Objection — Cross River Bank Opposes Customers Bank Settlement — In re KServicing

Record facts

U.S. Bankruptcy Court for the District of Delaware · No. 22-10951 · Doc. 206 · 2022-11-04 · Docket on CourtListener

Summary

Cross River Bank's objection to the debtors' motion for an order approving a settlement between KServicing and Customers Bank, filed November 4, 2022 as Doc 206 in In re Kabbage, Inc. d/b/a KServicing, Case No. 22-10951 (CTG), in the U.S. Bankruptcy Court for the District of Delaware. It states that Customers Bank withheld $65.5 million in fees, Kabbage withheld about $34 million collected on those loans, and the roughly $31 million net owed would be settled by a $23 million payment, leaving $8 million with Customers Bank. It argues the motion does not disclose the magnitude or merits of the contingent and unliquidated claims said to justify that retention, failing Bankruptcy Rule 9019. It also argues setoff under Bankruptcy Code Section 553 is unavailable for contingent claims. The objection runs ten pages and asks the court to deny the motion.

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

IN THE UNITED STATES BANKRUPTCY COURT 
FOR THE DISTRICT OF DELAWARE 
 
In re  
 
KABBAGE, INC. d/b/a KSERVICING, et al.,  
 
Debtors.1 
 
 
Chapter 11 
 
Case No. 22-10951 (CTG) 
 
(Jointly Administered) 
 
Re: Dkt. No. 172 
 
 
CROSS RIVER BANK’S OBJECTION TO DEBTORS’  
MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING AND APPROVING 
THE SETTLEMENT AGREEMENT BETWEEN KSERVICING AND 
CUSTOMERS BANK AND (II) GRANTING RELATED RELIEF  
 
Cross River Bank (“Cross River”) hereby objects to the Debtors’ Motion for Entry of an 
Order (I) Authorizing and Approving the Settlement Agreement between KServicing and 
Customers Bank and (II) Granting Related Relief [ECF 172] (the “Motion”).  In support of its 
objection, Cross River respectfully states as follows: 
INTRODUCTION 
1. 
Cross River’s objection to the Debtors’ 9019 Motion is limited.  Cross River does 
not object to Customers Bank (“CB”) returning funds it withheld from Kabbage, which starved 
the Debtors of needed liquidity and helped precipitate this bankruptcy.  But CB is not returning 
anything close to all of the funds it withheld.  Rather, the proposed settlement would permit CB to 
retain $8 million in cash that it owes to the Debtors without even the barest of showing in the 
Motion as to why CB is entitled to retain that cash.   
 
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) (collectively, the “Debtors”). 
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 1 of 10

 
 
2 
2. 
The Debtors must present “all facts necessary for” the Court to form “an intelligent 
and objective opinion of the probabilities of ultimate success should the claim be litigated.”  
Protective Committee of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-25 (1968); see 
also Myers v. Martin (In re Martin), 91 F.3d 389, 393 (3d Cir. 1996).  The Debtors’ 9019 Motion, 
however, says nothing about the merits of the “contingent and unliquidated” claims that CB may 
assert, and which are the purported basis for CB to retain $8 million in cash.  Indeed, the Motion 
spends more words generically reciting the “probability of success of litigation” standard under 
Martin than actually explaining why this settlement satisfies that standard.   
3. 
Nor does the Motion attempt to justify why CB will effectively be receiving cash 
now on its prepetition claims—long before any plan is confirmed.  To the extent the Debtors 
attempt to justify this treatment on the basis of setoff—which the Motion does not—it would fail 
because setoff is unavailable for contingent claims.   
4. 
The Debtors fare no better in explaining any benefits of the settlement, other than 
generic comments about avoiding expense and delay.  But the same could be said about virtually 
any settlement, in virtually any amount.  The Motion says almost nothing as to why this settlement 
should be approved. 
5. 
Finally, the Debtors repeatedly suggest how the settlement may facilitate 
confirmation of their Plan.  But that is assuming that the Debtors’ Plan should, or even could, be 
confirmed in its current form.  Cross River has material concerns about the Debtors’ Plan, which 
it will raise at the appropriate time.  For now, however, it is premature for the Debtors to be touting 
the unconfirmed Plan as a reason to approve this settlement. 
6. 
The Debtors have not met their burden to establish that the settlement is reasonable 
or fair and equitable, and thus it cannot be approved.   
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 2 of 10

 
 
3 
BACKGROUND2 
7. 
CB and Kabbage originated PPP loans in Round 1 of the PPP, and Kabbage earned 
and was paid by CP approximately $47 million in servicing fees.  CB and Kabbage originated 
approximately $800 million in new PPP Loans in Round 2 of the PPP beginning in January 2021.  
Motion ¶ 13.  According to the Debtors, Kabbage earned approximately $65.5 million in loan 
referral and servicing fees upon the origination of those Round 2 loans.  Id.  CB refused to pay 
those fees, asserting that its basis for doing so was certain “alleged failures in [Kabbage’s] 
processing of PPP Loans.”  Id.   
8. 
CB appears to contend that Kabbage’s alleged failures in processing loan 
applications caused certain loans to be missing “SBA-recognized ‘E-Tran’ numbers,” and thus 
those loans “may not (in whole or in part) be subject to guaranty or forgiveness by the SBA . . . .”  
Motion, Ex. 1 (Settlement Agreement), at 2, 4.  CB further contends that such loans give rise to 
additional claims for origination fees and other potential liability for which Kabbage is responsible.  
Id. at 2.  CB asserts that it “faces additional exposure in an unknown amount” because Kabbage 
allowed loan applications that did not comply with SBA guidance in certain respects.  Id. at 2-3.  
CB also asserts that it may incur DOJ or SBA penalties, or suffer losses on loans as a result of the 
alleged failures.  Id.   
9. 
According to the Debtors, these and other similar assertions by CB give rise to 
claims (the “CB Potential Claims”).  CB, however, has yet to assert the CB Potential Claims in 
these chapter 11 proceedings or in any other litigation forum.  Thus, as the Debtors admit, the CB 
Potential Claims are both “contingent and unliquidated” in nature.  Motion ¶ 1. 
 
2  For the avoidance of doubt, Cross River’s references to the Debtors’ statements in the Motion 
are without prejudice to Cross River’s ability to contest such statements in connection with the 
Motion or otherwise.    
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 3 of 10

 
 
4 
10. 
Kabbage continued to service CB’s PPP Loans notwithstanding that CB was 
withholding $65.5 million in fees owed to Kabbage purportedly on account of the CB Potential 
Claims.  Id. ¶ 14.  Kabbage itself began withholding certain amounts collected on CB’s PPP Loans 
that would have otherwise been remitted to CB if CB had paid Kabbage the $65.5 million in 
servicing and referral fees that CB owed.  Id.  As of the Petition Date, Kabbage had withheld 
approximately $34 million to “offset” the $65.5 owed to it by CB.  Id.   
11. 
CB and Kabbage executed a Settlement Agreement on October 27, 2022, 
purporting to settle their disputes, including: (1) CB’s failure to pay $65.5 million in loan referral 
and servicing fees; (2) Kabbage’s withholding of approximately $34 million collected on CB PPP 
Loans; and (3) the CB Potential Claims. 
12. 
The difference between the amount being withheld by CB ($65.5 million) and by 
Kabbage (~$34 million) is approximately $31 million, which net amount is owed by CB to 
Kabbage.  Other than CB’s contingent and unliquidated claims (i.e. the CB Potential Claims), CB 
does not appear to contend that it has any other defense to the $31 million in servicing fees that it 
owes to Kabbage after this setoff.  Nor does CB contend that the amount ($31 million) that it owes 
in fees is incorrect.  But, under the Settlement Agreement, CB is paying Kabbage only $23 million, 
not $31 million.  See Mot. ¶ 17 (summary of terms).  Thus, under the Settlement Agreement, CB 
will continue to withhold—and indeed forever keep—$8 million that it owes to the Debtors 
(equaling the $31 million owed by CB minus the $23 million CB will actually pay).   
13. 
The Debtors’ proposed agreement to allow CB to withhold $8 million in cash is 
purportedly on account of the contingent and unliquidated CB Potential Claims, which are being 
released under the proposed settlement.  Neither the Settlement Agreement nor the Motion, 
however, discloses: (a) the magnitude that CB asserts for the CB Potential Claims; (b) the 
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 4 of 10

 
 
5 
magnitude of the CB Potential Claims that are contingent, unliquidated, or both; (c) anything 
regarding the merits of the CB Potential Claims or the potential defenses thereto; or (d) the 
justification for allowing CB to effectively setoff its contingent and unliquidated claims against 
the amounts it has withheld.   
ARGUMENT 
14. 
As proponents of the proposed settlement with CB, “[t]he Debtors carry a burden 
of persuasion to provide the court with sufficient information to conclude that the compromise 
falls within the reasonable range of litigation possibilities,” and “the burden of persuading the 
bankruptcy court that the compromise is fair and equitable and should be approved.”  See In re 
Key3Media Grp., Inc., 336 B.R. 87, 93 (Bankr. D. Del. 2005), aff'd, 2006 WL 2842462 (D. Del. 
Oct. 2, 2006).  To meet its burden, the Debtors must demonstrate “the fairness of the settlement to 
other persons, i.e., the parties who did not settle.”  In re Nutraquest, Inc., 434 F.3d 639, 645 (3d 
Cir. 2006).  Indeed, this Court has held that because “[u]nsecured creditors are not voluntary 
investors in the Debtors,” their views on a settlement should be “entitled to substantial weight.”  
In re Exide Tech., 303 B.R. 48, 70 (Bankr. D. Del. 2003).3    
15. 
The Debtors have not met their burden.  The Motion provides little information 
about the CB Potential Claims.  It does not disclose the potential magnitude of the CB Potential 
Claims, which are both contingent and unliquidated.  Nor does it provide any disclosure regarding 
the merits of the claims, including potential defenses to those claims.  See In re Spansion, Inc., 
2009 WL 1531788, at *7 (Bankr. D. Del. June 2, 2009) (denying a Rule 9019 motion because, 
among other things, “the Debtors have provided little information as to the specifics of the Actions 
 
3  That is particularly true here where Cross River is: (1) the Debtors’ only other Partner Bank 
besides CB, (2) likely the largest unsecured creditor of the Debtors, and (3) prepaid the Debtors 
for servicing fees, as opposed to withholding servicing fees from the Debtors, as CB has done.   
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 5 of 10

 
 
6 
to provide a basis for evaluating the strengths and weaknesses of the litigation”); In re Trout, 108 
B.R. 235, 239 (Bankr. D.N.D. 1989) (“Without full disclosure an informed decision on the merits 
of the settlement,—how it affects the parties in interest or the case generally cannot be made.”).   
16. 
After a few paragraphs of rote recitation of Rule 9019 standards (Motion ¶¶ 21-23), 
the only thing the Debtors could muster about the probability of success of litigation is that it is 
“uncertain with respect to cost and outcome.”  Motion ¶ 23(a).  That is true about all litigation.  
There is nothing that either the Court or creditors can use to assess the reasonableness of this 
settlement and in particular the probability of success of litigation.  The Debtors’ Motion is filled 
with similar such conclusory sentences that say little more than simply quoting or paraphrasing 
the relevant standards. 
17. 
The Motion fails to present the facts and legal argument necessary for this Court to 
approve the settlement under Bankruptcy Rule 9019.  As the Supreme Court has made clear: 
There can be no informed and independent judgment as to whether a proposed 
compromise is fair and equitable until the bankruptcy judge has apprised himself 
of all facts necessary for an intelligent and objective opinion of the probabilities of 
ultimate success should the claim be litigated.  Further, the judge should form an 
educated estimate of the complexity, expense, and likely duration of such litigation, 
the possible difficulties of collecting on any judgment which might be obtained, 
and all other factors relevant to a full and fair assessment of the wisdom of the 
proposed compromise.  Basic to this process in every instance, of course, is the 
need to compare the terms of the compromise with the likely rewards of litigation.  
TMT Trailer, 390 U.S. at 424-25; see also In re Martin, 91 F.3d at 393 (applying TMT Trailer 
standard to Bankruptcy Rule 9019 settlement).   
18. 
The Motion also fails to justify why CB is entitled to retain cash that is owing to 
the Debtors.  As described (supra ¶ 12), CB owes the Debtors $31 million of the $65.5 million CB 
withheld, but under the proposed settlement CB is only going to pay the Debtors $23 million.  The 
settlement allows CB to retain the remaining $8 million of cash on account of its contingent and 
unliquidated claims.  But the Debtors fail to justify why CB is entitled to do so.  Perhaps the 
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 6 of 10

 
 
7 
Debtors are suggesting that a right to setoff is implicated here, but they never cite Bankruptcy 
Code Section 553 or otherwise discuss the requirements for setoff.  
19. 
Bankruptcy Code section 553 states: “This title does not affect any right of a 
creditor to offset a mutual debt owing by such creditor to the debtor that arose before the 
commencement of the case under this title against a claim of such creditor against the debtor that 
arose before the commencement of the case.”  This means that in order for a creditor to have a 
right to setoff in bankruptcy, (1) the creditor must have that right as a matter of applicable non-
bankruptcy law, and (2) that right must relate to a “mutual debt” that “arose before the 
commencement of the case.”  Based on the Motion, it appears that CB’s claims fail both of these 
tests. 
20. 
First, Cross River understands that the relevant agreements are governed by New 
York and Pennsylvania law, which would apply to determine whether there is a preexisting state 
law right of setoff.4  Under the laws of both states, contingent claims are ineligible for setoff.  In 
re Corp. Res. Servs., Inc., 564 B.R. 196, 201 (Bankr. S.D.N.Y. 2017) (“A claim is contingent and 
ineligible to be set off under New York law when it is dependent on some future event that may 
never happen or has not yet accrued.”); Spodek v. Park Prop. Dev. Assocs., 263 A.D.2d 478, 478-
79, (2d Dep’t 1999) (“[T]here is no right to setoff a possible, unliquidated liability against a 
liquidated claim that is due and payable.”); Leas v. Laird, 1820 WL 1828, at *1 (Pa. 1820) (holding 
that “defendants could not avail themselves of this set-off” where the obligation owed to them was 
contingent); In re MetCo Min. & Mins., Inc., 171 B.R. 210, 218 (Bankr. W.D. Pa. 1994) (“Setoff 
 
4    Section 553 requires an existing setoff right under applicable state law, with additional 
restrictions that must be met to impose a setoff.  In re Orexigen Therapeutics, Inc., 990 F.3d 
748, 752-53 (3d Cir. 2021) (citing In re SemCrude, L.P., 399 B.R. 388, 393 (Bankr. D. Del. 
2009)).   
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 7 of 10

 
 
8 
may be asserted pursuant to § 553 where one of the debts subject to setoff is absolutely owed but 
is not presently due when the petition is filed.”) (emphasis added); see also City of Milwaukee v. 
Milwaukee Civic Devs., Inc., 239 N.W.2d 44, 51 (Wis. 1976) (“The general law of recoupment 
and set-off does not embrace contingent claims ....”).   
21. 
Second, even if CB had a right to setoff under state law (it does not), the Motion 
fails to demonstrate that the right would be recognized in bankruptcy under section 553.  Under 
section 553, “setoff ‘is permitted when, at the time the bankruptcy petition is filed, the debt is 
absolutely owing but is not presently due, or when a definite liability has accrued but is not yet 
liquidated.’”  In re WL Homes LLC, 471 B.R. 349, 352-53 (Bankr. D. Del. 2012) (emphases in 
original); see also FDIC v. Liberty Nat’l Bank & Tr. Co., 806 F.2d 961, 968 (10th Cir. 1986) (“[I]t 
appears to be the general rule that contingent claims are not a proper subject of setoff.”).  This is 
because: “Courts interpreting § 553 have consistently held that, for setoff purposes, a claim—even 
a contingent one—arises when all transactions necessary for liability occur.  Just because a claim 
can exist under the Code before a right to payment exists for general bankruptcy purposes, does 
not mean that such a claim always provides the basis for a right of setoff.”  In re WL Homes LLC, 
471 B.R. at 352–53 (citations and quotations omitted).   
22. 
Permitting setoff of the CB Potential Claims at 100 cents on the dollar would also 
be impermissible in this scenario because it is inequitable and contrary to fundamental bankruptcy 
policy.  Other creditors, including Cross River (which has claims similar to CB’s against the 
Debtors), would likely receive pennies on the dollar.  See Orexigen, 990 F.3d at 754 (declining to 
expand the categories of debts that could be setoff under section 553 because “‘[s]etoff is at odds 
with a fundamental policy of bankruptcy, equality among creditors, because it permits a creditor 
obtain … a preference.’”).  The inequity would be particularly acute here—it would reward CB 
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 8 of 10

 
 
9 
for the improper “withholding of [$65.5 million] for over 20 months,” which “has caused 
significant financial strain on the Company,”5 while leaving Cross River, which prepaid the 
Debtors for servicing, at risk of recovering pennies on the dollar.  Such an outcome is inequitable 
and would support perverse incentives in dealing with counterparties, particularly where they may 
be in financial distress and close to bankruptcy.    
23. 
Finally, even if setoff were somehow permissible, the Debtors’ lack of disclosure 
makes it impossible to evaluate whether the $8 million “setoff” is within the range of 
reasonableness.  Indeed, given the lack of disclosure, it is impossible to know the amount for which 
the Debtors are even settling the CB Potential Claims.  If the CB Potential Claims are being settled 
for $8 million, for example, then they are being paid 100 cents on the dollar through a setoff of 
those CB Potential Claims against the $31 million in servicing fees that CB still owes Kabbage 
after the initial setoff of $65.5 million against $34 million.  If, on the other hand, the CB Potential 
Claims are being settled for some amount greater than $8 million, then the Motion does not even 
state what that amount is, let alone try to justify it.   
CONCLUSION 
24. 
For the reasons stated above, Cross River requests that the Court deny the Motion.   
 
 
 
5  Declaration of Deborah Rieger-Paganis In Support Of The Chapter 11 Petitions And First-
Day Pleadings, at ¶ 52 [ECF 13]. 
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 9 of 10

 
 
10 
 
Dated: November 4, 2022 
 
 
Respectfully submitted, 
Wilmington, Delaware 
BENESCH, FRIEDLANDER, COPLAN & 
ARONOFF LLP 
 
/s/ Gregory W. Werkheiser 
Gregory W. Werkheiser (No. 3553) 
1313 N. Market Street, Suite 1201 
Wilmington, Delaware 19801 
Telephone: (302) 442-7010 
Facsimile: (302) 442-7012 
gwerkheiser@beneschlaw.com 
 
-and- 
 
QUINN EMANUEL URQUHART &  
SULLIVAN, LLP 
 
Susheel Kirpalani 
51 Madison Avenue, 22nd Floor 
New York, NY 10010 
Telephone:  (212) 849-7000 
susheelkirpalani@quinnemanuel.com 
 
Matthew R. Scheck 
300 West 6th Street, Suite 2010 
Austin, TX 78701 
Telephone: (737) 667-6100 
matthewscheck@quinnemanuel.com 
 
Counsel to Cross River Bank 
 
Case 22-10951-CTG    Doc 206    Filed 11/04/22    Page 10 of 10

File and source

File

gov.uscourts.deb.188293.206.0.pdf

Size

292,761 bytes

SHA-256

3820d99c543462e15559ea07177490019bcdd7ea85e314256070c4350c3347e3

Our copy

gov.uscourts.deb.188293.206.0.pdf

Original

archive.org