Objection to Plan Confirmation — In re KServicing

Record facts

U.S. Bankruptcy Court for the District of Delaware · No. 22-10951 · Doc. 592 · 2023-02-28 · Docket on CourtListener

Summary

A limited objection and reservation of rights of Cross River Bank to confirmation of the debtors' Chapter 11 plan in In re Kabbage, Inc. d/b/a KServicing, et al., Case No. 22-10951 (CTG), in the U.S. Bankruptcy Court for the District of Delaware, filed February 28, 2023 as Doc 592. The objection states that the debtors have not shown they will transfer servicing of Cross River's PPP loans or deliver the servicing files required by the court's order approving a stipulation at ECF 444, attached as Exhibit A. It argues that a failure to transfer servicing would create administrative claims against the estate and affect borrowers seeking loan forgiveness from the Small Business Administration. It also reserves rights over selection of the Wind Down Officer under sections 1123(a)(7) and 1129(a)(5). The 9-page objection asks that confirmation be denied absent satisfactory resolution.

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IN THE UNITED STATES BANKRUPTCY COURT 
FOR THE DISTRICT OF DELAWARE 
 
 
In re  
 
KABBAGE, INC. d/b/a KSERVICING, et al.,  
 
Debtors.1 
 
 
 
 
 
Chapter 11 
 
Case No. 22-10951 (CTG) 
 
(Jointly Administered) 
 
Re: Dkt. No. 467 
 
Objection Deadline:  February 28, 2023,  
 
at 4:00 p.m. (ET) 
 
 
LIMITED OBJECTION AND RESERVATION OF  
RIGHTS OF CROSS RIVER BANK TO CONFIRMATION OF  
DEBTORS’ CHAPTER 11 PLAN 
 
Cross River Bank (“Cross River”) hereby files this limited objection and reservation of 
rights to confirmation of the Debtors’ Plan, and respectfully states as follows:2   
INTRODUCTION 
As set forth herein, the Debtors have not demonstrated that they will, or will even be able 
to, transfer servicing of Cross River’s PPP Loans, including the transfer to Cross River of its PPP 
loan Servicing Files (defined below) as required by this Court’s order approving the stipulation 
between Cross River and the Debtors [ECF 444].  This raises critical confirmation issues because 
the Debtors’ failure to do so will result in substantial administrative claims against the estate and 
 
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). 
2    References to the “Plan” are to the Amended Joint Chapter 11 Plan of Liquidation [ECF 466], 
and references to the “Disclosure Statement” are to the Amended Disclosure Statement for the 
Amended Joint Chapter 11 Plan of Liquidation [ECF 467].  Capitalized terms not defined 
herein are defined in the Plan and Disclosure Statement. 
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make consummation of the Plan impossible.  Moreover, failure to transfer servicing will cause 
substantial harm not only to Cross River, but also to thousands of borrowers who depend upon the 
servicing to obtain PPP loan forgiveness from the Small Business Administration.  In addition, the 
Debtors have yet to demonstrate satisfaction of other confirmation requirements, including by 
identifying the Wind Down Officer who will have significant control over the liquidation of the 
estates and the prosecution of valuable estate causes of action. 
As explained more fully below, unless the Plan is reformed to address the confirmation 
defects identified in this Objection and the Debtors otherwise carry their burden to establish that 
the Plan satisfies all confirmation requirements, confirmation of the Plan should be denied. 
BACKGROUND 
1. 
A key component of the Debtors’ Plan is the transfer of servicing of all CRB PPP 
Loans from Kabbage to a new servicer by the Effective Date.  See Plan § 5.3(c).  Indeed, the Plan 
states that Debtors will not have any PPP loan servicing obligations from the Effective Date 
forward.  Id. § 5.3(c)(iv).  Thus, if the transfer is not consummated by the Effective Date, then no 
one will be servicing the Cross River PPP Loans.   
2. 
To consummate the transfer of servicing by the Effective Date, Kabbage must, 
among other things, transfer to Cross River all of the “Servicing Files,” as defined in the CRB 
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Agreements,3 for the CRB PPP Loans.  Those files belong to Cross River (not the Debtors),4 and 
Debtors’ failure to return Cross River’s Servicing Files would violate the Court-ordered stipulation 
between the Debtors and Cross River, which requires the Debtors to produce those files to Cross 
River.  See Order Approving Stipulation Between The Debtors And Cross River Bank [ECF 444 
& 441-1] (together, the “Servicing File Order”) (“The Debtors will produce to Cross River the 
Servicing Files (as defined in the Agreements) . . . .”) (attached as Exhibit A hereto). 
3. 
Cross River has been actively demanding its Servicing Files from the Debtors and 
making its resources available to work with the Debtors to obtain them and to complete the transfer 
of servicing, and it will continue to do so.  The Debtors, however, have yet to comply with their 
obligations under the Servicing File Order, and despite multiple communications and promised 
timelines, it is still unclear when or whether Cross River will ever receive its files.  The Debtors 
purported to transfer some documents during the last few days before this objection was due, which 
 
3  Under the CRB Agreements, the “Servicing File” for a loan includes, among other things, “the 
documents, files and record held or maintained by or on behalf  of [Kabbage] pertaining 
specifically to such [loan] or the servicing thereof, including, without limitation, computer 
files, data tapes, books, records, electronic copies of documents, notes and Asset Files relating 
to such [loan].”  Sale and Servicing Agreement among Cross River Bank and Kabbage dated 
as of May 6, 2020 (“SAS”), § 1 at 6; see also Letter Agreement with respect to servicing under 
Loan Program Agreement, dated September 17, 2020, at 3-4 (“LPA Letter Agreement”).  The 
“Servicing File” for each loan further includes, as part of the “Asset File,” “(i) the related 
Governing Contract with the Loan Obligor fully executed or deemed executed, (ii) all 
amendments, restatements, modifications, riders or other supplements to the related Governing 
Contract with the Loan Obligor fully executed or deemed executed, (iii) the related loan 
application (consisting of the SBA Form 2483), (iv) the account number assigned to the 
applicable Loan Obligor, (v) the SBA loan number assigned to the applicable Asset, (vi) the 
resolution to borrow form utilized by the Seller, (vii) the Seller’s SBA Form 2484 and 
(viii) copies of any forms or other documentation necessary to be submitted to the SBA in 
order for the Asset to be eligible for the benefit of the SBA’s guaranty of the Asset.”  SAS § 
1, at 2; see also LPA Letter Agreement at 4 (using the term “Loan File” rather than “Asset 
File”). 
4  See SAS § 11(a)(vii) (“Ownership of such Servicing File shall vest in [Cross River] Bank, and 
the Servicing File shall be retained and maintained, in trust, by Kabbage in a custodial capacity 
only.”); LPA Letter Agreement at 3 (same). 
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Cross River does not appear to have received.  Regardless, Cross River still does not have the 
complete Servicing Files despite the Debtors having agreed to provide them nearly two months 
ago.  Thus, Cross River continues to have serious concerns regarding whether the Debtors will 
implement the required transfer of servicing to Cross River and deliver Cross River’s Servicing 
Files prior to the Effective Date.   
4. 
Cross River has been trying for well over a year (since before Debtors’ bankruptcy) 
to obtain copies of its Servicing Files for its PPP Loans.  The Debtors have at times assured Cross 
River they would provide the files promptly, and at other times have expressed confusion or 
uncertainty as to what the Debtors even have in their possession and control, as opposed to what 
parts of the files were transferred to American Express (without Cross River’s consent) as part of 
the transaction with American Express in October 2020 (the “AmEx Transaction”).  No 
explanation has ever been given as to why any of Cross River’s files were transferred to American 
Express.  Most recently, the Debtors blew through timeframes set out in a workplan incorporated 
into the Servicing File Order, and Cross River still does not have all of its Servicing Files.5 
5. 
Cross River’s concerns are heightened in light of the apparent lack of cooperation 
from American Express, which took the Debtors’ operating business (including systems and data) 
in exchange for a hefty payment to the Debtors’ shareholders, and which has nonetheless refused 
to provide documents necessary for the Debtors to properly service the loans.  See Declaration of 
Deborah Rieger-Paganis ¶ 16 [ECF 13] (“First Day Declaration”) (citing “AmEx’s refusal to 
 
5  The day before the due date for this response, the Debtors sent to Cross River a document titled 
“Transition Planning Status Report,” which purported to provide a report as to where things 
stand in the transition process.  The status report, however, is incomplete and, among other 
things, does not explain why Cross River still has not received all of its Servicing Files, and it 
provides no assurance that servicing will be transferred prior to the Effective Date.  
Nevertheless Cross River continues to review the status report, and, as noted, will continue to 
work with the Debtors.  
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honor its obligations under a Transition Services Agreement [ ] between the Company and AmEx 
entered into in connection with the AmEx Transaction, which has affected the Company’s ability 
to perform a number operational functions”); Disclosure Statement at 34 (“[T]he Company has 
experienced significant operational hurdles to even the simplest of corporate tasks by virtue of lack 
of cooperation or delay from AmEx . . . . Retrieving documents from AmEx has and continues to 
be difficult and requires concerted effort as responses are often delayed and incomplete.”); see 
also Subcommittee Report at 72 (describing that Kabbage retained “only contractual use” of the 
data and systems, and had to “request access” from American Express just to “perform forgiveness 
services for borrowers”).6     
6. 
The Debtors have rejected Cross River’s offer to work jointly with the Debtors to 
obtain the portions of the Servicing Files under American Express’s control.  Similarly, the 
Debtors have rebuffed Cross River’s requests that the Debtors seek relief from the Court to enforce 
American Express’s obligations to turn over the Servicing Files belonging to Cross River.  Based 
on the limited information Cross River has from the Debtors, the Debtors’ solo efforts to obtain 
the Servicing Files from American Express have thus far yielded only American Express’s 
statement that it might cooperate.   
7. 
Beyond the Servicing Files, there are other critical facets of transferring servicing 
that need to be completed, including, among other things, reconciliations of balances and 
transactions, borrower communications information, remittances of overpayments, origination and 
 
6  “Subcommittee Report” refers to: How Fintechs Facilitated Fraud In The Paycheck Protection 
Program, U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis Staff 
Report, Dec. 2022, available at 
https://coronavirus.house.gov/sites/democrats.coronavirus.house.gov/files/2022.12.01%20Ho 
w%20Fintechs%20Facilitated%20Fraud%20in%20the%20Paycheck%20Protection%20Progr 
am_0.pdf 
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borrower identification data, and data integrity checks for the foregoing.  Cross River remains very 
concerned about the lack of progress and transparency as to how and when those will be 
implemented to ensure a smooth transition prior to the Debtors’ cessation of its servicing 
obligations.  
OBJECTIONS  
A. 
The Debtors Have Shown Neither That The Plan Is Feasible, Nor That It 
Provides Adequate Means For Implementation 
8. 
The Debtors’ Plan must be feasible under Bankruptcy Code section 1129(a)(11), 
and it must “provide adequate means for the plan’s implementation” under section 1123(a)(5).  To 
date, however, the Debtors have shown no ability to consummate a key component of their Plan—
the transfer of servicing of Cross River’s PPP Loans.  Absent substantial progress for the transfer 
of servicing prior to the confirmation hearing—including the transferring of all Servicing Files—
the Court should deny confirmation on the grounds that the Debtors have failed to prove their 
ability to consummate the Plan. 
9. 
The Debtors are obligated under the Servicing File Order to transfer the Servicing 
Files.  The Debtors’ failure to do so would result in a substantial administrative claim, which would 
have to be paid in full pursuant to Bankruptcy Code section 1129(a)(9)(A).  Given the Debtors’ 
continued refrain that they are running out of cash, the prospect of a large administrative claim 
will surely preclude any ability for the Debtors to consummate any plan.  It is thus critical that the 
Debtors demonstrate their full compliance with the Servicing File Order prior to the confirmation 
hearing. 
10. 
Moreover, given the substantial uncertainty as to the Debtors’ ability to transfer 
servicing, the Plan should make the completion of the transfer of servicing of Cross River’s PPP 
loans an express condition to the effectiveness of the Plan.  The Debtors have already agreed to 
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this as to the Reserve Bank,7 but they have refused Cross River’s request for equal treatment.  
Instead, while the Plan says that the Debtors will have no obligation to service after the Effective 
Date, the Plan fails to provide that Cross River will have everything it needs to have its new 
servicer take over.  In other words, the Debtors’ Plan leaves open the distinct possibility that Cross 
River’s PPP loans would simply go unserviced post-Effective Date for some indeterminate amount 
of time.  This would expose Cross River, borrowers, and the SBA to substantial harm, which in 
turn will result in substantially higher claims (including Cross River’s administrative claim).   
11. 
The potential issues do not end there.  The Debtors have asked Cross River to 
identify contracts that it wants to be assumed and assigned to Cross River (or Cross River’s new 
servicer) for servicing of the loans.  The simple answer is that Cross River does not need any such 
contracts—provided that the Debtors actually comply with their obligations to turn over the 
Servicing Files.  If, however, the Debtors fail to do so, then there may be certain contracts—such 
as software licenses or even the Debtors’ onerous Transition Services Agreement with American 
Express—that may need to be assumed.  If the Debtors would simply comply with their obligations 
to turn over the Servicing Files prior to the confirmation hearing, then this entire issue would be 
moot.   
B. 
Cross River Reserves Its Rights As To Selection Of The Wind Down Officer 
12. 
The Plan provides that a Wind Down Officer will have substantial control over the 
liquidation of the estates.  This includes prosecution of the estate’s primary asset—claims relating 
 
7  The Plan provides that the occurrence of the effective date is subject to transferring servicing 
of the PPPLF Collateral (the Reserve Bank PPP loans) “to “the satisfaction of the Reserve 
Bank, unless the Reserve Bank consents in advance, at its sole discretion to Post-Effective 
Date PPP Servicing in accordance with section 5.3(d) herein.”  Plan § 9.1(g).   
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to the October 2020 AmEx Transaction.  The manner in which these assets are administered are 
critical to recoveries for unsecured creditors in this case.   
13. 
Section 1123(a)(7) mandates that the selection of any officer, director, or trustee 
under the plan be “consistent with the interests of creditors,” and section 1129(a)(5) requires that 
the appointment of such persons be “consistent with the interests of creditors and equity security 
holders and with public policy.”  Pursuant to these sections, Cross River negotiated with the 
Debtors consulting rights as to the selection of the Wind Down Officer.  Although the Debtors are 
apparently considering one of Cross River’s recommendations, the Debtors have yet to select the 
Wind Down Officer or to demonstrate why that selection is consistent with the requirements of 
Sections 1123(a)(7) and 1129(a)(5).  Cross River thus reserves all rights with respect to the 
selection of the Wind Down Officer.   
 
 
[Continued on next page] 
 
 
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CONCLUSION 
14. 
For the reasons stated above respectfully requests that confirmation be denied, 
absent satisfactory resolution of Cross River’s objections.   
 
Dated: February 28, 2023 
Respectfully submitted, 
Wilmington, Delaware 
BENESCH, FRIEDLANDER, COPLAN & 
ARONOFF LLP 
 
/s/ Gregory W. Werkheiser 
 
 
 
Gregory W. Werkheiser (No. 3553) 
1313 N. Market Street, Suite 1201 
Wilmington, Delaware 19801 
Telephone: (302) 442-7010 
Facsimile: (302) 442-7012 
gwerkheiser@beneschlaw.com 
-and- 
QUINN EMANUEL URQUHART &  
SULLIVAN, LLP 
 
Susheel Kirpalani 
Isaac Nesser 
51 Madison Avenue, 22nd Floor 
New York, NY 10010 
Telephone:  (212) 849-7000 
susheelkirpalani@quinnemanuel.com 
isaacnesser@quinnemanuel.com 
 
Erika Morabito 
1300 I Street NW, Suite 900 
Washington, D.C. 20005 
Telephone: (202) 538-8000 
erikamorabito@quinnemanuel.com 
 
Matthew R. Scheck 
300 West 6th Street, Suite 2010 
Austin, TX 78701 
Telephone: (737) 667-6100 
matthewscheck@quinnemanuel.com 
 
Counsel to Cross River Bank 
 
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