U.S. Trustee's Limited Objection to Chapter 11 Plan — In re KServicing (Bankr. D. Del.)

Record facts

UNITED STATES BANKRUPTCY COURT · No. 22-10951 · Doc. 590 · 2023-02-28 · Docket on CourtListener

Full text

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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: D.I. No. 466 
 
Hearing Date: March 13, 2023 at 10:00 a.m. 
ET. 
Objection Deadline: February 28, 2023 at 
4:00 p.m. ET.  
 
UNITED STATES TRUSTEE’S LIMITED OBJECTION TO AMENDED JOINT CHAPTER 11 
PLAN OF LIQUIDATION OF KABBAGE, INC. (D/B/A KSERVICING) AND ITS AFFILIATED 
DEBTORS 
 
Andrew R. Vara, the United States Trustee for Region 3 (“U. S. Trustee”), through his counsel, files 
this limited objection (the “Objection”) to the Amended Joint Chapter 11 Plan of Liquidation of Kabbage, 
Inc. (D/B/A Kservicing) And Its Affiliated Debtors (“Plan”) filed at D.I. 466, and in support, states as follows: 
 
 
 
 
 
 
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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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PRELMINARY STATEMENT 
 
1. 
The U.S. Trustee objects on a limited basis to confirmation of the Plan because 
certain aspects of the Plan’s third-party release and the injunction provision amount to a discharge 
of a liquidating debtor contrary to section 1141(d)(3) of the Bankruptcy Code.  For these reasons, 
the U.S. Trustee submits that the Plan should not be approved until the offending provisions are 
revised or stricken from the Plan.  
JURISDICTION, VENUE, AND STANDING 
 
2. 
This Court has jurisdiction over the above-captioned cases pursuant to 28 U.S.C. § 
1334.  This Court is authorized to hear and determine confirmation of the Plan pursuant to 28 
U.S.C. § 157(a, b), and the amended standing order of reference issued by the United States District 
Court for the District of Delaware dated February 29, 2012.  Venue of the cases is proper in this 
District pursuant to 28 U.S.C. § 1408(1). 
3. 
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 UST 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”). 
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4. 
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. 
5. 
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 
6. 
On October 3, 2022, the above-captioned Debtors filed voluntary petitions seeking 
relief under chapter 11.  See D.I. 1 
7. 
The U.S. Trustee has not appointed a committee of unsecured creditors in these 
cases.  See D.I. 156.  
8. 
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.  This Court subsequently approved the Amended Disclosure 
Statement after it ruled that creditors voting to accept the Plan had to be given an opportunity to 
opt-out of the Plan’s third-party release at the solicitation stage.  D.I. 470.  The solicitation version 
of the Plan is filed at D.I. 466.  Pursuant to the Plan, the Debtors are liquidating their assets, 
dissolving, and will no longer be engaged in business following confirmation of the Plan.  
9. 
Under the Plan, creditors and claimants that did not opt out of the release, abstained 
from voting, or -- through no failure of their own -- did not return a ballot or file a confirmation 
objection, provide, through the third-party release, a release of the Debtors and the Liquidating 
Debtors of ’any and all claims, interests, obligations, rights, suits, damages, Causes of Action, 
remedies, and liabilities whatsoever (including any derivative claims asserted or that may be 
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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[.]”  Plan at Art. 10.6, accord id. Art. 
1.101 (definition of Released Parties includes the Debtors and the Debtors’ Released Related 
Parties), accord id. 1.104 (definition of Releasing Parties).  
10. 
The Plan also contains an injunction provision which states as follows 
(“Injunction”): 
(a) Upon entry of the Confirmation Order, all holders of Claims and Interests and 
other parties in interest, along with their respective present or former employees, 
agents, officers, directors, principals, and affiliates, shall be enjoined from taking 
any actions to interfere with the implementation or consummation of the Plan in 
relation to any Claim extinguished, discharged, or released pursuant to the Plan. 
(b) Except as expressly provided in the Plan, the Definitive Documents, the 
Confirmation Order, or a separate order of the Bankruptcy Court or as agreed to by 
the Debtors and a holder of a Claim against or Interest in the Debtors, all Entities 
who have held, hold, or may hold Claims against or Interests in the Debtors 
(whether proof of such Claims or Interests has been filed or not and whether 
or not such Entities vote in favor of, against or abstain from voting on the Plan 
or are presumed to have accepted or deemed to have rejected the Plan) and 
other parties in interest, along with their respective present or former 
employees, agents, officers, directors, principals, and affiliates are 
permanently enjoined, on and after the Effective Date, solely with respect to 
any Claims, Interests, and Causes of Action that will be or are treated by the 
Plan from (i) commencing, conducting, or continuing in any manner, directly or 
indirectly, any suit, action, or other proceeding of any kind (including, without 
limitation, any proceeding in a judicial, arbitral, administrative or other forum) 
against or affecting the Debtors, the Wind Down Estates, or the Wind Down 
Officer, as applicable, or the property of any of the Debtors, the Wind Down 
Estates, or the Wind Down Officer, as applicable; (ii) enforcing, levying, attaching 
(including, without limitation, any prejudgment attachment), collecting, or 
otherwise recovering by any manner or means, whether directly or indirectly, any 
judgment, award, decree, or order against the Debtors, the Wind Down Estates, or 
the Wind Down Officer; or the property of any of the Debtors, or the Wind Down 
Estates, as applicable; (iii) creating, perfecting, or otherwise enforcing in any 
manner, directly or indirectly, any encumbrance of any kind against the Debtors, 
the Wind Down Estates, or the property of any of the Debtors, the Wind Down 
Estates, or the Wind Down Officer, as applicable; (iv) asserting any right of setoff, 
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directly or indirectly, against any obligation due from the Debtors, or the Wind 
Down Estates, as applicable, or against property or interests in property of any of 
the Debtors, or the Wind Down Estates, except as contemplated or Allowed by the 
Plan; and (v) acting or proceeding in any manner, in any place whatsoever, that 
does not conform to or comply with the provisions of the Plan 
Plan at Art. 10.6(a), (b) (emphasis added) 
 
ARGUMENT 
 
I. 
The Plan Violates Section 1141(d)(3) of the Bankruptcy Code.  
 
11. 
Section 1141(d)(3) of the Bankruptcy Code provides: 
The confirmation of a plan does not discharge a debtor if— 
the plan provides for the liquidation of all or substantially all of the property of 
the estate; 
the debtor does not engage in business after consummation of the plan; and 
the debtor would be denied a discharge under section 727(a) of this title if the 
case were a case under chapter 7 of this title. 
11 U.S.C. §1141(d)(3) 
12. 
The elements of section 1141(d)(3) are present here.  First, the Plan provides that 
the Debtors’ assets will be liquidated.  See Plan Art. 5.4(h) (stating that Winddown Officer shall 
liquidate remaining assets).  Second, the Debtors will not engage in business after consummation 
of the plan.  See id. Third, the Debtors, as corporations, would not be eligible for a discharge if 
they were chapter 7 debtors pursuant to Section 727(a)(1) of the Code, which provides that the 
Court shall grant a debtor a discharge unless the debtor is not an individual.  See, e.g., In re 
Flintkote Co., 486 B.R. 99, 129 n.80 (Bankr. D. Del. 2012) (“Section 1141(d)(3)(C) is always 
satisfied for corporate debtors, as they cannot receive discharges in chapter 7.”).  Therefore, the 
Debtors are not eligible for a discharge.  See Plan Art. 10.3.  
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13. 
Here, there are two ways in which the Plan achieves a discharge of the Debtor. 
First, the Debtors are receiving a release by creditors and claimants through the third-party release.  
See Plan Art. 10.6(b).  Second, the Injunction provides that holders of all claims treated under the 
Plan from taking the type of actions against the Debtors, personally, that the discharge injunction 
in section 524(a) of the Bankruptcy Code provides.  As set forth in section 524(a) of the Code, the 
effect of a discharge “with respect to any debt discharged under section . . . 1141” includes “an 
injunction against the commencement or continuation of an action, the employment of process, 
or an act, to collect, recovery or offset any such debt as a personal liability of the debtor[.]”  11 
U.S.C. § 524(a)(1) and (2) (emphasis added). 
14. 
The Debtors should not be able to obtain relief expressly prohibited by section 
1141(d)(3) of the Bankruptcy Code by including it in the Plan’s Injunction provisions.  Because 
the Plan violates section 1141(d)(3) of the Code, the Plan does not satisfy section 1129(a)(1) of 
the Code. 
II. 
Reservation of Rights. 
 
15. 
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.    
CONCLUSION 
16. 
For the reasons set forth above, conformation of the Plan should denied.  
 
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Dated: February 28, 2023 
Wilmington, Delaware 
Respectfully submitted, 
 
ANDREW R. VARA 
UNITED STATES TRUSTEE 
 
 
By:  /s/ Rosa Sierra-Fox                                               
 
 
            Richard L. Schepacarter 
            Rosa Sierra-Fox 
 
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 
Email: rosa.sierra-fox@usdoj.gov 
 
 
 
 
 
 
 
 
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CERTIFICATE OF SERVICE 
I, Rosa Sierra-Fox, hereby attest that on February 28, 2023, I caused to be served a copy of this 
Objection by electronic service on the registered parties via the Court’s CM/ECF system and upon the 
following parties by electronic mail: 
Daniel J. DeFranceschi 
Matthew P. Milana 
Zachary I Shapiro 
Amanda R. Steele 
Richards, Layton & Finger 
One Rodney Square, P.O. Box 551 
Wilmington, DE 19899 
Email: defranceschi@rlf.com 
Email: milana@rlf.com 
Email: shapiro@rlf.com 
Email: steele@rlf.com 
 
Ray C. Schrock 
Candace M. Arthur 
Natasha S. Hwangpo 
Chase A. Bentley 
Weil, Gotshal & Manges LLP 
767 Fifth Avenue 
New York, New York 10153 
Email: ray.schrock@weil.com 
Email: candace.arthur@weil.com 
Email: natasha.hwangpo@weil.com 
Email: chase.bentley@weil.com 
 
Anthony W. Clark  
Dennis A. Meloro  
Greenberg Traurig, LLP  
The Nemours Building  
1007 North Orange Street, Suite 1200  
Wilmington, DE 19801 
Email: Anthony.Clark@gtlaw.com  
Email: melorod@gtlaw.com 
 
David B. Kurzweil  
Matthew A. Petrie  
Greenberg Traurig, LLP  
Terminus 200  
3333 Piedmont Road, NE, Suite 2500  
Atlanta, GA 30305 
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Email: kurzweild@gtlaw.com  
Email: petriem@gtlaw.com 
 
Scott D. Cousins, Esq.  
Scott D. Jones, Esq.  
Cousins Law LLC  
Brandywine Plaza West  
1521 Concord Pike, Suite 301  
Wilmington, DE 19801  
Phone: (302) 824-7081  
Email: scott.cousins@cousins-law.com  
Email: scott.jones@cousins-law.com 
 
William A. Hazeltine, Esq. 
Sullivan ∙ Hazeltine ∙ Allinson LLC 
919 North Market Street, Suite 420 
Wilmington, DE 19801 
Email: Bankruptcy001@sha-llc.com 
 
John J. Monaghan, Esq. 
Holland & Knight LLP 
10 St. James Avenue, 11th Floor 
Boston, MA 02116 
Email: john.monaghan@hklaw.com 
 
Lisa M. Schweitzer, Esq. 
Kristin Corbett, Esq. 
Richard C. Minott, Esq. 
Cleary Gottlieb Steen & Hamilton LLP 
One Liberty Plaza 
New York, NY 10006 
Email: lschweitzer@cgsh.com 
kcorbett@cgsh.com 
rminott@cgsh.com 
 
Pauline K. Morgan Esq. 
Sean T. Greecher, Esq. 
Ryan M. Bartley, Esq. 
Young Conaway Stargatt & Taylor, LLP 
1000 North King Street 
Wilmington, DE 19801 
CM/ECF Noticing: bankfilings@ycst.com 
Email: pmorgan@ycst.com 
Email: sgreecher@ycst.com 
Email: rbartley@ycst.com 
 
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Susheel Kirpalani, Esq. 
Quinn Emanuel Urquhart & Sullivan, LLP 
51 Madison Avenue, 22nd Floor 
New York, NY 10010 
Email: susheelkirpalani@quinnemanuel.com  
 
Matthew R. Scheck, Esq. 
Quinn Emanuel Urquhart & Sullivan, LLP 
300 West 6th St, Suite 2010 
Austin, TX 78701 
Email: matthewscheck@quinnemanuel.com 
 
Gregory W. Werkheiser, Esq. 
Benesch, Friedlander, Coplan & Aronoff LLP 
1313 N. Market St., Suite 1201 
Wilmington, DE 19801 
Email: gwerkheiser@beneschlaw.com 
 
Derek C. Abbott 
Jonathan M. Weyand 
Morris, Nichol, Arsht & Tunnel 
1201 North Market Street, 16th Floor 
Wilmington, Delaware 19801 
Email: dabbott@morrisnichols.com 
Email: jweyand@morrisnichols.com 
 
James L. Bromley 
Sullivan & Cromwell 
125 Broad Street 
New York, NY 10004-2498 
Email: bromleyj@sullcrom.com 
 
GOVERNMENTAL ENTITIES 
 
Alastair M. Gesmundo 
U.S. Department of Justice Civil Division 
P.O. Box 875 
Ben Franklin Station 
Washington, D.C. 20044 
Email: Alastair.M.Gesmundo@usdoj.gov 
 
U.S. Department of Justice ‐ Civil Division, Commercial Litigation Branch, Fraud Section 
Attn.: Sarah Loucks, Esq. 
Attn.: Alastair M. Gesmundo 
1100 L Street, N.W., Room 7206  
Washington, D.C. 20005 
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Email: Alastair.M.Gesmundo@usdoj.gov 
Email: Sarah.E.Loucks@usdoj.gov 
 
U.S. Attorney’s Office for the District of Massachusetts 
Attn.: Brian LaMacchia, AUSA 
One Courthouse Way, Suite 9200 
Boston, Massachusetts 02210 
Email: blamacchia@usdoj.gov 
 
U.S. Attorney’s Office for the Eastern District of Texas - Civil Division 
Attn.: Betty Young, Esq. 
550 Fannin, Suite 1250 
Beaumont, Texas 77701 
Email: byoung@usdoj.gov 
 
Federal Trade Commission 
Attn.: Marguerite Moeller 
Attn.: Alan Bakowski 
600 Pennsylvania Avenue NW 
Washington, District of Columbia 20580 
Email: mmoeller@ftc.gov 
Email: abakowski@ftc.gov 
 
Small Business Bureau 
Attn.: Susan Streich 
Attn.: Eric Benderson 
409 3rd Street SW, Suite 7211 
Washington, District of Columbia 20416 
Email: susan.streich@sba.gov 
Email: eric.benderson@sba.gov 
 
/s/Rosa Sierra-Fox 
Rosa Sierra-Fox 
Trial Attorney 
 
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