U.S. Trustee's Objection to Disclosure Statement Approval Motion — In re KServicing (Bankr. D. Del.)

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UNITED STATES BANKRUPTCY COURT · No. 22-10951 · Doc. 431 · 2023-01-11 · Docket on CourtListener

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IN THE UNITED STATES BANKRUPTCY COURT 
FOR THE DISTRICT OF DELAWARE 
 
 
 
 
In re 
 
Chapter 11 
 
 
 
KABBAGE, INC. d/b/a KSERVICING, et al.,  
 
Case No. 22-10951 (CTG)  
 
 
(Jointly Administered) 
Debtors. 1 
 
Re: DI Nos. 398, 397, 396, 176 
 
 
Hearing Date: January 19, 2023, at 10:00 a.m. 
ET 
Objection Deadline: January 11, 2023, at 4:00 
p.m. ET (for the U.S. Trustee) 
 
UNITED STATES TRUSTEE’S OBJECTION TO MOTION OF DEBTORS FOR ENTRY OF 
ORDER (I) APPROVING THE DISCLOSURE STATEMENT OF THE DEBTORS, (II) 
ESTABLISHING SOLICITATION, VOTING, AND RELATED PROCEDURES, (III) 
SCHEDULING CONFIRMATION HEARING, (IV) ESTABLISHING NOTICE AND 
OBJECTION PROCEDURES FOR CONFIRMATION OF PLAN, (V) APPROVING SPECIAL 
ELECTRONIC NOTICING PROCEDURES, (VI) APPROVING DEBTORS’ PROPOSED 
CURE PROCEDURES FOR UNEXPIRED LEASES AND EXECUTORY CONTRACTS, AND 
(VII) GRANTING RELATED RELIEF 
 
Andrew R. Vara, the United States Trustee for Region 3 (“U.S. Trustee”), through his counsel, files 
this objection (the “Objection”) to Motion Of Debtors For Entry Of Order (I) Approving The Disclosure 
Statement Of The Debtors, (II) Establishing Solicitation, Voting, And Related Procedures, (III) Scheduling 
Confirmation Hearing, (IV) Establishing Notice And Objection Procedures For Confirmation Of Plan, (V) 
 
1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification 
number, as applicable are: Kabbage, Inc. d/b/a KServicing (3937); Kabbage Canada Holdings, LLC (N/A); Kabbage 
Asset Securitization LLC (N/A); Kabbage Asset Funding 2017-A LLC (4803); Kabbage Asset Funding 2019-A LLC 
(8973); and Kabbage Diameter, LLC (N/A). Kabbage is a trademark of American Express used under license; 
Kabbage, Inc. d/b/a KServicing is not affiliated with American Express. The Debtors’ mailing and service address is 
925B Peachtree Street NE, Suite 383, Atlanta, GA 30309. 
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Approving Special Electronic Noticing Procedures, (VI) Approving Debtors’ Proposed Cure Procedures For 
Unexpired Leases And Executory Contracts, And (VII) Granting Related Relief  (the “DS Approval Motion”) 
filed at D.I. 163, and in support, states as follows: 
 
PRELMINARY STATEMENT 
 
1. 
The U.S. Trustee objects to the DS Approval Motion2 because it proposes a 
solicitation procedure which does not allow many claimants the opportunity to “opt-out” of the 
Third Party-Release (defined below) in the Amended Plan (defined below). Therefore, the 
proposed “opt-out” procedure is unacceptable.3  
JURISDICTION, VENUE, AND STANDING 
 
2. 
Pursuant to 28 U.S.C. § 586, the U.S. Trustee is charged with the administrative 
oversight of cases commenced pursuant to chapter 11 of title 11 of the United States Code (the 
“Bankruptcy Code”). This duty is part of the U.S. Trustee’s overarching responsibility to enforce 
the bankruptcy laws as written by Congress and interpreted by the courts. See United States Trustee 
v. Columbia Gas Sys., Inc. (In re Columbia Gas Sys., Inc.), 33 F.3d 294, 295-96 (3d Cir. 1994) 
(noting that the U.S. Trustee has “public interest standing” under 11 U.S.C. § 307, which goes 
beyond mere pecuniary interest); Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 
F.2d 498, 500 (6th Cir. 1990) (describing the U.S. Trustee as a “watchdog”). 
 
2 Capitalized terms used herein as defined terms and not otherwise defined shall have those meanings ascribed to them in the Amended 
Plan, Disclosure Statement or otherwise referenced pleading or document. 
 
3 The United States Trustee has had discussions with Debtors’ counsel concerning the objections set forth herein.  The U.S. Trustee 
will continue to work with the Debtors to resolve or narrow the issues in controversy if possible. Notwithstanding anything in this 
Objection, the U.S. Trustee reserves any and all rights to make further objections at confirmation or otherwise.   
  
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3. 
Pursuant to 28 U.S.C. § 586(a)(3)(B), the U.S. Trustee has the duty to monitor plans 
and disclosure statements filed in chapter 11 cases, and to comment on such plans and disclosure 
statements. 
4. 
Pursuant to 11 U.S.C. § 307, the U.S. Trustee has standing to be heard with regard 
to this Objection. 
 
RELEVANT FACTS 
Procedural Background 
5. 
On October 3, 2022 (the “Petition Date”), the above-captioned Debtors filed 
voluntary petitions seeking relief under chapter 11.  See D.I. 1 
6. 
The U.S. Trustee has not appointed a committee of unsecured creditors in these 
cases.  See D.I. 156.  
DS Approval Motion  
7. 
On October 31, 2022, the Debtors filed the DS Approval Motion seeking approval 
of the Amended Disclosure Statement filed at D.I. 396 and establishing certain solicitation 
procedures, deadlines, and approval of materials for solicitation of votes on the Amended Plan of 
Liquidation filed at D.I. 395.  
I. 
The Third Party-Release and Proposed Solicitation Materials.  
 
8. 
The Amended Plan contains a release benefitting several non-Debtor third parties 
(the “Third-Party Release”) which states: 
As of the Effective Date, except (a) for the right to enforce the Plan or (b) as 
otherwise expressly provided in the Plan or in the Confirmation Order, to the fullest 
extent permissible under applicable law, as such law may be extended or integrated 
after the date upon which the Bankruptcy Court enters the Confirmation Order, on 
or after the Effective Date, each Released Party shall be deemed expressly, 
conclusively, absolutely, unconditionally, irrevocably and forever, released, and 
waived by each of the Releasing Parties from any and all claims, interests, 
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obligations, rights, suits, damages, Causes of Action, remedies, and liabilities 
whatsoever (including any derivative claims asserted or that may be asserted 
on behalf of any of the Debtors or their Estates), whether known or unknown, 
foreseen or unforeseen, existing or hereinafter arising, in law, equity, or 
otherwise, based on or relating to, or in any manner arising from, in whole or 
in part, the Debtors, the Chapter 11Cases, the Plan (including the Plan 
Supplement), the Disclosure Statement, the restructuring of Claims or Interests 
prior to or in the Chapter 11 Cases, the formulation, preparation, dissemination, 
negotiation of any of the foregoing or any contract, instrument, release, or other 
agreement or document created or entered into in connection with any of the 
foregoing, the pursuit of confirmation of the Plan, the solicitation of votes on the 
Plan, the pursuit of consummation of the Effective Date, the administration and 
implementation of the Plan, including the issuance or distribution of securities 
pursuant to the Plan, the subject matter of, or the transactions or events giving rise 
to, any Claim or Interest that is treated in the Plan, or the distribution of property 
under the Plan or any other related agreement, or upon any other act or omission, 
transaction, agreement, event, or other occurrence taking place on or before the 
Effective Date related or relating to the foregoing, except for Causes of Action 
arising from an act or omission of a Released Party that is judicially determined in 
a Final Order to have constituted actual fraud, gross negligence, criminal 
misconduct or willful misconduct. Notwithstanding anything to the contrary in the 
foregoing, the releases set forth above shall not be construed as releasing any post-
Effective Date obligations of any party or entity under the Plan, or any document, 
instrument, or agreement (including those set forth in the Plan Supplement) 
executed to implement the Plan. 
Plan § 10.6 (emphasis added).  
9. 
The Plan defines a Released Party as: 
“Released Parties” means, collectively, each of the following in their 
capacity as such: (a) the Debtors’ and the Debtors’ Related Parties; (b) the 
Wind Down Estates and the Wind Down Estate’s Related Parties; and (c) 
the Reserve Bank and its Related Parties.  
 
Amended Plan § 1.199. 
10. 
The Amended Plan defines the “Related Parties” as: 
1.98 
“Related Parties” means, with respect to any Exculpated Party or 
Released Party: (a) such entities’ predecessors (other than with respect to 
the Debtors), successors and assigns, subsidiaries, affiliates, managed 
accounts or funds, (b) all of their respective postpetition officers, 
postpetition directors, postpetition principals, postpetition employees, 
postpetition agents, postpetition trustees, postpetition advisory board 
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members, financial advisors, attorneys, accountants, actuaries, investment 
bankers, consultants, representatives, management companies, fund 
advisors and other professionals, solely to the extent such persons and 
entities acted on the behalf of the Released Parties in connection with the 
matters as to which releases are provided in the Plan, and (c) such entities’ 
respective heirs, executors, estates, servants and nominees; provided, that 
the Former Officers and Directors of the Debtors shall not be “Related 
Parties.” 
Amended Plan § 1.98.  
11. 
Lastly, the Amended Plan defines the Releasing Parties as: 
1.104 “Releasing Parties” means, collectively, each of the following in their 
capacity as such: (a) the Reserve Bank; (b) all holders of Claims or 
Interests who vote to accept the Plan; (c) all holders of Claims or 
Interests that are unimpaired or deemed to accept or impaired or 
deemed to reject the Plan and who do not object to the Plan; (d) all 
holders of Claims or Interests that are eligible to vote to accept or reject the 
Plan that either vote to reject the Plan or abstain from voting on the Plan for 
all Classes in which they are eligible to vote and who do not affirmatively 
opt-out of the releases in accordance with the ballot to solicit acceptances 
or rejections of the Plan; (e) all holders of Claims or Interests with notice 
and an opportunity to object to the releases; and (f) with respect to each of 
the foregoing Entities and Persons in clauses (a) – (e), all of their respective 
Related Parties solely with respect to claims that such Entities or Persons 
could have properly asserted on behalf of such Entities or Person in clauses 
(b) – (e). 
Amended Plan § 1.100 (emphasis added). 
12. 
The DS Approval Motion states that the voting classes—Class 3 (Reserve Bank 
Claims) and Class 4 (General Unsecured Claims)—will receive ballots to cast their acceptance of 
rejection of the Amended Plan.  The proposed ballots are found at Exhibits 2-A, 2-B of the DS 
Approval Motion and the Revised DS Order filed at D.I. 398.  A review of the ballots, as set forth 
below, reveals that those who vote to “accept” the Plan do not have the option to opt-out of the 
Third-Party Release.  
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D.I. 398 at Ex. 2-B.  
13. 
 Moreover, it appears that that creditors in classes who are unimpaired and deemed 
to accept the plan, and those who are impaired and deemed to reject the Plan, will likewise not 
have an option to opt-out of same because the Debtors do not propose to send these creditors any 
documents allowing that opportunity.  Rather, it appears, based on the Amended Plan’s definition 
of “Releasing Parties” that such creditors are further required to “object to the Plan” to perhaps 
not be involuntarily bound to the Third-Party Release, but it is unclear what is meant by “object to 
the Plan.” See Amended Plan § 1.100.  
14. 
The proposed ballots contain an option whereby creditors in Classes 3 and 4 can 
denote in a box that they “abstain” from voting on the Plan and opt-out of the Third-Party Release.  
Accordingly, creditors who fail to submit a ballot will be deemed not to have opted-of the Third-
Party Release.   
 
 
 
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ARGUMENT 
 
I. 
The Amended Disclosure Statement Should Not Be Approved Because the Amended 
Plan Is Not Confirmable.  
 
A. Third-Party Releases Should Only be Allowed if there is Affirmative Consent.  
 
15. 
Some Courts in this District have determined that third party releases of non-
debtors should be allowed only to the extent the releasing parties have given affirmative consent.  
See In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011).  In Washington Mutual 
the Court held that “any third party release is effective only with respect to those who affirmatively 
consent to it by voting in favor of the Plan and not opting out of the third party releases.”  Id. at 
355 (emphasis added).  Moreover, the Court clarified that merely having an opt out mechanism is 
not enough, holding that an “opt out mechanism is not sufficient to support the third party releases 
. . . particularly with respect to parties who do not return a ballot (or are not entitled to vote in the 
first place). Failing to return a ballot is not a sufficient manifestation of consent to a third party 
release.” Id. (emphasis added, citing In re Zenith Electronics Corp., 241 B.R. 92, 111 (Bankr. D. 
Del. 1999)).      
16. 
In Emerge Energy Services LP, Case No. 19-11563, 2019 WL 7634308 (Bankr. D. 
Del, Dec. 5, 2019), the Court ruled that consent to a third party release “cannot be inferred by the 
failure of a creditor or equity holder to return a ballot or Opt-Out Form.”  Id. at *52.  The Court 
reached this conclusion even though the Opt-Out Forms provided conspicuous notice of how to 
opt-out and the consequences of not doing so.  The Court also rejected the Debtor’s argument that 
inferring consent from “silence” should be approved as typical, customary, and routine.  Id.   The 
Court held that it could not, “on the record before it find that the failure of a creditor or equity 
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holder to return a ballot or Opt-Out Form manifested their intent to provide a release. Carelessness, 
inattentiveness, or mistake are three reasonable alternative explanations.”  Id. at *53.   
17. 
Here, the U.S. Trustee’s concerns with the Debtors’ proposed “opt-out” procedure 
would be largely resolved if the Debtors, instead, used an “opt-in” process to the Third-Party 
Release as that would result in affirmative consent. As of this filing, the Debtors have not agreed 
to use an “opt-in” procedure. Accordingly, the U.S. Trustee raises the issues set forth below, but 
in all respects reserves the right to raise same in connection with the confirmation or in any other 
cases pending before this Court.   
B. Even if “Opt-Out” is Acceptable, the Proposed “Opt-Out” is Meaningless and Deficient 
Because it is Available Only to a Narrow Swath of Claimants.  
 
18. 
Assuming arguendo that “opt-out” is an acceptable means to solicit an arguably 
consensual release of non-debtors from creditors, the proposed “opt-out” process in this case is 
meaningless and deficient as set forth below. If a plan is patently unconfirmable on its face, the 
application to approve the disclosure statement must be denied.  In re Quigley Co., 377 B.R. 110, 
115 (Bankr. S.D.N.Y. 2007) (citing In re Beyond.com Corp., 289 B.R. 138, 140 (Bankr. N.D. Cal. 
2003) (collecting cases); In re 266 Washington Assocs., 141 B.R. 275, 288 (Bankr. E.D.N.Y.) 
aff’d, 147 B.R. 827 (E.D.N.Y. 1992); In re Filex, Inc., 116 B.R. 37, 41 (Bankr. S.D.N.Y. 1990)). 
19. 
The DS Approval Motion proposes a procedure which only provides a narrow 
swath of creditors the ability to “opt-out” of the Third-Party Release thereby rendering the “opt-
out” mechanism meaningless. Those creditors with an ability to “opt-out” at the solicitation stage 
are: (1) creditors entitled to vote on the Amended Plan, who vote to reject the Amended Plan and 
opt-out of the Third-Party Release by indicating same on the ballot; and (2) creditors entitled to 
vote on the Amended Plan, who elect not to vote to accept or reject the and opt-out of the Third-
Party Release by indicating same on the ballot. The following creditors have no ability to “opt-
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out” of the Third-Party Release at the solicitation stage; (1) unimpaired claimants; (2) claimants 
deemed to reject; (3) claimants entitled to vote on the Amended Plan who vote to accept the 
Amended Plan; (4) “all holders of Claims or Interests with notice and an opportunity to object to 
the releases”; and (5) claimants entitled to vote on the Amended Plan who fail to return a ballot. 
The Amended Disclosure Statement and accompanying voting procedures provide no explanation 
as to why some creditors get to “opt-out” of the Third-Party Release at the solicitation stage and 
others do not.  
20. 
As to the unimpaired claimants that will have the Third-Party Release imposed on 
them without the opportunity to “opt-out” at solicitation stage, those claimants appear to include 
administrative claimants and priority tax claimants. The claims these parties would release under 
the Third-Party Release include their direct claims against numerous non-Debtors, which includes 
various entities related to the Debtors. Although unimpaired creditors will be paid in full on the 
claims they hold against the Debtors, the scope of the release of their direct claims against non-
debtors is far broader than the claims upon which they will be paid.  The release covers any claims 
against non-debtor Released Parties that are “based on or relating to, or in any manner arising 
from, in whole or in part, the Debtors.” See Amended Plan at § 10.6. So, for example, a taxing 
authority whose priority claim against the Debtor will be paid in full under the Plan (as required 
by the Code) could later be subject to an argument by a Released Party that it has no obligation to 
pay taxes in connection with revenue received from transactions with the Debtors because, under 
the Plan, the taxing authority has been deemed to release the Released Party for all claim related 
in any manner to the Debtors. There is no reason to make these parties wait to file a confirmation 
objection so that they perhaps may not have the Third-Party Release involuntarily imposed on 
them; as this Court has previously suggested, treatment under a plan is distinct and separate from 
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the various other provisions included in a plan. Accordingly, although the Bankruptcy Code may 
deem an unimpaired creditor a creditor that has “accepted” its treatment under a plan, it does not 
follow that the creditor is deemed to accept all parts of a plan, and if some creditors get an 
opportunity at the solicitation stage to “opt-out” of certain parts of a plan, then all creditors should 
be given the same opportunity at the same time.  
21. 
Concerning the claimants who are deemed to reject the Amended Plan, in this case 
those claimants appear to include several dozens of both institutional and individual shareholders 
who do not appear to have signed on to the Amended Plan.  As stated above, there is no reason to 
make these parties wait to file a confirmation objection (which would probably require hiring 
counsel) so that perhaps they may not have the Third-Party Release involuntarily imposed on them. 
Treatment under the Amended Plan is separate and distinct from whether a claimant agrees to 
having all aspects of a plan imposed on it.  An individual shareholder may hold direct causes of 
action against the Debtors’ officers and directors notwithstanding that it gets nothing under a plan. 
If the Debtors are providing some creditors the ability to opt-out at the solicitation stage, then all 
creditors should get that opportunity at the same time. 
22. 
Regarding creditors entitled to vote on the Amended Plan and who vote to accept 
it, the same argument applies concerning unimpaired and deemed to reject claimants, arguably 
with even greater force. The Debtors might argue that this Court ruled that the accepting creditors 
in In re TPC Group, Inc. et al., Case No. 22-10493 (CTG) (Bankr. Del. 2022), must be afforded 
the opportunity to opt-out at the solicitation stage because that case concerned a “death trap” with 
respect to the general unsecured creditor class. But the U.S. Trustee disagrees.  Although the “death 
trap” feature in that case made the facts of the case particularly egregious, this Court’s reasoning 
in TPC rested on the same principle discussed above: there is a difference between voting to accept 
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the proposed treatment under a plan and objecting to provisions of a plan distinct from the proposed 
treatment, like a release. Here, the “opt-out”, per this Court’s reasoning, is an objection to the 
release distinct from its vote concerning its treatment under a plan. If creditors voting to reject the 
plan due to the proposed treatment under a plan can “opt-out” of the Third-Party Release at the 
solicitation stage, so should creditors voting to accept their treatment under the Amended Plan.  
23. 
Creditors entitled to vote on the Amended Plan who fail to return a ballot will be 
automatically deemed to consent to the Third-Party Release and be stripped of their direct claims 
against non-debtors, regardless of the reason they did not vote. Those reasons may include that 
such creditors (a) never received the solicitation package, or received it late, due to mail errors or 
delays, or (b) received it timely, and completed it and returned it to the balloting agent, but through 
no fault of their own, the ballot never reached the balloting agent, or was received late. Other 
creditors in voting classes may receive the solicitation package, but not understand it, and may not 
have the time or financial resources to engage counsel and would never imagine that their rights 
against non-debtors could be extinguished through the bankruptcy of these Debtors.  
24. 
Finally, the Amended Plan will extinguish and release direct claims against non-
debtors held by the general category of “all holders of Claims or Interests with notice and an 
opportunity to object to the releases.” No explanation is provided as to who would fall under this 
category that does not already fall under another of the listed categories of Releasing Parties. Nor 
is any clarification as to whether “the opportunity to object” means they received a ballot with an 
“opt-out” box, or something else.  
25. 
In sum, even assuming the Debtors’ proposed “opt-out” procedure leads to a 
consensual release, here, it is meaningless and deficient because it is offered only to a narrow 
swath of claimants at the solicitation stage. To be truly meaningful, the Debtor should allow all 
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the claimants detailed above the opportunity to “opt-out” of the Third-Party Release at the 
solicitation stage.  
II. 
Reservation of Rights. 
 
26. 
The U.S. Trustee leaves the Debtors to their burden of proof and reserves any and 
all rights, remedies, and obligations to, inter alia, complement, supplement, augment, alter and/or 
modify this Objection, file an appropriate Motion and/or conduct any and all discovery as may be 
deemed necessary or as may be required and to assert such other grounds as may become apparent 
upon further factual discovery.   The U.S. Trustee also reserves all rights with respect to plan 
confirmation issues, including but not limited to whether the releases in the plan meet relevant 
confirmation standards until the relevant objection deadline. 
CONCLUSION 
Wherefore, for the reasons set forth above, the Amended Disclosure Statement should not 
be approved, and the DS Approval Motion should be denied.  
Dated: January 11, 2023  
Wilmington, Delaware 
Respectfully submitted, 
 
ANDREW R. VARA 
UNITED STATES TRUSTEE 
REGION THREE 
 
 
By:  /s/ Rosa Sierra-Fox                                               
 
 
            Rosa Sierra-Fox 
 
Richard L. Schepacarter 
            Trial Attorney 
 
United States Department of Justice 
 
Office of the United States Trustee 
 
J. Caleb Boggs Federal Building 
 
844 King Street, Suite 2207, Lockbox35 
 
Wilmington, Delaware 19801 
 
Phone: (302) 573-6492 
 
Fax: 
(302) 573-6497 
            rosa.sierra-fox@usdoj.gov 
 
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