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Letter to Judge Goldblatt — Customers Bank Response re Settlement Payment Dispute (Nov. 28, 2022)

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Court	U.S. Bankruptcy Court for the District of Delaware
Filed	2022-11-28

U.S. Bankruptcy Court for the District of Delaware · No. 22-10951 · Doc. 289 · 2022-11-28 · Docket on CourtListener

Summary

A 5-page letter filed by counsel for Customers Bank in In re Kabbage, Inc. d/b/a KServicing, Case No. 22-10951, in the U.S. Bankruptcy Court for the District of Delaware, filed November 28, 2022 as Doc 289. It responds to a letter filed with the court on November 25, 2022 and states that the bank calculated its settlement payment under the formula in the settlement agreement approved by the court on November 9, 2022. The letter sets out that formula as a $58 million settlement amount less a disputed fee holdback of approximately $8.3 million and a disputed remittance holdback of approximately $26.5 million, giving approximately $23.2 million, subject to a reconciliation process. It argues that the reconciliation, not the estimates, governs, disputes figures in the other letter, and says the bank will move for an accounting of October remittances, full payment and adequate protection.

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Algiers | Bogotá | London | Mexico City | Monterrey

November 28, 2022

Hon. Craig T. Goldblatt
United States Bankruptcy Court
District of Delaware
824 North Market Street
3rd Floor, Courtroom 7
Wilmington, DE 19801
Re:
In re Kabbage, Inc. d/b/a KServicing, et al., Case No. 22-10951
Dear Judge Goldblatt:
We write on behalf of our client Customers Bank (“CB”) in response to the letter filed with the
Court after hours on Friday, November 25, 2022 [Dkt No. 287]. That letter erroneously accuses
CB of not paying the correct Settlement Amount called for by the Settlement Agreement as
approved by the Court on November 9, 2022. The letter also states at p. 4 that “it remains
unclear as to how CB ultimately arrived at its arbitrary Settlement Payment amount. . .” Not so.
CB clearly and transparently communicated exactly how it calculated the Settlement Payment in
strict accordance with the formula provided in the Settlement Agreement. Attached hereto as
Exhibit A is the Reconciliation Statement that CB provided to KServicing on November 15,
2022 in connection with the Settlement Payment made by CB. The Reconciliation Statement is
neither unclear nor arbitrary. Moreover, at the same time, CB provided KServicing’s counsel
with an explanation for each line item of the Reconciliation Statement that made it abundantly
clear that the figures were drawn directly from documents and assertions that KServicing
provided during the reconciliation process called for by the Settlement Agreement. That
explanation is attached hereto as Exhibit B.
In short, KServicing is trying to use its own misapprehension and/or misdirection to redo an
agreement to which CB has scrupulously adhered.
Case 22-10951-CTG Doc 289 Filed 11/28/22 Page 1 of 5

Hon. Craig T. Goldblatt
November 28, 2022
Page 2

A short background on the Settlement Agreement is important because KServicing’s description
is distorted at best. The Settlement Agreement, which was approved by this Court in its
November 9, 2022 Order (I) Authorizing And Approving The Settlement Agreement Between K
Servicing And Customers Bank And (II) Granting Related Relief [Dkt. No. 232] (the “Order”), is
attached hereto as Exhibit C.
Turning first to the language of the Order, it, appropriately, nowhere states the amount of money
that is to be paid by CB to KServicing. Rather, the Order authorizes the Debtors to enter into the
Settlement Agreement, and to “take all actions, necessary to immediately continue and fully
implement the Settlement Agreement . . .” The Order also authorizes the Debtors and CB “to
take all actions necessary or appropriate to carry out the relief granted in [the] Order.” The
authority to carry out the terms of the approved Settlement Agreement included the authority to
determine the amount to be paid by CB to KServicing according to a formula in the Settlement
Agreement, namely $58 million “less the amount of the Disputed KServicing Holdbacks as of
the Petition Date.” See paragraphs 1(G) and 1(H) of the Settlement Agreement. Presumably for
this very reason each and every reference by the Debtors in their 9019 Motion [Dkt No. 172] to
the amount the Debtors were to receive, including each reference to the 9019 Motion quoted in
the second paragraph of their letter to the Court, was preceded by the adverb “approximately.”
Despite their current protestations, the Debtors knew that the ultimate payment was to be the
result of a reconciliation process expressly provided for in the Settlement Agreement.
The Disputed KServicing Holdbacks are defined at paragraph 1(D) of the Settlement Agreement
as “the Disputed KServicing Fee Holdback and the Disputed KServicing Remittance
Holdback.” The Disputed KServicing Fee Holdback is defined at paragraph 1(C) of the
Settlement Agreement as “the amount that constitutes loan origination and servicing fees due to
KServicing under the S&S Agreement” and is “approximately $8.3 million.” The Disputed
KServicing Remittance Holdback is defined at paragraph 1(E) of the Settlement Agreement as
being comprised of two amounts, namely amounts: “(i) collected from borrowers that
KServicing is required to remit to CB under the Original PSA and S&S Agreement, and (ii) held
by KServicing on account of cancelled loans.” Those amounts combined were estimated at
“approximately $26.5 million.”
Thus, if the estimates were accurate, the mathematical formula worked as follows:
$58 million Settlement Amount
Less
$8.3 million Disputed KServicing Fee Holdback
Less
$26.5 million Disputed KServicing Remittance Holdback
Equals
$23.2 million
Case 22-10951-CTG Doc 289 Filed 11/28/22 Page 2 of 5

Hon. Craig T. Goldblatt
November 28, 2022
Page 3

However, because KServicing is the servicer for CB and therefore in possession of the bank
account information for borrower remittances and other key components to the formula set forth
above, the parties agreed to a reconciliation in paragraph 3 of the Settlement Agreement. As a
simple explanatory example of the need to have a reconciliation, for every dollar actually
collected by KServicing as of the Petition Date above what the parties approximated, the
Settlement Payment would be reduced by that dollar amount. This is of course fair as the parties
agreed to a Settlement Amount of $58 million, some of which KServicing was already
holding. Determining the exact amount KServicing was holding on CB’s behalf was crucial to
determining the Settlement Payment. It is also important to note that every dollar that reduces
the Settlement Payment in accordance with the agreed upon formula is not a “gain” for CB, but
rather represents a dollar that KServicing had already received and reduces the amount that CB is
able to recover from the outstanding loans.
Paragraph 3 of the Settlement Agreement entitled “Reconciliation” provides as
follows: “Following the execution of this Agreement through the Effective Date, the Parties
shall work together in good faith to promptly reconcile the amounts of the Disputed KServicing
Fee Holdback and the Disputed KServicing Remittance Holdback as of the Petition Date to
determine the appropriate amount of the Settlement Payment.”
Importantly, as clearly set forth above, the reconciliation process was not open ended. Rather, it
ended on the Effective Date, which is defined at paragraph 2 of the Settlement Agreement as the
day the Court approves the Settlement Agreement. That date was November 9, 2022.
CB is the client of KServicing which is the servicer. Borrowers remit funds to KServicing, not
CB, as the servicer. KServicing, not CB, maintains a bank account to accept those funds. Thus,
the reconciliation process involved KServicing providing to CB trial balance and bank account
information so that CB could attempt to verify the amounts of the various Holdbacks, including
importantly the borrower remittances, as defined in the Settlement Agreement.
While KServicing seems to focus on some non-existent right to a payment of $23.2 million, CB
correctly focused on the obligation to make a payment that when combined with the KServicing
Holdbacks would equal the agreed upon $58 million Settlement Amount. The agreed upon
process to do so was through the reconciliation process to determine what amount of that $58
million KServicing was already holding back from CB, and what amount CB had to pay anew.
This is not the first time that KServicing has disregarded important rules. As it has admitted in
various places in the record of this case, including the First Day Declaration at paragraph 48 [Dkt
No. 13, filed on October 4, 2022], KServicing’s failure to follow the basic SBA rules on
calculating PPP loan amounts by double counting state and local taxes on tens of thousands of
loans thus generating loans that were in excess of the SBA guidelines. As a result of that failure
to follow basic rules, KServicing paid the SBA a $30 million settlement. Id. Additional failures
to follow rules by KServicing abound. KServicing failed to follow the SBA rules limiting loan
amounts in other ways, including failing to follow the limit on highly compensated employees
Case 22-10951-CTG Doc 289 Filed 11/28/22 Page 3 of 5

Hon. Craig T. Goldblatt
November 28, 2022
Page 4

(over $100,000 per year). Id. at paragraphs 45-47. As set forth in paragraph 47 of the First Day
Declaration: “The DOJ flagged approximately 6,200 loans totaling $120 million of principal
amount in connection with the $100k Issue and From 940 Issue . . . and instructed the Company
[KServicing] not to process those loans for Loan Forgiveness. A number of CB’s loans are
infected by KServicing’s failures. These failures have also resulted in the United States
Department of Justice investigating KServicing. Id. at paragraph 44.
KServicing has not followed basic rules with respect to the Settlement Agreement. In
connection with the reconciliation process required by the Settlement Agreement, KServicing
never provided to CB what it believed the Disputed KServicing Remittance Holdback to be.
Instead, KServicing provided CB with a variety of remittance, loan level, and trial balance
reports, none of which reconciled with each other. As of the Effective Date (and even as of
today), KServicing was never able to provide to CB a reconciled trial balance of the outstanding
loans, notwithstanding that this is the most basic report that any capable servicer should be able
to provide its client at any time. In connection with the reconciliation process required by the
Settlement Agreement, KServicing even refused to provide to CB the calculations performed by
its financial advisor Alix Partners that resulted in the approximate figures for the Holdbacks
found in the Settlement Agreement. See Exhibit D (two separate emails on two separate dates
during the reconciliation process to KServicing’s counsel requesting this basic
information). However, the one piece of actual source information it provided was information
about the KServicing bank account (at Synovus bank) to which the borrower remittances are
deposited for the benefit of CB.
Oddly, KServicing’s November 25, 2022 letter to the Court does not cite to that bank account
information, which reflected total borrower payments of $27,106,862 (including $497,900 that
KServicing admitted it was unable to account for) and instead provides no source documentation
for any of the figures it provides in its “calculations.” The figure in the letter for “Funds
Collected from Borrowers” is $24,224,998.14. There is no support provided for that figure and
CB has no idea from what it is drawn.
At no time during the ten-day period between CB sending KServicing the Reconciliation
Statement and the explanation of how CB drew each of the figures in it from documents
provided by KServicing during the reconciliation period (see Exhibits A and B hereto), has
KServicing communicated in any way to CB about its view that there was an error in calculation
or an oversight regarding a figure or an issue. Instead, it has raced to the Court in a filing made
after 5pm on the Friday after Thanksgiving claiming entitlement to estimates that the parties
agreed (in the Settlement Agreement) would need to be reconciled.
While CB regrets the burden on the Court that KServicing’s behavior is imposing, CB welcomes
the Court’s involvement. In fact, the Settlement Agreement contemplates at paragraph 21 that
any disputes arising out of the Settlement Agreement will be resolved by the Court, as does
paragraph 7 of the Court’s Order Authorizing and Approving the Settlement Agreement.
Case 22-10951-CTG Doc 289 Filed 11/28/22 Page 4 of 5

Hon. Craig T. Goldblatt
November 28, 2022
Page 5

Whatever process the Court decides upon will undoubtedly require KServicing to follow the
rules of the Settlement Agreement, and specifically the reconciliation process. CB welcomes a
motion process that will examine the information on each of the key Holdback issues that
KServicing provided to CB during the reconciliation process, and CB’s acceptance of them.
From CB’s perspective, KServicing seems upset that the true reconciliation process (not the
Settlement Agreement’s estimates) resulted in a Settlement Payment that is less than what
KServicing thought it would be. However, as noted above, that is simply because KServicing
received the difference earlier. In other words, it already had those funds and is not entitled to be
double paid on any dollar it was already holding back.
The Court’s involvement is also vital because KServicing has breached perhaps the most
consequential term of the Settlement Agreement from CB’s perspective, namely the obligation in
Paragraph 4(E) to collect, hold in trust, and promptly remit all borrower payments to CB from
the Petition Date forward.
On November 17, 2022, CB noticed a breach of this and other servicing obligations to
KServicing. See Exhibit E attached. The next day KServicing responded that “it has remitted to
CUBI postpetition amounts that were collected through October 31, 2022. . .” While CB would
otherwise also attach that letter, KServicing’s counsel marked it “Confidential” and CB will
leave it to KServicing as to whether it wishes to include it. In any event, KServicing’s
representation regarding remitting postpetition amounts through October 31, 2022 is not
correct. That day, KServicing remitted to CB $376,326.59. Every prior month the remittances
were approximately one million dollars and the bank account statement that KServicing provided
to CB for borrower remittances for the month of October showed approximately $1.5 million in
deposits. KServicing has failed to provide any reason for this shortfall exceeding $1 million.
As a result, CB will be seeking the following relief from KServicing in this Court by way of
prompt motion: (1) an accounting of the October remittances and KServicing’s transfers of those
remittances; (2) full payment of the October remittances; and (3) adequate protection of CB’s
interest in the funds on deposit and to be deposited in order to prevent further breaches of trust
and breaches of the Settlement Agreement by KServicing.

Respectfully,
HOLLAND & KNIGHT LLP

/s/Jeremy M. Sternberg
Jeremy M. Sternberg
cc: Candace Arthur, Ray Schrock, Natasha Hwangpo, Richard Slack, Chase Bentley, Theodore
Tsekerides (all of Weil, Gotshal & Manges)
Zachary Shapiro (Richards Layton)
John Monaghan (Holland & Knight)
William A. Hazeltine (Sullivan Hazeltine Allinson LLC)
Case 22-10951-CTG Doc 289 Filed 11/28/22 Page 5 of 5

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Letter to Judge Goldblatt — Customers Bank Response re Settlement Payment Dispute (Nov. 28, 2022)

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