Full text
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
)
In re
) Chapter 11
)
KABBAGE, INC. d/b/a KSERVICING et
al.,1
)
)
Case No. 22-10951 (CTG)
Debtors.
)
)
)
)
(Jointly Administered)
Hearing Date: March 20, 2023 at 10:00 a.m.
DEBTORS’ REPLY IN FURTHER SUPPORT OF MOTION OF DEBTORS FOR
ENTRY OF AN ORDER ENFORCING THE SETTLEMENT ORDER AND THE
SETTLEMENT AGREEMENT BETWEEN KSERVICING AND CUSTOMERS BANK
Kabbage, Inc. d/b/a KServicing (“KServicing”) and its debtor affiliates, as debtors
and debtors in possession in the above-captioned chapter 11 cases (collectively, the “Debtors”),
hereby submit this Reply (the “Reply”) in response to opposition [Docket No. 356] (the
“Opposition”) filed by Customers Bank (“CB”) to the Motion of Debtors for Entry of an Order
Enforcing the Settlement Order and the Settlement Agreement Between KServicing and Customers
Bank, (Dec. 7, 2022) [Docket No. 340] (the “Motion”).2 Contemporaneously herewith, the
Debtors submit the declarations of Donna R. Evans (the “Evans Reply Declaration”) and Tamica
M. Williams (the “Williams Reply Declaration”) and respectfully state as follows in support of
the Reply:
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). 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.
2 Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Motion.
KServicing adopts and incorporates by reference the arguments in the Motion in their entirety, as if fully set forth
herein.
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 1 of 13
2
PRELIMINARY STATEMENT
1.
Since the Motion was adjourned, CB and the Debtors have met and conferred on
the Settlement Payment issues and have narrowed the dispute to one issue. The remaining issue is
the appropriate calculation of “Disputed KServicing Remittances Holdbacks,” and, in particular,
the amount of funds collected from borrowers that KServicing would have otherwise been required
to remit to CB. The remaining amount at issue is $1,555,656.
2.
The dispute can be summarized as follows: In the early stages of the reconciliation
process concerning the amount of the Settlement Payment, the Company sent to CB two
spreadsheets on November 4, 2022 that contained, among other things, a preliminary list of loans
where KServicing had collected money from borrowers that still needed to be returned to CB
(“Borrower Remittances”). Borrower Remittances were to be deducted from the $58 million
Settlement Amount because KServicing was holding (and would return to CB as part of the
Settlement) amounts paid by Borrowers that still needed to be paid to CB.
3.
It is clear from the declaration submitted by Alyssa White with CB’s opposition
papers that CB’s calculation of the Settlement Payment took the amount of the Borrower
Remittances straight from the November 4, 2022 spreadsheets. White Decl. ¶ 11(b) (“Customers
Bank accepted those figures and the Reconciliation Summary at Exhibit 1 uses both of those
figures in reaching the lines item ‘Total Borrower Remittance Payments (P&I).’”); White Decl.,
Ex. 1.
4.
It is also now clear that the preliminary list of loans in the November 4, 2022
spreadsheets did not reflect the undisputed fact that KServicing had already paid CB with respect
to five (5) loans on those spreadsheets. As noted above, the amount previously remitted to CB
(and for which CB needs to increase its Settlement Payment) is $1,555,656.
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 2 of 13
3
5.
This dispute is straightforward. The five (5) loans at issue are expressly contained
in the November 4, 2022 spreadsheet that CB used to calculate Borrower Remittances. Yet, it is
now clear that the money received from borrowers with respect to these five (5) loans was already
paid to CB. If the Court were to adopt CB’s Settlement Payment calculation, CB would receive
the $1,555,656 twice: once when it was paid in the usual course of business back in October 2020
and once in connection with the Settlement Payment.
6.
CB has no real answer to this issue. CB seems to suggest that the prior payment of
the money owed to CB on these five (5) loans can somehow be ignored because it came from a
Wells Fargo bank account and not a Synovus bank account and took place in October 2020, before
what CB claims is the relevant time period. This assertion is at best perplexing. Regardless of the
bank account from which the payments were made, there is no dispute that these payments were
made to CB on account of these five (5) loans that were on the list that CB admittedly used to
determine Borrower Remittances.
7.
Second, it makes sense that any payments on these loans would have come from a
Wells Fargo bank account given the time the money was paid to CB. The Wells Fargo account
was the predecessor to the Synovus account and prior to the AmEx transaction it was the account
through which payments were made to CB.
8.
Because CB cannot dispute that the loan-by-loan list it admittedly used to determine
Borrower Remittances inaccurately reflected five (5) loans for which payments received from
borrowers had already been made to CB, CB contends that it conducted some type of “trial
balance” analysis that it says confirmed its Settlement Payment amount. This “trial balance”
analysis, discussed in the Declaration of Alyssa White, is not a loan-by-loan analysis and does not
(and cannot) refute the fact that five (5) of the loans on the spreadsheet used by CB to calculate
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 3 of 13
4
Borrower Remittances should not have been on that list because money collected on those loans
had already been paid to CB. In any event, even if the analysis were somehow relevant here, the
trial balance analysis provides no backup or support whatsoever and appears to be based on
information received from AmEx that the parties have repeatedly recognized is flawed and needs
to be reconciled to the Company’s books and records. Evans Reply Decl. ¶¶ 3-4, 6-7. Lastly, the
Debtors have repeatedly asked for the underlying backup to the trial balance analysis and have
only been provided with a single page document that simply purports to set out the calculation. As
such, the Debtors have been unable to duplicate the analysis or even analyze or otherwise review
any of the backup used. Under these circumstances any evidence with respect to this trial balance
analysis should be precluded.
9.
Another argument made by CB with respect to the Settlement Payment is that the
reconciliation process was supposed to end on November 9 and therefore it could pay any amount
without regard to whether that number is correct. But as set forth in the opening brief in support
of the Motion, the Settlement Payment is defined as the correct amount of the payment, not some
inaccurate amount when the reconciliation period purportedly ended. From the outset of the
Reconciliation Process, KServicing’s goal has been to reach the correct Settlement Payment
amount. Even after the Motion was filed, the Company has worked to arrive at the correct number
and has now narrowed the issue to be decided by the Court to calculation of Borrower Remittances.
It is unfortunate that CB refused to work with the Company before the Motion was filed, but it is
time for CB to pay the correct Settlement Payment.
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 4 of 13
5
ARGUMENT
I.
KServicing Already Paid CB Over $1.55 million in Borrower Remittances
10.
As noted above, the sole issue remaining in the Motion relates to the amount of
Borrower Remittances and its impact on the Settlement Payment. The calculation of the Settlement
Payment by each of CB and KServicing is set out in the chart attached as Exhibit D to the Williams
Reply Declaration and copied below, with blue highlight indicating the only calculations that differ
as between the two analyses:
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 5 of 13
6
11.
As the chart above reflects, the only difference to be decided by the Court is the
correct amount of Borrower Remittances. CB’s calculation lists the Borrower Principal Payment
of $25,578,633 and the interest of $1,030,328—which add up to $26,608,962. The Declaration of
Alyssa White confirms that CB obtained the Borrower Remittance amounts in its Settlement
Payment calculation from KServicing’s spreadsheet. Ms. White states:
During the reconciliation process, Donna Evans of KServicing sent
me (and others) an email on November 4, 2022 at 7:38 p.m. stating:
“Synovus accounts analysis: KServicing has performed an analysis
of the activity in the Synovus account from inception to October 3,
2022, reconciling the activity in that account to our remittances files.
See attached files for reference.” This email and the attached
Synovus bank statements are attached hereto as Exhibit 3. The first
entry in these Synovus bank statements is in November 2020.
Included with that email was an excel spreadsheet called “Synovus
account analysis,” which is attached hereto as Exhibit 3(a). That
analysis shows net borrower payments of $27,106,862, and breaks
it down into borrower repayments per remittances file ($26,608,962)
and remaining variance to be resolved ($497,900). Customers Bank
accepted those figures and the Reconciliation Summary at Exhibit 1
uses both of those figures in reaching the line item “Total Borrower
Remittance Payments (P&I).” White Decl. ¶ 11(b).
Thus, Ms. White admits that the Borrower Remittance total came directly from the files sent to
CB on November 4, 2022.
12.
The CB Remittance File3 sent to CB on November 4, 2022 expressly includes five
(5) loans for which prior payment to CB was not accounted. Excerpts from the CB Remittance
File, attached as Exhibit B to the Williams Reply Declaration, incorrectly reflected that KServicing
owed CB a total $1,614,611.83 on account of these five loans (although $1,555,656 of that amount
for these same loans was already paid to CB in October 2020, as shown below).
3 As defined in the Williams Reply Declaration, filed contemporaneously herewith. See Williams Reply Decl. ¶ 12.
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 6 of 13
7
13.
CB’s Opposition does not dispute that payment with respect to these five loans was
received. Indeed, the evidence is clear that $1,555,656 of that amount for these same loans was
already paid to CUBI in October 2020. At the time KServicing’s former CFO made that payment
to CB, he attached a spreadsheet entitled “CUBI payment details 10212020.xlsx” (the “CB
Payment Oct. 2020 Spreadsheet”) showing the amounts paid on account of each loan, by loan
number and amount. As set forth in the Williams Reply Declaration, that spreadsheet (described
there as the “payment file”) expressly listed the same five (5) loans at issue in the Motion. The
payment to CB described in that email on account of those loans is also reflected in a Wells Fargo
wire transfer record showing that the precise amount from the CB Payment Oct. 2020 Spreadsheet
was paid to CB. Williams Reply Decl. ¶¶ 15-17.
14.
Thus, in summary:
The Borrower Remittance amounts used by CB in its Settlement Calculation
admittedly came directly from the November 4 spreadsheets sent to CB;
The list of loans in that spreadsheet inaccurately included five (5) loans as
having amounts that had been paid by borrowers to KServicing that needed
to be, in turn, paid to CB;
The borrower payments for these five (5) loans were already paid to CB in
October 2020. The amount of these payments was $1,555,656.
15.
That should end the dispute and CB’s arguments with respect to this issue are
specious at best. First, CB argues that it is entitled to be paid twice on the same loans because the
payment was made from an account other than the current Synovus account used by KServicing
and because the payment was made before KServicing began holding back funds as a result of
CB’s non-payment of fees. See Opp’n ¶¶ 15–16; White Decl. ¶ 21. This argument makes no sense.
It does not matter from which bank account a payment is made, nor when a payment was made.
Rather, the point of the borrower remittance deduction from the Settlement Payment was that if
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 7 of 13
8
there was money being held by the Company that is owed to CB, then that amount was to be
deducted from the $58 million Settlement Amount to yield the Settlement Payment. Here,
borrower payments on five loans were incorrectly listed on the spreadsheet that CB used to
calculate Borrower Remittances, but it is clear that $1,555,656 was already paid to CB—it does
not matter from which bank accounts those payments were made or when they were made.
16.
Second, CB argues that the records reflecting KServicing’s $1,555,656 payment to
CB from KServicing’s former Wells Fargo account was a “secret file.” But as reflected in Exhibit
3 to the Williams Declaration, Kabbage’s then-CFO, Mr. Eidson sent this “secret file” to CB
contemporaneously with payment in October 2020, which showed the payments on the five (5)
loans at issue. That same day, Kabbage wired these funds to CB from its former Wells Fargo
account, which included the $1,555,656 on account of five loans at issue here. Williams Decl., Ex.
4. CB does not deny it received this payment.
17.
In addition, CB is well aware of KServicing’s use of the Wells Fargo account. See
Opp’n ¶¶ 14, 17. As CB knows, prior to the AmEx Transaction, KServicing (then known as
Kabbage) maintained its bank accounts with Wells Fargo—including accounts in which
remittances from CB borrowers were kept—and at that time did not have any accounts with
Synovus bank. See Williams Reply Decl. ¶¶ 19–20. As a result, CB’s alleged befuddlement and
supposed “shock,” as to why KServicing would refer to payments made from its former Wells
Fargo account is pure artifice, an attempt to create confusion where none exists. Simply put, CB
cannot deduct from the Settlement payment funds KServicing already paid to CB; such a
requirement would result in CB being paid the same funds twice, and would unjustly enrich CB
by crediting CB with funds it already has.
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 8 of 13
9
II.
CB’s Trial Balance Analysis Does Not Refute the Loan-By-Loan Remittance
Calculation and Should Be Disregarded in any Event
18.
Although CB and Ms. White make much of the “trial balance” analysis they claim
supports their calculation, see Opp’n ¶¶ 26–27, CB provides no back-up for this analysis and it is
unclear what was used and from where the calculation is derived.
19.
It appears that the trial balances to which CB is referring may have come directly
from AmEx (and not from KServicing). CB knows these AmEx “trial balances” are not accurate
and require further analysis and reconciliation. Indeed, as Ms. Evans explains, since the AmEx
Transaction, these trial balance reports are maintained by AmEx and KServicing has no control
over these reports. These trial balance reports do not include a large number of transactions or
reflect all proper transaction codes needed to render loan-level up-to-date data. Evans Reply Decl.
¶ 6. Both prior to and during this dispute, CB and KServicing have explicitly discussed, on multiple
occasions, whether, given the gaps in these AmEx-generated trial balance exports, the Parties
could implement some fix to make the AmEx trial balance data more reliable, including an
automated update that would layer necessary KServicing data on top of the reports to yield more
accurate information on the total outstanding loan population. See id. ¶¶ 6–7. However, as
KServicing communicated to CB, such an automated update, or “bridge file,” was near impossible
to create and thus has not been implemented. Id.
20.
In obvious recognition of the need to reconcile the AmEx trial balances, the Parties
agreed in the Settlement Agreement that the Company would have to provide a supplemental
report to the AmEx trial balance data. Exhibit A to the Settlement Agreement lists “Daily Trial
Balance Reports” and states that these “Daily Trial Balance Reports will continue to be generated
automatically each business day from the CoreCredit system of record maintained by American
Express in the format such reports are current[ly] prepared. A supplemental report will be provided
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 9 of 13
10
each business day for the entire originated portfolio that provides the bank total balance reflecting
all payment types (i.e., remittance, guaranty, forgiveness, return, fraud recovery, etc.). KServicing
will perform reconciliation and implement appropriate controls to ensure data sets are
harmonized.” Settlement Agreement, Ex. A, ¶ 2 (emphasis added). Thus, CB knew, and the
Settlement Agreement reflected, that the AmEx-generated trial balance reports are not complete,
and require reconciliation. Evans Reply Decl. ¶¶ 4, 8. Yet, it now appears that CB is using this
“trial balance” as a (poor) substitute for a loan-by-loan analysis. Thus, CB’s assertions that the
trial balances are the “gold standard” for reconciling financial data are belied by the undisputed
facts as confirmed by the Settlement Agreement itself.
21.
In her declaration, Ms. White contends that CB was “able to reconcile” its
Settlement Payment calculation with the “trial balances” (which CB knows have limitations)
within “about” $1,380. White Decl. ¶ 23. Ms. White’s declaration, however, attaches no data or
documentation in support of this assertion, nor has CB ever provided a loan-level justification for
its Settlement Payment calculation generally, nor its purported comparison of the same to the “trial
balance.” It appears that CB now seeks to avoid a “loan-by-loan” analysis in favor of some general
check because it knows the loan-by-loan analysis reflects that actual payment on the five loans at
issue was made to CB over 2 years ago.
22.
On multiple occasions, the Debtors have asked CB to provide data, documentation,
backup or other information that supports CB’s calculation of its Settlement Payment amount or
could aid in KServicing’s understanding of what CB describes as the reconciling of that amount
with the “trial balance.” In response, CB has repeatedly refused to provide specific backup or
information, other than a one-page demonstrative (with no source data), to authenticate how CB
arrived at its purported “reconciliation” of the “trial balance” with its Settlement Payment amount.
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 10 of 13
11
As a result, CB should be precluded at the hearing on the Motion from introducing the trial balance
analysis and any documents, data, or proffering any testimony based upon information or data that
has not been provided to KServicing concerning its purported reconciliation of its Settlement
Payment amount with the “trial balances” as referred to in the White Declaration.
III.
The Correct Settlement Payment Number Was Not Subject To Any
“Reconciliation” Deadline
23.
CB spends nearly five pages of its Opposition arguing that the clock ran out on
needing to calculate the correct Settlement Payment amount (Opp’n ¶¶ 6–13). But, there is nothing
in the Settlement Agreement that allows CB to pay less than the actual amount owed. As set forth
in the Motion, the Settlement defines the Settlement Payment as “an amount equal to the
Settlement Amount [of $58,000,000] less the amount of the Disputed KServicing Holdbacks as of
the Petition Date.” Settlement Agreement, §§ 1(G), 1(H). This requires the payment of the right
amount, and nothing limits that payment based on the reconciliation process engaged in by the
parties.
24.
The Reconciliation provision provides that “through the Effective Date, the Parties
shall work together in good faith to promptly reconcile the amounts of the Disputed KServicing
Fee Holdback and the Disputed KServicing Remittance Holdback as of the Petition Date to
determine the appropriate amount of the Settlement Payment.” Settlement Agreement, § 3(A). This
provision simply provides a mandatory period for the Parties to act in good faith to agree on the
right number and avoid disputes—not that they must cease all reconciliation as of that period.
More significantly, the Reconciliation provision does not state that if the Parties have not
reconciled the amount of the Settlement Payment by the Effective Date, CB could simply pay
whatever it wished. Yet, that is precisely what CB did.
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 11 of 13
12
25.
While CB states that KServicing’s Motion “tepidly alludes to some post-
reconciliation communications by both parties,” as supposed support for its deadline argument,
CB fails to mention (and does not deny) that these communications included CB General
Counsel’s representation to KServicing on November 9th (the Effective Date) that the parties
would continue their joint reconciliation efforts over the following weekend, given CB had until
November 14th to remit the Settlement Payment to KServicing. See Opp’n ¶ 7; Evans Decl. ¶ 18.
Moreover, the fact that even after the Effective Date CB paid KServicing an additional
approximately $1 million on November 15th as part of the Settlement Payment, demonstrates that
the clock did not “stop” as CB contends. See Evans Decl., Ex. 7.
CONCLUSION
WHEREFORE, the Debtors respectfully request that the Court enter the Proposed Order
attached as Exhibit A to the Motion, modified to account for the remaining $1,555,656 sought
herein, granting the relief requested in the Debtor’s Motion and such other and further relief as
may be just and proper.
[Remainder of page intentionally left blank]
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 12 of 13
Dated: March 13, 2023
Wilmington, Delaware
/s/ Matthew P. Milana
RICHARDS, LAYTON & FINGER, P.A.
Daniel J. DeFranceschi (No. 2732)
Amanda R. Steele (No. 5530)
Zachary I. Shapiro (No. 5103)
Matthew P. Milana (No. 6681)
One Rodney Square
920 North King Street
Wilmington, Delaware 19801
Telephone: (302) 651-7700
E-mail: defranceschi@rlf.com
steele@rlf.com
shapiro@rlf.com
milana@rlf.com
-and-
WEIL, GOTSHAL & MANGES LLP
Ray C. Schrock (admitted pro hac vice)
Candace M. Arthur (admitted pro hac vice)
Natasha S. Hwangpo (admitted pro hac vice)
Theodore E. Tsekerides (admitted pro hac vice)
Richard W. Slack (admitted pro hac vice)
Chase A. Bentley (admitted pro hac vice)
767 Fifth Avenue
New York, New York 10153
Telephone:
(212) 310-8000
E-mail:
ray.schrock@weil.com
candace.arthur@weil.com
natasha.hwangpo@weil.com
theodore.tsekerides@weil.com
richard.slack@weil.com
chase.bentley@weil.com
Attorneys for Debtors and Debtors in Possession
Case 22-10951-CTG Doc 670 Filed 03/13/23 Page 13 of 13