In re Kabbage, Inc. (KServicing) — First Day Hearing Presentation
- Date
- 2022-10-06
Summary
Exhibit A, a PowerPoint demonstrative titled First Day Hearing Presentation and dated October 6, 2022, filed as Doc 64-1 in Case 22-10951-CTG, the Chapter 11 cases of Kabbage, Inc. d/b/a KServicing. The 16-page deck states the company sold substantially all of its assets to affiliates of American Express in October 2020 for approximately $750 million, was left with $17 million of cash, and delivered more than $7 billion in PPP loan funds to more than 300,000 small businesses. A loan portfolio table reports total origination principal of $7,266 M against $5,682 M forgiven or guaranty purchased, or 78.2%. It describes Department of Justice, congressional and Federal Trade Commission investigations, a disputed $65 million servicing receivable, and a class action filed March 20, 2022. It sets out a proposed toggle plan with funded and unfunded transactions and a path forward.
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Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 1 of 16
EXHIBIT A
PowerPoint Demonstrative
RLF1 28012605v.1
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 2 of 16
First Day Hearing Presentation
October 6, 2022
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Roadmap
1 KServicing Background
2 Circumstances Leading to these Chapter 11 Cases
3 Chapter 11 Plan Overview
4 Path Forward
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Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 4 of 16
About KServicing
Kabbage, Inc. d/b/a KServicing (the “Company”) was founded as an online lending and servicing platform for small
businesses.
The Company has been in wind down since selling substantially all of its assets to affiliates of American Express
(“AmEx”) in October 2020 (the “AmEx Transaction”).
Approximately 99% of the Company’s outstanding loan servicing portfolio is comprised of loans issued under the
Paycheck Protection Program (the “PPP” and the loans issued thereunder, the “PPP Loans”), with the remaining 1%
being non-PPP loans issued to small businesses prior to the AmEx Transaction (the “Legacy Loans”).
The U.S. Small Business Administration (“SBA”) launched the PPP in April 2020 in connection with the enactment of the
CARES Act, which authorized hundred of billions of dollars of government aid to small businesses reeling from the onset
of the COVID-19 global pandemic.
The SBA partnered with private lenders and servicers, including the Company, to process loan applications on a highly
expedited timeline to get funding to small businesses desperately in need of working capital.
The Company filled a void in the PPP by providing loans to small businesses that did not have access to PPP Loans
provided by the largest financial institutions participating in the PPP.
With over a decade of experience building and operating a sophisticated online lending platform, the Company was
uniquely positioned to fulfill the U.S. government’s urgent need to quickly distribute aid to small businesses.
The Company ultimately became the second largest PPP lender by application volume, delivering more than $7 billion in
PPP Loan funds to more than 300,000 small businesses.
To date, the Company has successfully processed approximately 80% of its PPP Loan portfolio, and seeks to wind down its
operations, resolve remaining claims, and utilize the tools available in chapter 11 to distribute its assets through a chapter
11 plan.
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Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 5 of 16
Loan Portfolio Summary
Completed Loan Processing to Date
Total Origination Principal Forgiven or Guaranty Percentage Forgiven or
and Loan Count Purchased Loans Guaranty Purchased
PPPLF
Principal $1,623 M $1,011 M 62.3%
Loan Count 97,000 74,000 76.3%
CUBI
Principal $2,585 M $2,342 M 90.6%
Loan Count 99,000 91,000 91.5%
CRB
Principal $3,048 M $2,328 M 76.4%
Loan Count 122,000 99,000 81.1%
KS PPP
Principal $9 M $<1M 5.0%
Loan Count < 1,000 < 1,000 11.7%
Total
Principal $7,266 M $5,682 M 78.2%
Loan Count 319,000 264,000 82.8%
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Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 6 of 16
Key Parties
The Company’s Board of Directors is comprised of four (4) directors, all of which have been appointed after the AmEx
Transaction. Three (3) of the directors are independent. All of the Company’s management were appointed after the AmEx
Transaction.
Company’s Management
Chief Executive Officer, Director Laquisha Milner
Interim Chief Financial Officer David Walker
Vice President of Operations Donna Evans
General Counsel Holly Loiseau
Deputy General Counsel Salim Kafiti
Party Advisors, if known
Company Professionals Weil, Gotshal & Manges, LLP (Proposed Counsel)
Richards, Layton & Finger, P.A. (Proposed Co-Counsel)
AlixPartners LLP (Proposed Financial Advisor)
Federal Reserve Bank Cleary Gottlieb Steen & Hamilton LLP
Customers Bank Holland & Knight LLP
Cross River Bank Quinn Emanuel Urquhart & Sullivan, LLP
U.S. Department of Justice
U.S. Small Business Administration
Federal Trade Commission
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Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 7 of 16
Circumstances Leading to these Chapter 11 Cases
The Company’s plan has always been to wind down its loan portfolios to maturity and resolve all matters out-of-court.
However, given the numerous claims and substantial resources needed to resolve those claims, the Company has
determined that its optimal path to wind down operations and maximize recoveries for all stakeholders is pursuant to a
chapter 11 plan and the commencement of these cases.
Resources Available After AmEx Transaction
Lack of Clarity in SBA Guidance
Government Investigations and Attendant Stakeholder Disputes Have Caused a
Substantial Drain on the Company’s Resources
Additional Issues Causing Liquidity Constraints
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Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 8 of 16
Circumstances Leading to these Chapter 11 Cases (cont’d.)
Resources Available After AmEx Transaction
In October 2020, affiliates of AmEx acquired substantially all of the Company’s assets, including the technology
associated with the Company’s loan servicing platform and historical books and records, for approximately $750 million.
AmEx did not acquire the Company’s remaining PPP Loan portfolio or Legacy Loan portfolio.
Following the AmEx Transaction, the Company was left with $17 million of cash, a transition services agreement with
American Express, and other constrained resources to wind down its business.
The question facing the Company, among others, is whether those resources were enough to wind down the Company
at the time of that transaction in light of what was known at the time or reasonably foreseeable.
The Company’s Board of Directors, with the assistance of the Company’s advisors, has been investigating the AmEx
Transaction.
7
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 9 of 16
Circumstances Leading to these Chapter 11 Cases (cont’d.)
Lack of Clarity in SBA Guidance
In the first two months of the PPP, the government published 14 interim final rules and 48 FAQs, resulting in new SBA
guidelines being issued on nearly a daily basis.
Despite the lack of clarity, the U.S. government urged PPP lenders to process loans rapidly, even on the same day as the
borrower’s application.
The Company heeded the government’s call, and stepped in during a time of true national emergency, to help small
businesses in desperate need of immediate financial assistance.
Like the other PPP lenders, the Company was inclined to extend billions of dollars of unsecured loans to small businesses
in large part because the SBA guidelines required “minimal review” of applications, permitted the lenders to rely on
borrower representations, and, most importantly, because eligible PPP Loans were 100% backed by an SBA guaranty.
8
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 10 of 16
Circumstances Leading to these Chapter 11 Cases (cont’d.)
Government Investigations and Attendant Stakeholder Disputes Have Caused a
Substantial Drain on the Company’s Resources
DOJ Investigations. The U.S. Department of Justice offices in the District of Massachusetts and the Eastern District of
Texas are investigating the Company’s Borrower Diligence practices, alleging that the Company, among other things,
improperly included excess amounts on PPP Loans.
CUBI Receivable Dispute. From April 2020 to May 2021, CUBI funded or originated over $2.5 billion in loans through its
arrangements with the Company, generating tens of millions of dollars in fees payable. While CUBI did pay the Company
servicing fees for Round 1 PPP Loans, it has refused to pay any of the approximately $65 million in fees due for Round 2.
CRB Allegations. In various correspondence, CRB has asserted certain contractual claims against the Company, including
obligations for repurchase, indemnification, remediation, and restitution.
Congressional and FTC Investigation. The United States House of Representatives Select Subcommittee on the
Coronavirus Crisis and the Federal Trade Commission are similarly investigating the Company’s borrower diligence
practices and servicing.
Class Action Lawsuit. On March 20, 2022, certain PPP Loan borrowers filed a class action complaint against the
Company in the United States District Court for the Northern District of Georgia, Atlanta Division alleging that the
Company failed to timely and competently process loan forgiveness applications on behalf of borrowers.
9
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 11 of 16
Circumstances Leading to these Chapter 11 Cases (cont’d.)
Additional Issues Causing Liquidity Constraints
Limited Cash Flow. As a company already in wind down, and restricted from generating any new business by the AmEx
Transaction, the Company has limited and dwindling sources of incoming cash.
However, the Company has made significant progress in discussions with the Federal Reserve regarding the use of
certain PPPLF cash proceeds to help fund the administration of these cases and the servicing of the Company’s loan
portfolio.
CUBI Receivable. The $65 million in servicing fees owed by CUBI are an essential source of cash that the Company must
access to continue servicing its loan portfolio. The Company is still negotiating a potential interim settlement with CUBI,
which it hopes to resolve in the coming days.
Expensive Loan Servicing Platforms. The Company licenses the servicing platform it sold to AmEx in 2020, and must also
supplement that platform with additional services, due to AmEx’s refusal to revamp the legacy platform to meet revised
SBA processes—significantly increasing the technology cost to service its loan portfolios.
Defending Against Investigations and Disputes. The Company has participated in over 100 formal discussions with
dispute counterparties, and has been forced to engage several professional firms to properly defend itself from the
barrage of attacks.
Increased Servicing Costs. The DOJ investigation and the SBA’s refusal to process DOJ-flagged loans created a flood of
data requests and demands for additional reporting from the Company’s Partner Banks. To field and respond to the
overwhelming requests, the Company has had to expand its lean staff, which has dramatically increased operating costs.
10
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 12 of 16
Illustrative Timeline
Funded Transaction
March:
Confirmation
Hearing
TBD:
Federal Reserve
and Partner Early 2026:
Banks Elect Loan Portfolio
Whether to April: and
KS Services Remaining Loans
Transfer Loans Effective Date Corporate
or Fund Wind Down
Servicing Complete
Petition
Date Q4 2022 Q1 2023 Q2 2023 …2024 2025 2026
October: Early
Rejection January:
of Partner Confirmation
Bank Hearing
Servicing End of 2023:
Contracts Corporate
Wind Down
Mid January: Complete
November: Transfer
Transfer Servicing
Servicing Obligations for
Obligations PPPLF Loans by
for Partner Effective Date
Bank Loans
Unfunded Transaction
11
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 13 of 16
Proposed Chapter 11 Toggle Plan
Funded Transaction Unfunded Transaction
• Federal Reserve permits access to certain PPPLF cash
• Federal Reserve permits access to certain PPPLF cash
proceeds
proceeds
Cash Assumptions • CUBI receivable is recovered (with no more than a
• No recovery of the CUBI receivable
[25]% discount to the full receivable)
Illustrative Case
180-day case 100-day case
Duration
• Servicing Election: By [•], 2022, the Federal Reserve • Rejection of Partner Bank Contracts: Shortly after the
and Partner Banks shall each elect to either (i) fund petition date, the Company will file a motion seeking
the Wind Down Estate with $[•], which shall be used rejection of the CUBI and CRB servicing agreements.
for the continued servicing of the their respective
loans through a date mutually agreed, or (ii) take all • Servicing of PPPLF Loans: Company continues to service all
steps necessary to transfer all of the Company’s PPPLF Loans until emergence from chapter 11, at which
servicing obligations with respect to their loans to a time the Company will transfer all PPPLF loans to the Fed.
third-party loan servicer.
• Cooperation: The Company will use commercially
• Loan Servicing: Company continues to service all loans reasonable efforts to assist in transferring loans to an
Implementation until the earlier of a date certain and the date on alternate servicer. For the avoidance of doubt, the
which the Federal Reserve, CUBI, or CRB elect to Company will not be responsible for any costs associated
transfer their respective loans to an alternate servicer. with transferring the servicing obligations.
• Cooperation: The Company will use commercially
reasonable efforts to assist in transferring loans to an
alternate servicer. For the avoidance of doubt, the
Company will not be responsible for any costs
associated with transferring the servicing obligations.
12
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 14 of 16
Proposed Chapter 11 Toggle Plan (cont’d.)
Funded Transaction Unfunded Transaction
• Reserve Bank Claims:
• Reserve Bank Secured Claims: any secured claims held by the Reserve Bank arising and payable under and in
accordance with the PPPLF documents on account of PPPLF Advances and any interest, costs, and fees thereunder
Claims to be • Reserve Bank Priority Claims: deficiency claims on account of the PPPLF Advances entitled in right of priority under
Restructured section 507(a)(2) of the Bankruptcy Code.
• General Unsecured Claims: Any claim against the Debtors (other than Intercompany Claims) as of the petition date that
is neither secured by collateral nor entitled to priority under the Bankruptcy Code or any final order by the Bankruptcy
court.
• Reserve Bank Secured Claims: • Reserve Bank Secured Claims: Return of the PPPLF
• If Post-Effective Date Servicing : Cash proceeds of collateral
the PPPLF collateral
• If Transfer Servicing: Return of the PPPLF
collateral
• Reserve Bank Priority Claims: Recover from the GUC • Reserve Bank Priority Claims: Recover from the GUC Trust
Pool assets; entitled to recovery of full claim before assets; entitled to recovery of full claim before any General
any General Unsecured Claims recover from the GUC Unsecured Claims recover from the GUC Trust
Pool
Treatment of
• General Unsecured Claims: Each holder will receive its • General Unsecured Claims: Each holder will receive its pro
Restructured Claims
pro rata share of the GUC Pool, after distributions are rata share of the GUC Trust, after distributions are made on
made on account of Reserve Bank Priority Claims from account of Reserve Bank Priority Claims from the GUC Trust
the GUC Pool
• GUC Trust: On the effective date, the Debtors will transfer
• GUC Pool: Amount equal to any remaining net cash all estate causes of action to the GUC Trust
proceeds, provided that at the conclusion of the wind
down, any residual amounts remaining in the Wind
Down Budget shall be transferred to the GUC Pool,
except for any such amounts reserved for post-
effective date servicing costs
13
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 15 of 16
Proposed Chapter 11 Toggle Plan (cont’d.)
Funded Transaction Unfunded Transaction
• Administrative, Priority Tax, and Priority Non-Tax Claims: Paid in-full.
• Fee Claims: Paid in-full.
• Other Secured Claims: Payment in full in cash, or such other recovery necessary to satisfy section 1129 of the Bankruptcy
Code.
• Intercompany Claims: Each claim will either be reinstated or cancelled and released at the option of the Debtors,
Treatment of Other provided, that no distributions shall be made on account of Intercompany Claims on the effective date.
Claims • Intercompany Interests: Shall receive no recovery or distributions and be reinstated solely to maintain the Debtors’
corporate structure.
• Subordinated Securities Claims: Shall not receive or retain any property under the Plan. On the effective date, all claims
shall be deemed cancelled.
• KServicing Equity Interests: On the effective date, all claims shall be deemed cancelled.
The Wind Down Estate shall: The Wind Down Estate shall process the wind down, dissolve
• continue performing any remaining servicing and liquidate the estates, and make any distributions not
obligations; or otherwise distributed on the effective date.
• transfer its servicing obligations with respect to the
Fed, CRB, and CUBI loans to a third-party servicer. On the plan effective date:
• remaining assets of the Debtors’ estates shall transfer to
Wind Down Estate The Wind Down Estate shall have a budget for: the wind down estate; and
• the wind down process; and • any remaining estate causes of action shall transfer to the
• any continued servicing of loans. GUC Trust automatically.
At the conclusion of the wind down, any residual
amounts remaining shall be distributed to the Federal
Reserve, CUBI, and CRB, as applicable.
14
Case 22-10951-CTG Doc 64-1 Filed 10/06/22 Page 16 of 16
Path Forward
1 Continue servicing loan portfolio in the ordinary course
2 Finalize agreement with Federal Reserve to use certain PPPLF cash proceeds
3 Collect the CUBI receivable
4 Advocate for the SBA to honor its PPP loan purchase guaranty in-full
Confirm chapter 11 Plan and prepare for emergence in coordination with
5
stakeholders
6 Service the loans to maturity or otherwise transfer servicing obligations
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