of clarity,
government officials publicly expressed to participating lenders that time was of the essence with
regards to administering loans, at times even asking lenders to process loans to eligible PPP
Borrowers on the same day that they applied. There was no other way to objectively view those
facts and circumstances—it was a national emergency. Under the most difficult of circumstances,
the Company processed loan applications in good faith, in accordance with the framework
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established by the CARES Act, SBA’s PPP implementing regulations, and the SBA’s written
guidance concerning lender obligations under the PPP.
B.
The Disputes
43.
Notwithstanding the Company’s compliance with SBA guidance, the
Company remains the subject of numerous Disputes, which requires the Company to expend a
significant amount of time and resources defending itself across multiple costly fronts. Such time
and resources are finite—the Company already is in wind down, is not originating or processing
any new loans, and generates limited cash flow from a dwindling Legacy Loan Portfolio and a
subset of its PPP Loans. The Company is overburdened despite its focus on servicing its remaining
Loan Portfolios, ensuring the timeliness of submission of Loan Forgiveness and Guaranty
Purchase applications, and prioritizing uninterrupted processing. In the face of the Disputes, the
Company’s servicing operations have evolved into a significantly more time intensive and costly
enterprise. For example, submissions to the SBA for Loan Forgiveness or Guaranty Purchase for
“excess amounts” has required months of back and forth with the DOJ and the SBA, responding
to extensive and burdensome information requests, borrower fraud and suspicious activity
analysis, engagement of professionals for review of the Loan Portfolios, and more. Even then, the
issue of “excess amounts” as processed by the SBA remains unresolved. Further, responding to
and participating in the Disputes and defending against false allegations has required expenditure
of significant amounts. Balancing their limited resources with ballooning costs from litigations
and investigations—and unable to reach consensual out-of-court resolutions—the Debtors
commenced these Chapter 11 Cases to preserve their assets and utilize the protections and tools of
chapter 11 to optimize their ability to continue providing services to borrowers and their remaining
wind down efforts.
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44.
The DOJ and the SBA. On December 28, 2020 and July 11, 2021, the MA
DOJ and Texas DOJ, respectively, initiated investigations into whether the Debtors’ performance
of Borrower Diligence violated the False Claims Act and the Financial Institutions Reform,
Recovery, and Enforcement Act. It is the Company’s position that the DOJ’s allegations are
wholly without merit.
45.
Under the PPP Loan program, a borrower’s maximum loan amount was
2.5 times the amount of the Borrower’s average monthly payroll costs. Qualifying payroll costs
consisted of employee compensation and payments for certain benefits, among other things, but
the CARES Act required exclusion of compensation of an individual employee in excess of an
annualized salary of $100,000 prorated for the covered period. Further, in guidance issued on
April 24, 2020, the SBA instructed Borrowers to compute payroll costs by adding 2019 gross
wages and tips paid to employees together with fringe benefits, which are excluded from taxable
Medicare wages & tips. Using the Internal Revenue Service Form 940, Box 4 (“Box 4”) as a guide
to calculate these costs complied with such guidelines because virtually all fringe benefits exempt
under the Federal Unemployment Tax Act—and thus which an employer would list in Box 4—are
also excluded from Medicare tax.20
46.
At all times, the Company complied with PPP lending requirements. With
respect to approving loan applications in which the borrower failed to exclude employee
compensation in excess of $100,000, the Company was entitled to rely on borrower representations
and certifications regarding amounts required to be excluded from the calculation of payroll costs.
Any loan amounts resulting from borrowers’ inclusion of individual employee compensation in
20 In addition, given the urgency of getting money in the hands of businesses in need and the deferred tax deadlines
passed by Congress in response to the pandemic, the SBA expressly permitted Round 1 PPP lenders to originate
PPP Loans based on draft tax documents.
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excess of $100,000 were attributable to the borrowers’ failure to follow PPP requirements.
Notably, the publicly-reported maximum amount of a PPP Loan for a small business with one
employee was $20,833, whereas the average loan amount for PPP Loans processed by the
Company was $23,546. Additionally, allowing borrowers to use Form 940, Box 4 in their payroll-
cost calculations was a reasonable effort to implement PPP requirements, and was consistent with
SBA guidance on calculating loan amounts. The proper and intended manner for the program to
deal with excess loan amounts was for lenders to seek identification of excess amounts when
borrowers applied for forgiveness, and then collect excess amounts from borrowers with SBA’s
guaranteed purchase of the excess amount still intact. Requiring more would de facto impose more
than “minimal review” requirements on lenders, and transfer risk to them that the PPP rules did
not contemplate.
47.
Despite the Company’s compliance with SBA guidance, the DOJ is alleging
that the Debtors improperly included individuals with compensation of more than $100,000 in its
payroll calculations (the “$100k Issue”), and failed to exclude ineligible expenses from
applicants’
Box
4
submissions
in
making
PPP
Loan
eligibility
determinations
(the “Form 940 Issue”).21 The DOJ flagged approximately 6,200 loans totaling $120 million of
principal
amount
in
connection
with
the
$100k
Issue
and
Form
940
Issue
(the “DOJ-Flagged Loans”) and instructed the Company not to process those loans for Loan
Forgiveness. Further, in response to the DOJ’s allegations, the SBA stopped processing Loan
Forgiveness for DOJ-Flagged Loans, with little indication of when or under what circumstances
processing would resume. The Company was not permitted to discuss these investigations with
21 The DOJ has also alleged that the Company improperly counted state and local taxes twice in calculating payroll
costs, resulting in additional excess loan amounts. As noted previously, the DOJ elected not to participate in the
SALT Settlement between the Company and the SBA on October 25, 2021.
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concerned borrowers, who became increasingly frustrated and brought escalations and claims
against the Company. Only recently—after weeks of discussions with the Company, shared
documentation, and analysis—did the SBA provide the Company with the clarity needed to submit
DOJ-Flagged Loans for Loan Forgiveness and Guaranty Purchase. Importantly, the SBA has
communicated to the Company, that, at this time, it will not guarantee any excess loan amounts
stemming from the $100k Issue or the Form 940 Issue; therefore, the fate of these amounts, the
Company, and the Partner Banks and the Federal Reserve remain in limbo until such a time as the
SBA makes clear its final position with respect to the excess loan amounts, and it appears the SBA
is deferring to the DOJ in many respects as the DOJ investigation continues.
48.
SALT Issue. In 2021, the Company was engaged in extensive discussions
with the SBA regarding approximately 53,000 PPP Loans processed by the Company on its behalf
and on behalf of the Partner Banks that may have been originated in amounts involving duplicate
counting of state and local income taxes. The duplicate calculation resulted in borrowers receiving
PPP Loans in excess of the maximum amount they were eligible to receive under the program
rules. Any such error also potentially resulted in the Company and/or the Partner Banks collecting
processing fees from the SBA that were in excess of amounts that should have been paid. On May
3, 2021, the SBA and the Company entered into an interim voluntary agreement related to the
SALT Issue. For approximately three months, while the SBA and the Company discussed the
SALT Issue, and the Company engaged an independent third-party to assess the reasonableness of
the Company’s methodology in identifying the potentially affected loans, the SBA took unilateral
action and paused Loan Forgiveness processing for the Company’s entire PPP Loan portfolio. The
SBA paused Loan Forgiveness processing on 53,000 PPP Loans for an additional five months. On
October 25, 2021, the Company and the SBA entered into a final settlement agreement in
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resolution of the SALT Issue (the “SBA SALT Settlement Agreement”) and pursuant to which
the Company paid the SBA $30 million (the “SBA SALT Settlement Amount”) and, in exchange,
the SBA resumed Loan Forgiveness processing for all PPP Loans in the Company’s Loan
Portfolio, which ensured that borrowers would not be further impacted.22 Payment of the SBA
SALT Settlement Amount significantly impacted the Company’s already dwindling liquidity.23
Further, despite a degree of involvement in discussions regarding the SALT Issue and the ultimate
resolution reached with the SBA – including payment of the SBA SALT Settlement Amount, the
DOJ has subsequently alleged claims against the Company under the False Claims Act on account
of the same SALT Issue.
49.
Conflicting Agency Positions. As maturity dates for certain of the
Company’s 24-month PPP Loans approached, the Company found itself in the untenable position
of addressing the deadline for Pledged PPPLF Loan repayment obligations, which the Federal
Reserve has not extended, for loans where the Company had yet to receive funds from the borrower
in satisfaction of the outstanding amount due or payment from the SBA due to its Guaranty
Purchase obligations. The implicated Pledged PPPLF Loans were generally delayed in processing
because either the DOJ/SBA directed that such loans not be processed, or the Company needed
additional time to address SBA issued “hold codes” placed on the applicable forgiveness or
guaranty purchasing applications to the extent the SBA’s automated screening tool identified the
borrower as potentially being ineligible for the loan (or the loan amount) it received. Failure to
22 The Partner Banks did not contribute settlement amounts. The Partner Banks did not incur any direct liability on
the SALT Issue once the PPP Loans were cleared for full processing.
23 To address Pledged PPPLF Loans affected by the SALT Issue, the Company paid the Federal Reserve the full
amount outstanding under such loans without regard for any excess amounts. Any payments thereafter received by
the Company on account of borrower repayment or through the SBA Guaranty Purchase have been retained by the
Company to satisfy recoupment of the amounts paid to the Federal Reserve.
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pay the outstanding PPPLF obligations by the maturity date was a default under the PPPLF
Documents. Despite the need for accommodations to be made such that PPPLF maturities reflect
the delay in SBA processing of Pledged PPPLF Loans, this did not occur. In certain instances the
Debtors advanced millions of dollars of their own funds to satisfy amounts due on PPPLF
obligations to avoid defaulting under the PPPLF Documents and to provide borrowers with a
bridge in time so that they may address their respective loan obligations through self-payment,
loan forgiveness or the SBA paying under its Guaranty Purchase obligation. The Company found
itself in the middle of conflicting agency positions which resulted in adverse consequences to its
already depleting liquidity and its ability to serve borrowers.
50.
Congressional Subcommittee Investigation. On May 27, 2021, the
Congressional Subcommittee notified the Company that it was investigating potential waste, fraud,
and abuse in connection with the PPP Loan program. The Congressional Subcommittee requests
extensive document production, including documents and policies related to the Company’s PPP
Loan program, training materials provided to employees and contractors, and communications
concerning potential fraud or other financial crime related to PPP Loans, among other things. The
Company is producing these documents on a rolling basis and continues to communicate with the
Congressional Subcommittee regularly.
51.
Federal Trade Commission Investigation. On February 8, 2021, the
Company received a Civil Investigative Demand (a “CID Letter”) from the FTC alleging that the
Company engaged in deceptive and/or unfair acts or practices under the Federal Trade
Commission Act and the COVID-19 Consumer Protection Act in connection with the Company’s
advertising, marketing, underwriting, originating, and servicing of PPP Loans. In the CID Letter,
the FTC requested that the Company produce, among other things, PPP Loan statistics and
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Borrower information, technical errors detected in the Company’s PPP Loan platform, and
descriptions of the Company’s PPP Loan policies, among other things. As of September 7, 2022,
the Company has produced approximately 32,000 documents to the FTC and is undertaking a
privilege review of approximately 17,000 additional documents. The Company is continuing to
communicate with the FTC and producing documents on a rolling basis.
52.
Customers Bank. From April 2020 to May 2021, CUBI funded or
originated over $2.6 billion in loans through its arrangements with the Debtors, generating tens of
millions of dollars in fees payable to the Debtors under the CUBI Agreements, including
approximately $65 million in loan referral and servicing fees (the “CUBI Receivable”) in
connection with Round 2 PPP Loans. CUBI’s withholding of the CUBI Receivable for over 20
months has caused a significant financial strain on the Company. In response, as of September 30,
2022 the Debtors withheld certain payments due to CUBI in the amount of approximately $34
million (the “KServicing Withholding”) to offset the CUBI Receivable (all of the foregoing, the
“CUBI Dispute”). The Company has already expended a significant amount of its depleted
resources in addressing the CUBI Dispute, increasing the servicing costs associated with the CUBI
Loans.
53.
On May 25, 2022, the Company filed a complaint in the United States
District Court for the Northern District of Georgia, Atlanta Division (the “Georgia Action”),
alleging breach of contract under the CUBI Agreements for CUBI’s withholding of the CUBI
Receivable. On August 16, 2022, the Debtors and CUBI held a mediation in an effort to resolve
the CUBI Dispute.
54.
After months of negotiations, CUBI and the Company are still discussing
terms of a potential settlement, which would bring much needed cash flow to the Company and
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put the Debtors in a position to pursue a more consensual plan confirmation process, as described
in more detail herein.
55.
Cross River Bank. In correspondence beginning August 12, 2022, CRB has
asserted various contractual claims under the CRB Agreements, including repurchase obligations
and a right to indemnification under the CRB SAS, and a right to indemnification and remediation
and or/restitution under the CRB LPA. In addition, CRB has requested that the Company provide
sufficient data to identify 100k Loans and Form 940 Loans (as defined herein), and assurances that
the Company will be able to meet its obligations to CRB. In response, the Company has provided
the requested information and explained its position that repurchase obligations were not triggered
and the Company does not owe any indemnification, remediation, or restitution under the CRB
Agreements. The Company has already expended a significant amount of its depleted resources
in responding to CRB’s allegations and document requests, increasing the servicing costs
associated with the CRB Loans. Nevertheless, the Company plans to continue discussions with
CRB in an effort to reach a consensual resolution of CRB’s demands.
56.
Borrower Class Action Lawsuit. On March 20, 2022, named plaintiffs
Jason Carr, Vicki LeMaster, Edward Ford Services LLC, Carlton Morgan, 365 Sun LLC, and
Candice
Worthy
(the “Class Action Plaintiffs”)
filed
a
class
action
complaint
(the “Class Action Complaint”) against the Company in the Georgia District Court, alleging that
the Company failed to timely and competently process Loan Forgiveness applications on behalf
of Borrowers. The Class Action Complaint seeks injunctive relief directing the Company to
review and process Loan Forgiveness in accordance with SBA regulations, disgorgement of PPP
Loan origination fees on theories of unjust enrichment, and damages in accordance with state
consumer protection statutes. On May 31, 2022, the Company moved to dismiss the class action
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in its entirety on the basis that the Class Action Plaintiffs did not allege facts sufficient to establish
legal claims against the Company and also that private individuals do not have standing to pursue
the alleged causes of action.24 This motion has been fully briefed and the parties are awaiting
decision from the Georgia District Court. The Company has cooperated with all required initial
disclosures.
57.
American Express. To further exacerbate the aforementioned difficulties,
the Company has experienced significant operational hurdles to even the simplest of corporate
tasks by virtue of a lack of cooperation or delay from AmEx. In connection with the AmEx
Transaction, the parties entered into the AmEx TSA pursuant to which, among other things, AmEx
provides the Company with information and access to books and records necessary and critical to
run its PPP business and access to the Company’s legacy software, which provides PPP Loan and
Legacy Loan borrowers a platform to submit payments and supports PPP-related processes such
as Guaranty Purchase (with the key exception of Loan Forgiveness processes, as explained herein)
(the “AmEx Platform”).
58.
With the incredibly voluminous information production requests from the
DOJ and various other stakeholders in connection with the Disputes, AmEx’s performance under
the AmEx TSA is more important than ever. Nevertheless, retrieving documents from AmEx has
and continues to be difficult and requires concerted effort as responses are often delayed and
incomplete. Further, when the SBA issued a revised Loan Forgiveness application form in early
2021, AmEx was required to revise the AmEx Platform to accommodate the revisions pursuant to
24 See Defendant Kabbage, Inc., d/b/a KServicing’s Motion to Dismiss and Request for Oral Argument, filed May 31,
2022 (Case 1:22-cv-01249-VMC, ECF No. 12).
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the terms of the AmEx TSA, and it refused to do so. AmEx’s refusal forced the Company to
engage a third-party vendor, Biz2Credit, to process Loan Forgiveness applications.
59.
The Debtors are hopeful that the flow of information with AmEx will
improve during the Chapter 11 Cases so that they may have, at a minimum, the books and records
necessary to conduct their operations; but to the extent necessary, the Debtors are prepared to use
the tools provided to debtors-in-possession to seek out any required information, including through
Bankruptcy Rule 2004 discovery. The Debtors are cognizant of the importance of the AmEx
Transaction to the administration of these Chapter 11 Cases and, as described above, the
transaction and any causes of action related thereto are under review by the Board.
C.
Liquidity Constraints
60.
Given that it has been winding down its operations, the Company is not
entering into any new business and therefore is limited in its ability to independently source funds
to support its remaining servicing and wind down operations, which also makes the chances of
securing third-party funding highly improbable. Further, the Company’s remaining operations
generate only immaterial revenue and cash flow. As described in detail herein, (a) the PPPLF
Portfolio and Legacy Loan Portfolio generate modest income and cash flow as the Company’s
servicing fees earned in connection with the Partner Bank Portfolio (as defined below) were paid
up-front,25 and (b) this modest income is declining as borrowers pay down their loans and the loans
mature on a rolling basis
61.
In addition to the withholding of the CUBI Receivable and the Company’s
lack of go-forward cash flows under its servicing agreements, its liquidity is being significantly
impacted by two major items: (a) the Company’s fees payable to AmEx under the AmEx TSA
25 With the exception of the CUBI Receivable.
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and to Biz2Credit for services that AmEx was obligated, but refused, to provide under the AmEx
TSA; and (b) the cost of defending against the Disputes, which includes increased servicing and
administration costs in connection thereto. The net result is that the Company is rapidly burning
through its remaining cash and has no ability to originate more loans or otherwise create new
income streams.
62.
Fees Payable to AmEx and Biz2Credit. As described above, in connection
with the AmEx Transaction, the Company and AmEx entered into the AmEx TSA whereby AmEx
agreed to provide services pivotal to the Company’s operations, which includes, among other
things, access to and maintenance of the AmEx Platform, certain cloud services, and documents
and files transferred to AmEx that the Company needs to process its PPP Loans and Legacy Loans
and otherwise wind down the remaining loan portfolios (the “AmEx Services”). The Company
relies heavily on AmEx to access the services, documents, and files necessary to service PPP
Loans, wind down the business, and facilitate these Chapter 11 Cases. Notably, around February
2021 when the SBA issued a revised Loan Forgiveness application form, AmEx refused to revamp
the AmEx Platform to accommodate the updated form, as required under the terms of the AmEx
TSA. The Company subsequently scrambled to find a third-party service provider, and engaged
Biz2Credit to provide a platform for Loan Forgiveness activities (the “B2C Platform”).26
63.
Put simply, the AmEx Services and B2C Platform are expensive. As of the
Petition Date, the Company has spent a combined $7 million in 2022 on the AmEx Services and
the B2C Platform. The Company estimates that it will pay between $275,000 and $375,000 per
month on the AmEx Services and B2C Platform, collectively, during these Chapter 11 Cases.
26 Because the SBA would no longer accept the old Loan Forgiveness form, borrowers were unable to submit their
applications for Loan Forgiveness for nearly three months while the Company identified and prepared the B2C
Platform for the Company’s PPP program.
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64.
Cost of Defending Against the Disputes. The Company has expended
tremendous amounts of time and resources to address the Disputes. In response to document
requests from Dispute counterparties, the Company has produced hundreds of thousands
documents to date and voluminous amounts of electronic data. The Company has participated in
over 100 formal meetings, in person and virtual, and phone calls with Dispute counterparties,
which does not include countless emails and other forms of correspondence. Additionally, to
demonstrate that the Company’s Borrower Diligence processes complied with SBA guidance, the
Company hired forensic accountants to analyze the DOJ-Flagged Loans for potential excess
amounts.
65.
As of the Petition Date, the Company has spent approximately $19 million
in 2022 on professional fees in connection with the Disputes. This amount does not include the
considerable amount of time and attention the Company’s employees—including its directors and
officers—have had to spend addressing the Disputes, away from the Company’s regular operations
and wind down.
66.
Increased Servicing and Administration Costs. The Disputes—and more
specifically the DOJ investigations and the SBA’s refusal to process DOJ-Flagged Loans for Loan
Forgiveness and Guaranty Purchase—have significantly increased the time and resources required
to process PPP Loans. To continue its regular operations, implement internal processes and
controls to account for the DOJ-Flagged Loans (by, for example, flagging such loans internally for
special processing, suspending Loan Forgiveness review activity at the request of the SBA and the
DOJ, performing special review activity and heightened underwriting standards at the Loan
Forgiveness stage that are not contemplated by SBA guidance, and adjusting deadlines for Loan
Forgiveness and Guaranty Purchase) and respond to document requests, among other things, the
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Company has had to augment its staff with additional contractors. As of the Petition Date, the
Company has spent approximately $11 million in 2022 on staffing firms, and a majority of such
amounts can be attributed to increased demand to process document requests, submit reports, and
respond to inquiries in connection with the Disputes.
67.
Expending Resources on Subpoena Responses. The Company is the
recipient of more than 100 subpoenas per week in connection with borrower bankruptcies and
other court proceedings related to the Company’s PPP Loans. Responding to these subpoenas
requires the production of loan files and certifications of authenticity of business records, as well
as the provision of witnesses at evidentiary hearings and trials to testify as to the authenticity of
business records and the loan origination process. The Company employs a dedicated staff of
approximately five employees to deal with such subpoenas and related matters.
D.
Debtors’ Prepetition Settlement Efforts
68.
Prior to the filing of these Chapter 11 Cases, the Company sought to resolve
the Disputes with its key stakeholders and obtain a workable framework to wind down the
Company’s operations. In the months leading up to these Chapter 11 Cases, the Company engaged
with key stakeholders with the goal of building consensus around an efficient and effective wind
down framework. The Debtors intend to continue their efforts to obtain consensus among the
relevant parties. As previously stated herein, the Company is seeking to maximize the value of a
finite pool of resources, and seeking a path forward that insulates, where possible, the PPP and
Legacy Loan borrowers.
69.
As described above, given the Debtors’ limited time and resources, the
Debtors filed a proposed chapter 11 plan contemporaneously herewith that provides two options
for implementation, depending on its ability to secure funds through negotiations with the Federal
Reserve and CUBI to operate its Loan Portfolio during these Chapter 11 Cases. The proposed
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plan, with the ability to toggle between two scenarios depending on the facts and circumstances,
is the Debtors’ best option for mitigating potential disruption to PPP borrowers and to maximize
the value of its estates.
V.
FIRST-DAY PLEADINGS
70.
The Debtors have filed their First-Day Pleadings contemporaneously
herewith to facilitate a smooth transition into these Chapter 11 Cases and minimize disruption to
the Debtors’ business operations. I am familiar with the contents of each First-Day Pleading and
believe that the relief sought in each First-Day Pleading is necessary to enable the Debtors to
operate with minimal disruption, and effectively focus its limited team of resources on a value
maximizing transaction for the benefit of all parties in interest. The facts set forth in each First-Day
Pleading are incorporated herein by reference. Capitalized terms used, but not otherwise defined
in this section, shall have the meanings ascribed to such terms in the relevant First-Day Pleading.
A.
Administrative Motions
i.
Motion of Debtors Pursuant to Fed. R. Bankr. P. 1015(b) for Entry
of Order Directing Joint Administration of Related Chapter 11
Cases (the “Joint Admin Motion”)
71.
The Debtors request entry of an order directing joint administration of these
Chapter 11 Cases for procedural purposes only pursuant to Bankruptcy Rule 1015(b), and that the
Bankruptcy Court maintain one file and one docket for all of the Chapter 11 Cases under the lead
case, Kabbage, Inc., d/b/a KServicing. Although the lead Debtor is listed, for tax identification
purposes, as “Kabbage, Inc.,” the lead Debtor also does business under the trade names
“KServicing” “KServicing, Inc.” and “KService Corp.” Accordingly, the proposed case caption
for the jointly-administered cases will reflect the trade name “KServicing” to, among other things,
preserve familiarity with the Debtors’ businesses for all interested parties.
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72.
I believe joint administration of the Chapter 11 Cases will provide
significant administrative efficiencies, as it will save the Debtors and their estates substantial time
and expense by removing the need to prepare, replicate, file, and serve duplicative notices,
applications, and orders. Further, joint administration will relieve the Bankruptcy Court of
entering duplicative orders and maintaining duplicative files and dockets. The U.S. Trustee,
creditors, and other parties in interest will similarly benefit from joint administration of these
Chapter 11 Cases, as it will spare them the time and effort of reviewing duplicative pleadings and
papers.
73.
I believe joint administration of these Chapter 11 Cases will not adversely
affect creditors’ rights because the Joint Admin Motion requests administrative consolidation of
the Debtors’ estates for procedural purposes only. The relief requested in the Joint Admin Motion
is in the best interests of the Debtors’ estates, their creditors, and all other parties in interest and
will enable the Debtors to continue to operate their businesses in chapter 11 with the least
disruption.
ii.
Motion of Debtors for Entry of Order (I) Authorizing the Debtors
to (A) File and Maintain Consolidated Creditor Lists, and (B)
Redact Certain Personal Identification Information for Individuals,
(II) Approving Special Electronic Noticing Procedures, and (III)
Granting Related Relief (the “Creditor Matrix Motion”)
74.
The Debtors request entry of an order (i) authorizing the Debtors to (a) file
and maintain a single, consolidated creditor matrix in these cases (the “Creditor Matrix”), and to
file a single, consolidated list of the Debtors’ 30 largest unsecured creditors, in lieu of filing and
maintaining separate creditor lists and mailing matrices for each Debtor, and (b) redact certain
personal identification information for individuals, (ii) approving special electronic noticing
procedures (the “Special Electronic Noticing Procedures”), and (iii) granting related relief.
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75.
I believe permitting the Debtors to file and maintain a single, consolidated
Creditor Matrix, and file a single, consolidated list of the Debtors’ 30 largest unsecured creditors,
in lieu of filing and maintaining separate creditor lists and mailing matrixes for each Debtor entity
is warranted under the circumstances of these Chapter 11 Cases. Specifically, maintaining a single
consolidated Creditor Matrix will benefit the Debtors and their estates by allowing the Debtors to
more efficiently provide required notices to parties in interest and reduce the potential for duplicate
mailings.
76.
Cause exists to authorize the Debtors to redact address information of
individual creditors and interest holders—many of whom are the Debtors’ employees and the
Debtors’ current and former Borrowers (as defined in the Motion)—and interest holders from the
creditor list because such information is unnecessary to disclose, sensitive, and could be used to
perpetrate identity theft. The Debtors propose to provide, on a confidential basis, an unredacted
version of the Creditor Matrix and any other applicable filings to the Debtors’ claims and noticing
agent, the U.S. Trustee, any official committee of unsecured creditors appointed in these Chapter
11 Cases, any subsequently appointed trustee, the Court, and any party in interest upon reasonable
request. In addition, any party in interest that is not provided with an unredacted version of the
applicable document upon request may file a motion with the Court to obtain such documents.
77.
Allowing the Debtors to abide by the Special Electronic Noticing
Procedures with regard to Borrowers is appropriate in these Chapter 11 Cases. The Debtors have
approximately 456,000 current and former Borrowers identified on the Creditor Matrix. The cost
of postage alone to mail the Case Commencement Notice to 456,000 Borrowers would exceed
$500,000. The Debtors intend to provide email notice to Borrowers, and to the extent the Debtors
do not have an email address on file, or to the extent the Debtors receive a “bounce-back” or similar
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error message in response to the electronic service of the Case Commencement Notice, the Debtors
will serve the Case Commencement Notice via first-class mail directed to the last known physical
address maintained in their books and records for such Borrower. The Special Electronic Noticing
Procedures will substantially reduce administrative burdens, and moreover, no parties in interest
will be prejudiced by the relief requested in the motion as it only applies to the claims of
Borrowers. The Debtors will also publish the Case Commencement Notice in both The New York
Times and USA Today. In the event any Borrower has filed a notice of appearance or a proof of
claim in these Chapter 11 Cases, the Debtors will provide such party with notice as required under
Bankruptcy Rule 2002.
B.
Operational Motions Requesting Immediate Relief
i.
Motion of Debtors for Interim and Final Orders Authorizing
Debtors to (I) Continue Servicing and Subservicing Activities and
(II) Perform Related Obligations (the “Loan Servicing Motion”)
78.
The Debtors request entry of an order authorizing, but not directing, the
Debtors to continue in the ordinary course of business to: (a) service and subservice PPP Loans
and Legacy Loans; (b) remit certain overpayments to borrowers and the SBA, as applicable, and
any reconciliation activities related thereto; (c) pay prepetition amounts owed to critical vendors
on the terms and conditions described in the Loan Servicing Motion; and (d) fulfill compliance
and regulatory obligations. Each of the activities for which the Debtors seek Court authority to
continue are consistent with both the Debtors’ prepetition conduct and with customary practices
in the loan servicing industry.
79.
Servicing PPP Loans and Legacy Loans accounts for all of the Debtors’
revenue and all of the Debtors’ customers depend on the Debtors continuing to perform their
servicing functions. Indeed, the focus of much discussion with the Debtors’ customers has, not
surprisingly, been on the need to continue servicing loans. Accordingly, continuing to service PPP
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Loans and Legacy Loans is a vital component of the Debtors’ business and essential to a successful
wind down. The failure to comply with the terms and conditions set forth in the applicable
servicing agreements may trigger additional, costly obligations upon the Debtors, harm borrowers
and their customers, and obligations to indemnify. I believe it is imperative that the Debtors be
permitted to continue to perform under its agreements with the Federal Reserve, the Partner Banks,
and Celtic, which will allow the Debtors to operate their business in the ordinary course without
interruption, and preserve the value of the estate for its stakeholders. Nothing in the Loan
Servicing Motion is intended or shall be construed as an approval, assumption, adoption, or
rejection of any agreement, contract, lease, program, or policy between the Debtors and any third
party under section 365 of the Bankruptcy Code.
80.
In connection with their general corporate activities, as well as their
origination and servicing businesses, the Debtors utilize the services of numerous third-party
vendors and service providers that are critical to operations (collectively, “Critical Vendors”),
who perform a variety of critical functions for the Debtors.
81.
I believe employing these specialized vendors is more cost-effective than
performing such activities in-house; indeed, replacing certain of these vendors would not only be
difficult and disruptive, but also cost-prohibitive. The Debtors have developed long-standing
relationships with their Critical Vendors, which has enabled them to negotiate favorable pricing,
credit terms, and priority scheduling. Any failure to timely honor the Debtors’ prepetition
obligations to the Critical Vendors could jeopardize these relationships, and any interruption of
their services for even a short period of time would impair the Debtors’ operations and the value
of the enterprise.
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82.
The Debtors’ PPP servicing activities are carried out in a highly orchestrated
and sequenced manner, so that the Debtors can comply with PPP requirements, SBA guidelines,
and the terms of their agreements with the Federal Reserve and the Partner Banks—and most
importantly, so that Loan Forgiveness and Guaranty Purchase applications are processed on time.
Adherence with SBA proscribed deadlines is critical. Failure to process a loan in a timely manner
could result in the SBA refusing to forgive the loan, which directly impacts borrowers, or refusing
to purchase the loan, which directly impacts the Federal Reserve and the Partner Banks. The
importance of timely processing of PPP loans cannot be understated and any disruption in the
Debtors’ PPP servicing business caused by the refusal or delay of even a single Critical Vendor in
performing its services could have severe and irreversible impacts on the Debtors and their PPP
borrowers and other stakeholders. Through the Loan Servicing Motion, the Debtors request
authority, but not direction, to continue to employ and pay the prepetition obligations of, in the
Debtors’ sole discretion, the Critical Vendors. The Debtors seek to pay (a) up to approximately
$75,000 of such prepetition amounts (which constitutes approximately seven percent of the
Debtors’ prepetition trade vendor balance) to Critical Vendors during the first thirty days of these
Chapter 11 Cases. Without the requested relief, I believe the Critical Vendors may refuse to
continue providing services to the Debtors postpetition or may impose unfavorable trade terms.
83.
Accordingly, I believe the Debtors’ continued servicing of its PPP Loans
and Legacy Loans in the ordinary course of business and continued employment of, and payment
of prepetition amounts due to, Critical Vendors are vital to the Debtors’ business operations and
success of these Chapter 11 Cases.
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ii.
Motion of Debtors for Entry of Interim and Final Orders (I)
Authorizing Debtors to (A) Continue Using Existing Cash
Management System, Bank Accounts, and Business Forms, (B)
Implement Changes to Cash Management in the Ordinary Course
of Business; and (II) Granting Related Relief (the “Cash
Management Motion”)
84.
The Debtors request entry of an order (a) authorizing them to (i) continue
using their existing cash management system, (ii) implementing changes to their cash management
system in the ordinary course of business, and (b) granting related relief.
85.
The Debtors cash management system collects, concentrates, and disburses
funds related to (a) servicing PPP Loans, (b) borrower payments made on account of PPP Loans,
(c) Loan Forgiveness, (d) Guaranty Purchase, and (e) borrower payments on account of Legacy
Loans. A diagram of the cash management system is attached to the Cash Management Motion
as Exhibit D. I understand that the cash management system facilitates cash monitoring,
forecasting, and reporting, and enables the Company to maintain control over the administration
of its 15 bank accounts (the “Bank Accounts”). Of the Bank Accounts, thirteen are maintained at
Synovus Financial Corp., one is maintained at Primis Bank, and one is maintained at Celtic Bank.
Because the banks at which the Bank Accounts are maintained do not comply with section 345(b)
of the Bankruptcy Code, the Debtors are seeking a 45 day extension of time from entry of the
Interim Order to comply with the requirements of section 345(b) of the Bankruptcy Code while
they discuss the issue with the U.S. Trustee and any statutory committee appointed in these cases.
86.
I understand that the Debtors also utilize a corporate credit card which
permits employees to pay expenses related to office supplies and services as well as other work-
related subscription costs in connection with their business. Through the Cash Management
Motion, the Debtors seek authority to continue this corporate credit card program.
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87.
The Debtors’ cash management system is similar to those used by other
lending and servicing businesses to collect, concentrate, and disburse funds. I believe any
disruption or alteration to the Debtors’ cash management system would alter the way in which they
collect and disburse cash throughout the cash management system and disrupt their operations,
particularly with respect to collection and processing of borrower payments. Further, without the
Debtors’ corporate credit card program, employees would have to pay work related expenses and
services upfront and wait for reimbursement, thereby jeopardizing the Debtors’ operational
effectiveness.
88.
I believe the Debtors’ cash management system constitutes an ordinary
course and essential business practice providing significant benefits to the Debtors. Accordingly,
I believe the Debtors’ continued use of their cash management system without interruption is vital
to the Debtors’ business operations and success of these Chapter 11 Cases.
iii.
Motion of Debtors for Entry of Interim and Final Orders
(I) Authorizing Debtors to (A) Pay Prepetition Wages, Salaries,
Employee Benefits, and Other Compensation and (B) Maintain
Employee Benefit Programs and Pay Related Obligations and (II)
Granting Related Relief (the “Wages Motion”)
89.
The Debtors request entry of an order (a) authorizing them to (i) pay
prepetition wages, salaries, employee benefits, and other compensation, and (ii) maintain
employee benefit programs and pay related obligations, and (b) granting related relief.
90.
The Debtors’ workforce is comprised of 18 full time employees paid on a
salaried basis (the “Salaried Employees”), and two employees paid on an hourly basis, one of
which is part time (the “Hourly Employees” and, together with the Salaried Employees, the
“Employees”) who are critical to the success of the Debtors’ business and are responsible for
ensuring, among other things, that the Debtors’ operations continue to run smoothly and
effectively. The Debtors also engage with various staffing agencies, and through those staffing
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agencies utilize the services of approximately 163 independent contractors (the “Contractors,”
and together with the Employees, the “Workforce”), 159 of which are contracted out by the
Employment Vendors (as defined in the Wages Motion). I believe that the failure to maintain the
continued, uninterrupted services of the Workforce could upend the Debtors’ wind down efforts
and jeopardize the Debtors’ ability to reach a consensual resolution with its key stakeholders.
91.
The Debtors maintain various programs for the Employees relating to
compensation and benefits, including payroll processing, retirement savings plans, withholding
obligations, reimbursable expenses, health insurance programs, life insurance and disability
programs, retirement plans, and training and development programs (the “Compensation and
Benefits Programs”), and pay various administrative fees and premiums in connection therewith.
I believe that the vast majority of the Employees rely primarily on the Compensation and Benefits
Programs to pay their daily living expenses and support their families. I believe that the Employees
would face significant financial hardships if the Debtors are not permitted to continue
administering the Compensation and Benefits Programs in the ordinary course of business.
Further, the Debtors’ failure to honor their obligations in connection with the Compensation and
Benefits Programs could result in attrition at a time when the Debtors are relying on the Employees
to perform at peak efficiency, and it would be difficult, if not impossible, to replace them in a
timely fashion.
92.
Further, the Debtors also seek to compensate the Contractors through the
staffing agencies in the ordinary course throughout the Chapter 11 Cases. Based on my personal
experience, the continued services of the Contractors are essential to the Debtors’ operations and
any disruption to these services would adversely impact the Employees as well as the Debtors’
ability to sustain business operations. The various components of the Compensation and Benefits
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Programs are described in further detail in the Wages Motion and are incorporated herein by
reference.
93.
I believe that the Debtors have substantial business justification for
continuing to administer the Compensation and Benefit Programs and honoring their obligations
in connection therewith, including the need to maintain Employee morale and reassure employees
that the Debtors intend to honor their obligations to Employees—both during and after their tenure
with the Debtors.
94.
Accordingly, on behalf of the Debtors, I respectfully submit that the relief
requested in the Wages Motion is in the best interests of the Debtors’ estates, and should be
granted.
iv.
Motion of Debtors for Entry of Interim and Final Orders (I)
Authorizing Debtors (A) to Pay Certain Prepetition Taxes and
Assessments and (B) Granting Related Relief (the “Taxes and Fees
Motion”)
95.
The Debtors request that the Court (i) authorize the Debtors to pay certain
prepetition Taxes and Assessments (as defined in the Taxes Motion) due and owing to various
local, state, and federal taxing and other governmental authorities (collectively, the “Taxing
Authorities”) that arose prior to the Petition Date, and (ii) grant related relief.
96.
In the ordinary course of business, the Debtors collect, withhold, and incur
an assortment of Taxes and Assessments that they remit periodically to the Taxing
Authorities. The Taxes and Assessments generally fall into the following categories, each of
which is discussed in more detail in the Motion: (i) franchise taxes, (ii) personal property taxes,
(iii) income taxes, and (iv) other fees (collectively, the “Taxes and Assessments”). The Debtors
seek to pay certain prepetition Taxes and Assessments in order to, among other things, forestall
Taxing Authorities from taking actions that might interfere with the Debtors’ continued business
Case 22-10951-CTG Doc 13 Filed 10/04/22 Page 47 of 52
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RLF1 28018285v.1
and operations, and potentially impose significant costs on the Debtors’ estates. Such actions may
include bringing personal liability actions against directors, officers, managers, and other key
employees (whose full-time attention to the Debtors’ Chapter 11 Cases is required to avoid
business disruptions and maximize recoveries to the Debtors’ creditors), or asserting liens on the
Debtors’ assets or seeking to lift the automatic stay. In addition, the non-payment of such Taxes
and Fees may give rise to priority claims pursuant to section 507(a)(8) of the Bankruptcy
Code. Accordingly, I believe the relief requested in the Taxes Motion is necessary to avoid
immediate and irreparable harm to the Debtors and is in the best interests of the Debtors’ estates,
their creditors, and all other parties in interest.
v.
Motion of Debtors for Entry of Interim and Final Orders (I)
Authorizing Debtors to Continue Insurance Policies and Pay All
Obligations With Respect Thereto and (II) Granting Related Relief
(the “Insurance Motion”)
97.
The Debtors request that the Court (i) authorize the Debtors to (a) continue
their Insurance Policies (as defined in the Insurance Motion) in accordance with the terms provided
in the underlying agreements and to perform under the Insurance Policies in the ordinary course
of business, and (b) pay any prepetition Insurance Obligations (as defined in the Insurance Motion)
arising under the Insurance Policies, and (ii) grant related relief.
98.
I believe the continuation of the Debtors’ Insurance Policies postpetition
will be essential to the preservation of the value of the Debtors’ business, properties and assets. In
certain instances, continuation of the Insurance Policies are required by law. If any of the Debtors’
Insurance Policies are terminated or lapse, the Debtors would be exposed to substantial liability to
the detriment of all parties in interest and could be in violation of law. State law may prohibit the
Debtors from operating without certain insurance. Additionally, given that the Debtors’ Insurance
Carriers and Insurance Brokers are intimately familiar with the Debtors’ Insurance Policies, even
Case 22-10951-CTG Doc 13 Filed 10/04/22 Page 48 of 52
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RLF1 28018285v.1
the temporary loss of their services would be detrimental to the Debtors’ estates. Accordingly, I
believe authorization to continue to honor all Insurance Obligations, which includes continuing to
pay the Insurance Brokers, is in the best interests of the Debtors and their estates, necessary to
avoid immediate and irreparable harm to the Debtors, and critical to the continued operation of the
Debtors’ business.
vi.
Motion of Debtors for Entry of Interim and Final Orders (I)
Approving Debtors’ Proposed Form of Adequate Assurance of
Payment to Utility Providers, (II) Establishing Procedures for
Resolving Objections by Utility Providers, (III) Prohibiting Utility
Providers From Altering, Refusing, or Discontinuing Service, and
(IV) Granting Related Relief (the “Utilities Motion”)
99.
The Debtors request that the Court enter orders (i) approving the Debtors’
proposed form of adequate assurance of payment to Utility Providers (as defined in the Utilities
Motion) (the “Adequate Assurance Procedures”), (ii) establishing procedures for resolving
objections by the Utility Providers, and (iii) prohibiting the Utility Providers from altering,
refusing, or discontinuing service to, or discriminating against, the Debtors on account of the
commencement of these Chapter 11 Cases or outstanding prepetition invoices, and (iv) granting
related relief.
100.
In the ordinary course of business, the Debtors incur expenses for
telecommunications, cable, and internet. Any interruption in Utility Services—even for a brief
period of time—would seriously disrupt the Debtors’ ability to continue servicing the loan
portfolio, including important servicing of PPP Loans for the Federal Reserve and the Partner
Banks. Such a result could seriously jeopardize the Debtors’ restructuring efforts and, ultimately,
creditor recoveries.
101.
Further, the Adequate Assurance Procedures are necessary for the Debtors
to effectuate their chapter 11 wind down without unnecessary and costly disruptions on account of
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RLF1 28018285v.1
discontinued Utility Services. If the Adequate Assurance Procedures are not approved, the Debtors
likely will be confronted with and forced to address numerous requests by their Utility Providers
at a critical time for their business. The Debtors’ Utility Providers have unilateral discretion to
decide that they are not adequately protected and, therefore, may make exorbitant demands for
payment to continue providing service or discontinue providing service to the Debtors altogether.
Such an outcome could seriously jeopardize the Debtors’ operations and their ability to maximize
the value of their estates.
102.
Accordingly, I believe the relief requested in the Utilities Motion is
necessary to avoid immediate and irreparable harm to the Debtors, is in the best interests of the
Debtors’ estates, and should be granted.
I declare under penalty of perjury that, to the best of my knowledge and after
reasonable inquiry, the foregoing is true and correct.
Date: October 3, 2022
New York, New York
/s/ Deborah Rieger-Paganis
Deborah Rieger-Paganis
Managing Director
AlixPartners LLP
Case 22-10951-CTG Doc 13 Filed 10/04/22 Page 50 of 52
RLF1 28018285v.1
Exhibit A
Corporate Structure Chart
Case 22-10951-CTG Doc 13 Filed 10/04/22 Page 51 of 52
Kabbage, Inc. d/b/a KServicing
Organizational Structure
EIN Ending: 3937
Kabbage Financial
Services Limited
Incorporated: UK
EIN Ending: N/A
Kabbage Canada
Holdings, LLC
Incorporated: Delaware
EIN Ending: N/A
Kabbage Asset
Securitization LLC
Incorporated: Delaware
EIN Ending: N/A
Kabbage Asset Funding
2017-A LLC
Incorporated: Delaware
EIN Ending: 4803
Kabbage Asset Funding
2019-A LLC
Incorporated: Delaware
EIN Ending: 8973
Kabbage Diameter, LLC
Incorporated: Delaware
EIN Ending: N/A
Kabbage India Private
Limited
Incorporated: India
EIN Ending: N/A
All ownership is 100% unless otherwise noted.
* Kabbage, Inc. d/b/a KServicing, KServicing, Inc., KService Corp., and Kabbage Platform (Kabbage Platform used solely in the state of New York).
Debtor
Non-Debtor
99.9%
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