Customers Bank Rule 2004 Motion for Servicing Transition Discovery — In re KServicing (Bankr. D. Del.)

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U.S. Bankruptcy Court for the District of Delaware · No. 22-10951 · Doc. 608 · 2023-03-06 · Docket on CourtListener

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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. 
Chapter 11 
Case No. 22-10951 (CTG) 
(Jointly Administered) 
 
Hearing Date:  March 20, 2023 at 10:00 a.m.  
Obj. Deadline:  March 13, 2023 at 4:00 p.m. 
 
MOTION FOR AN ORDER PURSUANT TO BANKRUPTCY RULE 
2004 DIRECTING PRODUCTION OF DOCUMENTS AND MATERIALS 
AND APPEARANCE FOR ORAL EXAMINATION 
Customers Bank respectfully moves this Court, pursuant to Section 105 of title 11 of the 
United States Code (the "Bankruptcy Code"), Rule 2004 of the Federal Rules of Bankruptcy 
Procedure (“Bankruptcy Rules”) and Rule 2004-1 of the Local Rules for Practice and Procedure 
of the United States Bankruptcy Court for the District Court of Delaware (the "Local Rules"), for 
the entry of an order compelling Kabbage, Inc. (“Kabbage or the “Debtor”) to (i) produce the 
documents set forth in Exhibit A hereto and (ii) to produce the appropriate individuals for 
examination by Customers Bank with respect to the Deposition Topics that are also set forth in 
Exhibit A, including without limitation the Debtors employees responsible for operations and IT, 
respectively, Donna Evans and Jason Dods.  In support of this motion (the “Motion”), Customers 
Bank respectfully states as follows: 
PRELIMINARY STATEMENT 
1. 
The Debtor is running headlong down the path of confirming a liquidating chapter 
11 plan (the “Plan”) that (i) indicates an intention by the Debtor to provide commercially 
reasonable efforts to transition servicing of Customers Bank’s $180 million PPP loan portfolio to 
a new servicer prior to the Plan’s Effective Date, (ii) rejects the contracts under which that 
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servicing occurs as of the Effective Date, and (iii) affords the Debtor the unilateral option to 
provide or not provide any servicing or transitioning efforts from and after the Plan’s Effective 
Date.  Faced with a March 13, 2023 Plan confirmation hearing with the attendant possibility of a 
March 28, 2023 Plan Effective Date, and the associated possibility of cessation of loan portfolio 
servicing or transition efforts, Customers Bank has requested, implored and ultimately demanded 
that that the Debtor live up to its Plan-provided undertaking of pre-Effective Date servicing 
transition efforts and that it deliver the information solely in its and its agents possession 
necessary for Customers Bank to act as a successor servicer.  Inexplicably, Customers Bank’s 
efforts have been unsuccessful, met not with the promised commercially reasonable efforts, but 
rather with periodic and largely unfulfilled promises separated by lengthy periods of silence.   
2. 
 With the potential of less than thirty days remaining to undertake a servicing 
transition that under the best of circumstances should take approximately forty-five days, and 
having received passing little cooperation from the Debtors thus far to provide the information in 
its possession necessary to effect that transition, Customers Bank seeks through this Motion to 
invoke the provisions of Bankruptcy Rule 2004 to compel the Debtor to do that which it has 
repeatedly said it will do, but also repeatedly failed to do voluntarily—namely provide the 
information necessary for a transition to Customers Bank, which has informed the Debtor that it 
will act as successor servicer.      
3. 
As noted, Customers Bank has informed the Debtor that Customers Bank intends 
to perform successor servicing itself and that it requires certain information, in order to do so, 
which is either its property in the Debtor’s possession or is the Debtor’s property, including the 
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Debtor’s loan servicing files.1  Whether the Debtor or Customers Bank owns the servicing files, 
the information contained in those files and the Debtor’s conduct in maintaining and 
administering those files are well-within the scope of examination under Bankruptcy Rule 2004.  
(“The examination may relate only to the acts, conduct, or property or the liabilities and financial 
condition of the debtor, or to any matter which may affect the administration of the debtor’s 
estate.”)  Fed. R. Bankr. P. 2004(b).).  
BACKGROUND 
4. 
The Plan states that that the Debtor shall “use commercially reasonable efforts to 
assist the Reserve Bank and/or Partner Banks to transfer servicing obligations to a third-party 
loan servicer prior to the Effective Date.” [Amended Plan at Section 5.3]. Despite this provision, 
the Debtor has rebuffed weeks of commercially reasonable requests for the basic information 
needed for Customers Bank to take over the servicing of its loans as of March 31, 2023. 
5. 
For example, by letter dated January 18, 2023, Customers Bank requested certain 
basic transition information, including borrower ACH payment information, information 
regarding potentially fraudulent loans, and data on borrower forgiveness.  Declaration of Jeremy 
Sternberg in Support of Customers Bank’s 2004 Motion (“Sternberg Declaration”) at para. 2.2  
The Debtor has not provided this information.   
 
1 It is also noteworthy that the post-petition settlement agreement between the parties, entered by Court Order on 
November 9, 2022, obligates the Debtor to perform servicing until transfer to a new servicer.  More specifically, 
Paragraph 4(A) of the Settlement Agreement provides that the Debtor “shall take commercially reasonable efforts to 
maintain the current levels of PPP loan servicing with respect to the Remaining Loan Population . . . from the 
Effective date through the earlier of (i) March 31, 2023 and (ii) the date of transfer of KServicing’s servicing 
obligations to an alternative servicer acceptable to [Customers Bank] . . . .”  Customers Bank has identified an 
acceptable alternative servicer, namely itself, but the Debtors have provided no meaningful information to aid the 
transition of servicing to Customers Bank by March 31 or any date. 
2 A copy of the Sternberg Declaration is attached hereto as Exhibit B. 
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6. 
By letter dated January 26, 2023, Customers Bank provided the Debtor with a 
basic transition plan/timeline and a draft of a borrower communication letter. Sternberg 
Declaration at para. 3.  The Debtor has not provided comment on the borrower communication 
letter.     
7. 
On January 27, 2023, Customers Bank provided the Debtor with a draft FAQ 
communication to borrowers.  Sternberg Declaration at para. 4. The Debtor has not provided 
comment on the draft FAQs.   
8. 
At the same time (late January 2023), Customers Bank suggested a phased 
transition in which the Debtor would initially stop billing, payment processing, processing 
borrower forgiveness applications and submissions to the SBA of guaranty purchase.  Such a 
“pause” would allow Customers Bank to prepare for full transition in a more coherent and 
organized fashion.  Customers Bank proposed that the pause start on February 1, 2023.  By email 
dated January 31, 2023, counsel for the Debtor responded:   
The proposal was actually very well received and there were a number of components the 
company liked and thought were necessary to [sic] for a clean transition.  The benefits of 
“pausing” were certainly among the appreciated factors.  As I suspected though the 
turnaround was met with hesitation and the challenges of doing something like this on 
short notice didn’t feel prudent. I think there is alignment on the key points and for the 
concepts that the company is working through to avoid hiccups it could be a good idea 
for the right fin ops people to talk and have a solution in place. I know it isn’t 2/1 that 
your clients hoped but would they be willing to have the plan in place for 3/1 start?.”   
However, the Debtor has refused to respond to basic information requests in order to effect the 
“pause” on March 1, or more recently for a “pause” on March 15.  Sternberg Declaration at para. 
5.3   
 
3 The Debtor has refused to engage on this pause request despite informing Customers Bank that it has requested 
that the SBA honor its request to pause virtually all other servicing activity.  
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9. 
On February 2, 2023, in response to a request from the Debtor, Customers Bank 
provided a detailed spreadsheet of the information it needed in order to effect the servicing 
transition.  As of March 5, 2023, the Debtor has not provided that information.   
10. 
On February 9, Customers Bank provided in writing a further updated detailed 
transition plan with information needed, sequencing, and dates.  The Debtor has failed to provide 
any needed information in response.  After more entreaties for meetings and/or information in 
the days and weeks that followed that have basically been rebuffed by the Debtor, on February 
22, 2023, counsel for Customers Bank wrote to counsel for the Debtor: 
It is now a week until March 1 and Kabbage has not shared any of the information 
needed to effect the limited cutover that we have discussed on March 1 (stopping 
borrower collections and new forgiveness applications), let alone the information 
required for a full transition some time later despite the many requests for information 
and invitations to meet by Customers Bank. 
 
Much time has passed since our last joint meeting on the transition issues (at which time 
we discussed among other things the attached set of narrowed requests), and our 
subsequent requests for detail about borrower communications, connection between the 
IT teams on the cloud based loan files, comments on the draft borrower communication 
and FAQs, and more have not resulted in any meaningful responses.   
 
Id. at para. 6. 
11. 
The Debtor has still refused to provide any of the servicing transfer information 
requested or any information about a clear pathway or plan to a pause and/or full transition.   
12. 
While the information sought is critical to Customers Bank’s ability to take on the 
servicing of its loans that are currently being serviced by the Debtor, the real parties who stand to 
benefit from an orderly transition or to be harmed by one that is as disordered and chaotic as the 
Debtor seems to intend are the thousands of borrowers.  A disordered transition will result in 
miscommunications with borrowers, lost or missed or misapplied payments, missing deadlines 
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for applying for guaranty purchase from the SBA and many other problems that can and should 
be avoided and not be visited on unsuspecting borrowers.    
13. 
Basic discovery including testimony about type, location, contents and IT 
requirements for transferring the loan servicing files, and production of those files appears to be 
a necessary alternative to the promised but undelivered “commercially reasonable” efforts by the 
Debtor to effect a transition of the Customers Bank $180 million PPP loan portfolio to 
Customers Bank for the benefit of the borrowers.    
14. 
For these reasons, and the reasons below, Customers Bank respectfully requests 
that the Court grant the Motion. 
JURISDICTION AND VENUE  
15. 
This court has Jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 
1334.  This matter is a core proceeding under 28 U.S.C. § 157(b).  Venue of the Debtors' Chapter 
11 cases and this Motion is proper pursuant to 28 U.S.C. §§ 1408 and 1409.  The statutory 
predicates for the relief sought herein are section 105 of the Bankruptcy Code, Bankruptcy Rule 
2004, and Rule 2004-1 of the Local Rules. Customers Bank consents pursuant to Local Rule 
9013-1(f) to the entry of a final order by the Court in connection with this Motion to the extent 
that it is later determined that the Court, absent consent of the parties, cannot enter final orders or 
judgments in connection herewith consistent with Article III of the United States Constitution. 
RELIEF REQUESTED 
16. 
Customers Bank seeks entry of the Proposed Order annexed hereto (the "Proposed 
Order"), which would compel the Debtor (i) to produce the documents and materials requested in 
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Exhibit A, and (ii) to conduct an examination of its key transition employees, Donna Evans and 
Jason Dods, with respect to the topics listed in Exhibit A, as well as any other witness necessary 
to fully address the topics listed on Exhibit A. 
BASIS FOR RELIEF 
17. 
An examination pursuant to Bankruptcy Rule 2004 "can be ordered 'on motion of 
any party in interest.'"  In re Lifeco Inv. Group, Inc., 172 B.R. 478 (Bankr. D. Del. 1994) 
(quoting Fed. R. Bankr. P. 2004(a)).  Rule 2004 further provides that the Court may order the 
examination and the production of documentary evidence concerning any matter that relates "to 
the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any 
matter which may affect the administration of the debtor's estate, or … any matter relevant to the 
case or the formulation of a plan."  Fed. R. Bankr. P. 2004(b); see also Harrow v. Street (In re 
Fruehauf Trailer Corp.), 369 B.R. 817, 827-28 (Bankr. D. Del. 2007) (noting the "extensive 
document discovery" that occurred pursuant to a subpoena issued under Fed. R. Bankr. P. 2004).  
To that end, "[t]hird parties having knowledge of the debtors' affairs, as well as a debtor itself, 
are subject to examination."  In re Valley Forge Plaza Assoc., 109 B.R. 669, 674 (Bankr. E.D. 
Pa. 1990). 
18. 
The scope of a Rule 2004 examination is "unfettered and broad," as the plain 
language of the rule indicates.  See 9 Collier on Bankruptcy 2004 [1] at 2004-6 (15th ed. Rev. 
1997) (quoting In re Table Talk, Inc., 51 B.R. 143, 145 (Bankr. D. Mass. 1985).  Courts have 
repeatedly recognized that the scope of Bankruptcy Rule 2004 examinations "as broad, 
unfettered and in the nature of a 'fishing expedition.'"  In re Countrywide Home Loans, Inc., 384 
B.R. 373, 400 (Bankr. W.D. Pa. 2008) (citing In re Lev, No. 05-35847, 2008 WL 207523, at *3 
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(Bankr. D.N.J. Jan. 23, 2008); In re Silverman, 36 B.R. 254 (Banker. S.D.N.Y. 1984); In re 
Vantage Petroleum Corp., 34 B.R. 650 (Bankr. E.D.N.Y. 1983)).  Indeed, Bankruptcy Rule 2004 
affords parties-in-interest an extremely broad right of discovery and "is even broader than that of 
discovery permitted under [the Federal Rules of Civil Procedure], which themselves contemplate 
broad, easy access to discovery."  In re Valley Forge Plaza Assocs., 109 B.R. 669, 674 (Bankr. 
E.D. Pa. 1990) (citations omitted). 
19. 
Rule 2004 relief is necessary and applicable here.  The requested discovery will 
provide Customers Bank with the information necessary to protect the borrowers, information 
that (i) involves assets of the Debtor or assets of Customers Bank in the possession of the Debtor 
or its agents, (ii) implicates the Debtor’s conduct during this case in carrying out its servicing 
obligations and (iii) the receipt of which would advance the transition of servicing through 
affording Customers Bank the requested information unquestionably affecting the administration 
of the estate.   
20. 
As set forth above, the information sought is reasonable and necessary and for 
reasons unknown to Customers Bank, the Debtor simply refuses to share it.  
21. 
The specific document requests and deposition topics set forth on Exhibit A 
attached hereto are no more than what is needed, and what the Debtor has acknowledge are 
needed, to effect a proper transition of loan servicing (in accordance with the Debtor’s Plan) 
from the Debtor to Customers Bank.  It bears repeating that the ultimate beneficiaries of a proper 
transition are the thousands of borrowers with outstanding PPP loans.  Each topic concerns 
information relevant "to the acts, conducts, or property or to the liabilities and financial condition 
of the debtor."  Fed. R. Bankr. P. 2004(b 
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22. 
The requests and deposition topics in Exhibit A are essentially the same and are 
likewise reasonable in scope.  To ensure the timely production of these documents and the 
information to be gained from the depositions, the Court should grant this Motion in its entirety.   
CERTIFICATION OF COMPLIANCE WITH LOCAL RULE 2004-1(b) 
23. 
Pursuant to Local Rule 2004-1, undersigned counsel certify that they conferred 
with the Debtors’ counsel regarding the requested production of documents and the timing of 
such production. As of the filing of this Motion, the parties are unable to come to an agreement 
regarding the timing and scope of the proposed document production.  
NOTICE 
24. 
Notice of this Motion will be provided to (a) the Office of the United States 
Trustee for the District of Delaware; (b) the holders of the thirty (30) largest unsecured claims 
against the Debtors on a consolidated basis; (c) the Federal Reserve Bank; (d) Cross River Bank; 
(e) the Small Business Administration; and (n) any party that has requested notice pursuant to 
Bankruptcy Rule 2002. 
NO PRIOR REQUEST 
25. 
No prior request for the relief requested herein has been presented to this or any 
other court. 
WHEREFORE, for the reasons discussed herein, Customers Bank respectfully 
requests entry of an order substantially in the form annexed hereto as Exhibit C: (i) granting the 
Motion in its entirety; (ii) compelling the Debtor to produce documents and materials set forth in 
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Exhibit A; (iii) authorizing Customers Bank to conduct examination of the Debtor’s employees 
Donna Evans and Jason Dods in connection with the topics listed in Exhibit A on an expedited 
basis; and (iv) granting such other and further relief as this Court deems just and proper under 
the circumstances.  
Dated:  March 6, 2023 
Wilmington, Delaware 
SULLIVAN • HAZELTINE • ALLINSON LLC 
 
 
William A. Hazeltine 
 
 
 
 
William D. Sullivan (No. 2820) 
William A. Hazeltine (No. 3294) 
919 North Market Street, Suite 420 
Wilmington, Delaware 19801 
Telephone: 302-428-8191 
Facsimile: 302-428-8195 
whazeltine@sha-llc.com 
 
-and- 
 
HOLLAND & KNIGHT LLP 
John J. Monaghan (admitted pro hac vice) 
Jeremy M. Sternberg (admitted pro hac vice) 
Lynne B. Xerras  
10 St. James Avenue 
Boston, MA 02116 
Telephone: 617-523-2700 
Facsimile: 617-523-685 
john.monaghan@hklaw.com 
jeremy.sternberg@hkaw.com 
lynne.xerras@hklaw.com 
  
Counsel to Customers Bank  
 
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