Kabbage Letter Rulingv2 — In re Kabbage, Inc. d/b/a KServicing, et al.

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
CRAIG T. GOLDBLATT
JUDGE

824 N. MARKET STREET
WILMINGTON, DELAWARE
(302) 252-3832
March 15, 2023
VIA CM/ECF
Re:
In re Kabbage Inc., No. 22-10951
Dear Counsel:
The debtors in these bankruptcy cases operated an online loan servicing
business.  The debtors sold most of their assets to American Express in October 2020.
In these bankruptcy cases, they have largely sought to wind down their remaining
assets, the largest portion of which were loans issued to small businesses under the
Paycheck Protection Program.
This Court held a confirmation hearing on March 13, 2023.  On account of the
parties’ very good work, all of the objections to confirmation filed by creditors were
resolved prior to the hearing.  The U.S. Trustee, however, objected to confirmation on
the ground that the plan improperly granted a discharge to a liquidating debtor in
violation of 11 U.S.C. § 1141(d)(3).  Following a bench ruling by this Court, the debtors
agreed to modify the plan so that it provides for a temporary injunction that only
remains in place so long as the post-confirmation entities hold assets.  Once it is clear
that those entities are empty shells, the temporary injunction will terminate.  Such
a temporary injunction does not violate § 1141(d)(3).  The parties submitted a form of
plan and confirmation order that conformed to this ruling.  The Court has entered
that order.1  This letter ruling is intended to supplement the reasoning set forth in
the Court’s bench ruling.
While the plan provides for the liquidation of the debtors, it does not create a
separate post-confirmation liquidating trust that would be eligible to take free and
clear title to the debtors’ assets under § 1141(c).  Instead, those assets remain with

1 D.I. 680 (the “Confirmation Order”).
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the legal entities that consisted of the prepetition debtors, which are referred to after
the effective date of the plan as the Wind Down Estates.  Those entities are directed
by the Wind Down Officer.
Because the legal entities that made up the prepetition debtors will not end up
as corporate shells upon the effective date but will instead hold assets that are
intended to be distributed to creditors under the plan, the parties had good reason to
protect the debtors and the Wind Down Estates from the holders of prepetition claims
who might seek to defeat the operation of the plan by taking action against the post-
bankruptcy entities on account of their prepetition claims.
As originally drafted, § 10.3(b) of the plan sought to guard against that risk by
providing that “all Entities who have held, hold, or may hold Claims against or
Interests in the Debtors … are permanently enjoined, on and after the Effective date”
from, among other things, “commencing, conducting, or continuing … any suit … of
any kind … against or affecting the Debtors, the Wind Down Estates, or the Wind
Down Officer, as applicable.”2  The difficulty with this language, however, is that (as
§ 10.3(f) acknowledged) the debtors are liquidating and thus ineligible for a discharge
under § 1141(d)(3).  Accordingly, the plan states that nothing therein shall “grant the
Debtors a discharge pursuant to section 1141(d) of the Bankruptcy Code.”3
The U.S. Trustee objected to confirmation, correctly pointing out that the
language of the plan injunction was materially identical to the language of § 524(a)’s
discharge injunction and was thus the functional equivalent of the discharge to which
the debtors were not entitled.4  In response, the debtors acknowledged that they are
ineligible for a discharge under § 1141(d) but argued that the provisions of their plan,
operate as an injunction rather than a discharge.  As such, the debtors argued
(pointing to a handful of bench rulings in prior cases), the injunction was appropriate
even if it amounted to a “de facto” discharge.5
This Court has serious concerns about the propriety of granting relief that is
the functional equivalent of a discharge to a debtor that is ineligible for a discharge
on the ground that the parties affixed a different label to it.  The heart of the equitable
authority of bankruptcy courts, Justice Douglas taught in Pepper v. Litton, is “that

2 D.I. 627 § 10.3(b).
3 Id. § 10.3(f).
4 D.I. 590.
5 D.I. 637 at 74-77.
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substance will not give way to form.”6  Otherwise put, bankruptcy law will treat as a
duck that which quacks like a duck.
More fundamentally, though, this was a problem to which there was a ready
solution that would avoid doing any violence to bankruptcy principles.  Collier’s
explains that the reason § 1141(d)(3) prohibits a liquidating debtor from receiving a
discharge is that corporate debtors in chapter 7 do not receive a discharge, and §
1141(d)(3) prevents “debtors from avoiding the operation of section 727(a)(1) through
the use of a liquidating plan under chapter 11 instead of a chapter 7 liquidation.”7
And the “policy behind [§ 727(a)(1)] is the prevention of trafficking in corporate
shells…. A corporation may obtain relief from its debts through dissolution.  But it
does not need relief if it no longer has any assets.”8
The debtors here, of course, do not need injunctive protection once they no
longer have any assets.  Their only concern was preventing creditors from acting
against the post-effective date entities while they do have assets.  The debtors have
no interest in “trafficking in corporate shells.”  Once the entities have distributed
their assets in accordance with the plan, and are reduced to corporate shells, there is
no longer any need to protect them.
The readily available solution, therefore, is to afford those entities not
permanent injunctive relief, but rather temporary injunctive relief that will remain
in effect only as long as those entities hold assets.  Counsel for the U.S. Trustee agreed
(appropriately) that if the injunctive relief enjoyed by the debtors and the Wind Down
Estates is temporary rather than permanent, it is not the functional equivalent of a
discharge, and the granting of such relief would not run afoul of § 1141(d)(3) or the
purposes it serves.
The plan has thus been revised to so provide that the relief afforded to the
debtors and the Wind Down Estates is temporary rather than permanent.  The Court
is satisfied that this is precisely the type of interstitial, gap-filling authority that
§ 105(a) was intended to authorize.  To be sure, the Supreme Court made clear in
Law v. Siegel that § 105(a) did not grant bankruptcy courts the authority to grant
relief that directly contradicted the express text of the Bankruptcy Code.9  And the

6 Pepper v. Litton, 308 U.S. 295, 305 (1939).
7 8 Collier on Bankruptcy ¶ 1141.05[4] (16th ed. 2022).
8 6 Collier on Bankruptcy ¶ 727.01[3] (16th ed. 2022).
9 Law v. Siegel, 571 U.S. 415, 421 (2014) (“[A] bankruptcy court may not contravene specific statutory
provisions.  It is hornbook law that § 105(a) does not allow the bankruptcy court to override explicit
mandates of other sections of the Bankruptcy Code.  Section 105(a) confers authority to carry out the
provisions of the Code, but it is quite impossible to do that by taking action that the Code prohibits.”)
(internal citations omitted).
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import of Jevic is that bankruptcy courts’ equitable discretion is limited not only by
what the Bankruptcy Code says expressly, but also by reasonable inferences that one
might draw about Congress’ intent from the Bankruptcy Code’s language,  structure
and principles.10  But there is neither an express nor implicit prohibition on imposing
a temporary injunction against actions by creditors that would undermine the
operation of the plan.  Because the injunction will expire once the debtors’ entities
are corporate shells, this injunction is not inconsistent in any way with the
underlying purposes of §§ 1141(d)(3) or 727(a).  The Court is thus satisfied that the
revised injunction provided in § 10.3 of the plan operates to “carry out” the provisions
of the Bankruptcy Code and is thus a proper exercise of the authority provided in 11
U.S.C. § 105(a).  The Court has thus entered the Confirmation Order as revised.
Sincerely,

Craig T. Goldblatt
United States Bankruptcy Judge

10 Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 464-469 (2017).
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