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UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
IN RE:
. Chapter 11
.
KABBAGE, INC. d/b/a
. Case No. 22-10951 (CTG)
KSERVICING, et al.,
.
. (Jointly Administered)
.
.
. Courtroom No. 7
. 824 North King Street
Debtors.
. Wilmington, Delaware 19801
.
. Wednesday, March 22, 2023
. . . . . . . . . . . . . . . 2:00 p.m.
TRANSCRIPT OF BENCH RULING HEARING
BEFORE THE HONORABLE CRAIG T. GOLDBLATT
UNITED STATES BANKRUPTCY JUDGE
APPEARANCES:
For the Debtors:
Daniel J. DeFranceschi, Esquire
Amanda R. Steele, Esquire
Zachary I. Shapiro, Esquire
Matthew P. Milana, Esquire
RICHARDS, LAYTON & FINGER, P.A.
One Rodney Square
920 North King Street
Wilmington, Delaware 19801
Audio Operator: Donna Capell
Transcription Company: Reliable
The Nemours Building
1007 N. Orange Street, Suite 110
Wilmington, Delaware 19801
Telephone: (302)654-8080
Email: gmatthews@reliable-co.com
Proceedings recorded by electronic sound recording,
transcript produced by transcription service.
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INDEX
BENCH RULING:
PAGE
Agenda
Item 1: Motion of Debtors for Entry of an Order
3
Enforcing the Settlement Order and the
Settlement Agreement Between KServicing
and Customers Bank
[Docket No. 340; Filed December 7, 2022]
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(Proceedings commenced at 2:00 p.m.)
THE COURT: Good afternoon. This is Judge
Goldblatt. We’re on the record in In Re Kabbage, Inc., which
is Case No. 22-10951.
We are here for the purpose of my announcing a
decision in the matter that was heard in the evidentiary
hearing on Monday. So, thanks to all for gathering. Here it
goes:
We are here on the debtors’ motion to enforce a
settlement agreement reached at the early stages of this
bankruptcy case with Customers Bank and approved by this
Court. The debtor contends that Customers Bank’s settlement
payments, which totaled approximately $20.5 million, was
$1,555,656 less then Customers Bank was required to pay under
the terms of the settlement agreement.
The Court conducted an evidentiary hearing on this
motion on March 20th, 2023. The Court heard the testimony of
three witnesses: Tameka Williams and Donna Evans from the
debtor KServicing, and Alyssa White from Customers Bank. The
Court also admitted into evidence a number of exhibits which
the Court has reviewed.
At the outset, I want to say that I fully
understand why this is a dispute that the parties needed to
bring to the Court for a judicial resolution. I found all of
the witnesses to be entirely credible. This is a
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circumstance in which both sides have genuine reason to
believe in their positions. I view this as a close case.
To start with the punchline, my review of the
evidence leads me to conclude that the debtor has carried its
burden of showing, by a preponderance of the evidence, that
it is entitled to the additional $1.56 million that it seeks.
While there is certainly some evidence pointing in the other
directions, for the reasons I will explain, my factual
finding is that the debtor has carried its burden even if
only narrowly.
A few procedural niceties. This dispute is within
the Court’s subject matter jurisdiction under 28 U.S.C.
Section 1334(b) as a dispute over a post-petition agreement
that had been agreed by the Court. It is a core matter under
Section 157(b) such that this Court may enter final judgment.
As a technical matter this action seeks money
damages so case can be made that such a money judgment may
only be issued in connection with an adversary proceeding
under Bankruptcy Rule 7001, but even if that is the case
those procedural protections are certainly waivable and it is
common practice to seek to enforce a settlement agreement
that is approved by the Court through motions practice.
Here, no party has taken issue with proceeding by
way of motion and the Court is entirely comfortable resolving
the dispute in the posture in which it has been presented by
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the parties. Accordingly, pursuant to Bankruptcy Rule 7052
and 9014, I am now setting forth my findings of fact and
conclusions of law.
The settlement agreement, itself, was admitted
into evidence. That agreement, of course, is attached to the
Court’s order authorizing the debtor to enter into the
agreement which is docketed at D.I. 232. By way of context,
the debtor, KServicing, was a servicer of loans issued under
the payment protection program. Customers Bank owned some
number of those PPP loans. Under prepetition agreements
KServicing was entitled to a fee for servicing those loans
and was, otherwise, required to remit to Customers Bank the
amount it collected on those loans.
Disputes arose between the parties which led
KServicing to stop remitting payments to Customers Bank and
to file a lawsuit in the District Court for the Northern
District of Georgia. Those disputes were settled in
connection with the settlement agreement at issue here.
Paragraph 8 of the agreement provides that within
three business days of the effective date Customers Bank
shall pay to KServicing an amount equal to the settlement
payment. The effective date is defined as the date on which
the Court enters the order approving the agreement which was
November 9th, 2022.
The settlement payment is defined as the
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settlement amount which is separately defined as $58 million
less the amount of the disputed KServicing holdbacks as of
the petition date. Disputed KServicing holdbacks is also a
defined term and means collectively the disputed KServicing
fee holdback and the disputed KServicing remittance holdback.
Both of those items were originally contested
between the parties, but over the course of the litigation
the dispute narrowed so that by the time we reached the
evidentiary hearing the only area of disagreement was the
amount of the KServicing remittance holdback. That term is,
of course, also defined in the agreement. As relevant here,
it means the amount collected from borrowers that KServicing
is required to remit to Customers Bank under the terms of the
parties prepetition agreements.
Now the settlement agreement also set out a
mechanism by which the parties would endeavor to reconcile
how much needed to be paid. Paragraph 3 of the agreement
provided that the parties would work together in good faith
between the execution date and the effective date which was
the date on which the Court entered the order approving the
settlement to determine what the amount of the holdback would
be.
Before getting into the specifics of how the
parties endeavor to reconcile the amount of the KServicing
remittance holdback it bears mention that the record made
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clear that throughout the parties relationship there were
regular and recurring issues with respect to the accuracy and
the integrity of the data. Over the nearly 100,000 PPP loans
that KServicing serviced for Customers Bank, the record
suggests that many thousands of these loans were subject to
discrepancies in the accounting data and that in the ordinary
course of business the parties met regularly in an effort to
reconcile those discrepancies.
For the purpose of this dispute, the point of that
finding is not to criticize either party. It is simply a
recognition of the fact that both parties and now this Court
were left to do the best they could do with information that
everyone appreciated was imperfect.
I will also add that, perhaps related to the prior
point, the parties had a variety of other disputes that
cropped along the way including disputes about canceled loans
and the payment of interest. During the evidentiary hearing
the parties spent a fair amount of time pointing out the
issues on which it turned out that one side was right and the
other was wrong perhaps with the intent of persuading this
Court that the fact that a party made a mistake about some
different issue meant either that they were a bad actor or
that it was likely that they also made a mistake about this
issue.
To be clear, I am drawing no such inference. I am
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satisfied that both parties were acting in good faith. Yes,
there were mistakes. That is a function of the fact that
capable, but imperfect humans were working with even more
imperfect data. There is nothing at all surprising or
remarkable that various other mistakes were made and it is to
the parties credit that when they realized there was mistake
they corrected it and/or dropped the issue.
I am not, otherwise, addressing the facts relating
to those “other” since resolved disputes which I consider
irrelevant to the remaining dispute that is now before me.
The evidence shows that on November 4th, 2022
KServicing sent Customers Bank a spreadsheet, referred to as
the Synovus repayment file, which was a listing of
transactions relating to individual PPP loans identifying
amounts paid to KServicing that KServicing was required to
remit to Customers Bank. It appears that this file was
derived from information related to KServicing’s account at
Synovus Bank. That account was opened in November 2020 after
the sale of the debtors’ principal assets to American Express
at close.
The evidence further shows that Customers Bank
used this information in determining the amount of the
disputed KServicing remittance holdback and made its
settlement payment based on that information. Just to be
clear about this, the inclusion of an amount within the
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KServicing remittance holdback operated to reduce the amount
that Customers Bank paid to KServicing. That makes sense
because these were amounts that KServicing owed to Customers
Bank, but in substance including an amount within this
remittance holdback and reducing the settlement payment by
that amount was a mechanism by which Customers Bank,
effectively, paid itself amounts that were due to it from
KServicing.
It bears note that the evidence also shows that
Customers Bank was comfortable that this amount was correct
because the amount it generated turned out to be within about
$1,500 of the amount in its trial loan balance analysis which
was Customers Bank’s own accounting of the amounts
outstanding on the various loans.
Thereafter, however, KServicing determined that
five of the loans included in the remittance file as loans
for which KServicing had collected funds from borrowers, but
had not yet remitted to Customers were improperly included in
the file. The reason that their inclusion was incorrect was
that KServicing demonstrated that in 2020 it had, in fact,
made payments to customers in the amount of the disputed
$1.56 million on account of those loans.
Those payments were made not out of the Synovus
Bank account, which the debtor opened after the closing of
the American Express transaction, but out of a prior account
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at Wells Fargo Bank that presumably was transferred to
American Express as part of the transaction. The evidence
that these loans were included in the disputed KServicing
remittance holdback and that the same loans had been paid in
2020 is clear and specific.
The circumstances were articulated with fair
precision in Paragraphs 9 to 18 of Ms. Williams declaration,
that is at D.I. 671, which was admitted into evidence and was
not materially disputed. The net result of that is that in
substance KServicing has paid that $1.56 million to Customers
Bank twice; first in October 2020 when those amounts were
paid, and again in November 2022 when those amounts were
deducted from the settlement payment.
Customers Bank makes, essentially, three responses
to this showing; one is legal, the second is factual, and the
third is one that I will describe as equitable. I will
describe each of these three responses.
While I find that the legal argument fails as a
matter of ordinary contract principals, the factual and
equitable arguments have some real force. But at the end of
the day neither can quite overcome the clear and simple
factual showing that the debtor has made.
The legal argument that Customers Bank makes is
that Paragraph 3 of the settlement agreement says that the
parties had worked together in good faith from the time the
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agreement was executed until it became effective when
approved by this Court to reconcile the amount of the
holdbacks and to determine the amount of the settlement
payment which was due three days thereafter. Customers
position is that it was entitled to and did, in fact, rely on
the information that KServicing provided to it and that
Paragraph 3 operates to estop KServicing from coming in after
the effective date with new data showing that the amount paid
was incorrect.
I do not think that that is correct as a matter of
contractual construction. That is not to say a contract
cannot be written to operate that way. Parties will
sometimes do that, but when that is what a party intends one
would expect it to be reflected in clear contractual language
that so specifies. But a provision that says that the
parties will work hard to share information and try to get it
right by date X should not be read to mean that if it turns
out that there was just a mistake the party is barred from
recovering the amount to which it is, in fact, entitled under
the terms of the agreement.
Paragraph 20 of the settlement agreement provides
that it is governed by Pennsylvania law, and Pennsylvania
case law strongly supports this reading of the contract.
Acme Markets v. Federal Armored Express, Inc., 648 A.2d 1218,
Superior Court of Pennsylvania (1994), is a good example.
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The case notes that Pennsylvania law generally enforces
contracts according to their language. It adds, however,
that: “Pennsylvania law abhors forfeitures and penalties,
and enforces them with the greatest reluctance;” Id. at 1221.
The point is that while it is possible to
construct an enforceable contract that sets up a procedural
rule that if a party fails to comply will bar the party from
recovering an amount to which they are, in fact, entitled
such an outcome is a disfavored one. If the parties want to
establish such a mechanism they certainly need to be express
about it. And there is nothing in Paragraph 3 of this
settlement agreement to suggest it should be so construed.
The second argument that Customers Bank makes is a
factual argument. It contends that it was comfortable with
the settlement amount it paid because it turned out to be
within $1,500 or so of its trial balance analysis that it
kept across the entire portfolio for PPP loans that were
serviced by KServicing.
Alyssa White testified about the trial balance
analysis in some detail. She explained that this analysis
was the basis for Customers own financial reporting and that
she believed that it accurately stated the amounts due on the
portfolio PPP loans. In view of the flaws with KServicing
data over the course of the relationship, if there was $1.56
million for which KServicing was paid twice it necessarily
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followed, Customers Bank argued, that there was some
offsetting error somewhere else in the oceans of data.
Much of the cross-examination of Ms. White was
dedicated to litigating a discovery dispute. KServicing
contends that it asked for the information that underlies the
trial balance analysis over the course of discovery and did
not receive it. Customers Bank’s response was that most of
the underlying information was exchanged between the parties
in the ordinary course of their relationship such that
KServicing had access to it without the need for it to be
produced in the litigation.
In any event Customers Bank says that if it failed
to produce information requested by KServicing in discovery
it was incumbent upon KServicing to file a motion to compel.
KServicing now askes that the information be excluded from
evidence because it was not provided in discovery or, at
least, the basis for testing the information was not provided
in discovery.
I will admit into evidence the material that
Customers Bank has proffered. In the end, my conclusion is
that even considering that evidence and appreciating the
points that Customers Bank has made about the trial loan
balance analysis I nevertheless conclude that the
preponderance of the entire body of evidence is that
KServicing is entitled to the disputed $1.56 million.
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That said, I am satisfied that the evidence that
Customers Bank has proffered about the trial loan balance
analysis should properly be included in the record for the
purpose of permitting a reviewing court to assess whether
that factual finding is clearly erroneous.
My finding, however, is that the evidence that I
do have about the trial loan balance analysis, while entitled
to some weight, is insufficient to overcome the specific
showing that the debtors have made. I am by no means
rejecting Ms. White’s testimony about the trial loan balance
analysis. The problem is that there is something that is
necessarily conclusory about it.
According to the evidence that was presented the
trial loan balance analysis is a function of countless
individual debits and credits. And it is only as good as each
of the underlying inputs. To accept Customers Bank’s
argument would require the Court to accept largely, on faith,
the proposition that there must be some countervailing error
somewhere in the course of the relationship to balance out
the specific showing about the $1.56 million that the debtors
have made.
It is by no means impossible that Customers Bank
is right about this, but in a world of imperfect information
my task is to do my best to make findings of fact based on
the evidence that the parties put in front of me. My finding
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is that the specificity of the evidence that the debtor has
provided outweighs the more general and somewhat conclusory
evidence that Customers Bank has presented based on the trial
loan balance analysis.
As I have said, this is a close call. Maybe its
55/45, but may finding of fact is that the preponderance of
the evidence supports the conclusion that the debtors are
entitled to the disputed $1.56 million.
The final point that Customers Bank makes is what
I call an equitable argument. It argues that KServicing
bears the responsibility for the poor quality of the data.
Customers Bank contends that in a world in which errors are
abundant, this ruling, essentially, permits KServicing to
cherry-pick one error from a vast field of problematic data
when that is convenient for KServicing, and that it is
fundamentally unjust to permit KServicing to benefit in this
manner from a problem that was of its own making.
I do understand that point and, as I have said, it
is not entirely without force. That said, notwithstanding
what is often said about bankruptcy courts being courts of
equity, this is a contract dispute which is a legal rather
then an equitable matter. And my task is, therefore, to do
my best to weigh the evidence of objectively and reach the
judgment that is dictated by the law and the facts.
My conclusion, based on that review of the
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evidence presented, is that the debtors have a legal
entitlement to recover the disputed $1.56 million from
Customers Bank. I do not believe that any principal of
equity, even accepting the points that Customers Bank is
making, would permit this Court to reach a different outcome
in light of those findings and conclusions.
So, that is my ruling. The parties are directed
to settle an order consistent therewith.
Is there any other matter that the parties believe
the Court should address why we are here?
(No verbal response)
THE COURT: All right. Seeing none, I thank the
parties for the superb manner in which this complex dispute
was presented.
With that we are adjourned. Thank you.
(Proceedings concluded at 2:21 p.m.)
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CERTIFICATION
I certify that the foregoing is a correct
transcript from the electronic sound recording of the
proceedings in the above-entitled matter to the best of my
knowledge and ability.
/s/ Mary Zajaczkowski March 22, 2023
Mary Zajaczkowski, CET-531
Certified Court Transcriptionist
For Reliable
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