Court filing
First Day Hearing Transcript — In re KServicing (Bankr. D. Del.)
Filed October 7, 2022 in Kservicing Bankruptcy; one of 140 filings from this case.
Record facts
| Court | U.S. Bankruptcy Court for the District of Delaware |
|---|---|
| Filed | 2022-10-07 |
U.S. Bankruptcy Court for the District of Delaware · No. 22-10951 · Doc. 91 · 2022-10-07 · Docket on CourtListener
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
IN RE:
. Chapter 11
. Case No. 22-10951 (CTG)
KABBAGE, INC., d/b/a
. (Jointly Administered)
KSERVICING,
.
. Courtroom No. 7
. 824 Market Street
Debtors.
. Wilmington, Delaware 19801
.
. Thursday, October 6, 2022
. . . . . . . . . . . . . . . 9:30 a.m.
TRANSCRIPT OF ZOOM HEARING
BEFORE THE HONORABLE CRAIG T. GOLDBLATT
UNITED STATES BANKRUPTCY JUDGE
APPEARANCES:
For the Debtors:
Daniel J. DeFranceschi, Esquire
RICHARDS, LAYTON & FINGER, PA
One Rodney Square
920 North King Street
Wilmington, Delaware 19801
-and-
Ray C. Schrock, Esquire
Natasha S. Hwangpo, Esquire
Chase A. Bentley, Esquire
Elizabeth A. Ruocco, Esquire
WEIL, GOTSHAL & MANGES, LLP
767 Fifth Avenue
New York, New York 10153
Audio Operator:
Brandon J. McCarthy, ECRO
Transcription Company: Reliable
The Nemours Building
1007 N. Orange Street, Suite 110
Wilmington, Delaware 19801
Telephone: (302)654-8080
Email: gmatthews@reliable-co.com
Proceedings recorded by electronic sound recording,
transcript produced by transcription service.
Case 22-10951-CTG Doc 91 Filed 10/07/22 Page 1 of 71
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APPEARANCES (CONTINUED):
For the Federal
Reserve Bank of
San Francisco:
Sean T. Greecher, Esquire
YOUNG CONAWAY STARGATT & TAYLOR, LLP
Rodney Square
1000 North King Street
Wilmington, Delaware 19801
-and-
Lisa M. Schweitzer, Esquire
CLEARY GOTTLIEB STEEN
& HAMILTON, LLP
One Liberty Plaza
New York, New York 10006
For Cross River Bank:
Susheel Kirpalani, Esquire
QUINN EMANUEL URQUHART
& SULLIVAN, LLP
51 Madison Avenue
22nd Floor
New York, New York 10010
For Customers Bank:
John J. Monaghan, Esquire
HOLLAND & KNIGHT, LLP
10 St. James Avenue
11th Floor
Boston, Massachusetts 02116
For American Express:
James L. Bromley, Esquire
SULLIVAN & CROMWELL, LLP
125 Broad Street
New York, New York 10004
For the United States
of America:
Alastair Gesmundo, Esquire
UNITED STATES DEPARTMENT OF JUSTICE
1100 L Street, NW
Washington, DC 20005
Case 22-10951-CTG Doc 91 Filed 10/07/22 Page 2 of 71
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APPEARANCES (CONTINUED):
For the US Trustee:
Richard L. Schepacarter, Esquire
Rosa Sierra-Fox, Esquire
UNITED STATES DEPARTMENT OF JUSTICE
OFFICE OF THE UNITED STATES TRUSTEE
J. Caleb Boggs Federal Building
844 King Street
Suite 2207, Lockbox 35
Wilmington, Delaware 19801
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INDEX
MOTIONS:
PAGE
Agenda
Item 9: Motion of Debtors for Entry of Interim and 49
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 [Docket No. 12 – filed October 3, 2022]
Court’s Ruling:
51
Agenda
Item 10: Motion of Debtors for Entry of Interim and 51
Final Orders Establishing Notification
Procedures and Approving Restrictions on
Certain Transfers of Interests in the Debtors
[Docket No. 6 – filed October 3, 2022]
Court’s Ruling:
52
Agenda
Item 11: Motion of Debtors for Entry of Interim and 52
Final Orders (I) Authorizing Debtors (A) to
Pay Certain Prepetition Taxes and Assessments
And (B) Granting Related Relief
[Docket No. 9 – filed October 3, 2022]
Court’s Ruling:
53
Agenda
Item 12: Motion of Debtors for Entry of Interim and 54
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 [Docket No. 10 – filed October 3, 2022]
Court’s Ruling:
55
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INDEX
MOTIONS:
PAGE
Agenda
Item 13: Motion of Debtors for Entry of Interim and 55
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
[Docket No. 8 – filed October 3, 2022]
Court’s Ruling:
56
Agenda
Item 14: Motion of Debtors for Entry of Interim and 56
Final Orders (I) Authorizing (A) Debtors to
Continue Insurance Policies, and (B) Pay All
Obligations with Respect Thereto, and (II)
Granting Related Relief
[Docket No. 7 – filed October 3, 2022]
Court’s Ruling:
58
Agenda
Item 15: Motion of Debtors for Interim and Final 58
Orders Authorizing Debtors to (I) Continue
Servicing and Subservicing Activities and
(II) Perform Related Obligations
[Docket No. 11 – filed October 3, 2022]
Court’s Ruling:
62
Agenda
Item 16: Application of Debtors Pursuant to 11 U.S.C. 62
§ 105(a) and 28 U.S.C. § 156(c) for
Appointment of Omni Agent Solutions, Inc. as
Claims and Noticing Agent Effective as of the
Petition Date
[Docket No. 4 – filed October 3, 2022]
Court’s Ruling:
64
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INDEX
MOTIONS:
PAGE
Agenda
Item 17: Motion of Debtors for Entry of an Order (I) 64
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
[Docket No. 5 – filed October 3, 2022]
Court’s Ruling:
68
EXHIBITS
DECLARATIONS:
PAGE
1) Declaration of Deborah Rieger-Paganis 48
2) Declaration of Paul Deutch 63
Transcriptionist’s Certificate 71
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(Proceedings commenced at 9:30 a.m.)
THE COURT: Good morning, all. This is Judge
Goldblatt and we are on the record in, In re Kabbage, Inc.,
which is Case Number 22-10951. We are proceeding this
morning by way of Zoom. As a result, I ask, as I think you
folks know, that I ask that folks leave your microphones
muted unless you're addressing the Court. That when you do
address the Court, that you introduce yourself for the record
each time. And, finally, that folks generally leave your
cameras off, unless you're, either, addressing the Court or
wish to be recognized, mostly because I find the device of
having you turn your camera on to be a helpful way to signal
to me that you'd like to be recognized, in which case, I will
then recognize you.
So, with that, why don't I pass the virtual podium
to counsel for the debtor to take us through this morning's
agenda. So, whoever's going to take the lead.
MR. DEFRANCESCHI: Good morning, Your Honor.
Although I won't be taking the lead, that'll be my
friend and proposed co-counsel, Ray Schrock. I did want to
say good morning. Thank you, Your Honor, for hearing us
today, and essentially turn it over to Mr. Schrock.
THE COURT: Okay. Thank you, Mr. DeFranceschi.
Mr. Schrock?
MR. SCHROCK: Good morning, Your Honor.
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Can you hear me okay?
THE COURT: I can, thank you. You can proceed.
MR. SCHROCK: Okay, great. Thank you.
First of all, it's a pleasure to be before you
again and thank you for hearing us for this first day
hearing. I'd like to thank the Court, of course, for working
with us on scheduling this hearing, including for the bridge
order on the cash management over the last day. That was
extremely helpful. I would also like to thank the U.S.
Trustee for working with us on the first day relief.
I think that the only open issue, subject to
somebody correcting me later on, of course, is a new one for
me, but just the creditor matrix and -- and kind of deciding
how do we want to effectuate service, in light of the fact
that this is an online service loan servicing platform.
And, also, I would be remiss if I didn't thank our
constituents, a number of whom we've been working with prior
to commencing these cases. I can't say that I'm sure this is
a surprise -- the cases are a surprise to the key parties in
this case. We've definitely been working with everyone, you
know, in the days and weeks leading up to these cases.
Your Honor, I'd also like to introduce my
colleagues. I have Candace Arthur. I believe she has her
camera on. She's be working with me on this case. Natasha
Hwangpo, who will be, you know, up here in a few minutes.
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And also my litigation partner, Ted Tsekerides, who will be
handling any witness work and is also leading the Amex
investigation for us internally.
Your Honor, we did file an amended agenda at
Docket 47. We filed a few affidavits of service yesterday at
Docket 59. We filed the NOL affidavit of service just to
make sure that that was out separately. And then just
related to the first day hearing, we had, you know, the
petitions and the original agenda at Docket 55 and then we
filed an amended agenda, just that fifth -- or the notice of
affidavit of service at 56, so that it was just to cover
things off, just to tidy it up.
Your Honor, in terms of how we would like to
proceed, I would like to, you know, go through a
demonstrative that we filed at Docket 64 if that would be
acceptable, just to give you and the parties in interest an
overview of the case. I will try not to repeat a lot of the
things that we put into the first day declaration, but I
think it will be helpful to see and understand the structure
of what we're attempting to do here.
And then I'll turn it over to my colleague Chase
Bentley, who will be working through a few matters on the
agenda and we'll kind of progress on from there, if that
would be acceptable?
THE COURT: Unless there's someone who wants to be
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heard to the contrary, that's certainly acceptable from the
Court's perspective. So, I'm happy to give you a chance to
walk through the slides.
MR. SCHROCK: And then one other thing, Judge. I
think that Ms. Schweitzer from -- who's representing the
Federal Reserve, also, after I give my opening -- I should
have -- should mention this, I think she wants to say a few
words to the opening, as well. We've been working closely
with the Federal Reserve.
THE COURT: Okay. Certainly. I think it makes
sense, Mr. Schrock, to give you a chance to do your opening
and then before we turn to the motions, if there's any other
party in interest who wants to chime in at that point, give
them such an opportunity, and then we can turn to the
motions, unless someone wants to be heard otherwise.
If not, let me give you a chance to do your
overview.
MR. SCHROCK: Okay, great. Thanks very much.
Your Honor, if I could ask for my colleague Chase
Bentley to be able to screen share just for the parties, that
would helpful.
THE COURT: Certainly. It looks like Mr. Bentley
should now have that ability.
MR. SCHROCK: Okay. Great.
THE COURT: Mr. Schrock, just so folks are clear,
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the slides you're showing, if I have this right, were filed
on the docket at D.I. 64; is that correct?
MR. SCHROCK: That is correct, Your Honor.
THE COURT: Okay.
MR. SCHROCK: Thank you.
Okay. Chase, go ahead and hit the next slide,
please.
So, in terms of a roadmap, what I'd like to cover
is just the basics around KServicing, who we are, make some
introductions for you with the management team, as well, the
circumstances leading up to these cases.
We do have a Chapter 11 plan that's on file and
because of the -- frankly, just because of the liquidity and
we want to have a tidy wind-down to the company, we wanted to
make sure that we put that out there, and I'm happy to take
you through it. It's a basic pot plan with a toggle feature,
whether or not parties want to fund, and then a path forward,
and then we'll take it from there.
So, if you could flip to the next slide, please,
Chase.
So, Kabbage has been doing business as KServicing.
You know, it was founded as an online serving and, you know,
lending platform for small businesses. This company has
been, effectively, in wind-down since selling substantially
all of its assets to the leads of American Express in October
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of 2020. Now, about 99 percent of the company's outstanding
loans or portfolios comprised of what we call the Paycheck
Protection Program, the Triple P loan program, with the
remaining 1 percent being non-PB loans, issued to small
businesses, prior to the Amex transaction.
As Your Honor and probably everybody is all too
aware, the U.S. small businesses, the SBA launched the Triple
P program in April 2020 in connection with enactment of the
CARES Act, which authorized hundreds of billions of dollars
of government aid to small businesses reeling from the
pandemic.
The SBA partnered with private lenders and
servicers like Kabbage to process loans on a highly expedited
timeline to get funding to small businesses, desperately in
need of working capital. As we all probably remember during
that time, in April of 2020, there's no other way to say it:
It was a national emergency at that time. There was extreme
pressure to get these loans out to people who needed them.
I certainly remember everything that we were
hearing from government officials and, you know, Kabbage was
really on the front lines of helping those small businesses
make it through the pandemic and get back on their feet. The
company ultimately became the second-largest Triple P lender
by application filing and delivered more than 7 billion in
Triple P loan funds to more than 300,000 small businesses.
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And to date, we have successfully processed about 80 percent
of the Triple P loan portfolio. I'm going to go through some
details with you and we're really here to seek a wind-down of
operations resolved for many claims and utilize the tools
available in Chapter 11 to distribute the assets for a
Chapter 11 plan.
Now, we've been working with the company for
several months and, you know, when you're looking to winding
down a company, as we were explaining to the board and
management, it's just not as easy as turning off the lights,
the last one out the door, and, you know, going through this.
It's a, especially with the consumer-facing businesses like
this, where we're still, you know, processing -- we're still
servicing over 50,000 loans with a principal balance in
excess of $1.3 billion, it is difficult and especially has
been complicated by a number of the, you know, investigations
and kind of what I'll call the looks by the federal
government to ensure that the Triple P loan servicing
portfolio has been, you know, serviced and administered to,
according to rules and laws.
Next slide, please.
So, just an overview. I think this will be
helpful as we kind of think about just the buckets of loans
that are out there. The Triple P, LF loans, those are the
loans that came through the paycheck protection loan
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program -- loan facility that was given by the actual Federal
Reserve. So, those are the loans that, you know, we
originated at KServicing, Kabbage. We actually went through
and those loans are still owned by the Federal Reserve or,
sorry, owned by KServicing, but there's a first priority
security interest in those loans that has been granted to the
Federal Reserve. So, they are our largest creditor. It's in
excess -- the total loan balance is outstanding, still, is in
excess of, you know, over $500 million. But those are the
loans, the biggest batch of loans that are really on the
balance sheet of Kabbage.
The other batch of loans that they can kind of
think of, although not on our balance sheet, but are, you
know, kind of more or less owned by Kabbage, are the legacy
loans that are not on this page but it's about $17 million,
3400 loans, small loans. But those are really from our
business, prior to the payroll protection program [sic]
enactment. So, those are loans that, you know, were --
they're going to be running off, essentially, over the next
several months.
But for me, at least, when you think about the
loans that are on the balance sheet, it's those two big
batches and then you have a very small batch, which is what's
called the "KS PPP" down here. Those are just loans that we
originated on our own. I actually think there's less than a
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hundred, I know we said, that are still outstanding and, you
know, it's just a very small balance of a couple million
dollars or, you know, between one and two million dollars
that is really outstanding.
THE COURT: So, Mr. Schrock, just to make sure
that I'm following --
MR. SCHROCK: Yes.
THE COURT: -- for the PPPLF loans where the
Federal Reserve is the underlying supplier of liquidity, as
far as the borrower is concerned, it's got a contractual
agreement with Kabbage, which is its lender, essentially, so
therefore those loans are on your balance sheet, and I guess
the same is true for those two other smaller buckets that you
described. So, there, the borrower has a contractual
relationship, a lender/borrower relationship with Kabbage
itself and, essentially, the underlying provider of capital
is effectively behind the scenes, as far as the borrower is
concerned?
MR. SCHROCK: That's correct.
THE COURT: Okay.
MR. SCHROCK: And then, you know, I would also say
that even with respect to what I'm going to call, you know,
the "partner bank loans," which were where we're just purely
a servicer, which includes Customers Bank, which, you know,
those of us who have been working on the matter for a while,
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"Cubby" is, you know, how people refer to them and they're
represented by Holland & Knight and then you've got Cross
River Bank, represented by Quinn Emanuel, those are -- it's
just a purely servicing relationship that, you know, where
those loans are owed by them, but we're still the customer-
facing, you know, party that is dealing with the borrowers,
ensuring that we're working through the forgiveness process.
If they're not forgiven, making sure we're -- are.
THE COURT: Okay. There, it works the same way
any other servicing relationship works, where the underlying
obligation --
MR. SCHROCK: Right.
THE COURT: -- is at least in the first instance,
due to the lender, subject to whatever contractual
arrangements are made to manage the servicing?
MR. SCHROCK: Yes, that's correct, Your Honor.
THE COURT: Okay.
MR. SCHROCK: That's correct, yeah.
And so, when you think about these loans, and
you'll learn a lot more about this as we move forward, you
know, there's a couple of big buckets of debt that the Triple
P program that went out. You had the April, you know, batch
that went out when there's, you know, just an immense amount
of loans that were originated and distributed. That's what
we call "round one" and then there's round two. Round two
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was, you know, you may remember, came out in the December
time frame of 2020, but actually, most of those loans are
actually originated in December of, or say January of 2021.
And where all of the -- you know, the great
majority of the issues with, you know, the SBA and all the
parties, have been with the round one loans. It's not in all
instances, but, you know, I'm trying to generalize so you
understand at least from the parties' perspectives -- and
they can certainly correct me, but I'm trying to be fair -- I
think that's where people saw, you know, listen, there's a
lot of -- that's been the toughest batch to process and where
a lot of the efforts and the Government have been focused on.
The round two have been pretty clean. You know,
lots of -- you know, and not surprisingly, right. We were a
little bit farther into the pandemic. We had people, you
know, we weren't in an emergency. We aren't working on, you
know, when you just think about the conditions under which
this company had to work in April 2020 trying to disburse
these loans, it's almost hard to fathom. There was -- was so
much pressure to get these loans out, get them out the same
day. We have to get it in the hands of the people that need
them. People were, you know, people were under an extreme
amount of pressure and this meant everything.
Traditional banks, they just didn't have these
relationships. You know, they didn't have the ability to,
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you know, process everything, you know, and with the KYC, you
know, requirement, frankly, with, you know, U.S. Bank holding
companies. There was a, you know -- and so companies like
Kabbage, you know, really, like, bore the, you know, the
lion's share of putting a lot of these loans out there.
And I'm not here to say that everything is perfect
in the midst of a global pandemic when the world is shut
down, that there can't ever be an error, but certainly, we --
this company has been solely focused on making sure they're
doing their job and doing the right thing for these
borrowers, doing the right things by the Government. They're
trying to wind-down.
And it just, frankly, you know, it just became so
much, you know, it's dealing with -- we're like a pinata
almost here between all the various agencies.
THE COURT: So, Mr. Schrock, your papers are very
good and very clear and I think you tell a compelling story
that says, Look, in April of 2020, there was a national
emergency. You know, people's ability to feed their children
depended on this cash getting out the door and no one thought
you should be overly persnickety about that at the time,
because we were dealing with a time of crisis.
And you say that the current investigations you're
dealing with are now essentially, you know, hindsight
criticism. And I don't think any of the relief that you're
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asking me on the first day asks me to form a judgment on any
of this, but I do understand that narrative and you tell it
very compellingly in your papers.
MR. SCHROCK: Okay, thanks. I will move on.
Thanks.
Let's go ahead and flip the slide, please, Chase.
Your Honor, I want to make sure I can make some
introductions just to folks that are going to be, you know,
here with you. Laquisha Milner is the CEO of Kabbage. I'm
not sure if she has a camera up, but I wanted to make sure
that you knew Ms. Milner. You know, she's really our
captain, you know, pushing us through, you know, this on a
day-to-day basis and making sure that we're doing everything
we can.
You know, our general counsel is Holly Loiseau --
and I'm sorry, Holly -- by the way, you know, this -- we --
she's our general counsel and she's been instrumental,
obviously, in pushing us through.
Sal Kafiti, also our deputy general counsel, has
been extremely involved.
And then Deborah Rieger-Paganis is our first day
declarant from AlixPartners, and she is available and able to
answer any questions for the Court, and I will try and move
her, the admission of her first day declaration at the
conclusion of my presentation.
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THE COURT: Okay. For now, I'd like to welcome
everyone, virtually, to Wilmington.
MR. SCHROCK: Thanks, Your Honor. We're looking
forward to seeing you in person.
The company's professionals are set forth there.
The Federal Reserve Bank, as I noted, is represented by
Cleary Gottlieb, Ms. Schweitzer. Customers Bank is
represented by Holland & Knight. Cross River Bank, Quinn
Emanuel, Mr. Kirpalani. And then I should also note for the
company's professionals, Jones Day has been handling the DOJ
civil investigation and Ms. Janelle Hall has been, you know,
taking the laboring oar on that. But those are the key
players that you're likely to hear from. There'll be others,
I'm sure, but those are the key ones.
Let's keep going, please.
So, this -- I'm going to move through this
relatively quickly, just especially in light of the comments
that Your Honor made. But the circumstances leading these
cases are set forth here and we'll try and talk just a little
bit about this to give you a little bit more clarity, in
particular, about the Amex transaction.
Next slide, please.
So, in October 2020, affiliates of Amex acquired
all, you know, substantially all the company's assets,
including the technology associated with the company's loan
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serving platform for approximately 750 million. We do have a
transition services agreement with Amex. Yeah, we're still
working together on that.
But, you know, notably, when you think about those
two batches of loans that I mentioned, Your Honor, the round
one and the round two, this transaction took place in between
the round one and round two. So, you know, originally, I
think the company was, you know, planning on looking at this
and saying, Listen, we're going to wind-down. They heeded
the Federal Government's call to go to round two and
that's -- frankly, it's glad, you know, the company is
fortunate that it did, because I think that it's really round
two where, you know, we have a much higher processing rate
that it was able to provide the company with additional
liquidity for the wind-down. So, I think that certainly was
a smart move, but this transaction happened in between those
two things.
You know, there's an investigation and I think
it's set forth there and, you know, we're working on that and
we'll need to continue working with Amex on that. I believe
that Sullivan & Cromwell, Mr. Bromley, is representing
American Express, as well, Your Honor, and certainly, he's
(indiscernible) and I looking forward to working with him.
Next slide, please.
You know, we've talked about in our pleadings, the
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lack of SBA guidance. I think I'm going to just note here
that we believe we did everything that we were supposed to.
We think this is revisionist history and, you know, I don't
want to see this company in the midst of its final days to be
used as a scapegoat, because that's not fair, it's not
correct.
Let's keep going.
When I think about what happened here, why are we
here in Chapter 11, as opposed to just trying to do this, you
know, and make a final distribution to shareholders, the
government investigations here have been an immense drain on
the company's resources. There's no other way to put it. I
think that there's a lot to that. There's been a lot of
professional assistance that's been needed. It's kind of
frozen the company in its ability to get more -- to get these
loans, you know, processed.
And, you know, as a result, it caused friction
with customers. On the Cubby receivable dispute, I think one
important thing for you to know, Judge, is, one, we're
working with Cubby. We're trying to get to a deal. We're
still working with the Federal Reserve, you know, and I'm
optimistic we're going to have a deal and then we're going to
be talking more about a funded transaction, rather than
unfunded.
But with the Cubby receivable dispute, you know, I
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think that we were paid, you know, and we got paid servicing
fees in advance for a lot of our customers. We were paid for
the servicing fee advance on round one.
Round two, we haven't been -- you know, other than
what we set off prior to the commencement of these cases, we
haven't been paid anything. And, you know, we're working on
it, but, you know, notably, I think that Cubby is trying to
set off for round two, you know, with a round two servicing
fee for issues they see with round one. And so, that's one
of the things that in the days and weeks ahead, we'll try
to -- try and work through. And so, that's -- you know, but
that's something that we -- it's a critical issue. All the
parties are aware of it and I think that, you know, if we
didn't commence these cases, we just didn't have the
funneling mechanism to make sure that everybody understood
the company's only got limited liquidity.
And I do want to note, Your Honor, that one thing
that's been very clear from all of the customers, they want
the company to continue to do its job. They want us to
finish the job of continuing to service these loans. This is
not a case where you need a, in our view, like an investment
banker to go market the loan servicing platform.
These -- if you go talk to people about, Will you
take on these loans, the first thing you're going to hear is,
Well, how much are you going to pay me to do that?
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It's not like there's a, you know, there's a real
marketability to a Triple P loan servicing portfolio. But
we're willing to work with people to transition. We're
willing to work with people to continue to service those
loans on a wind-down. But it's certainly -- we're willing to
do it one way or the other.
And then the ST -- the congressional and FTC
investigations have just been ongoing. You know,
occasionally, we're getting subpoenas. We're getting --
we're being, you know, requested to do those things, as well.
And then there's a class-action lawsuit that is now going to
be subject to the stay and, you know, we hope to resolve just
any claims that are resulting from that as part of these
cases.
As I do mention in the first day declaration, Your
Honor, all the management and board, they were put in place
after the Amex transaction. So, I do want to note for
everyone, this is just people trying to do the right thing
here. A lot of the board meetings, without divulging
confidences are, you know, Gee, we're really trying to do the
right thing here. We weren't involved in this. We're trying
to get these loans serviced. They're greatly concerned about
running out of liquidity and not being able to service these
borrowers. And I think for everyone's sake, the Government,
you know, the partners, we all have to find a solution here,
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but we have to do it pretty quickly.
Next slide, please.
The additional issues, you know, causing liquidity
constraints are listed here. I don't think I'm going to hit
anything else here on these. I'll just note those. These
are highlights from the first day declaration.
Keep going.
So, when we talk about a plan, we filed a plan
because we want to maintain control of our own destiny to be
able to wind-down this company, you know, quickly, but also,
you know, for the benefit of all stakeholders and maximize
value. So, we have a plan. You know, there's a disclosure
statement and we're going to be pressing people to, you know,
let's come to an agreement here rather quickly.
On the bottom is the unfunded transaction. So, if
we don't reach any agreements with the Federal Reserve, if we
can't reach agreements with Cubby, we don't have any choice,
but to move to transition those loans to another servicer and
move to distribute the company's assets, pursuant to the
Bankruptcy Code's priority scheme.
I don't think that anybody really wants that, you
know, but it is a forcing mechanism to try and make sure that
everybody is focused that we have to reach these agreements
quickly. We're very close to an agreement with the Federal
Reserve. I think if we reach an agreement with Cubby, you
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know, that, you know, in some regard, even on an interim
basis, saying, Here's the things we can agree on so that we
have funding, and we'll resolve the other issues through
either by mediating them or, you know, dealing with it in
front of the Court, that we're really on the top line in
terms of a funded transaction.
THE COURT: So, Mr. Schrock, as I read -- I just
worked my way through the plan briefly and obviously saw the
description in the first day declaration, it sounds like
your -- the unfunded version is essentially the tantamount to
your saying, Look, if we can't get to a deal, we're just
going to throw the case back at you and best of luck.
Is that essentially what that looks like?
MR. SCHROCK: Essentially, Judge, yes. I mean, we
have to, because we just wouldn't have -- we wouldn't have
enough liquidity to continue servicing those loans. And we
made very clear to our partners that that's not what we want.
But when I just look at the cash available on the company's
balance sheet, there's no other choice --
THE COURT: Okay.
MR. SCHROCK: -- and that's why the Board, you
know, is, frankly, pressing and said, Listen, we have to get
on with it and make sure that we do the right thing here by
everyone.
You know, there's been a lot of discussion on the
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funded transaction to least making sure that the company can
service loans through the end of March and whether or not
it's going to make sense to transfer the loans, even in a
funded transaction or have the company to do it, these are
things I think we just, frankly, have to work through and
we're willing to work with all of our parties on a consensual
basis for issues related to that.
And, you know, I think that that's essentially
what we're dealing with on the toggle plan between the
unfunded and the funded transaction.
The remainder of the presentation just takes you
through what is essentially a pot plan. I don't think that
there's anything that's really controversial in that pot plan
in terms of, you know, being able to toggle between an
unfunded and funded. But, you know, depending on how
negotiations go here over the next couple of weeks, we're
going to be back in front of the Court, you know, requesting,
here's the schedule that we really need to move this case
forward expeditiously, and I'm hopeful that we can reach an
agreement and that everyone can be reasonable and just
realize that, you know, you've got a company and management
team and board and professionals that want to do the right
thing by everyone and get through this as quickly as
possible.
It is a lot of whether or not there's going to be
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significant shortfalls and there's going to have to be, you
know, additional funds contributed. It comes down to whether
or not, you know, the SBA is going to honor a lot of these
guarantees on these loans for the round one loans that have
been flagged. I think that's why the customers are, you
know, a little bit reserving rights and saying, Gee, you
know, we can't be stuck on shorthand, that's why the Federal
Reserve is doing there, and it's, you know, any time you're
dealing with a complicated loan portfolio, you know, a
government loan program it is -- but it is -- it's not lost
on me that whether or not the SBA honors loans means
everything to whether or not the Federal Reserve recovers on
its loan portfolio.
So, this is the system we have and we're working
within it, but it is complicated, despite the fact that it's,
you know, in the final stages of the company's existence.
So, with that, Your Honor, I thank you for
indulging me on this, but I really thought that, you know,
kind of teasing some of these issues out would be helpful for
you. And I don't -- I'm trying to be objective about it. I
understand people are going to have different views, but
hopefully (indiscernible) I've been fair about presenting the
issues to you.
THE COURT: Okay. Thank you, Mr. Schrock.
I will say that I do find presentations of this
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kind to be very helpful and this was among them, particularly
helpful, so I do appreciate that. But I also want to be fair
to others who have a different perspective.
Again, no one should feel they need -- nothing --
none of this is with prejudice to anything, but to the extent
there's someone who would like the opportunity to be heard,
I'll give them that chance.
Ms. Schweitzer, I think you were first and then
we'll go to Mr. Greecher and Mr. Kirpalani.
MR. GREECHER: Oh, Your Honor, if I could just --
Sean Greecher from Young Conaway -- we are co-counsel with
Cleary Gottlieb for the Federal Reserve Bank and as
Mr. Schrock said, Ms. Schweitzer would like to make some
remarks.
We did file a pro hac motion. I don't believe
that order's been entered, but we ask Your Honor's indulgence
to allow us to uh --
THE COURT: Certainly. So, to the extent there
are any pro hacs, and, yet, we'll address them when they come
in, and no concerns there for today's purposes. So, thank
you for that, Mr. Greecher.
And Ms. Schweitzer, you can proceed.
MS. SCHWEITZER: Thank you, Judge.
It's, for the record, Lisa Schweitzer from Cleary
Gottlieb Steen & Hamilton, here on behalf of the Federal
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Reserve Bank of San Francisco in this Chapter 11 case. And
as Mr. Greecher noted, our co-counsel is the Young Conaway
firm.
I recognize we don't need campaign speeches today.
This is all for background. But given that the Federal
Reserve Bank is, as Mr. Schrock noted, the largest creditor
in the case, and their largest secured creditor, I thought it
made sense just to walk you through a little bit of the
history of the PPPLF, trying not to be redundant on things
you've heard before. Lots of acronyms, so feel free to ask
questions, but I just find to say it a couple times helps, at
least, me, because there's a lot of different programs going
on.
And so, just by way of background, as Mr. Schrock
noted, the CARES Act is what established the I understand
Paycheck Protection Program to provide loans that are fully
guaranteed, in this case, by the Small Business
Administration, or SBA, and they were provided to eligible
small businesses and not-for-profits that were adversely
impacted by the COVID-19 pandemic.
The Board of Governors at the Federal Reserve
system and the U.S. Treasury established the Paycheck
Protection Program liquidity facility, or what we call the
"PPPLF," to bolster the effectiveness of the PPP by providing
liquidity support for the PPP program by making loans to PPP
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lenders that are secured by PPP loans.
So, just for the sake of clarity, the PPPLF, which
is a Federal Reserve facility, and the PPP, or the Paycheck
Protection Program, are different programs. The rules and
requirements regarding the PPP lending and servicing PPP
loans are administered by the SBA, and under the PPPLF, the
Federal Reserve Bank has provided term financing to PPP
lenders. Supplying PPP lenders with additional liquidity
helped increase their capacity to make PPP loans.
Kabbage, which is one of the debtors in this case
are specifically from the Federal Reserve Bank of San
Francisco. The PPPLF has not made new extensions of credit
since July 2021, but in total, the PPPLF lent $208 billion
across the country and today, only a total of only 14 billion
remains outstanding. So, that has been a quite successful
program.
Under the PPPLF, the Federal Reserve Banks,
including the Federal Reserve Bank of San Francisco, would
lend dollar-for-dollar against PPP loans that were originated
by an institution authorized to make PPP loans, including
non-depository institutions, such as Kabbage.
Kabbage participated in the PPPLF program through
the execution of a letter of agreement and, which along with
the Federal Reserve Bank's operating circular Number 10,
governs their participation in that program.
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The Federal Reserve Bank extended approximately
$1.62 billion to Kabbage in financing advances that were
secured by PPP loans owned by Kabbage and pledged to the
Federal Reserve Bank, as well as the proceeds of those loans.
These PPP loans, which include two-year loans and five-year
loans, are guaranteed by the SBA under the PPP program, as
Mr. Schrock noted, as long as they meet the eligibility
requirements for those guarantees.
As of the petition date, the outstanding principal
balance of the PPPLF advances to Kabbage is approximately
$540 million. Prior to the filing of the cases, certain
events of default occurred under the PPPLF agreements, to
which Kabbage is a party. The defaults -- and I won't go
into much detail here -- some of the issues that you see in
the first day declaration, but the defaults related to
payment maturity date, Kabbage's ability to continue
servicing the loans, and insolvency, and other breaches of
reps, warranties, and covenants.
The PPPLF does not require a notice of default to
be served; however, on October 21st, 2022, as noted in the
first day declaration, the Federal Reserve sent Kabbage a
letter identifying these and other defaults, and the Reserve
Bank's right to recourse against Kabbage in light of the
defaults.
As a result of the defaults, the Reserve Bank is
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entitled to receive all the proceeds of the PPP loans pledged
as collateral under the PPPLF and the advances are all due;
however, prior total Chapter 11 filing, the Reserve Bank
engaged in discussions with Kabbage regarding actions that
can be taken to ensure orderly repayment of the PPPLF and the
continued servicing of the PPP loans pledged to the Reserve
Bank.
Of course, the Reserve Bank did not, and doesn't
now, waive any rights or remedies under the PPPLF, and just
for the benefit of today's hearing and expedition, I'll save
Mr. Schrock from having to jump up. Everything I'm saying is
our view and perspective. He reserves all rights. We're not
having final hearings on it, but we think it's helpful for
you to hear the facts as we (indiscernible) them.
And more recently, as Mr. Schrock has indicated,
as well, the Reserve Bank has been engaged with Kabbage's
advisors regarding the potential limited use of the Reserve
Bank's cash collateral during the Chapter 11 case, again, to
further an orderly repayment of the PPPLF and the PPP loans
that constitute the collateral pledged to the Federal
Reserve, with a goal of ensuring that the full amount of
financing extended under the PPPLF (indiscernible) and
there's no interruption in servicing of the underlying PPP
loans.
The Reserve Bank is continuing to have discussions
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with Kabbage on these matters and we hope an agreement can be
reached that allows for an orderly case and full repayment of
the PPPLF. As Mr. Schrock noted, this (indiscernible) a
consensual first day hearing. The Reserve Bank doesn't
oppose the first day relief that's being sought by Kabbage or
we'd note that Kabbage has accepted the Reserve Bank's
comments to their motions and proposed orders, particularly
the loan servicing and cash management motions and has
confirmed that the proceeds of the PPP loans that were
pledged to the Reserve Bank will be segregated, to the extent
that they're paid directly to Kabbage, as the parties discuss
the potential use of cash collateral.
Finally, as Mr. Schrock noted, the debtors have
filed a proposed plan, what they call the "toggle plan" where
either the loans stay with the company, serviced by the
company, or on an unfunded plan, where it looks like they
would turn over the loans and the collateral to either the
Reserve Bank and turn over the other loans to the other
parties.
We have only started reviewing the plan. This is
for other days. It's not before the Court today. The
Reserve Bank, obviously, reserves all of its rights. We hope
we can all work towards a consensual plan, where the Reserve
Bank will receive full repayment on its outstanding secured
claims, although, obviously, these discussions are all
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ongoing with all the parties.
Unless Your Honor has any further questions, I
just wanted to give you our view with respect to this,
straight from the Federal Reserve's point of view.
THE COURT: So, thank you, Ms. Schweitzer. That's
very helpful and it does help give context to what I had
thought I understood when I got on the bench. So, I
appreciate that. It's very helpful and I don't have any
other questions.
MS. SCHWEITZER: Thank you, Your Honor.
THE COURT: Thank you, Ms. Schweitzer.
Mr. Kirpalani?
MR. KIRPALANI: Good morning, Your Honor.
Susheel Kirpalani from Quinn Emanuel Urquhart &
Sullivan, on behalf of the Cross River Bank. It's very nice
to appear before you.
I'll just say I wanted to give Your Honor a bit of
a macro perspective from what I think is the largest
unsecured creditor of the debtors. I agree with a lot of
what Mr. Schrock said in terms of what has happened so far,
but I just wanted to make a finer point on a couple of
things.
We don't know exactly what decision-making
occurred to permit $750-plus million to come into the debtors
and then go out to the debtors' shareholders just two years
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ago. We do know that some pocket change was left behind to
handle all of the debtors' go-forward servicing obligations
and other obligations, whether it's regulators or anyone
else.
I think what makes Cross River Bank different
from, you know, the other so-called partner banks, which was
a little bit lumped together in the first day papers, but I
wanted to make sure that Your Honor was clear as to the
pretty big difference between Cross River Bank and, as Mr.
Schrock calls it "Cubby."
Cross River Bank already paid for all of its
servicing and so, unlike the other partner bank who owes the
estate tens of millions of dollars, it's the other way
around, potentially, when it comes to the relationship
between Cross River Bank and the debtors. And, you know, I
appreciate that Weil Gotshal is doing an investigation into
American Express, I certainly hope that investigation also
includes the former directors and officers of the debtor,
because, certainly, as between those directors and officers,
certainly under Delaware law, and innocent third-party
creditors like my client, I think the burden falls on the
directors and officers to make sure that the company retains
more than just pocket change in order to honor all of its
commitments and obligations.
I'll just say that I met Mr. Schrock yesterday and
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he mentioned that he thinks with respect to funds that are
received by the debtors from borrowers that are really Cross
River Bank's borrowers, that all amounts have been paid over
to Cross River Bank before the filing. I just wanted to
mention we're still reconcile some numbers. I hope that's
the case. I'm not sure that's the case.
And with respect to the plan that's on file, we
also haven't had a chance to really dive into it, but I
certainly hope it's not, you know, that toggle plan that is
really a toggle between a rock and a hard place for creditors
who have already paid for the servicing. I appreciate that,
you know, there's only a little bit of money left in the
debtors' estate, but, you know, there was a lot of money in
this debtor just two years ago.
And with that, I'll reserve comments as the case
unfolds. But thank you, very much, Your Honor, for letting
me speak.
THE COURT: Okay. Thank you, Mr. Kirpalani.
Mr. Schepacarter?
MR. SCHEPACARTER: Thank you, Your Honor.
Can Your Honor hear me clearly?
THE COURT: I can.
MR. SCHEPACARTER: All right. Thank you.
For the record, Richard Schepacarter for the
United States Trustee. Just a couple of comments and maybe
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even questions for Mr. Schrock. One is that the -- we
understand the demonstrative and we actually agreed ahead of
time that that would not be moved into evidence, but we do
reserve our right with respect to the first day declaration,
because as Your Honor pointed out, it's kind of their story
more than some testimony and, frankly, if we were to hear --
be here to cross-examine the witness on that, we might be
here for a couple of days.
THE COURT: All right. Well, when we get to the
motions, we can address any evidentiary concerns about the
testimony.
MR. SCHEPACARTER: Right. Thank you.
So, having said that, we wouldn't have any
objection to it being admitted, subject to all of those
reservations, and basically that it's for today -- for
today's purposes, so that they can get through the door and
move on with this case.
The second part of it is I have a question that
kind of just sort of popped up from listening to Mr. Schrock
and then to Mr. Kirpalani, is that the American Express
investigation, I guess we'll call it, it sounded like
Mr. Schrock's firm and maybe some people from his firm are
undertaking that investigation, and I just wanted to
understand if that's the case, and who else may be
undertaking that investigation of the, I guess we'll call it
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the "American Express transaction." I'm not sure what falls
under that, but just at this point in time, at this early
point in time, just to get an understanding as to what's
going on. Thank you.
THE COURT: Thank you, Mr. Schepacarter.
Mr. Schrock, if you want to respond, I'll give you
that chance.
MR. SCHROCK: Sure. So, Mr. Schepacarter, yes, it
is, you know, given that we're relatively new to the scene
from April of this year, we're handling the investigation. I
also think AlixPartners is providing some assistance related
to that, but we don't intend on, you know, having another
firm, you know, handle that investigation.
THE COURT: Okay. Mr. Schepacarter, anything
further from your perspective?
MR. SCHEPACARTER: Not at this point. If
something pops up, I'll -- and I think Ms. -- I have, also,
Ms. Rosa Sierra-Fox is also handling part of this case with
me and she may have some comments later on when we get to the
creditor matrix.
THE COURT: Okay. Ms. Sierra-Fox, anything at
this point?
(No verbal response)
THE COURT: It looks like that was a no.
Okay. Is there any other party in interest that
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would like the opportunity to be heard?
Mr. Monaghan?
MR. MONAGHAN: Thank you, Your Honor.
John Monaghan from Holland & Knight, and we are
counsel to Customers Bank. I hoped not to play a speaking
role today and right from Mr. Schrock's presentation, I
thought that I had accomplished that goal, but Mr. Kirpalani
made a couple of statements that all I will do is state for
the record that in the view of Customers Bank, there is no
set of circumstances in which Customers Bank owes the debtor
tens of millions of dollars. So, as not to poison the
ongoing negotiations, that I agree with Mr. Schrock, are
ongoing and have been for some time, I'll note -- not go
further than that, but to say that I have no doubt that if
called upon to demonstrate the existence of a bona fide
dispute, there would be that demonstration and it would be
successful.
THE COURT: Okay. I don't think anyone is asking
me to resolve anything today, so I will allow all of you to
continue talking and we'll take up any question that's put in
front of me if and when it's put in front of me.
Is there anything further, Mr. Monaghan, or was
that the substance of what you wanted to convey? Okay --
MR. MONAGHAN: Your Honor, there's nothing
further, Your Honor.
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THE COURT: Okay. Thank you, Mr. Monaghan.
Let me just ask, is there any other party in
interest that wants to be heard as a preliminary overview
matter?
(No verbal response)
THE COURT: Okay. If not, Mr. Schrock, I'm happy
to pass the baton back to you or any of your colleagues, to
whom you pass the baton further, to proceed as you deem
appropriate.
MR. SCHROCK: Thanks very much, Your Honor.
Again, Ray Schrock, Weil Gotshal, proposed counsel for the
debtors.
At this point, I would like to move into evidence
the first day declaration of Ms. Deborah Rieger-Paganis. She
is from AlixPartners. I heard the reservations that are
already put on, you know, by Mr. Schepacarter, which are just
fine with us. We just wanted to make sure that we could get
it into evidence for the purposes of first day hearing, for
purposes of getting the necessary evidentiary record to get
the relief, you know, in front of us.
I appreciate that there are things in there that,
you know, that the declaration go to the story of the case
and we're certainly not seeking to have, you know, a lot of
that admitted for the truth of the matter asserted. It's for
the, you know, for the convenience of the parties, and as I
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understand it, any of the debtors' story coming into these
cases.
THE COURT: Okay. Let me --
MR. SCHROCK: It's at Docket 13, and I think we
can put -- if Deborah can please go on camera.
THE COURT: And Mr. Schrock, do you intend to do
any direct or are you simply moving the declaration into
evidence?
MR. SCHROCK: Just moving the declaration into
evidence, Your Honor.
THE COURT: Okay.
MR. SCHROCK: She is available for cross-
examination.
THE COURT: Okay. Hold on one second.
MR. SCHROCK: (Indiscernible.)
THE COURT: My apologies.
MR. SCHROCK: No worries.
(Pause)
THE COURT: Okay. So, let me ask this question:
Is there any party in interest that would like to be heard,
with respect to the admissibility of Ms. Rieger-Paganis'
first day declaration, which is filed at D.I. 13?
Mr. Schepacarter?
MR. SCHEPACARTER: Thank you, Your Honor.
For the record, Richard Schepacarter, for the
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United States Trustee. As Mr. Schrock put on the record,
that I put on the record, my reservation of rights, given
that statement and the fact that I think that we all
understand that this document is being moved for today's
purposes only and has a lot of background information, given
that, and that all the parties, even parties who haven't
appeared today, everybody's rights are reserved, we have no
objection to the entry of it today for these purposes. Thank
you.
THE COURT: All right. Is there any other party
in interest that would like to be heard with respect to the
admissibility into evidence for today's purposes of the first
day declaration?
(No verbal response)
THE COURT: Okay. Seeing no one --
MR. BROMLEY: Your Honor?
THE COURT: Oh, I'm sorry, Mr. Bromley.
MR. BROMLEY: Yes, good morning, Your Honor.
James Bromley of Sullivan & Cromwell, on behalf of
American Express and related entities. Just with respect to
the first day declaration, there are certain statements that
are background in nature as Mr. Schrock noted that reference
American Express. We don't believe that they should be
admitted for any purpose today and they are irrelevant to any
of the relief that's being sought. So, we have an objection
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to anything being admitted with respect to the first day
declaration that is -- makes any statement with respect to
American Express.
THE COURT: Okay. Mr. Schrock?
MR. SCHROCK: That's fine, Your Honor.
THE COURT: Okay. So, let me ask the question
this way: Is there any party in interest that would object
to the admissibility into evidence of the first day
declaration, which is filed on the docket at D.I. 13, with
the understanding that, A, it's admitted only for the purpose
of today's hearing and, B, that any statement that relates to
American Express is stricken?
MR. KIRPALANI: Your Honor?
THE COURT: Mr. Kirpalani?
MR. KIRPALANI: Yeah, I certainly have no
objection to what Mr. Bromley asserts, by my understanding of
the first day declaration, which has been the way that I've
dealt with first day declarations for many years is just
because a party doesn't object to a specific characterization
of events with respect to their client, doesn't mean that
that characterization is correct. And of course
Mr. Schrock's clients submitted a declaration saying that
everything my client has asserted is bogus, so, obviously,
I'm not going to say we have to strike everything in the
declaration that relates to Cross River Bank, but I think
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it's the way things normally operate, but that's not being
accepted for its truth because it's not relevant to any of
the relief being sought today.
But if I'm required to make an objection with a
move to strike to trike things that relate to whether the
debtors have complied with their obligations to Cross River
Bank, then I would make that objection.
THE COURT: So, look, here's where we are.
Mr. Schepacarter has asked, and the debtors agreed that the
declaration be admitted only for the purposes of today. So,
it's being admitted only for the purposes of an evidentiary
basis for the relief sought in the various first day motions.
What you say, Mr. Kirpalani, about whether it was
necessary to strike the references to Amex is a fair point,
but the proponent of the testimony agreed to strike it and so
there we are. You can either ask -- let me strike the
references to Cross River Bank or you could accept the
correctness of what you said, which is it doesn't matter.
Either way, it's fine with me. I'm here to
resolve disputes that are put in front of me, so if you've
got an objection, I'll give you a chance to make it and if
you think it doesn't matter and you'll move on, that's okay,
too.
MR. KIRPALANI: It doesn't matter and I'll move
on. Thank you.
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THE COURT: Okay.
MR. SCHROCK: And, Your Honor, just to be clear, I
thought that what Mr. Bromley was saying was that it doesn't
going to be admitted into evidence. I didn't realize that we
were actually be striking the statement from, you know, from
the record.
THE COURT: Well, I think that's --
MR. SCHROCK: And so I think (indiscernible).
THE COURT: Mr. Bromley, let me ask you this
question: For the purposes of today's proceeding, I
understood your motion to object to its admission into
evidence, which I thought meant that it's stricken from the
declaration. If you'd live with what Mr. Kirpalani agreed to
on behalf of his client, that's also fine with the Court.
Let me make sure I understood what your objection
was.
MR. BROMLEY: Your Honor, you understood my
objection entirely. There was no basis on which to make any
statements with respect to American Express. There is no
competency, with respect to this witness, and there's no
relevance to any statements with respect to American Express
to any of the relief that's being sought.
THE COURT: So, Mr. Schrock, I think the relevance
objection is fair one, which is it doesn't make -- it doesn't
bear on the statements made with respect to American Express,
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as I see it, don't bear on whether you are or aren't entitled
to any of the first day relief that you're seeking and
therefore I was comfortable striking it on that basis. It
doesn't mean it's false or that it's true; it just means it's
not part of the record on the first day hearing.
If you want to argue for a different outcome, I'll
give you that opportunity.
MR. SCHROCK: Your Honor, I think for purposes of
today's hearing, that fine. It can be -- I hear Mr. Bromley
end up being stricken. Of course my comments are not
testimony but, certainly, you know, we certainly stand behind
everything that we've said.
THE COURT: I understand that and none of what I'm
ruling bears on the truth or falsity of any of the statements
that have been made.
MR. SCHROCK: Yeah.
THE COURT: Okay.
MR. SCHROCK: Very good.
THE COURT: So, is there any objection to
admitting the declaration, subject to the caveats just
described on the record?
(No verbal response)
THE COURT: Okay. Hearing none, it'll be
admitted, subject to those reservations and limitations.
And, Mr. Schrock, I'll allow you to proceed.
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(Rieger-Paganis Declaration received in evidence)
MR. SCHROCK: Fantastic. Thanks, Judge.
So, I think at this point, I'll be turning it over
to my colleague Mr. Chase Bentley, who's going to be taking
you through the next item on the agenda and thanks very much,
Your Honor.
I'm going to transfer rooms back down with my
colleagues down there in 24(b).
THE COURT: Okay, thank you.
Let me just say the following. I didn't yet ask
anyone if they wanted to cross-examine the witness. It seems
to me appropriate that to the extent anyone seeks to cross-
examine the witness with respect to any particular motion, I
ask that you, when I ask whether anyone wants to be heard,
with respect to the motion, if someone seeks cross-
examination, let me ask that you seek to do it then and then
you'll be permitted to do that, but that it makes
servicemembers to consider that, to the extent that it arises
in connection with particular motions and not in the
abstract.
So, with that, why don't I allow Mr. Schrock to
pass the virtual podium and to proceed through the motions.
MR. SCHROCK: Okay. To you, Mr. Bentley. Thank
you, Your Honor.
THE COURT: Okay. Mr. Bentley?
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MR. BENTLEY: Thank you. Good morning, Your
Honor.
Are you able to hear he clearly?
THE COURT: I can.
MR. BENTLEY: Great. Your Honor, Chase Bentley of
Weil Gotshal, proposed counsel on behalf of at debtors. I'll
be addressing Agenda Items 9, 10, and 11 from the amended
agenda that was filed yesterday at Docket 47. Those motions
are cash management, tax attributes, and taxes, respectively.
Your Honor, first, I'll address Agenda Item 9,
which is cash management. The motion was filed at Docket 12.
I'd also note that Your Honor entered an emergency
bridge order at Docket 43 last night on an interim basis,
pending this hearing.
Your Honor, through this motion, the debtors
request authority on an interim basis to consider to maintain
its cash management system and to pay outstanding pre-
petition bank fees and (indiscernible) expenses, including
those that arise during the interim period.
Your Honor, no formal objections were filed to
this motion; however, we did have informal discussions with
both, the U.S. Trustee and as Ms. Schweitzer, on behalf of
the Federal Reserve, referred to earlier, the Federal
Reserve. So, their initial comments were incorporated into
the motion in the proposed order that was filed with that
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motion; however, after the filing of the motion, we did
receive further comments from the Federal Reserve.
The debtors filed a revised, proposed order at
Docket 62, together with a redline against the proposed order
that was filed with the initial motion.
Your Honor, if you'd like, I'm happy to walk
through those changes for you. I do note that Ms. Schweitzer
did preview them, but I'm happy to walk through them in a
more detail.
THE COURT: So, Mr. Bentley, I received that
redline this morning before taking the bench and have
reviewed them, so I don't, myself, have sort of independent
concerns about any of those changes, so I don't think you
need to walk through them, unless there's anything that you
feel a need for the sake of the record, to put forward.
MR. BENTLEY: No, Your Honor. I think that the
revised, proposed order speaks for itself and we've spoken
with the Fed at length about the details that go behind that
language, and I think unless Ms. Schweitzer wants to say
anything, then we are okay to move on.
THE COURT: Okay. Ms. Schweitzer?
MS. SCHWEITZER: No, Your Honor. I don't believe
I need to address it anymore.
THE COURT: Okay. So let me ask this: Is there
any other party in interest that would like the opportunity
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to be heard with respect to the cash management motion?
(No verbal response)
THE COURT: Okay. Seeing no one, Mr. Bentley,
I've reviewed the motion, the original order, the revised
order. I'm satisfied the relief that is sought is customary
and appropriate and don't, myself, have any concerns, so we
will go ahead and enter that revised order.
MR. BENTLEY: Thank you very much, Your Honor.
THE COURT: And that's obviously on an interim
basis.
MR. BENTLEY: Sorry. Oh, correct. Thank you very
much.
Next, I'll address Agenda Item 10, which is the
debtors' tax attributes or is commonly known as "net
operating loss" motion. The motion was filed at Docket 6.
Your Honor, through this motion, the debtor is
seeking interim relief to protect potential value of
consolidated tax attributes, including net-operating losses.
The debtors have not received any formal objections to this
motion.
Similar to the cash management motion, we did have
discussions with the U.S. Trustee, primarily pertaining to
informal comments and questions. Those were addressed,
without a need to revision of the motion that was filed.
One comment that I would like to call out, though,
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in particular, from the U.S. Trustee for Your Honor is that
the U.S. Trustee requested that notice be provided to all
substantial stockholders, as that term is used in the motion,
either for such holders, and debtors did, indeed provide that
service, as evidenced in the affidavit of service, which was
filed on the docket yet at Docket 54.
Unless Your Honor has any further questions or
comments, we'd request that you enter an order approving this
motion on an interim basis.
THE COURT: Okay is there any party in interest
that would like the opportunity to be heard with respect to
the NOL motion?
(No verbal response)
THE COURT: Okay. Seeing no one, I've reviewed
the motion, appreciate that this relief is customary and
appropriate. I don't have any independent concerns with
respect to the relief sought therein, and we will go ahead
and enter that order and, again, on an interim basis.
MR. BENTLEY: Thank you, Your Honor.
The next and final item that I'll personally
address is Agenda Item 11, which is the debtors' tax motion.
That motion was filed at Docket 9.
Your Honor, through this motion, the debtor is
seeking interim relief to pay certain pre-petition taxes
outstanding and fees in amount of $67,000, including any of
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those that come due during the interim period.
Again, similar to the prior motions, we have
received no formal objections on the tax motion and we did
just have informal discussions with the U.S. Trustee prior to
filing the motion, and so the motion and the proposed order
on the docket do reflect the U.S. Trustee's comments.
Unless Your Honor has any further questions or
comments, I would ask that you please enter an order
approving this motion on an interim basis.
THE COURT: Let me ask this: Is there any party
in interest that would like the opportunity to be heard with
respect to the motion to pay pre-petition taxes?
(No verbal response)
THE COURT: Okay. Seeing none, again, I've
reviewed that motion and order and agree that it is standard,
customary, and appropriate, and in the absence of any
objection, we will enter that order on an interim basis.
MR. BENTLEY: Thank you, Your Honor.
And with that, Your Honor, I'll turn over the
podium, which for us is real, but for others, is virtual. Up
next is my colleague Elizabeth Ruocco, who will address the
next items on the agenda.
THE COURT: Okay. Thank you, Mr. Bentley.
And, I'm sorry, I -- if you'd just introduce
yourself for the record, then you can proceed.
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MS. RUOCCO: Thank you, Your Honor.
Elizabeth Ruocco of Weil, Gotshal & Manges,
proposed attorneys for the debtors and debtors-in-possession.
THE COURT: Okay.
MS. RUOCCO: I would like to start by, of course,
thanking the Court for its time this morning and I would also
like to thank the Office of the United States Trustee, who
worked closely with us to address and incorporate any
comments leading into the October 3rd filing.
And with respect to the three motions that I will
be addressing, I believe we have addressed the U.S. Trustee's
comments to their satisfaction.
Your Honor, I'll be presenting three motions,
which relate to wages, utilities, and insurance, in that
order. Beginning with the wages motion, Your Honor, this can
be found at Docket 10. Through the interim order, the
debtors request authorization to pay prepetition wages,
salaries, and benefits, and maintain these compensation and
benefit programs in the ordinary course.
A few things to note for the Court with respect to
the relief sought are that the debtors are seeking a total of
approximately 1.5 million for interim relief comprised of
compensation and benefit related obligations. A few other
things, Your Honor, with respect to the relief sought, the
debtors do not request any relief with respect to an employee
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bonus program, or KERP, during the interim order, and just
for added color, the debtors have approximately 20 employees
and 163 contractors, all of which are vital to continued
operations.
Unless the Court has any questions, I would
request enter of the interim order, Your Honor.
THE COURT: Okay. Is there any party in interest
that would like to be heard with respect to the employee wage
and benefit motion?
(No verbal response)
THE COURT: Okay. Seeing none, I have reviewed
the motion and proposed order and don't independently have
concerns about the relief sought therein, which strikes the
Court as standard and customary under the circumstances, and
so we will enter that order on an interim basis.
MS. RUOCCO: Thank you, Your Honor.
Turning the utilities motion, which can be found
at Docket 8, through this motion, the debtors seek enter of
an interim order authorizing approval of its proposed forms
of adequate assurance, as well as procedures for settling any
requests related to additional adequate assurance.
Just further color for the Court, through this
order, the debtors are proposing to deposit $12,300 in a
separate escrow account as adequate assurance for the utility
providers. And that amount was calculated by a historical
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lookback period of six months many and represents the average
two-week cost for each utility provider.
The utility providers can request additional
adequate assurance by adhering to the procedures set forth in
a proposed interim order. Of course, unless the Court has
any questions I'm happy to answer; if not, we would request
enter of the interim order.
THE COURT: Okay. Is there any party in interest
that would like to be heard, with respect to the utilities
motion?
(No verbal response)
THE COURT: Okay. Seeing none, again, I've
reviewed the motion and proposed order, believe the relief
sought is appropriate, and will -- we will enter that order
on an interim basis, following this morning's hearing.
MS. RUOCCO: Thank you, Your Honor.
Turning last to the insurance motion, which is
located at Docket 7, through the interim order, the debtors
seek authorization to maintain their existing coverage and
pay related obligations, as well as to renew, supplement, and
modify additional coverage in the ordinary course of
business.
As the Court may have seen in the motion, the
debtors maintain various insurance, which relate to liability
and property coverage, cybersecurity, director and officer,
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as well as attorney liability. A few things to note for the
Court are that the debtors are not seeking to pay anything in
the interim period, but in the event it is uncovered that
there was a pre-petition obligation, the debtors have a line
or item in the interim order which seeks authorization to pay
that up to a $25,000 cap.
And one other thing to note for the Court is that
the cyber insurance policy is set to expire during the
interim period on October 16th, 2022, so the debtors do
intend to renew that policy during the interim period.
I'm happy to answer any further questions the
Court may have with respect to the relief sought, and if not,
we would request enter of the interim order.
THE COURT: Just to make sure that I follow, so,
as I read the motion, it's not actually asking for any
particular relief, as I understand it, right. You're asking
to maintain your insurance program in the ordinary course,
which, as your motion explains, you don't really need my
authority to do. And you say there's nothing that's due as
of the petition date, so you're not asking for authority to
pay anything, but what you're really asking for is, gee, if
it turns out we discover we have a pre-petition amount, we
want that authority. So, it's, in that sense, essentially, a
comfort order just in case. Do I understand the relief
correctly?
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MS. RUOCCO: Yes, Your Honor; that's fair.
THE COURT: Okay. That doesn't particularly
trouble or concern me, but let me ask, is there any other
party in interest or any party in interest that would like
the opportunity to be heard, with respect to the insurance
motion?
(No verbal response)
THE COURT: Okay. If not, I'm satisfied that the
relief sought is appropriate, certainly in the absence of any
objection thereto, and we will go ahead and enter that order,
again, on an interim basis.
MS. RUOCCO: Thank you, Your Honor. We appreciate
it. And with that, I will cede the podium to my colleague,
Ms. Natasha Hwangpo, who will present the remaining items on
the agenda.
THE COURT: Okay. Thank you very much.
MS. HWANGPO: Good morning, Your Honor.
THE COURT: Good morning.
MS. HWANGPO: Natasha Hwangpo, of Weil, Gotshal &
Manges, proposed counsel to the debtors.
Bringing up the rear, I will be handling the last
three agenda items, which I believe are Numbers 15 through
17. Starting with the loan servicing motion, Your Honor, at
Agenda Item 15, Docket 11, we're calling this motion
essentially, our "loan servicing motion" and it's stylized as
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a status quo motion seeking authority, but not direction to
continue running our business in the ordinary course.
As with any comfort motion, many of our borrowers
and counterparties have already found comfort that we're
seeking to continue the authority to continue servicing our
loans, again, in the ordinary course. That is, at least,
until our cash position restricts us, but at that point, Your
Honor, we will come back to the Court and keep, of course,
you apprised of any changes.
But back to the motion itself, Your Honor, the
debtors are requesting authority, but not direction, to
continue with the ordinary course servicing and subservicing
their loan portfolio, including their PPP loans and their
legacy loans. And, of course, remitting borrower --
overpayments to borrowers, the SBA, as applicable, and doing
any reconciliation activities related thereto.
We also are seeking in the ordinary course to
continue fulfilling our compliance and regulatory
obligations, as further described in the motion. One thing
of note, Your Honor, in the loan servicing motion, we're also
seeking to pay pre-petition vendor amounts up to a cap of
$75,000 of note that accounts were approximately 7 percent of
the debtors' outstanding vendor payables.
As you know, Your Honor, the company is an online
financial services company. The majority of our vendors are
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service providers and any disruption on account of vendor-
related refusal or delay could cause irreparable harm and
irreversible impacts on the debtors and through a waterfall,
their customers and the borrowers.
One thing we also wanted to note, Your Honor, is
that before the hearing commenced, we did receive some
comments from the SBA through the Department of Justice. We
have not yet been able to get through the can comments that
they've sent, but what we would like to do and propose, if
Your Honor is agreeable, that we would discuss with the SBA,
again, through the DOJ, their comments, and then submit a
revised order, pursuant to a COC.
THE COURT: Okay. Before I get to that, let me
ask if there's any other party in interest that would like
the opportunity to be heard with respect to the motion.
Mr. Gesmundo?
MR. GESMUNDO: Good morning, Your Honor.
THE COURT: And apologies if I mispronounced your
name.
MR. GESMUNDO: Not a problem.
Alastair Gesmundo on behalf of the United States
of America. I appreciate Ms. Hwangpo noting that inquiry and
that ask for some proposed language did come to me, and so
I'm in support of her proposed plan of action and submitting
revised language under COC.
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THE COURT: Okay. Thank you, Mr. Gesmundo.
Ms. Schweitzer?
MS. SCHWEITZER: Thank you, Judge Goldblatt.
It's Lisa Schweitzer. And I'm sure Ms. Hwangpo
would have done it anyway, but we would just ask that we be
able to see any changes to the order before it's submitted.
And as she noted, we were comfortable with the order with the
additional language put in, protective of our collateral.
So, I just wanted to make that comment on the record.
THE COURT: Okay. Thank you, Ms. Schweitzer.
Is there any other party in interest that would
like to be heard, with respect to the motion to continue loan
servicing in the ordinary course?
Mr. Kirpalani?
MR. KIRPALANI: Thank you, Your Honor.
Susheel Kirpalani from Quinn Emanuel, on behalf of
Cross River Bank. We also seek a copy before it is submitted
to the Court under a certificate of no objection.
THE COURT: Okay. Ms. Hwangpo, take it that's
agreeable to the debtor?
MS. HWANGPO: Yes, we will do so.
THE COURT: Okay.
MR. GESMUNDO: Your Honor, Alastair Gesmundo,
again, on behalf of the United States.
Just for everyone's comfort, no one is worried
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that the language is a significant departure from what Ms.
Hwangpo described. I appreciate her describing this as a
stylized -- stylized as a status quo, and I want to reassure
the other parties that the intent was just to clarify as
status quo. Thank you.
THE COURT: Okay. Thank you Mr. Gesmundo.
Is there any other party in interest that would
like to be heard with respect to the loan servicing motion?
(No verbal response)
THE COURT: Okay. If not, I've seen the motion
and proposed order in its earlier form. It looks like,
again, as counsel described, the only sort of substantive
relief that was really being sought was the authority to pay
$75,000 of critical vendor payments and that, otherwise, it
sought authority that Section 363 expressly provides.
That said, I have no concern about entering an
order that makes that clear, and subject to the parties
submitting further clarifying language under certification
and subject, of course, to the Court's review of that
language, we'd expect to enter that language when it is
submitted under certification.
MS. HWANGPO: Thank you, Your Honor.
Moving on to the next item on the agenda at
Number 16, the application to appoint Omni as the debtors'
claims and noticing agent. We filed that at Docket 4.
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Also with the application, as Exhibit A, the
debtors filed the Deutch declaration and Mr. Paul Deutch, I
believe is with us here in the virtual courtroom is and
available for any questions.
At this time, Your Honor, I would request that the
declaration of Mr. Deutch be entered into evidence.
THE COURT: Is there any party in interest that
would like to be heard, with respect to the admission of
Mr. Deutch's declaration that was submitted in connection
with the motion to retain Omni?
(No verbal response)
THE COURT: Okay. Seeing none, that declaration
will be admitted.
(Deutch Declaration received in evidence)
MS. HWANGPO: Thank you, Your Honor.
The debtors believe that there are more than 200
creditors or parties in interest in the case and,
accordingly, the appointment of a claims and noticing agent
is required under Local Rule 2002-1. The debtors believe
that appointing Omni as claims agent will help alleviate the
administrative burden on both, the Court and all parties in
interest, and the debtors solicited and received proposals
from three approved claims and noticing agents, and
ultimately selected Omni, based on its experience,
reputation, and competitive pricing.
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Unless Your Honor has any questions, we'd
respectfully request that the order be entered.
THE COURT: Is there any party in interest that
would like to be heard, with respect to the motion to appoint
Omni as claims agent?
(No verbal response)
THE COURT: Okay. Seeing none, I have reviewed
that motion and proposed order, including Mr. Deutch's
declaration and I am satisfied that that relief is
appropriate and we will enter that order.
MS. HWANGPO: Thank you, Your Honor.
Last, but not least is Agenda Item 17, Docket 5,
the debtors' motion seeking authorization to file and
maintain a consolidated creditor list, redact personal
identification information, approving special electronic
noticing procedures.
I'd note, Your Honor, the debtors only seek to
apply the special electronic noticing procedures to their
borrowers and we believe the relief is appropriate as the
company is an online lending and servicing platform and the
primary means of communication with all borrowers is through
electronic mail; although, there are some inquiries that we
handle via telephone, but other than that, everything is
communicated via email.
The intent, Your Honor, is to provide as much
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notice as possible, but tailoring it to the mode of
communication that the borrowers are already receiving and
also the company's limited resources. We've been working
with the Office of the United States Trustee on this motion
and incorporated comments to the motion and the proposed
order, prior to filing, and since that time, we've continued
to work with the U.S. Trustee and this morning, filed a
revised form of order at Docket 66.
Your Honor, I am happy to walk through the few
changes quickly.
THE COURT: Sure.
MS. HWANGPO: So, the first -- sorry.
THE COURT: Let me let you do that.
MS. HWANGPO: Okay. Thank you, Your Honor.
So, we made one comment in the very beginning of
the order and that was just to clarify, I think we missed a
definition of "borrowers," so we made that clarification, and
then also the addition of paragraph 9, which is the language
the U.S. Trustee has sought to us include.
THE COURT: Hold on. Let me just pull it up
quickly.
MS. HWANGPO: And, Your Honor, perhaps I could
just explain what paragraph 9 does, which is carves out the
named plaintiffs in a putative class action and their
counsel.
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THE COURT: Got it. So, I did see that this
morning. Okay. So, what you've done is you've -- you're
providing actual mail service on the named plaintiffs in the
class-action lawsuit, but you proposed to provide electronic
service on other creditors who are otherwise your borrowers
and presumably have otherwise consented to receive notices
from the company electronically.
Is that, essentially, the ask?
MS. HWANGPO: That is, Your Honor.
THE COURT: Okay.
MS. HWANGPO: One more thing, in addition. As
part of our discussions with the United States Trustee, we
have said that we would make a statement on the record and
that statement is:
"To the best of our knowledge, the vast majority
of the company's borrowers, whether PPP or legacy, have
consented to the electronic transactions and noticing."
And with that, Your Honor, we understand that the
U.S. Trustee does not object to the relief.
THE COURT: Okay. Ms. Sierra-Fox?
MS. SIERRA-FOX: Good morning, Your Honor.
Rosa Sierra-Fox on behalf of the United States
Trustee. Counsel is correct, based on the representation
made on the record about the borrowers' consent to receive
electronic notice, while in doing their business with the
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debtor and the addition of the language, carving out the
putative class action named plaintiffs and their counsel, our
issues were resolved.
We would just like to note that in the ordinary
course, and we usually prefer, and we think the rules
require, service by mail on parties in interest and parties
that are part of the creditor matrix. We understand,
however, that there is a very large amount of borrowers
involved in this case and that they have otherwise, in the
ordinary course, conducted their business through email and
have otherwise, very important to our office, consented to
doing business that way.
And that's a big part of why we are not objecting
to the relief that they are seeking in this instance today,
without prejudice to any of their cases, and the usual
reservations.
THE COURT: Okay. Thank you, Ms. Sierra-Fox.
Is there any other party in interest that would
like the opportunity to be heard, with respect to the
creditor matrix and noticing motion?
(No verbal response)
THE COURT: Okay. If not, so, I've obviously
reviewed the motion and proposed order. I understand
Ms. Sierra-Fox's point. I do know what the language of Rule
2000(f) says; that said, in the absence of any party raising
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any objection to the relief being sought today and without
prejudice to any party's right to come in and ask to modify
this order if a party so requests, I'm satisfied,
particularly in light of the representations of counsel and
the circumstances of this case, that the relief sought is
permissible.
So, we will go ahead and enter that order.
MS. HWANGPO: Thank you, Your Honor.
I believe that takes us through the balance of the
agenda and unless Your Honor has any questions, I believe
we're complete.
THE COURT: Okay. Let me just make sure I
understand what I've already done. The joint administration
motion that I entered yesterday, that wasn't an interim order
or is that just a bridge order, right; that was an actual
final order, providing for joint administration?
Ms. Barksdale is nodding her head, so that must be
the case. Okay. So, that's done and doesn't need to be
addressed further and the cash management, which was a bridge
order, we now have heard and we will enter that order.
So, I guess that takes us -- does that take us
through the agenda, then?
MS. HWANGPO: Yes, sir.
THE COURT: Okay. Let me -- and I take it that
there have been dates that have been set for a second day,
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which I believe is October 26th, and there's an omnibus
hearing set for November 7th.
Is that consistent with what the debtor has?
MS. HWANGPO: Yes, Your Honor; that's our
understanding.
THE COURT: Okay. Let me just -- that's now on
the record so everyone is aware.
Is there -- let me ask this, from the debtors'
perspective, is there anything else the Court can do to be
constructive today?
MS. HWANGPO: Not from our perspective, Your
Honor. We thank you for your time.
THE COURT: This is my job, I'm very happy to do
it.
(Laughter)
THE COURT: Is there any other party in interest
that would like the opportunity to be heard in any matter
today?
Mr. Schepacarter?
MR. SCHEPACARTER: Thank you, Your Honor.
For the record, Richard Schepacarter for the
United States Trustee. Just to advise the Court and all the
parties in interest, we have dispatched questionnaires for
the creditors committee to the top-30 list, those parties
that can serve.
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The return date for those to come back to our
office is October 11th, so hopefully, or we anticipate that a
committee will be formed sometime during the week of
October 10th. That should be plenty of time, hopefully,
before the next omnibus hearing is coming.
I just wanted to let all the parties know that.
Thank you.
THE COURT: Okay. Thank you, Mr. Schepacarter.
Mr. Kirpalani?
MR. KIRPALANI: No, Your Honor. Mr. Schepacarter
answered my question. Thank you.
THE COURT: Okay. Thank you.
Is there any other party in interest that would
like to be with heard on any other matter this morning before
we adjourn?
(No verbal response)
THE COURT: Okay. If not, let me thank all of the
parties for the -- obviously, this is a case in which a lot
of work happened before you came into our court and all of
that work did make the Court's job easier and is much
appreciated. So, thank you to everyone on all sides of the
case for that. And with that, we will stand adjourned. Thank
you.
COUNSEL: Thank you, Your Honor.
(Proceedings concluded at 10:57 a.m.)
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CERTIFICATION
I certify that the foregoing is a correct
transcript from the electronic sound recording of the
proceedings in the above-entitled matter to the best of my
knowledge and ability.
/s/ William J. Garling October 7, 2022
William J. Garling, CET-543
Certified Court Transcriptionist
For Reliable
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