Court filing
November 7, 2022 Hearing Transcript — Judge Goldblatt Approves Customers Bank Settlement — In re KServicing Wind Down Corp., et al. (Bankr. D. Del.)
Filed November 8, 2022 in In re KServicing Wind Down Corp., et al.; one of 140 filings from this case.
Record facts
| Court | U.S. Bankruptcy Court for the District of Delaware |
|---|---|
| Filed | 2022-11-08 |
U.S. Bankruptcy Court for the District of Delaware · No. 22-10951 · Doc. 228 · 2022-11-08 · Docket on CourtListener
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
IN RE:
. Chapter 11
.
KABBAGE, INC. D/B/A
. Case No. 22-10951 (CTG)
KSERVICING, et al.,
.
. (Jointly Administered)
.
. Courtroom No. 7
. 824 Market Street
Debtors.
. Wilmington, Delaware 19801
.
. Monday, November 7, 2022
. . . . . . . . . . . . . . . 1:00 p.m.
TRANSCRIPT OF HEARING
BEFORE THE HONORABLE CRAIG T. GOLDBLATT
UNITED STATES BANKRUPTCY JUDGE
APPEARANCES:
For the Debtors:
Zachary Shapiro, Esquire
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
920 North King Street
Wilmington, Delaware 19801
Candace Arthur, Esquire
Natasha Hwangpo, Esquire
Richard Slack, Esquire
WEIL GOTSHAL & MANGES LLP
767 Fifth Avenue
New York, New York 10153
Audio Operator: Theresa Mistretta
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 228 Filed 11/08/22 Page 1 of 104
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APPEARANCES (CONTINUED):
For Cross River Bank:
Issac Nesser, Esquire
QUINN EMANUEL URQUHART
& SULLIVAN LLP
51 Madison Avenue, 22nd Floor
New York, New York 10010
Matthew Scheck, Esquire
QUINN EMANUEL URQUHART
& SULLIVAN LLP
865 S. Figueroa Street
10th Floor
Los Angeles, California 90017
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INDEX
MOTIONS:
PAGE
Agenda
Item 9: Debtors’ Motion for Entry of an Order (I)
4
Authorizing and Approving Settlement Agreement
Between Debtors and Customers Bank and (II)
Granting Related Relief
[Docket No. 172 – filed October 28, 2022]
Court’s Ruling:
93
Agenda
Item 8: Motion of Debtors for Entry of Order (I) 100
Authorizing Debtors’ Limited Use of Cash
Collateral, (II) Granting Adequate Protection
to Secured Lender, (III) Modifying Automatic
Stay, and (IV) Granting Related Relief
[Docket No. 143 – filed October 24, 2022]
Court’s Ruling:
102
WITNESSES CALLED
BY THE DEBTORS:
PAGE
LAQUISHA MILNER
Cross-examination by Mr. Nesser
10
Redirect examination by Slack
53
Recross examination by Mr. Nesser
64
EXHIBITS:
PAGE
Debtor Exhibits
8
Declaration of Laquisha Milner
8
Declaration of Deborah Rieger-Paganis
101
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(Proceedings commence at 1:00 p.m.)
THE COURT: Be seated. Thank you.
So good afternoon. We are here in In Re Kabbage,
which is -- hold on -- Case Number 22-10951.
Counsel can bring us through the agenda.
MR. SHAPIRO: Good afternoon, Your Honor. For the
record, Zach Shapiro from Richards, Layton & Finger today, on
behalf of the debtors.
There are several items on the agenda, but only two
going forward, Number 8 and 9.
THE COURT: Okay.
MR. SHAPIRO: So I will, with that, turn the podium
over to Candace Arthur from Weil Gotshal, who will walk you
through those items.
THE COURT: Okay. Thank you, Ms. Shapiro.
Ms. Arthur.
MS. ARTHUR: Good afternoon, Your Honor. For the
record, Candace Arthur of Weil, Gotshal & Manges on behalf of
Kabbage, Inc., doing business as Kservicing, the debtors in
these cases.
Your Honor, as Mr. Shapiro noted, we do only have
two items to go forward with today on the agenda. With your
indulgence, we would like to take them out of order and start
with the 9019 motion, just given the impact that it has on
the cash collateral motion.
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THE COURT: Okay.
MS. ARTHUR: So I will, in that instance, cede the
podium to my partner Richard Slack, and he will go forward
with the submission of evidence for Your Honor.
THE COURT: Okay. Very well. Thank you.
Mr. Slack.
MR. SLACK: Good afternoon, Your Honor. Richard
Slack from Weil.
Your Honor, what we would propose doing on the 9019
is to have the evidence come in. We have a handful of
exhibits that were filed in our exhibit list, we've met and
conferred on those, so I'll go through those.
We have one witness, Your Honor. We have Laquisha
Milner, who's the CEO. And let me introduce her right now.
She is here in the courtroom. And we've agreed that, again,
with your court's -- with the Court's permission, that her
declaration would be her direct testimony, and then she would
be available for cross-examination, you know, today.
So we would propose going forward with the evidence
and then having argument immediately after that.
THE COURT: Okay. That is fine with me.
MR. SLACK: Great, Your Honor.
So, Your Honor, we have submitted an exhibit list,
we have a binder. If I could approach, I can --
THE COURT: Cert --
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MR. SLACK: -- I can hand you a binder.
THE COURT: Certainly. Thank you.
(Participants confer)
THE COURT: And just -- Mr. Slack, just so I
follow, the parties have agreed that -- or are you to going
to walk me through --
MR. SLACK: I'm going --
THE COURT: -- what you've --
MR. SLACK: -- to walk --
THE COURT: -- agreed to?
MR. SLACK: -- you through.
THE COURT: Okay.
MR. SLACK: But we do have agreement, Your Honor.
And there's a couple of just minor tweaks to it, which I'll
walk the Court through.
Your Honor, there's agreement that all of the
exhibits can come in, but I'm going to talk about some
limitations on a few of them.
THE COURT: Okay.
MR. SLACK: So, with respect to Item Number 3,
which is the case servicing white papers, the parties are
agreeing that that can come in to show, essentially,
Kabbage's position with respect to those claims, but not for
and we're not trying to bring it in for the truth of the
merits of those claims.
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THE COURT: Understood.
MR. SLACK: Similarly, Your Honor, if you look to
Items 11, 12, 13, and 14, which are letters between Customers
Bank's counsel and counsel for Kabbage, again, we're agreeing
that those letters can come in for purposes of showing the
party's position and what they said to one another, again,
but not for the underlying truth of any of those statements.
And then the other very minor limitation is the
cash collateral budget, which is Item Number 4, which, as
Your Honor may note, is an exhibit to the order in the cash
collateral motion. That parties would agree that that can
come in to show what the projections were, what the budget
was at the time, but again, not necessary -- not to show what
the actual results are.
THE COURT: Understood.
MR. SLACK: And so, with that, Your Honor, I'd move
all of the exhibits in the binder into evidence.
THE COURT: Okay. Any objection to those documents
being admitted with the caveats as expressed?
MR. SCHECK: Matthew Scheck from Quinn Emanuel on
behalf of Cross River Bank.
No objections to the exhibits with the caveats
stated on the record. Thank you.
THE COURT: Okay. Any other party-in-interest have
any objection? If not, they will be admitted subject to
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those caveats.
(Debtors' Exhibits received in evidence)
MR. SLACK: Thank you very much, Your Honor.
So now, as I said, Your Honor, we also have Ms.
Milner, we put in her declaration. And again, with the
Court's permission, we would ask that that be admitted into
evidence and be treated as her direct testimony.
THE COURT: Any objection thereto?
MR. SCHECK: Your Honor, no objection.
THE COURT: Okay.
(Milner Declaration received in evidence)
MR. SLACK: So, Your Honor, I have copies of that,
if you'd like a copy of the declaration.
THE COURT: I don't think -- so this is the
declaration that's filed as --
MR. SLACK: That's --
THE COURT: -- Docket Item Number 211?
MR. SLACK: That's correct, Your Honor.
THE COURT: Okay. Yeah, I don't need another copy
of that.
MR. SLACK: So the other -- and the other thing is
I would ask that the witness be allowed to have her direct
testimony in front of her when she's on the stand.
THE COURT: Any objection?
MR. SCHECK: No objection, Your Honor.
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THE COURT: Okay.
MR. SLACK: So, with that, Your Honor, we would
call Ms. Milner to the stand.
THE COURT: Okay. Ms. Milner. And --
MR. SLACK: And --
THE ECRO: Please raise your right hand.
LAQUISHA MILNER, WITNESS FOR THE DEBTORS, AFFIRMED
THE ECRO: Please state your full name and spell
your last name for the record.
THE WITNESS: My name is Laquisha Milner, M-I-l-n-
e-r.
THE ECRO: Thank you. You may be seated.
THE WITNESS: Thank you.
MR. SLACK: And Your Honor, I'm going to approach
the witness and give her a copy of the declaration.
THE COURT: Certainly.
MR. SLACK: Thank you.
With that, Your Honor, we are -- we're going to
turn the witness over for cross-examination for whichever
parties would like to do that.
THE COURT: Okay. Is there cross-examination?
MR. NESSER: Yes, Your Honor. Isaac Nesser for
Cross River Bank.
Your Honor, before I begin, there was a document
not on the exhibit list, it's the first-day declaration,
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October 3rd, 2022. We -- I expect we'll be referring to that
in the course of the examination. Would it be all right if
we provided the witness a copy?
THE COURT: Certainly.
UNIDENTIFIED: May I approach, Your Honor?
THE COURT: Certainly.
UNIDENTIFIED: Does Your Honor care for a copy?
THE COURT: I actually have the first-day
declaration. Hold on here, so I think I got it.
UNIDENTIFIED: And anybody else require a copy?
(Participants confer)
THE COURT: Okay. You can proceed.
CROSS-EXAMINATION
BY MR. NESSER:
Q Good afternoon, Ms. Milner.
A Good afternoon.
Q You've submitted a declaration that we just discussed
opining on the settlement agreement that we're discussing
this afternoon, correct?
A Correct.
Q You signed that yesterday?
A (No verbal response)
Q You signed that agreement -- you signed that --
A I --
Q -- yesterday?
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A I did sign the agreement.
Q I'm sorry. You signed the declaration yesterday.
A Yes.
Q And in the declaration, you say that the settlement is
fair and reasonable, right?
A Yes, the settlement is fair.
Q And I'd like to discuss some of the factors that you
consider when assessing whether this settlement --
A Uh-huh.
Q -- or really any settlement is fair and reasonable.
So, to begin with, you need to know what the claim is,
right?
A Yes.
Q You need to know how large the claim is.
A (No verbal response)
Q Yes?
A We need -- how large? No.
Q In order to assess whether a settlement is reasonable,
you need to know what the consideration is that's being
exchanged in the settlement, right?
A Yes.
Q And you need to know what the claim is and what the
consideration is in order to assess whether the settlement is
fair and reasonable, right?
A Yes.
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Q And if the claim relates to events that may happen in
the future, you need to know what those things are, right?
A We need to understand what the claims are, yes.
Q And what the contingencies are, right?
A Yes.
Q And you need to know how likely those contingencies are
to occur.
A No.
Q You need to have some understanding or some assessment
of that issue. Yes?
A Yes.
Q And again, you need to know those things in order to
assess --
A Uh-huh.
Q -- whether a settlement is fair and reasonable, right?
A Yes.
Q And once you know what the claim is and then you deal
with contingencies, you also need to assess whether the claim
is likely to succeed if it's litigated, right?
A I -- I would not say that as a yes, no.
Q You need to understand how strong the claim is, right?
A I need to understand the claim, yes.
Q And you need to understand whether you would prevail if
the claim were litigated, right?
A Yes.
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Q And so you need to know, therefore, what the strength of
the claim is?
A I need to understand the claim, yes.
Q And you need to know what the defenses are.
A Yes, I do need to understand the defenses.
Q And you need to understand how strong the defenses are.
Yes?
A Yes.
Q All of that, again, in order to assess whether a
settlement is fair and reasonable.
A Yes.
Q One other thing. In order to assess whether a
settlement is fair and reasonable, you also need to know what
the settlement is, right? How much is --
A Yes.
Q How much is being exchanged and when it's -- and when
it's being paid, right?
A Yes.
Q Okay. So, just to recap, and then we'll get into the
substance, to assess whether a settlement is fair and
reasonable, you need to consider, number one, the nature and
size of the claim; number two, any contingencies; number
three, any defenses; and then, number four, the nature of the
settlement, right?
MR. SLACK: Your Honor, I object to that. He's
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saying -- he was repackaging, and I think the witness'
testimony was different and stands on its own.
THE COURT: What's your response to the objection?
MR. NESSER: I don't believe it misstated in any
respect the testimony.
THE COURT: Let me -- I'll let you ask the question
again and give the witness a chance to answer it.
BY MR. NESSER:
Q So, Ms. Milner, we talked about four types of factors,
right? Just now, that we've talked about as necessary to
consider when assessing whether a settlement is fair and
reasonable. We -- again, we talked about four of them:
The first one you'll agree with me is you have to know
the nature and size of the claim, right?
A Please ask that again.
Q We can continue.
A Yeah.
Q But the factors that we were talking about just now, and
you identified a number of them that you agree would have to
be considered in order to assess whether a settlement is fair
and reasonable. Can we talk -- like can we just call those,
for the purposes of the next little while, the
"reasonableness factors"? Is that okay with you?
A Yes.
Q So let's turn now to the settlement with Customers Bank.
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A Uh-huh.
Q In Paragraph 6 of your declaration, you say that "CD
contends" -- this is a quote:
"CB contends that the Company is liable to it for
claims that primarily fall in four buckets."
Yes?
A Yes.
Q And the first bucket relates to missing e-tran loans?
A Yes.
Q Second bucket relates to the hundred-thousand-dollar
issue?
A Yes.
Q The third relates to the Form 940 issue. Yes?
A Yes.
Q And the fourth bucket relates to potential claims
arising from certain DOJ investigations, right?
A Yes.
Q Now we said earlier that, in order to assess whether a
settlement was fair and reasonable, you need to know what the
claims are that are being settled, right?
A Yes.
Q And those four buckets that we just talked about, those
four buckets are the claim that you determined the settlement
here would fairly and reasonably resolve, correct?
A Please ask that again.
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Q Yeah.
A I didn't hear you.
Q When you were assessing whether the settlement here was
fair and reasonable --
A Uh-huh.
Q -- you were considering those four buckets of claims,
right?
A I was considering a number of things to determine if it
was reasonable.
Q I understand. But what -- I'm saying the first factor
we talked about is what is the claim that we're talking
about, right? What is it that we're settling?
A Yes.
Q Okay. And when you were attempting to determine what it
is that you're settling, you identify four buckets in your --
A Uh-huh.
Q -- declaration, right?
A I did.
Q And those are the buckets that you considered in
determining what is it that we're settling, right?
A Yes.
Q Okay. And there's nothing else in your declaration
where you say here's a fifth bucket, right?
A These are the four that we've stated, yes.
Q Okay. And so let's talk about the first bucket, which
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is the missing e-tran loans, right? According to your
declaration, the issue there is that the SBA should have
assigned loan numbers to certain loans, but it didn't do so.
Is that fair?
A Yes.
Q And --
A That -- that's fair.
Q And you say that -- I'm quoting now from Paragraph:
"Absent the SBA reinstating a missing in e-tran
loan, the lender, like Customers Bank, can only look to the
borrower for repayment and would not have the benefit of the
SBA guaranty purchase."
Yes?
A Potentially, yes.
Q What do you mean by "potentially"?
A Meaning, if the -- if the bank does not, in this
instance, get the funds back from the borrower, then it would
not be honored, as of now, by the SBA. That's what that's
saying.
Q As of now, right? And so --
A Uh-huh.
Q -- the SBA also may change its mind on that issue. Yes?
A They could.
Q Yeah. So, when you say -- well, let's continue.
So Customers Bank has asserted that these e-tran loans,
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these missing e-tran loans, may not be eligible in whole or
in part for guarantee or forgiveness, right?
A Correct.
Q And they haven't taken a position on whether it's in
whole or in part, right?
A No.
Q So, for all we know, it could be that the issue on the
e-tran loans is the full face amount of those loans or it
could be some subsidiary part of those e-tran loans, right?
A Correct.
Q And do you have an opinion on that issue?
A I have an opinion that we are not liable for those, as
we have operated in conjunction with the program, with PPP;
however, it is a claim.
Q If that claim is permitted to proceed, though, is it
your belief that it should be permitted with respect to the
whole face amount or some smaller subset of the face amount?
A I don't think I can speak to that right now.
Q Okay. And --
A I don't have --
Q -- do you --
A -- enough --
Q -- have any --
A -- information.
Q -- assessment of how a court might resolve that issue?
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A I -- I have -- no.
Q And again, Customers Bank has not told you how it feels
about that issue.
A No.
Q Okay. And you say also that the aggregate outstanding
principal amount of the PPP loan subject to this e-tran
issue, as of October 11, 2022, was approximately $13.7
million. Yes?
A That is our calculation based on the population of the
loans and the amounts --
Q Right.
A -- that is ours. Uh-huh.
Q And we agreed before that, in assessing whether a
settlement is fair and reasonable, one thing to consider is
what the contingencies might be, right?
A I don't think I understand.
Q One of the --
A Can you --
Q -- things we --
A -- explain it again?
Q -- discussed is you have to know if the claim relates to
something that might happen in the future, you need to know
what that might is and what the likelihood of it happening
is, right?
A I don't think I have enough to -- to answer that. I
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mean -- I mean, we definitely assessed what the population
was and we understood that this was our --
Q Uh-huh.
A -- view of it and that CB and the SBA may have another
view, which could be much, much larger.
Q Sure.
A But given the data that we have, we were able to assess
at the 13.7 million, knowing it could be more.
Q Has Customers ever told you that they ascribe a much
larger number to this bucket of claims?
A Customers Bank did not tell me directly.
Q So the only number you have is 13.7, right?
A No. In my declaration, in Paragraph 7 --
Q Uh-huh.
A -- it goes to talk about that the -- CB says that the
claims that they have asserted could be the remainder of its
outstanding portfolio --
Q Sure.
A -- which is approximately 181 million at the petition
date.
Q Sure. But I'm talking just about the e-tran issue. Yo
have a --
A I --
Q -- 13.7 --
A I do not have a number exactly from --
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Q And you don't know what Customers' number is.
A I do not know what that number is was what I'm saying, I
don't know what Customers' number is. My end is 13.7.
Q Did you ever ask what Customers' number is?
MR. SLACK: Your Honor, I just want to point out
something that -- is that there was a mediation which counsel
knows very well that's covered by the mediation privilege.
And there -- you know, I -- so I would say, Your Honor, that
the -- and he can ask the witness. But the information that
was in the mediation was not put in our papers. There was a
discussion, obviously, about the mediation. And you know, so
I would just, you know, counsel, you know, maybe the, you
know, counsel here and the witness not to disclose what's in
the mediation because we're not at liberty to do that.
THE COURT: All right. So I understand you're
preserving the mediation privilege. And to the extent you
hear a question that calls for an answer that would divulge,
you can --
MR. SLACK: Yeah. The hard part is, Your Honor, if
you get a question that doesn't say what did you learn in the
mediation, but did you know X, and that information comes in
the mediation, you know, you can't answer that, that
question. And I -- there hasn't been a foundation. But I
would just say, Your Honor, that that kind of a question,
when there's been an extensive mediation and extensive
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mediation submissions, which, again, counsel knows, you know,
is a little -- is, I think, a little misleading.
THE COURT: All right. Do you have a proposal of
how to navigate the mediation privilege in this context?
MR. SLACK: Your Honor, in Paragraph 19 of the
reply, the debtors explicitly rely on extensive discussions
during mediation, based on which the debtors expect that CB
will argue that it's entitled to setoff and/or recoup from
the approximately sixty-five-and-a-half-million-dollar
receivable amounts, et cetera.
Given that they're explicitly relying on the
mediation, I don't know how --
THE COURT: I think that the fact of the mediation
is disclosed and is understood, but that doesn't waive the
privilege as to every communication that took place in the
mediation.
MR. NESSER: Sure.
THE COURT: So ...
MR. NESSER: Well, the -- maybe I can take it step
by step then.
THE COURT: That's fine.
MR. NESSER: The witness has already indicated that
-- actually, I think we're fine.
THE COURT: Okay.
BY MR. NESSER:
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Q So you don't -- just to recap where we were. You don't
know what Customers Bank's number is on this e-tran issue.
Yes?
A I do not know that.
Q Okay. And if borrowers repay the loans that are the
subject to the e-tran issue, what happens to your 13.7-
million-dollar number?
A That particular number decreases.
Q And by the way, if a borrower, does not pay its loan,
that's a default that shows up on their credit report and so
forth, right?
A I cannot say that. I -- I don't have that information -
-
Q You don't know.
A -- in front of me. No, I do not know that.
Q And borrowers, in fact, have been repaying many of the
PPP loans that Kabbage has been servicing, right?
A Yes.
Q And --
A Borrowers make payments, yes.
Q And in the first-day declaration, in fact, you say that
-- or the declarant says that approximately $256 million of
principal of the loans that Kabbage was servicing have been
reduced on account of borrower payments of principal in the
ordinary course. Does that sound about right to you?
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A I cannot testify to that. I did read it, but I do not
know that fact off the top of my head.
Q Do you have any reason to disbelieve that statement?
A No --
Q Okay.
A -- I do not.
Q And if -- but borrowers repaying is a contingency that
would affect how much that claim is worth on the e-tran
loans, right?
A It could, yes.
Q And likewise, the SBA could agree to honor its -- honor
the guarantee on those loans, right?
A Could, but none of that -- I mean, that has not
happened.
Q Right. But that -- but if that were to happen, what
would happen to your 13.7-million-dollar number?
A I cannot state what would happen exactly. What's the
question again?
Q If SBA --
A I'm sorry.
Q If SBA honored the guarantee --
A Okay.
Q -- on the loans --
A Uh-huh.
Q -- that are -- that comprise that $13.7 million --
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A Uh-huh.
Q -- in principal amount --
A Uh-huh.
Q -- then the size of Customers' claim against Kabbage on
the e-tran loans would decrease, right?
A Well, again, I don't know the size of the Customers
claim, but the 13.7 would decrease.
Q Right. In fact, it could go away entirely, right?
A If every borrower paid?
Q No. If the SBA agreed to honor the guarantee on all of
those loans.
A I can't say it would go away completely? I'm -- I mean,
all -- I can't speak to that --
Q If you --
A -- exactly what would happen for each and every loan.
Every loan is different.
Q If the SBA agreed to honor the guarantee --
A Uh-huh.
Q -- on all of the loans --
A Uh-huh.
Q -- that have a missing e-tran number --
A Yes.
Q -- how could it be that Customers Bank would still have
a claim against you on those loans?
A What I can say is, if the SBA agreed to honor the
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guarantee, we would process those loans as we do in normal
course.
Q And it may be that there's some other issue that impacts
whether those loans ultimately are guaranteed, right?
A It could be.
Q But the actual e-tran issue would vanish.
A If they decided to honor, again, yes.
Q Yes.
A We would part -- yeah --
Q And --
A -- process --
Q And that issue is in limbo right now, right?
A We do not have an answer on that.
Q And it's fair to say that that issue is in limbo, right?
A It is fair to say that. Yes, we don't, yes, have an
answer on that from the SBA.
Q I'm sorry. It's fair to say that issue is in limbo,
right?
A Can you define what you think is "limbo"? I'm sorry. I
want to make sure.
Q Do you not understand what the word "limbo" means?
A I do, for me. But before I agree, I just would like to
ask, please --
Q Why don't you turn to Paragraph 47 of the first-day
declaration?
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A Uh-huh.
(Pause in proceedings)
A I'm there.
Q And do you see there it says:
"Importantly, the SBA has communicated to the
company, that, at this time, it will not guarantee any excess
loan amounts stemming from the hundred-thousand-dollar issue
or the Form 940 issue; therefore, the fate of these amounts,
the company, and the partner banks, and the Federal Reserve
remain in limbo until such a time as the SBA makes clear its
final position with respect to the excess loan amounts" --
And it goes on.
Do you see that?
A I do not, but -- on Page 47?
Q Paragraph 47.
A Oh, Paragraph 47.
Q Page 28.
A Okay.
(Pause in proceedings)
A Okay. Yes, I believe -- this matter is unresolved, yes.
We can -- sure, we can say "limbo."
Q Okay. And just so we don't have to do it again --
A Yes.
Q -- that's the case for the e-tran issue and the Form 940
issue and the hundred-thousand-dollar issue, right?
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A Yes.
Q Okay. What is the status of your discussions with the
SBA on those issues?
A Ongoing.
Q When is the most recent time you heard from them?
A The most recent time I heard from them? Probably -- I
don't have an exact date, but within the last 21 days.
Q And when we say -- and when I ask -- I'm asking, of
course, about Kabbage, in general. Yes?
A Okay. I don't have that exact answer then.
Q But --
A Uh-huh.
Q So your best -- the best you can say, sitting here now
without looking at calendars, is that you think, in the last
three weeks or so --
A Yes. Yes.
Q -- is the last time that SBA has communicated with
Kabbage on these issues or with its outside counsel. Yes?
A Yes.
Q And what did SBA say at that time?
A I do not know exactly what was said at that time.
Q Who participated in those discussions?
A I'm not sure as -- yeah. I'm not sure.
Q How do you know that those discussions occurred?
A Because I know what events are occurring, but I do not
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know exactly what, you know, internal counsel, outside
counsel who led the conversations.
Q So what do you believe is the likelihood that SBA will
ultimately honor these loans? Do you have --
A I don't --
Q -- a basis to make --
MR. SLACK: Objection --
Q -- an assessment?
MR. SLACK: -- to the form of the question.
THE COURT: What's your response?
MR. NESSER: I can rephrase it.
BY MR. NESSER:
Q You know that the SBA communicated with Kabbage in the
last few weeks on this issue, right?
A I know that, yes.
Q But you don't know what was said in that discussion.
A No.
Q But you're generally familiar that those discussions are
ongoing.
A Correct.
Q Do you know whether SBA said anything in those
discussions about what its plans are with respect to these
loans?
A No.
Q Isn't that an important thing to understand if you're
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settling a claim based on that issue?
A It is -- I am aware that we are conversation because
this is an ongoing, important topic. I am aware of that.
Q When will those discussions resolve?
A I do not yet have a date for that.
Q When will you have that date?
A We are working on it as a high priority of the company.
But again, it's working with SBA, so I cannot say when they
will have a decision.
Q So, on the e-tran and the Form 940 and the hundred-
thousand-dollar issue --
A Uh-huh.
Q -- if SBA decides to honor its guarantee, all of those
issues go away, right?
A I can't say that all of the issues go away. I would
hope they would.
Q Those three issues go away, right?
A I -- I cannot state that they all go away. If they
honor the guarantee, yes, we will process the loans according
to the guidelines of the program.
Q If SBA honors its guarantee on the e-tran loans, then
customers can't sue you for an issue on -- for that issue on
the e-tran loans, right?
A I can't answer that.
Q And if SBA honors the guarantee on the hundred-thousand-
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dollar issue loans, customers can't sue you on the basis that
customers incurred liability on the hundred-thousand-dollar
issue, right?
A If we are allowed to process, that should not be an
issue.
Q Right.
And the same on the 940, right?
A I would say yes.
Q And by the way, those --
A Uh-huh.
Q -- SBA issues would resolve, not only the claims here,
but they would resolve other claims in this bankruptcy that
are relevant to the bankruptcy, also, right?
A
So there are claims that, if you go back to my
declaration, talk about point four where you have got the DOJ
claim for anything that could come up that is false claims.
This settlement helps to resolve that, but I can’t say about
what Customers Bank if it would solve everything.
Q
Sure. All I mean is that, for example, Cross River has
started similar claims against Kabbage on the E-Tran issue,
and the Form 940 issue, and the $100,000 issue, right?
A
Mm-hmm.
Q
And if the SBA were to resolve those three issues it
would not only address those claims in so far as they’re
pending with customers, but it would also deal with the Cross
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River piece, right?
A
Yes. Yes. It would help.
Q
So that issue is really at the center of this bankruptcy
in a lot of ways, right?
A
No. This particular bankruptcy is three-fold. This is
a holistic bankruptcy and settlement, and this is why we’re
here.
First, if you look at the settlement what it says is
that we have a liquidity issue that this particular
settlement helps us to resolve. This liquidity is also
important because Customers Bank owes us a total of $65.5
million; $34 million of that we withheld. That $23.2 million
that they are going to write us a check for immediately helps
us to get about 90 percent of the total amount of the claim.
That is why this settlement is so important to the
organization. Getting that $23.2 million in also allows the
company to continue servicing its loans and it ensures that
borrowers are able to continue to get service and we process
them through forgiveness.
Lastly --
Q
How long --
A
I’m sorry.
Q
-- will you be able to service the loans if you get --
MR. SLACK: Your Honor, I think the witness should
be allowed to finish her testimony and not be interrupted.
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MR. NESSER: Your Honor, respectfully, the witness
is giving a speech that is not responsive to the question
asked.
THE COURT: So I agree that what she said was
interesting, but not directly responsive to the question. So
I will allow the counsel to ask a new question.
BY MR. NESSER:
Q
In your testimony just now you talked about the value of
the settlement as providing liquidity, and enabling Kabbage
to continue servicing loans, right?
A
Mm-hmm.
Q
How long will Kabbage be able to continue servicing its
entire loan portfolio if this deal gets done?
A
We will be able to service through March and then two
months after that for a transition.
Q
And is that correct as to the Cross River loans as well
as the Customers loans?
A
It’s all of the loans in our portfolio.
Q
Have you committed anywhere in writing that if this deal
gets done you will continue to service Cross River’s loans
through, I guess the end of May 2023?
A
What we said is that this funding allows us to continue
business as usual and that includes servicing the Cross River
loans as well.
Q
Are you testifying here today as a factual matter that
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if the settlement gets done Kabbage will continue to service
Cross Rivers loans until the end of May 2023?
A
Yes. I am testifying that the $23.2 million will allow
us to continue servicing all the loans in our portfolio
through March.
Q
Are you making that commitment on the record today that
Cross River can rely on that?
A
Yes.
Q
What about past May of 2023?
A
I don’t have the details on any budget past then.
Q
So if the deal doesn’t get done when does your liquidity
run out?
A
If this deal does not get done the company drops below
$5 million the second week of December and the company is
negative by the end of December. So we will not have any
funding at the end of December.
Q
So this settlement buys you five months of additional
servicing from December till the end of May?
A
Yes.
Q
And past that it’s anybody’s guess, right?
A
Past that it will be further conversations.
Q
And so we may well be back here in May, June saying we
have to transition servicing, we’re out of money, we need to
do something, right?
A
What I am saying is that this $23.2 million allows us to
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get through these Chapter 11 proceedings and then continue
servicing through the end of March and then two months of
transition.
Q
Okay. Ms. Milner, have you heard that the SBA is
considering a settlement in which you would honor the
gaurantee on loans subject to -- I’m sorry, on loans that are
pledged to the Federal Reserve?
A
I do not have details on that?
Q
Have you heard that generally?
A
No.
Q
If Kabbage wanted to resolve the issues with the SBA
Kabbage could bring a proceeding against the SBA, right, and
seek to have resolution of those issues?
A
I am not sure what the steps would be other than the
ones that we continue to take which is, you know, reaching
out, having meetings, walking through it.
Q
Well you could raise them with the Court, for example.
A
I would have to defer to counsel on next steps and what
that would be.
Q
Ms. Milner, we agreed before that another one of the
factors you might consider in assessing reasonableness is the
strength of any defenses, right?
A
Yes.
Q
And Kabbage believes it had strong defenses on the E-
Tran issue, right?
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A
It does, on all issues.
Q
Kabbage has strong defenses on all of the issues. And
Kabbage has never conceded that it violated the PPP Program
requirements as to any of the issues, right?
A
No.
Q
And likewise Kabbage has never conceded that it has
liability to Customers Bank, right?
A
No.
Q
Because even if there was a violation of the SBA rules
you still have to determine whether there was a violation of
your contract with Customers Bank, right?
A
We stand firm that we have not violated any rules.
Q
And you have also not breached your contract?
A
No.
Q
So just to make sure we’re on the same page the $13.7
million number that is in your declaration is not discounted
to account for the contingency of borrowers repaying, right?
A
No.
Q
Or for the contingency of the SPA reinstating the loans?
A
No.
Q
Or for any legal defenses, right?
A
No.
Q
And your declaration doesn’t specify what that number
would be if it were discounted to account for all of those
issues, right?
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A
There’s no discounts. It represents the population of
loans that are impacted by E-Tran. That is what the $37 --
Q
Your declaration also doesn’t specify how much
consideration Kabbage is giving to Customers in exchange for
releasing the missing E-Tran claim, right?
A
Consideration. Can you please explain what you mean by
that?
Q
What is Customers Bank getting in exchange for releasing
its claims on the missing E-Tran loans?
A
This settlement ensures that we continue to process
loans through the period that we discussed.
Q
I’m sorry, maybe you didn’t hear my question. Your
declaration doesn’t specify what Customers Bank is receiving
in exchange for releasing its claims on the E-Tran loans,
right?
A
No.
Q
No as in your agreeing with me?
A
No. I am saying that they’re not getting -- I don’t
think I understand the question.
Q
Customers Bank has a claim against Kabbage, right?
A
Correct.
Q
And the claim relates to these missing E-Tran loans,
among other things, right?
A
Yes.
Q
And we know that the face amount of those loans, in your
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calculation, is $13.7, right?
A
For E-Tran only, yes.
Q
And if you were to take some discounts you would wind-up
at some lower number, right?
A
It does not state any discounts in my declaration.
Q
Okay. But how much money is Customers Bank receiving on
this claim in the settlement that you are --
A
I am not giving Customers Bank any money in this
settlement.
Q
So they’re getting nothing for the release of this
claim?
A
I am saying I am not -- again, this settlement is
allowing KServicing to get the $23.2 million in cash and keep
the $34 million that we have withheld which brings us to the
$58 million. So I am not giving --
Q
When you were deciding how much to settle for what value
did you place on the E-Tran issue?
A
We didn’t place a value just on E-Tran. We looked at
this as a holistic settlement with all the parts that I have
discussed before including liquidity, including the ability
to continue to service, and also the claims. We just did not
focus on one thing. And the releases. So it was all of that
to determine that this was a good and fair settlement. We
stand behind that.
Q
Ms. Milner, let’s talk about the 100,000 issue and the
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940 issue a little bit more.
In your declaration you say that:
“The potentially impacted loans, as determined by the
company, following analysis, have a potential excess amount
of approximately $5 million.”
Yes?
A
Yes. I state that.
Q
And then you say you understand that there remains
uncertainty with respect to that amount, right?
A
Correct.
Q
And so this is -- just so we’re clear at the start this
is a potential claim involving a potential excess amount of
approximately $5 million, but that is all uncertain, yes?
A
Correct.
Q
So the $5 million number is the potential size of
Customers claim, not the actual claim?
A
No. So, again, the $5 million is our view after working
with FRA on just the excess amount on the loan and that is
what we calculated. Customers Bank could think something
different, other parties could think other things different,
but that just only represents the excess part of the loan.
Q
Has Customers Bank ever told you what it believes this
claim is worth?
A
I do not have that information.
Q
Again, the $5 million in your declaration is just the
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excess amount. It’s not a prediction about what that claim
actually is worth, right?
A
No. It’s the excess amount for those particular loans.
Q
It’s not a prediction about what the claim is worth,
right?
A
No.
Q
You are agreeing with me, yes.
A
I am agreeing that it represents the excess for the
loans that we have identified that could be impacted by the
100,000/940. It is our calculation.
Q
Is it your calculation of the value of the claim or of
the excess amount?
A
The excess.
Q
Okay. So that approximate, potential, uncertain $5
million number that is not actual the value of the claim that
comes down if the SBA agrees to honor its gaurantee. We
talked about that before, right?
A
It could.
Q
And that is a contingency, yes?
A
Mm-hmm.
Q
And likewise, on defenses, Kabbage has defenses on these
two issues, right?
A
Yes.
Q
Okay. As with the E-Tran issue you don’t have a number
that you can give us in which you say here is how much we are
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paying to resolve the 940 issue, right?
A
No because I am not paying to resolve the 940 issue.
Q
And there is no number that you can say here is how much
we are paying to resolve the --
A
No. This is, again, holistic settlement not focused on
the one area.
Q
And there is no number that you can give me in which you
say, well, here is how much I believe all of these claims
together would be worth if account for contingencies and
discounts, right?
A
No.
Q
That number is not in your declaration and you don’t
have that number, right?
A
I do not have a total number because, again, in my
declaration, especially on point four, it talks about the DOJ
and other things. There is no number there at all. So I do
not have a total number.
Q
Yeah, so let’s talk about the fourth bucket. So the
fourth bucket you say relates to potential claims arising
from any DOJ investigations relating to the $100,000 issue,
the Form 940 issue or any pending False Claims Act case or
related investigation involving the company that is being
pursued by the U.S. Attorney’s Office in Massachusetts,
right?
So those are potential claims arising from pending
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investigations, right?
A
Correct.
Q
There is no current liability to the Government, right?
A
They think there is. These are claims.
Q
The Government hasn’t sued anyone, right?
A
No. The Government has not sued us.
Q
And have you received any written communication from the
Government in which they say here is how much you owe on
these issues?
A
I can’t speak to that.
Q
Okay. Has Customers Bank ever gotten a communication?
A
I don’t know that.
Q
Did Customers Bank ever tell you, look, here is how much
the U.S. Attorney’s Office has told me I owe it in connection
with these issues?
A
I do not know that answer.
Q
And, in fact, we can go further, Customers Bank has said
that this bucket involves claims in an unknown amount, right?
A
Correct.
Q
They use that phrase “unknown amount.”
A
Correct.
Q
So this is a claim that is potential, and pending, it
could be nothing, it’s not anything right now, yes?
A
We don’t know that. Our thoughts is because there isn’t
a number it could be very -- it could be large. It could be
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large.
Q
“Could” be, yeah.
A
Could be.
Q
Did you ever assess the likelihood that it could be
large?
A
We have looked into the things that we have. We don’t
have a number for it.
Q
Okay.
A
These are claims.
Q
Did you ever assess the defenses that you --
A
We did not litigate this, so we did not do -- you know,
it wasn’t litigated in Court. Like we haven’t gone through
any discovery on this case. We didn’t do -- you know, it
wasn’t taken to Court yet.
Q
So you haven’t really analyzed it?
A
No. We have analyzed it. We have, you know, taken it
in, looked at it. We understand that there are claims and
that is why this settlement is good because it provides a
release for these claims. So it also allows us to get the
liquidation that we need.
So, again, this settlement is good because it’s not just
about the claims. It’s about the claims and all the other
areas.
Q
We talked about that you agreed with me at the very
outset that in order to assess whether a settlement is fair
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and reasonable you need to know what the claim is, we need to
know the contingencies, you need to know the defenses, right?
A
Yes.
Q
And as to this fourth bucket we don’t know what the
claim is because you have said it may not exist, right?
A
We know that there is a claim.
Q
But it is an unknown amount.
A
It’s an unknown amount.
Q
And the -- as to the contingency you don’t know what the
likelihood is that this would actually come to pass, right?
A
I don’t know.
Q
And as to defenses you are not able to tell me right now
how strong or weak your defenses might be, yes?
A
I am not.
Q
So in light of all of that how can you possibly
determine that this is a fair and reasonable settlement as to
the fourth bucket?
A
Because it includes -- it is a good settlement because
we know that there are claims. The cost to discover and
litigate this is expensive. We hold firm that we haven’t
done anything wrong. We have abided by all of the rules, but
in order to get to an answer we would have to litigate.
So in looking at the potential cost of litigation and
discovery for this, and the fact that we get releases from
all claims, and we get the liquidity we have assessed that
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this is a good and fair settlement for us to continue to
service as our borrowers.
Q
To service your borrowers for the next few months?
A
To service our borrowers and get through these Chapter
11 proceedings.
Q
And you talked just now about the cost of litigation.
How much would it cost to litigate these claims?
A
I don’t have an exact number.
Q
Let’s move on for a minute. In Paragraph 7 of your
declaration you say that, and you refer to this earlier,
that:
“Although CB has not quantified all of its claims
asserted the debtors with specificity it has represented to
the company, in discussions between the parties, that its
claims against the debtors are potentially equal to the
remainder of its outstanding portfolio which was
approximately $181 million as of the petition date.”
Yes?
A
Correct.
Q
Now when did -- did they make that representation to you
during a mediation?
A
I don’t know what occurred during mediation. I was not
there.
Q
Okay. But was that representation made to Kabbage
during a mediation?
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A
I can’t answer that.
Q
When was that representation made?
A
I don’t know the exact date and time.
Q
Do you know the general date and time?
A
I don’t.
Q
Who made the representation?
A
I know that the representation was made, I spoke with
counsel and my advisors, but I don’t know the exact date in
which that happened.
Q
And you also don’t know who made the representation in
particular?
A
I don’t know who said it exactly.
Q
Was that a representation made in writing?
A
I can’t say if it was made in writing or not, but it’s
something that was said and that is a claim that they have
made.
Q
Did they provide any backup to support the $181 million
number?
A
It’s their belief. So I personally did not get -- I
don’t know that.
Q
Kabbage didn’t get anything either?
A
I can’t say that we did not. I cannot say that we
didn’t.
Q
But you signed the declaration here and you’re
testifying here today?
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A
Oh, yes.
Q
And your position is that the settlement is fair and
reasonable, correct?
A
It is. I believe that.
Q
One of the reasons you think it’s fair and reasonable is
because Customers has told you that its claim might be as
much as $181 million?
A
Yes.
Q
But you don’t know whether Kabbage has any documentation
that would support a claim of $181 million, right?
A
Well because the claim or the support is that they are
outstanding portfolio. I know that that was the outstanding
portfolio at that time. So I am representing that that is a
claim that they have made. It could be equal to that amount.
Q
What was the value of the outstanding portfolio on the
date that they made the representation?
A
I don’t know that exact number off the top of my head.
Q
But it would have been higher, right?
A
It could have been.
Q
And if we wait another two months it will continue to go
down, right?
A
If we wait another two months this organization will not
be in existence.
Q
But did Customers Bank tell you that the size of my
claim is going to decrease as the size of the face amount
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decreases or did it say that my claim is $181 million and it
will always remain $181 million?
A
It was $181 million at the time of this petition.
Q
But you don’t even know whether it was $181 at the time
they made the representation?
A
I know that this was the size of their portfolio at the
time of the petition date and that is why we -- I state here
that the potentially equal to the remainder of this
outstanding portfolio.
Q
But you don’t know what the outstanding size of the
portfolio was on the date that they made this representation,
right?
MR. SLACK: Your Honor, it’s been asked and
answered. Now this is the fourth time that the witness has
answered the question.
MR. NESSER: I can move on.
BY MR. NESSER:
Q
Customers has said that its total claims, right, you say
are potentially equal to $181?
A
Yes.
Q
What does that mean “potentially?”
A
Potentially equal to being that it’s the remainder of
their outstanding portfolio. So in their mind the claim
could be, at least, that amount.
Q
Might be, but not that it actually is?
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A
Potentially.
Q
Right. So they have never actually said their claim is
$181 million?
A
I do not have that. I have what they said was
potentially equal and that is why it’s in the declaration.
Q
Okay. So the -- you have identified three categories
of, sort of, loan specific issues and then you have this
fourth bucket of this unknown potential number, right? In
order for you to have $181 million of liability that would
have to mean that you are paying them money on loans that are
outside of the first three buckets, right?
A
I am not sure that I understand the question.
Q
Sure. The $181 million number does that involve only
the loans subject to the E-Tran, and 940, and $100,000 issue?
A
It represents all of their claims. Again, if you refer
to the declaration --
Q
Yeah.
A
-- it says that the claim against the debtors are
potentially equal. It doesn’t say which of the claims. It
says the claims, so all of them.
Q
Right. But do they have claims on the loans other than
the loans in those three buckets?
A
That, again, could be covered in bucket four, but those
are the main claims. There could be potentially other
claims, but as part of this settlement it resolves that and
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that is, again, one of the reasons why this is a fair
settlement because it resolves all of the claims.
Q
In exchange for a few months of servicing?
A
It resolves the claims because the main focus is getting
in our receivable which is owed to us.
Q
Ms. Milner, Kabbage has its own portfolio of loans, yes?
A
Excuse me.
Q
Kabbage has a portfolio of loans that it issued and it
services, right?
A
Yes.
Q
And those are separate from any loans that were done
with partner banks, right?
A
What do you mean separate?
Q
In the first day declaration it says that PPP loan
originated, funded, and serviced by the company for its own
account are among the loans that are being serviced by
Kabbage today?
A
Yes. We service our loans as well.
Q
Do any of those loans -- are any of those loans subject
to the E-Tran, or 940, or $100,000 issue?
A
Yes.
Q
And how are you marking those loans on your books?
A
I cannot exactly answer that question. All of the loans
are handled in the same way.
Q
Can you generally answer the question?
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A
So it was missing a -- I don’t think I understand the
question. Please as it again.
Q
Well, let’s actually be more specific. So in the loan -
- in the Kabbage loan portfolio are there any loans that are
subject to the E-Tran issue?
A
Yes.
Q
Are there any loans that are subject to the 940 issue?
A
Yes.
Q
Are there any loans that are subject to the $100,000
issue?
A
Yes.
Q
And Kabbage -- if the SBA doesn’t honor its gaurantee,
and if those borrowers don’t pay Kabbage is going to take a
loss on those loans, right?
A
Yes.
Q
Is there any indication in Kabbage’s books and records
about the likelihood that Kabbage will take a loss on those
loans?
A
No. Again, we are -- we have identified those loans.
We know what the population is and we know what the value is,
but at this point, because it’s unresolved, we don’t know
what is going to happen with those.
Q
So are you assuming in your books that Kabbage is going
to get paid on those loans?
A
I don’t have the details of our books and how it is set,
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but we know what the loans are and we understand the
potential exposure of that.
Q
But you have no idea what Kabbage is assuming regarding
the likelihood that it’s going to --
A
Not at this time.
Q
Have you -- you don’t know whether those loans have been
marked down or impaired for accounting or financial purposes?
A
I do not.
Q
Who would know the answer to that?
A
We would have to talk to someone in our finance
department.
Q
Ms. Milner, there isn’t a number in your declaration
that I can point to and say here is how much Customers Bank
is actually demanding on these issues, right, in total?
A
No. I don’t have that number.
Q
And there is not a number in your declaration that I can
point to and say here is how much we are -- here is how we
are accounting for the contingencies and defenses, right?
A
There is not a number.
Q
On a holistic basis, which is --
A
So the -- I don’t think I understand the question.
Q
On a holistic basis is there a number anywhere in the
declaration that I can point to and say, oh, here is how
Kabbage is valuing --
A
So, yes, it’s the $13.74 E-Tran is the $5 million for
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the $100,000 and 940. We don’t have a value for the bucket,
but we understand it could potentially be --
Q
Right.
A
-- large.
Q
I mean the contingencies and the discounts for --
A
No. I don’t have that number.
Q
For the entire claim?
A
No.
Q
And there is not a number in your declaration that I can
point to and say here is how much Kabbage is proposing to pay
to resolve the four buckets, right?
A
No.
MR. NESSER: Nothing further.
THE COURT: Mr. Slack, redirect?
MR. SLACK: Yes, Your Honor, a few questions.
REDIRECT EXAMINATION
BY MR. SLACK:
Q
Good afternoon.
So you were asked on cross-examination about the four
buckets of claims by customers that you put in your
declaration. Do you generally remember early on being asked
about those four buckets?
A
Yes.
Q
And -- now are the claims -- those four buckets, are
those the only claims, the only issues that the company is
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addressing in the settlement?
A
No. It could be future, right. The settlement says that
we resolve, especially in bucket four, any issues that come
up, you know, later and we get releases on everything. So it
could also have an impact on some future claims.
Q
Putting aside claims by Customers are there other things
in this settlement --
A
Yes.
Q
-- that are getting resolved.
A
Yeah, so --
Q
So can you explain to the Court what are the “things,”
what are the other elements of the settlement other than
claims by Customers against the company that are being
resolved?
A
The items that are being resolved in this settlement
are, one, we are getting in the receivable which, again, was
$65.5 million, we are getting to keep the $34 million that we
withheld, and we are receiving a full cash payment of $23
million. That is important because that means that we now
have a total of $58 million which represents almost 90
percent of the 65. That is one thing.
The second thing it resolves is our liquidity. Because
the company is at a point where the cash, which is the $23
million, is important so that we can continue to service our
loans. This particular settlement allows us to get that in at
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one time. The cash comes in the door. We continue to
operate.
Then, again, it helps with the releases on both parties.
Then, again, it resolves those claims as well. So all of
those things are involved in why this settlement is good and
fair.
Q
Now you were asked some questions about the liquidity
issues and after asking the questions Mr. Nesser made some
comment about having a runway of only four or five weeks. I
think I may be off.
MR. NESSER: It was months.
BY MR. SLACK:
Q
So can you take a look at Exhibit 4. Do you have the
exhibit binder in front of you?
MR. SLACK: Can I approach, Your Honor, with the
exhibit binder?
THE COURT: Of course.
BY MR. SLACK:
Q
Ms. Milner, if you take a look at Exhibit 4, and I
recognize this is very small, so I need my glasses to be able
to see it, but do you recognize this as the budget that was
attached to the cash collateral motion?
A
Yes.
Q
And you are generally big picture familiar with this
budget?
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A
Yes.
Q
So if you take a look at the column that is November
25th, 2022 and you go down and see a $23 million entry, do
you see that?
A
I do.
Q
So is it fair to say that this budget reflects the $23
million that Customers Bank is promising to pay as part of
the settlement?
A
Yes, it does.
Q
And then if you look at the very bottom of that column,
all the way to the bottom, it says current cash balance. Do
you see that?
A
I do.
Q
So it reflects that when the company gets in the $23
million, according to this budget, the company would have $28
million, roughly, in cash, correct?
A
Correct.
Q
And using this -- again, I hope it’s not too small, at
what point does this budget show that the company, absent the
$23 million, if you back that out, would be lower than a $3
million cushion for the company to operate?
A
It looks like 12/2, I think I can see that. Yes, absent
of that if we do not receive it on 11/25 then -- I’m sorry, I
think that’s 12.
Q
Just an entry, right, in 12/2?
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A
Yes.
Q
The company goes below $3 million.
MR. NESSER: Objection, Your Honor.
THE COURT: I’m sorry, what is the basis for the
objection?
MR. NESSER: It was leading, Your Honor.
THE COURT: I’m sorry.
THE WITNESS: Oh, I’m sorry, I couldn’t see it.
MR. NESSER: Leading.
THE COURT: I will -- why don’t you ask the
question again in a way that doesn’t suggest --
BY MR. SLACK:
Q
So, Ms. Milner, can you point to the Judge on what date
the company goes below $3 million in cash cushion if the
settlement is not approved?
A
On 12/2.
Q
And at what point does the company goes cash negative
according to this budget if the settlement doesn’t go
through?
A
If the settlement does not go through by the end of the
month 12/23 we began to go cash negative.
Q
So it’s fair to say, right, that according to this
budget by the end of this calendar year the company will go
cash negative without the settlement, correct?
A
That is correct.
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Q
One last thing, if you look at the end of this budget,
which is February 1st, can you tell the Court what is the
cash balance at that time?
A
If I receive the -- if I don’t receive it its negative
$1.
Q
Let me ask it differently. So if you do receive -- if
the company does receive, and the Court approves it and you
receive the $23 million from Customers Bank how much money
will the company continue to have to operate at the end of
this budget according to this budget in February of 2023?
A
It’s still $18 million.
Q
And in your view is that sufficient capital cash cushion
for the company to be able to service its loans through the
Chapter 11?
A
Yes, it is.
Q
Now you were asked a number of questions by Mr. Nesser
and you understand that Mr. Nesser’s client is Cross River
Bank, correct?
A
I do.
Q
I think Mr. Nesser asked you whether Cross River Bank
had similar claims. Do you remember that roughly?
A
I do.
Q
And Cross River does have very similar claims to those
of Customers, correct?
A
Correct.
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Q
Are you aware of any communications that Cross River has
had with the company where Cross River has sought to resolve
the same claims that have been made by Customers?
A
No.
Q
Do you know whether your lawyers have had any
communication with Cross Rivers lawyers about resolving the
Cross River claims?
A
I think very early on there was one conversation, but I
am not aware of anything recent. I know that that they have
these claims.
MR. SLACK: Your Honor, I would like to put into
evidence an August 12th, 2022 letter from Quinn Emanuel to
Davis Polk.
MR. NESSER: Are these on the exhibit list?
MR. SLACK: What’s that?
MR. NESSER: Are these on the exhibit list?
MR. SLACK: They are not. They are being used for
redirect.
MR. NESSER: Just to be clear, you’re impeaching
the witness with these documents?
MR. SLACK: No. I am engaging in appropriate
redirect with respect to these documents.
MR. NESSER: Your Honor, I object to the
introduction of these documents.
MR. SLACK: Can I approach?
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THE COURT: Let me look at the document and
understand the context.
MR. SLACK: Your Honor, can I make a proffer on
this?
THE COURT: You can make a proffer, yes.
MR. SLACK: So, Your Honor, there was a whole
series of questions where Mr. Nesser was trying to suggest
that nobody could ever try to resolve claims that are wholly
contingent and unliquidated that are like the Customer ones.
I think if I could I could put in front of you, Your Honor, a
whole series of letters, which I am prepared to do, where
counsel for Quinn Emanuel has done exactly that.
So I think it’s completely appropriate for redirect
given the questions that were asked on cross for the Court to
be able to take into consideration that counsel for Cross
River has also sought to resolve those claims that it now is
trying to assert shouldn’t even be the subject of any
discussions and resolutions until the SBA decides this and we
figure out two months down the road that.
THE COURT: Okay.
MR. NESSER: Your Honor, if Mr. Slack wants to
swear and testify to those facts I suppose that is something
we can discuss. The witness was asked whether she is aware
of this and the witness said she is not aware of any of this.
There is no foundation for putting any of this in front of
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the witness. It goes way beyond the scope of the cross-
examination and it’s inappropriate.
THE COURT: So let me tell you where I am. I think
that it doesn’t go beyond the scope because I think on cross
you said it’s impossible to resolve a claim that is so
uncertain. So it’s a fair response. Where, I think, your
right is I don’t see how you use this document with this
witness who says she has never seen this document before.
So I am not going to admit the document into
evidence with this witness despite its apparent relevance
because I don’t think you have got a basis to do it with this
witness.
MR. SLACK: So, Your Honor, I think we have put in
our witness list that for rebuttal that we would call
witnesses. I would note that Mr. Nesser is a CC on this. So
I would ask to call Mr. Nesser solely for the --
THE COURT: Right now you have got a witness on the
stand. So why don’t you deal with that and we can come back
to your additional evidence if and when we get there.
MR. SLACK: Okay.
THE COURT: And let me just suggest for the benefit
of all the parties that the point that is at issue here
strikes the Court as sufficiently commonsensical that having
an evidentiary fight about it strikes me as tempest in a
teapot. I will let you all decide how to put on your case,
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but to the extent that observation is helpful let me put it
out there.
MR. SLACK: So just a couple more questions for Ms.
Milner.
BY MR. SLACK:
Q
Ms. Milner, I know you have had the opportunity to say
much of this in different pieces, but in your own words can
you explain why this settlement today is an important one for
the company?
A
Yes. This settlement is important for the company
because it represents a year and a half of work that myself
and the board have done to try and get the $65.5 in
receivables. We have gone through a lot of conversations.
We sued. We are now here. This settlement is good because
we will be able to get back $58 million of the funds.
Like the $23 million will be in cash received to us.
Looking at the budget its cash that will go directly to
servicing our borrowers and insuring that we can continue to
do what we were here to do in the first place which is
service our borrowers. Again, it also allows us to resolve
the, you know, claims issues and get releases from Customers
Bank.
And the board and I have reviewed this, we have thought
about it extensively, we have conferred with our legal
counsel and our financial analysis. We believe that this is
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a good and a fair deal. The cash at the door it removes all
of our liquidity issues and, again, allows us to get back and
receive 90 percent of the outstanding receivables. So I
stand behind that this is a good and fair deal. And I think
that it would be good for us to move forward with it.
Q
And, Ms. Milner, as you dealt with the process of this
with the board you mentioned that this had been going on.
Can you describe for the Court the process by which you and
the board went through over this time and then ultimately
resulted in the board approving this settlement?
A
Yes, as stated --
MR. NESSER: Your Honor, objection; it’s beyond the
scope.
THE COURT: I think that is a close question, but I
do think the cross suggested that the analysis was
superficial and that this responds to that question. So I
will allow it.
THE WITNESS: As I stated we have been going back
and forth with Customers for over a year and a half. We have
initial started out sending letters. It was business to
business. We then sent demand letters. We also filed a
lawsuit to try and get this money. We went to mediation and
talked through it. We then reviewed settlements, some of
which, you know, of course we did not take. This was a back
and forth process over a long period of time.
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Most recently when we got to this settlement we
talked to counsel, we talked to our advisors, and, you know,
some of the settlements weren’t great and we did not take
those settlements. We made sure that this was the best deal
because it has a cash pay-out immediately. Again, that is
exactly what we wanted, that is what we needed, and that is
in the best interest of the company.
So the board, again, after several conversations
talking with our counsel and our advisors, looking at our
operations, met and decided that this particular deal was the
best, and it was fair, and it would be in the best interest
of the company to take it. So we did.
MR. SLACK: Your Honor, I don’t have any further
questions.
THE COURT: Okay. Thank you, Mr. Slack.
Mr. Nesser, any recross?
MR. NESSER: Just a couple.
RECROSS-EXAMINATION
BY MR. NESSER:
Q
Ms. Milner, your declaration says nothing about other
settlements that you did not take, right?
A
No.
MR. NESSER: That's all I have.
THE COURT: Okay.
Mr. Slack, any further evidence?
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MR. SLACK: So, let me just ask counsel whether
they're going to allow that letter to come in or not.
MR. NESSER: Come in for what?
I think His Honor is clear that there's no dispute
that the letters are the letters. If the judge wants to look
at the letters, he can look at the letters.
MR. SLACK: Well, we're not putting it in for the
truth. We're putting it in for the --
MR. NESSER: Maybe we can talk about this after
the witness is off? I don't see the reason why we're
having -- why there's a need for any controversy about this.
MR. SLACK: Well, I would just say this, Your
Honor, if Your Honor will indulge literally 30 seconds of
direct from --
THE COURT: Let me ask this question.
MR. SLACK: Yes?
THE COURT: Is there anything further for this
witness?
MR. SLACK: No, there's not, Your Honor. Thank
you.
THE COURT: Okay. So, thank you, Ms. Milner, for
your testimony. You can step down. Not that it isn't fun
for everyone to spend the day in the witness box.
(Witness excused)
MR. NESSER: Your Honor, if the Court wants to
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consider the letters, we have no objection to that.
THE COURT: Does that moot your concern,
Mr. Slack?
MR. SLACK: That takes care of it, Your Honor.
Thank you.
THE COURT: Okay. Any further evidence on behalf
of the Debtor?
MR. SLACK: No, Your Honor. Thank you.
THE COURT: Okay. Mr. Nesser -- oh, I'm sorry.
Any -- do you, on behalf of the Objectors, do you
have an evidentiary case?
MR. NESSER: Nothing further.
THE COURT: Okay.
MS. ARTHUR: So, thank you, again, Your Honor.
And for the record, once again, Candace Arthur,
Weil, Gotshal & Manges, on behalf of the Debtors.
So, Your Honor, what you have before you is a
global settlement that is not complex, despite the
complexities of the claims involved. Importantly, the
settlement has three main components and we do believe that
one should not evaluate the agreement outside of those three
components. It should be considered together.
First, the company is owed $65.5 million from
Customers Bank and that's full stop. That being said, the
seller provided the company will receive 58 million, which as
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Ms. Milner noted, is merely a 90 percent recovery on a
collections claim that the company has attempted to address
for nearly two years.
Second, the settlement, unequivocally addresses
liquidity circumstances that the company is facing, which is
such that absent receipt of the cash component of the
settlement agreement, that's the $23 million, absent receipt
of it, the company will have less than $3 million the first
week of December and it will also fall below that again.
THE COURT: So, can I -- look, let me just
describe how, in broad strokes I think I'm thinking about the
issue in front of me --
MS. ARTHUR: Yes.
THE COURT: -- and tell me if you think I'm
thinking about it wrong. To me, there are sort of two
severable issues, which is, one, do we liquidate today, the
claim that Customers asserts against you, as opposed to
letting it play out and maybe taking advantage of the ability
to, Well, you know, you lose your setoff right because your
claim never became fixed before the end of the bankruptcy or
do you choose to liquidate it? And there, I take it your
argument is, essentially, Look, I can't afford to play it
out. I need the cash.
Question two, then, is, Okay, if we're going to
liquidate it now and give them the right to set off the claim
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in what amount, is the $8 and a half million essential
settlement of their potential claims within the range of
reasonable?
Let me pause there. And is that way -- is that
frame of thinking about the question in front of me a
reasonable way to think about it?
MS. ARTHUR: I think so, Your Honor, so long as
when you mention their claims, it's inclusive of the
universe.
THE COURT: All -- the global settlement,
including complete releases.
MS. ARTHUR: Of course.
THE COURT: And I understand you can't really
separate the two pieces and that part of the reason you might
settle it at one amount as opposed to another is because
getting cash today has a value to you.
MS. ARTHUR: Well, because they have my money, but
yes.
THE COURT: So, I understand that.
Can you just walk me through what the record tells
me as to why, in light of the merits, just using the Martin
factors --
MS. ARTHUR: Yes.
THE COURT: -- I don't need to be slavish about
the multi-part test, because I think that it, you know,
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basically, I'm supposed to use common sense and ask the
question: Would a reasonable person in the position of the
Debtor, who was being diligent and competent and well-
informed, make a decision like this?
So, I don't think we need to overcomplicate the
analysis, but just walk me through the evidence that says,
you know, a diligent person in the Debtors' position would
reasonably decide that resolving -- that $8 and a half
million is a fair number in light of the strength of the
claims against the Debtor.
MS. ARTHUR: Sure thing, Your Honor.
I'll take the claims first. In the first
instance, the Debtors have a collection claim of the
65 million and it would be great and ideal if we got all of
that, all those -- all that amount; instead, there is a
haircut that the Debtors are forced to take on it.
And second, we look at some of the counterclaims
that Customers Bank has asserted against us in connection
with their defense as to why they're withholding the money.
That includes, not only the Form 940 issue and the 100k
issue, as well as the missing E-Tran loan population and the
claims against the pending DOJ investigations, but in
addition, the $34 million that the company is withholding.
In terms of the record before the Court, we have
described the nature of those claims and the scope of it in
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the first day declaration in the disclosure statement and the
settlement agreement itself. Our defenses --
THE COURT: So, can I pause -- stop you there.
So, the first day declaration, in fairness, let me
offer one observation, just for what it's worth. The first
day declaration describes the government investigations. I
didn't read the first day declaration to describe, for me,
the claims that Customers was asserting against the Debtor.
I saw a discussion of the outstanding, the $65 million issue
and I saw a discussion of the government claims against the
Debtor.
And maybe if I were brighter, I would have figured
out that because the Government asserts those claims against
the Debtor, that could give rise to claims by the lenders
against the Debtor, but that wasn't laid out really clearly,
is observation A.
Observation B, which is more important, is, you
know, when you filed this motion, you knew it was objected to
because you had conversations with Cross River before. But
the motion was quite bare-bones and left, really, all of the
work of justifying what you're doing to the reply.
And we are where we are, and I'm going to address
this on the merits, but just as a point going forward, when
you're the Debtor and you're filing and seeking relief and
you know there's someone who's appropriate, I don't think
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it's appropriate to keep your cards sort of hidden and wait
until the reply to lay it out.
We are where we are and, fortunately, in this
case, opposing counsel is extremely capable and I don't think
any prejudice occurred as a result. But just in terms of
laying out my expectations, I just want to be clear about
that.
MS. ARTHUR: Yes, Your Honor.
And for sure, in no way were the Debtors trying to
hold their cards, particularly against a counterparty that
has asserted the same exact claims and that we provided
information to well in advance of any of the deadlines.
THE COURT: I understand. I'm not saying there's
procedure here.
MS. ARTHUR: Apologies, though, to the extent --
yes.
THE COURT: I just say that only so that --
MS. ARTHUR: Of course.
THE COURT: -- if that happens again, I get to be
mad about it.
(Laughter)
MS. ARTHUR: Fair enough, Your Honor. We only
make a mistake once, so that's fair enough.
But, Your Honor, in looking at the breadth of
those claims, you know, Customers Bank did assert that, on
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the maximum end, it would be $181 million. As Ms. Milner
noted, we did some of our own calculations when it came to
certain of the other buckets, the E-Tran for one, Form 940,
and, as well as the 100k issue, and for that, at minimum, it
was about $20 million.
Taking that range alone, the $8 million that
Customers Bank would retain in connection with a release of
their claims, was more than fair and reasonable to the
Debtors, particularly when they exercise their sound business
judgment in agreeing to enter into the settlement.
Also (indiscernible) Your Honor, in connection
with the claims and the assessment, the company also
(indiscernible) defenses and it considered not only the
strength of the defenses because it believes, and it still
believes today, that it would prevail, but the time --
THE COURT: Right. So, Ms. Arthur, so, look, it's
always unfair to ask a Debtor to support a settlement in
which it's settling a claim that it believes that it owes
nothing and it should win everything. And it's not really
fair to make you explain why you think you might lose. And I
get that dynamic and you're doing the best you can and that's
just the nature of the beast.
But, in fairness, isn't Mr. Nesser's point the
$20 million number, sure, that's the outside exposure, but
that goes down for lots of different reasons. It goes down
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as cash comes in the door in the ordinary course. It goes
down if it turns out the SBA agrees to honor the guaranty in
any event, and that it's not really like someone has a $20
million claim that you're settling at 40 cents, because if
you were to, in any rational way, try to ask yourself, What's
the most likely number -- if we did something wrong, which we
don't think we did, how much do we owe?
It's not like anyone thinks that number is really
$20 million, right. We don't know how much less than that it
is, but it's clearly some amount less than that; isn't that
right?
MS. ARTHUR: Well, Your Honor, I would
respectfully disagree as to whether or not it would be less
than 20 million, only because the truth of the matter is,
regardless of whether you're right or you're wrong, it
doesn't mean that you would not have to cut a check for
something. That's just, you know, the American jurisprudence
right.
THE COURT: Oh, I understand that.
MS. ARTHUR: That being said, you know, in
connection with the Martin factors and looking at, you know,
whether or not there's a success, the probability of success
in the litigation, you know, courts, importantly, look at the
time that's available to collect on this, the time that's
going to be taking for judgment. And if it's taken two
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years, including a pre-petition period, where we attempted to
resolve these very claims, not only with Customers Bank, but
with the other key stakeholders, they're clearly complex and
it's clearly not going to be a cut-and-dried answer.
THE COURT: No, I understand that.
Okay. I'm sorry.
MS. ARTHUR: So, to that point, Your Honor, when
looking at the range and Mr. Nesser's point as to, Well, why
don't you wait it out and why don't you, you know, wait to
see what the SBA does, wait to see what the DOJ does, we
can't afford to do that anymore. So, the time component is
incredibly important.
And that being said, the time component, in
addition with our liquidity, you know, we have to take a fair
and honest assessment, ourselves, as Debtors as to what is
going to be appropriate for the borrowers, as well. And the
inability to service them for those two months in a proper
manner, the inability to fulfill our obligations is something
that the company and the CEO, particularly, took very
seriously, when weighing these options.
In terms of the claims, as well, and the strength
of it, in bankruptcy, just as in any other courts, Your
Honor, when it comes to a settlement and a compromise, we're
giving more than we would want to give and that's just the
nature of what's before us. But it doesn't mean it's wrong
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and it doesn't mean it doesn't, you know, meet the standards
that the Court has articulated in Martin or otherwise, and it
doesn't mean that there's not going to be an aggrieved party.
If Customers Bank were to stand up today, I think,
Your Honor, they would say their claims aren't contingent and
that they're not the same as Cross River's, because they're a
secured creditor. They would say that the landscape of what
was available to them is different because they had the
company's money. They had the $65.5 million. It changes the
discussion with them. As a result, it changes what we can
push forward.
And so, when it comes to how we're going to treat
the same claims, the Debtors have to treat them differently
because Customers Bank is in a different position and I think
that it is -- it certainly meets the Debtors' business
judgment in doing so and I think it certainly satisfies the
Martin factors, as well, in doing so.
So, that's how we're kind of looking at the
claims, Your Honor, in that assessment.
THE COURT: I understand that. That's very
helpful.
Thank you, Ms. Arthur.
MS. ARTHUR: And I'm happy to go through the
Martin factors on, you know, each floor. I think we stand on
all four corners on them, but I'm happy to do so if that's
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helpful for Your Honor, and for the record, as well.
THE COURT: I don't -- I've seen the briefing and
I don't think an articulation of each of the four factors is
separate, at least for the purpose of argument, necessary.
MS. ARTHUR: And so, Your Honor, one other thing I
would want to make sure I mention for the Court is when it
comes to the needs that we've been mentioning in terms of
liquidity, and I know you've heard it ad nauseam by now and
it's been written in many of our briefings in terms of the
need, the financial need, those funds do get the company
through that six-month period for administering the
Chapter 11 cases.
That being said, and I do want to clear it up,
because I know there was a bit of a back-and-forth on the
stand earlier, when it comes to any guaranties or as to what
the company is going to be able to do in connection with its
servicing obligations and the contracts, you know, the
Debtors aren't standing up today, in any way, and waiving
their rights, whether it be under 365 or otherwise, as to
what happens.
MR. NESSER: Objection.
MS. ARTHUR: I don't know if you're going to
object. I'm doing an argument.
MR. NESSER: Your Honor, the witness literally
waived those rights.
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THE COURT: I'll give you -- look, nothing that
counsel is going to say is going to change the witness'
testimony, but the context -- you can all put it in context.
You're both entitled to put it in context.
MR. NESSER: I apologize.
MS. ARTHUR: So, Your Honor, to that point, in
terms of the Debtors' intentions, when it comes to whatever
the plan that's going to come before you and whatever it
states, the funds allow us to be able to have those
discussions, to be able to meet the with parties, to be able
to put forth a confirmable plan. What it doesn't do is
provide any commitments to certain parties to service their
loans through May.
That being said, does it provide for the company
for sure to service obligations through the end of March? It
does, and that's what was intended, and that's been stated,
but I don't want there to be confusion as to whether or not
the Debtors are foregoing any of the tools in the Chapter 11
toolbox that they have available to them.
THE COURT: Okay. Understood.
I think we can address a future dispute about
that, if one were to ripen.
MS. ARTHUR: I think so, too, Your Honor.
So, Your Honor, that being said, and just to kind
of bring it back to the settlement before you, you know, it's
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the Debtors' position that the evidence that has been
submitted today, as well as the record before the Court,
supports a finding that the Debtors exercised sound business
judgment in entering into the agreement and that the
settlement, itself, is fair and reasonable, and it surely
reaches the lowest prongs of reasonableness, as well.
Your Honor, it's in the best interests of the
estates. Absent this settlement, the Debtors would have to
take immediate action to address the service obligations that
it has, not just for Customers Bank, but for Cross River, as
well, and the Federal Reserve and its entire loan portfolio,
and that is something that the Debtors have been very
transparent about from the beginning and the outset of this
case.
So, you know, that being said, Your Honor, I would
also respectfully request that the Court overrule the
objection. I think the objection incorrectly focuses on just
the resolution of Customers Bank's claims, instead of what is
actually at play here, which are the different components
that we mentioned, which the settlement revolves. The
settlement completely resolves our liquidity situation. It
addresses a collections issue. And it does resolve
potentially sizable claims.
Absent -- you know, having a contrary finding to
this, Your Honor, would create a standard where parties are
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not able to compromise on contingent and unliquidated claims,
and that cannot be the case. It can't be a situation where a
party is incapable of resolving claims that are contingent
and unliquidated. In fact, the amount of money and expenses
that the company has already expended in addressing and
defending against these claims makes it very clear that there
is, in fact, some value that is being obtained if they
weren't released and if they were, in fact, addressed through
settlement or otherwise.
So, with that, Your Honor, I'll respectfully cede
the (indiscernible) to my opposing counsel.
THE COURT: Okay. Thank you, Ms. Arthur.
Counsel?
MR. SCHECK: Good afternoon, again, Your Honor.
Matthew Scheck from Quinn Emanuel for Cross River.
Your Honor, I think it's well-accepted that settlements are
favored -- nobody's questioning that -- but a Debtor or a
trustee still has to prove the settlement meets the standards
that are established by the Supreme Court in TMT Trailer and
Martin by the Third Circuits and that includes, and I'll
quote from TMT Trailer:
"All facts necessary for an intelligent and
objective opinion of the probabilities of ultimate success,
should the claim be litigated."
We don't have that here, Your Honor. The Debtors
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haven't given that to this Court. When you asked for items
in the record about the merits, there's nothing. The witness
could not testify at all about anything helpful to the Court
in assessing the merits, the strengths and weaknesses of the
claims and defenses.
THE COURT: So, but let me ask this question.
MR. SCHECK: Sure.
THE COURT: I take it that Cross River -- I mean,
without having to fight about what's in the letter, Cross
River asserts similar claims, right?
MR. SCHECK: That's absolutely true. We put that
in our objection; absolutely, Your Honor.
THE COURT: And you don't think those claims are
worthless, right?
MR. SCHECK: No.
THE COURT: They're -- they are -- the way I'm
thinking about the issue is at some level, imagine we had a
502(c) estimation, where someone wanted to resolve the claim,
right. And it involves uncertainty and contingencies and
things that haven't happened and that's, like, just the
nature of life.
And so, you know, the facts of this are different
from TMT and what we've got here is a, you know, contingent
claim where there -- which involves events that might or
might not happen in the future, and therefore, there's more
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guesswork, right, involved than there is, you know, if we had
an event -- an accident that occurred in the past and we've
got to resolve it, right. So, that's just the nature of the
beast. That doesn't mean you can't do it, it just means
you're left to do the best you condition with what you have,
right?
MR. SCHECK: Understood, Your Honor.
And nobody's suggesting you can't settle
contingent or unliquidated claims. You absolutely can. Now,
you still have to put forward and prove your case in terms of
the settlement being reasonable.
And I think what the Debtors have done here is
they've said -- I think in their reply they said, Well, Cross
River ignores the liquidity issue. But they have it
backwards. We understand the liquidity issue, but the
Debtors are ignoring the merits.
And, Your Honor, it's as if a DIP lender came into
court -- I'm sorry, if a Debtor came into court seeking a DIP
loan and they said, Your Honor, we really need the money.
You have to approve this --
THE COURT: Uh-huh.
MR. SCHECK: -- and Your Honor said, What's the
interest rate, and they said, 40 percent, you still -- it
still has to be objectively reasonable. You don't get to
approve a settlement or to have a settlement approved as the
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Debtors, simply because you assert that you need the money.
THE COURT: So, I agree with that.
But Mr. Scheck, do you have any reason to believe
that the Debtor here did anything other than the best it
could do by its lights to do what's right for the estate?
MR. SCHECK: Well, I have -- yeah, I think the
record reflects that that, in fact, may not be the case and
we should talk about --
THE COURT: Why?
MR. SCHECK: They said that for 20 months, they've
been aggressively pursuing getting that money back that was
improperly withheld. And they said in the letters that are
in evidence that it was improperly withheld under the
contract.
They waited 15 of those 20 months to file a
lawsuit at all. No lawsuit. A few letters back and forth --
we have them in the record. They did not diligently pursue
that.
When the bankruptcy was filed, they could have
sought to tee up the legal issue: Can you withhold funds on
the basis of a contingent claim? Because I think that
drastically changes the settlement.
Because, Your Honor, what we're talking about
here, we talked about -- Your Honor, I think, very aptly, put
what the issues are, but, respectfully, I think there's sort
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of a sub-issue under liquidating the claim, and that is
paying the claim. This isn't effective distribution of
$8 million.
THE COURT: Well, that's the cost of getting money
in the door, right. Once the claim is liquidated and they're
getting paid on a claim by the Debtor, then a liquidated
claim against the Debtor is subject to setoff. That's just
the price of poker, right?
MR. SCHECK: Well, our contention, though, is that
this claim was not subject to setoff.
THE COURT: Well, you say it's not subject to
setoff, because it's unliquidated, but even a liquidate --
MR. SCHECK: No -- I'm sorry, I didn't mean to
interrupt you.
THE COURT: No, go ahead.
MR. SCHECK: We do not believe that the issue is
that it's unliquidated. A contingent claim is not set up to
set off or --
THE COURT: Okay. I understand that.
Imagine that they're not going to get a check --
MR. SCHECK: Yep.
THE COURT: -- from Customers, you know.
Let me put it this way, the way I -- if you think
there's evidence to the contrary, tell me what it is, but it
seems to me they're not going to get cash from Customers,
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absent a global settlement and they need the cash.
So, here we are. And the question is, then, is it
reasonable to enter into a global settlement? And unless you
can tell me otherwise, it seems to me the fact that they're
going to run out of cash in a few weeks, counsel's in favor
of the reasonableness of the judgment to get to a settlement.
Then the question is, is it -- is the settlement,
itself, within the range of reasonable?
And so, tell me -- I understand that the claim is
un -- the claim is contingent in the sense that it depends on
things happening in the future that haven't yet happened,
right. And I get the notion at some level, right, that --
you know, look, if I issued a guaranty of a debt that hasn't
yet matured, that today, the beneficiary of the guaranty
doesn't (indiscernible) a setoff against me.
Here, we've got a claim that, sure, it's
contingent. It might turn out to be nothing, but it also
might turn out to be something. And what we've got is an
effort to use our business judgment to figure out what's a
fair way to resolve that in view of the uncertainties, and
what's wrong with that?
Isn't that what we do in bankruptcy every day?
MR. SCHECK: Yes, but an informed judgment on how
to look at those uncertainties. We heard from the witness,
this is the witness they put forward to support this motion,
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the declaration, that there was no analysis, no knowledge
about the uncertainties, any probabilities.
We do our best --
THE COURT: Well, in fairness --
MR. SCHECK: -- but we still have to do it.
THE COURT: -- in fairness, Mr. Scheck, look, this
is a little bit complicated and this is a hard problem,
right, because we have a policy that favors mediation and
there's a mediation privilege and this was mediated.
So, I hear you, that that creates a little bit
more of a black box problem than you would have in the
absence of that, and it is the Debtors' burden. But don't I
take into account the fact of the mediation as something when
I think about the universe of evidence that I do have?
MR. SCHECK: Sorry, Your Honor.
THE COURT: Was that question coherent?
MR. SCHECK: Yes, I understood the question.
And I think the issue, though -- and, Judge
Walrath actually dealt with this in a WaMu opinion, and I
wish I had the type of photographic memory to recite it --
but she dealt with the issue of, I don't need to bust into
the attorney-client privilege on a 9019.
And we can think about a mediation privilege
similarly, because the attorneys can argue the issues, the
issues of law to me, and they can establish if a defense is
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strong or a claim is strong or weak. And, again, that was
missing here.
Mr. Nesser with the witness, focused on the
declaration, but if we focus on the motion, and I'll even
grant the reply as being in support of the motion, there is
nothing here that the Debtors have given you from counsel,
from the witness to assess the actual merits of these claims.
And I think the letter -- I hate to bring up the
now-infamous Quinn Emanuel letter -- but this letter is
entirely irrelevant because we're not asking the Court to
approve a settlement. There's no TMT Trailer or 9019 for
writing a letter.
And nobody said that this was in August, there was
no bankruptcy yet. Nobody's suggesting that we had to
establish the reasonableness of that settlement, but they do.
And I also -- well, I should pause here, because I
don't want to move off the merits too quickly if Your Honor
has questions, but I also wanted to address the liquidity.
THE COURT: Okay. Why don't you turn to that.
MR. SCHECK: Okay. I think the first point I want
to make on the liquidity -- so, the Debtors justify, try to
justify the settlement on the basis of bringing in the
23 million, rather than the complete, what we say, 31 million
that's owed.
There's two problems with the argument. The first
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I won't belabor because I think I've already, you know,
argued it to the point, which is the fact that they need the
money is something we need to consider, but we do need to
still meet the standard on the merits.
THE COURT: Okay. Let me ask you this question:
Are you aware of another source of liquidity that's available
to the Debtors if they don't take the settlement?
MR. SCHECK: Not at this time.
THE COURT: Okay.
MR. SCHECK: But I do want to address the
liquidity, because even with this settlement, it's not clear
for how long the Debtors will service loans. We just saw a
pullback of any commitment.
We have a plan. The disclosure statement
objections are due next week and we have a plan with blanks.
It has blanks for when they're going to service till. We
have no idea. They haven't committed to do anything.
So, it comes -- and, also, they went, at length,
in the first day declaration about the problems they're
having with American Express and the database. How do we
have comfort that this settlement that's bringing in money is
going to provide us servicing through a certain date -- they
won't commit to it, they want to hold the rejection threat --
and we don't have comfort that they're actually going to
effectively service the loans and be able to transfer them.
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THE COURT: Okay. But Mr. Scheck, if you are
given a choice between a chance of success and certain
failure, which is better?
MR. SCHECK: Well, understood, but also, it's -- I
don't know that that's the only choices. I don't know.
Customers Bank, and they're here and they may say
it -- I don't know -- but they have the same issue. They
need the servicing, too.
And so, I don't know -- a denial of a settlement
is not a denial with prejudice, typically, and I don't know
what they could come to. But I know that this settlement
purports to give a creditor -- the Debtor acknowledged
drove -- helped drive them into bankruptcy -- and, remember,
setoff and recoupment are equitable defenses -- helped drive
them into bankruptcy, gives them a preference by
distributing, and I know we talked about this point a little
bit, $8 million on a claim while unsecured creditors may
receive nothing or pennies, and that's a problem. And so, I
don't know if that's the only two choices, but I fully
understand and acknowledge Your Honor's point.
But I do think it's important, Your Honor. I
think we came into this settle -- this hearing, not fully
understanding the strengths and weaknesses, as asserted by
the Debtors, of the claims, but, importantly, I don't know
that we understand what this settlement is buying.
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How many is the servicing going to be effective?
We're going to have to pay, apparently, for the
transfer at the end of this process. So, again, I mean not
sure how far their liquidity argument goes.
Either way, though, they still need to meet the
standards and we submit they have not.
THE COURT: Okay. I understand your position.
Anything further by way of reply, Ms. Arthur?
MS. ARTHUR: Thank you, Your Honor. Very briefly.
Again, for the record, Candace Arthur of Weil, on
behalf of the Debtors. Your Honor, what strikes me from what
counsel has, you know, just stated or described is a scenario
by mutual destruction here and he's requesting the Debtors
play a game of chicken with their own operations in order to
see who blinks first, whether it be Customers Bank or whether
it be Cross River, in terms of the settlement agreement.
And the settlement, itself, I think the liquidity
is not -- cannot be challenged. The money is what it is.
The cash is what it is. Its availability is what it is.
In terms of, you know, what strategies the Debtors
had available to it at the commencement of this case, they
were all explored. They were all diligently looked into.
In terms of collecting on a breach of contract
claim, even if Your Honor gave us the judgment that we wanted
in connection with our 65.5 million, what -- in terms of
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timing, when could we have actually been able to get that?
So, a lot of different things came into play.
In terms of the discussions with Customers Bank
that -- and I am being mindful of the mediation and the
privilege that shrouds it -- they would say here today that
they do have damages today, and that it's not contingent.
They would say that they've already been harmed and that
they -- they don't have to wait for the SBA and the DOJ to
make any further decisions because today they cannot sell
their loan portfolio because it's not backed.
So, to kind of postulate that, in any way, that
the Debtors have not looked at the defenses that have been
raised and not -- and thought to themselves, Even that being
said, should I take a deal that provides them with a
90 percent recovery?
It's shocking that anyone's saying that that's a
problem. I think that that is actually shocking. I'm
surprised that the motion, itself, is contested, given the
claims that they have, the familiarity with it that they
have. They're the only creditor that has stood up and said
anything.
You know, I think, Your Honor, that's very
telling. Similarly, as it's telling that, you know, I
believe that this is just an attempt for Cross River to be
able to take advantage of the situation in connection with
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their own claims.
It's unfortunate, and I do agree with them, that
actions that were taken against the company have, in any way,
been beneficial to that -- to a party that agreed with the
company. I completely agree with that.
But that being said, that's the nature of a
compromise and that's just where we are today. So, Your
Honor, I do respectfully request that the Court grant the
motion, and I do believe that counsel, himself, provided
reasons for it, given the fact that there's a disclosure
statement -- it's pending before the Court -- there's a
Chapter 11 plan that does have to, you know, be amended to
address the things that we need.
Of course we couldn't fill in numbers, Your Honor;
we needed the settlement agreement. We needed the money to
put in. Of course, you know, counsel is asking, When can we
service it? Well, we can service the loans and we'll have a
date for servicing the loans if we had the money in. And
then we can make that determination.
And we think we've been very clear with everyone
that that was a toggle and that this case was commenced with
a toggle as a result. So, the feigning of surprise and the
feigning of ignorance here as to what's, you know, what the
company is doing with the Debtors' plan, you know, I don't --
I feel is very disingenuous.
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So, respectfully, Your Honor, we do request that
you overrule the objection and that you grant the motion.
THE COURT: Okay. Thank you, Ms. Arthur.
Is there anything further that I should hear
before taking it under advisement?
MR. SCHECK: Your Honor, I won't belabor the
point. I'm sure that it probably doesn't need to be said,
but the questioning of how genuine our objection was, I'd
probably leave it alone, but --
THE COURT: Look, fair enough. I'm assuming --
let me say this, I take this as a good faith dispute between
parties who are acting in good faith, so I'm not persuaded
that you are disingenuous. I'm not (indiscernible) you're
right, either, but we'll get to that. But I don't think you
stood at the podium and said something you knew to be false.
MR. SCHECK: Understood. And I just want to make
clear, though, it also ignores, I think, our position. She
said -- I think counsel said that we're the only creditor
that stood up. I think five creditors have made a notice of
appearance, including the SBA and the Fed Reserve.
And I think we're a significant creditor. They're
a two-partner bank, so I think it is meaningful.
THE COURT: I understand.
MR. SCHECK: But understood, I won't belabor the
point.
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THE COURT: Okay. The record there is what it is,
so --
MR. SCHECK: Thank you, Your Honor.
THE COURT: Okay. So, here's where I am. I think
this is a situation that would benefit from a prompt ruling.
I've heard a lot and I have a lot of notes. I would like to
go process them. What I -- I think it shouldn't take me long
to do.
Would it work for the parties if I took a half an
hour or so, got my thoughts in order and came back and read
something into the record?
(No verbal response)
THE COURT: Okay. So, why don't I do this, I'll
come back on at 3:30, which will not give me enough time to
actually be coherent, but I'll be less coherent that I would
otherwise be.
(Laughter)
THE COURT: So, I'll do that. I'll be back on at
3:30 and with that, we're in recess. Thank you.
COUNSEL: Thank you, Your Honor.
(Recess taken at 2:51 p.m.)
(Proceedings resumed at 3:31 p.m.)
THE COURT: Okay. Thanks, everyone, for your
patience. I do appreciate the terrific arguments all around.
I am prepared to rule.
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The Debtor Kabbage seeks approval of a settlement
with Customers Bank. The motion is opposed by Cross River
Bank, which contends that it is the Debtors' largest
unsecured creditor.
This afternoon, the Court held a hearing on the
motion, which included the testimony of Laquisha Milner, the
Debtors' CEO, and the introduction into evidence of several
documents. The Court heard spirited argument from very
capable counsel on both sides.
This oral ruling will constitute the Court's
findings of fact and conclusion of law under Federal Rule of
Bankruptcy Procedure 7014(c), which incorporates Federal Rule
of Civil Procedure 52.
For the reasons I will explain, I will grant the
motion. So, the factual background is that Kabbage processed
loan applications, originated PPP loans, and serviced those
loans on behalf of itself and on behalf of other financial
institutions. There's no dispute that the origination and
servicing of those loans has given rise to an array of
governmental investigations and potential claims.
Those claims include claims by the underlying
lenders. Some of those claims are contingent. Essentially,
if the borrower fails to pay and your wrongful conduct means
that the SBA is not obligated to honor its guaranty, we have
a claim against you for our losses.
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It is at least arguable that some of those claims
are present claims, essentially, that our portfolio of loans
is worth less today in the open market than it would have
been, but for your allegedly wrongful conduct.
Because the claims are contingent, placing a value
on the claim requires more guesswork, which is to say,
predictions about the future, than does valuing the claim
that is entirely about events that occurred in the past.
According to the Debtors, Kabbage was entitled to
recover approximately $65.5 million from Customers Bank in
loan referral and servicing fees. The Debtors stated that
Customers Bank never paid these fees to Kabbage and Customers
Bank said that it's nonpayment was on account of the alleged
failure in Kabbage's processing of the PPP loans.
Kabbage then, effectively, paid itself $34 million
of that amount to offset amounts that it otherwise owed to
Customers Bank.
In May, Kabbage sued Customers Bank for breach of
contract. Following that lawsuit, there were settlement
discussions and a mediation. The parties reached a
settlement, which the Debtor now asks this Court to approve.
The settlement has essentially four key
components. The company will receive $23 million in cash
nearly immediately. The Debtors and their estates will get a
release of the contingent and unliquidated claims that
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Customers Bank was otherwise asserting. The Debtors and
Customers Bank have an agreement on the servicing obligations
going forward. And the parties will be able to avoid the
ongoing costs and risks associated with ongoing litigation.
At bottom, the settlement allows Customers Bank to
keep approximately $8 million that the Debtor contends was
otherwise due to it.
The fundamental question before this Court is
whether settling on those terms was a reasonable thing for
the Debtor to have done on all of the circumstances present
here.
The legal standards and familiar and undisputed.
The Court must be in a position to form an intelligent and
objective opinion about the probabilities of ultimate
success, should the claim be litigated. That's from TMT
Trailer Ferry v Anderson, 390 U.S. 414, 424-425 (1968).
The Third Circuit's decision of In re Martin,
91 F.3d 389 (3d Cir. 1996) sets out the four-factor test that
controls, here in the Third Circuit. The case makes clear
that while settlements are favored, courts need to take a
careful look to ensure that they're fair.
The four factors are the probability of success in
litigation, the likelihood of difficulty in collection, the
complexity of the litigation involved, and the expense and
inconvenience and delay that is necessarily attendant to
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litigation, and the paramount interest of creditors.
Other cases like Judge Carey's decision in
Spansion and, Judge Walrath's opinion in Washington Mutual
both make clear that the Debtor has an evidentiary burden
that can't be met, simply with guesswork and speculation, but
there needs to be a factual basis to establish the
reasonableness of the settlement.
So, the Debtors do carry the burden of persuading
the Court that the settlement falls within the range of
reasonableness; though, in assessing that, the Debtors'
exercise of its business judgment is entitled to some measure
of respect from the Court.
Here, the Court is persuaded, based on the
evidence that it considered, that these factors counsel in
favor of settlement and that conclusion is driven by a number
of specific factors. First, and perhaps most importantly,
the fact that the Debtor needs cash now supports the decision
to essentially liquidate the Customers' claim against the
estate now to get this matter tied up and, therefore, to
generate much-needed cash. There is no suggestion that there
is any other source of funding available.
And so when asked whether the Debtors' decision is
reasonable, it seems to me that that needs to be viewed in
the context in which the Debtor finds it. And what is
reasonable for someone to do when they are over a barrel may
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be different from what is reasonable to do in other
circumstances.
There is no suggestion that a better deal might
have been available. I'm satisfied, based on the testimony
of Ms. Milner and the evidence I reviewed, that this deal was
certainly reached at arm's-length, after extensive
negotiation, and the Debtor did the best it could to bring in
the best deal that it was able to bring in.
Would the Debtor have preferred to bring in more?
Of course, that's always true.
On the quantification and assessment of the risk,
look, I think that Customers -- I'm sorry -- that Cross River
Bank makes reasonable arguments that some additional evidence
about the realistic, worst-case possibility would have been
helpful. That said, I'm satisfied that the evidence that was
presented is sufficient to meet the Debtors' burden.
We do know that the government investigations are
wide-ranging and allege an array of alleged misconduct. We
do know that Customers asserts from Ms. Milner's declaration
that Customers asserted its potential claim could exceed the,
then-outstanding portfolio of loans, which on the petition
date was $181 million.
And the Court is moved here by the fact that at
the end of the day, what the Debtor needs to show is that,
essentially, valuing the claim of Customers Bank in these
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circumstances at $8 million was a reasonable judgment for it
to make.
The claim asserted is in excess of $180 million.
The resolution brings in a receivable that was due to the
Debtor, it brings in, basically, more than almost 90 cents on
the dollar on that receivable, due to it from Customers.
Here, the cost of litigation, the Court can
conclude, based on simply the exercise of common sense, would
have been in the millions of dollars.
And the delay associated with litigating the claim
to judgment would likely have caused the company to run out
of money. The record here is undisputed that the company is
going to run out of money in the absence of this settlement
in December.
Here we are, it's November 7th, and there's no
suggestion that there was any other source of cash, and so
the Court does believe that, in looking at the quantity and
quality of the evidence submitted in support of the
settlement, that it needs to be viewed in light of that
context. And in light of that context, the Court is
persuaded that the evidence presented meets that burden.
So, on that record, and for those reasons, I'm
persuaded that the exercise of judgment was reason, that the
settlement falls within the range of reasonable, in light of
the circumstances the company faced, and for those reasons, I
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will grant the Debtors' motion, and I ask that counsel for
the Debtors settle an order so providing.
Are there questions about that ruling?
(No verbal response)
THE COURT: Okay. If not, are there any other
ways the Court can be helpful to the parties while we are
here?
MS. ARTHUR: There's one more motion.
(Laughter)
THE COURT: Oh, you have another motion?
(Laughter)
THE COURT: Let me let you -- why don't we proceed
on hearing that motion.
MS. ARTHUR: So, Your Honor, there's one more item
on the agenda. I will cede the podium to my partner,
Ms. Natasha Hwangpo to present.
THE COURT: Okay. Thank you very much, and thank
you for that correction.
(Laughter)
THE COURT: I'm paying attention, I swear.
MS. HWANGPO: Good afternoon, Your Honor.
Natasha Hwangpo, Weil, Gotshal & Manges, counsel
for the Debtors.
Last, but not least, we have Agenda Item 8, which
is the cash collateral motion. Mindful of the time, and I'm
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sure everyone trying to catch the next train out of here,
I'll keep this very short.
With the motion, Your Honor, just for a little bit
of housekeeping, as Exhibit B, we filed the Rieger-Paganis
declaration and Ms. Rieger-Paganis is with us in the
courtroom and available for questions.
So, at this time, we would request that that
declaration be admitted into evidence.
THE COURT: Is there any objection to the
introduction of the declaration into evidence?
(No verbal response)
THE COURT: Okay. Hearing none, it will be
admitted.
(Rieger-Paganis Declaration received in evidence)
MS. HWANGPO: Thank you, Your Honor.
Your Honor, the cash collateral motion is going
forward today on an uncontested basis and, further, given
Your Honor's ruling on the Cubby settlement, the cash
collateral budget, which was attached as Exhibit 1 to the
proposed order, remains unchanged.
So, unless Your Honor has any questions, I'm happy
to walk through the redline if Your Honor would like that,
but if not, we would ask that the order be entered.
THE COURT: Let me take a quick look just to make
sure that I've seen -- so, the redline was filed?
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MS. HWANGPO: At Docket 208 with our revised,
proposed order.
THE COURT: Let me just make sure I've seen that.
I confess, I paid more attention to the contested motion, so
I want to make sure I get this right.
(Pause)
THE COURT: Okay. I did review this before and I
don't have any further questions about the revised form of
cash collateral order.
MS. HWANGPO: Great. Thank you, Your Honor.
We ask that it be entered at your convenience.
THE COURT: We will enter that order, yes.
That's been uploaded?
MS. HWANGPO: Yes.
THE COURT: Okay.
MS. HWANGPO: Yes.
THE COURT: Okay. Then, we will enter that order.
Okay. That brings me back to my earlier question,
which is: Is there anything else that I can do to be helpful
to the parties today?
(Laughter)
MS. HWANGPO: At this point, Your Honor, we are
done with the balance of our matters for today.
THE COURT: Okay. Any other party in interest
wish to be heard on any other matter?
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(No verbal response)
THE COURT: Okay. If not, again, thanks to the
parties for today's argument.
We stand adjourned. Thank you.
MS. HWANGPO: Thank you, Your Honor.
(Proceedings concluded at 3:44 p.m.)
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CERTIFICATION
We 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 our
knowledge and ability.
/s/ William J. Garling November 8, 2022
William J. Garling, CET-543
Certified Court Transcriptionist
For Reliable
/s/ Mary Zajaczkowski November 8, 2022
Mary Zajaczkowski, CET-531
Certified Court Transcriptionist
For Reliable
/s/ Coleen Rand November 8, 2022
Coleen Rand, CET-341
Certified Court Transcriptionist
For Reliable
Case 22-10951-CTG Doc 228 Filed 11/08/22 Page 104 of 104File and source
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