Kabbage - Second Objection to Claims for Reclassification As Filed
- Date
- 2023-04-03
Summary
The Debtors' Second Omnibus Objection (Substantive) to Certain Misclassified Claims, filed March 14, 2023 as Doc 679 in In re Kabbage, Inc. d/b/a KServicing, et al., Case No. 22-10951 (CTG), in the U.S. Bankruptcy Court for the District of Delaware, with an objection deadline of April 3, 2023 and a hearing date of April 13, 2023. The debtors ask the court to reclassify the claims on Schedule 1 as general unsecured claims. The objection states that all of the claims were filed after the General Bar Date by PPP Loan borrowers the debtors service, and that they incorrectly assert priority under section 507(a), administrative expense priority under section 503(b)(9) or secured status under section 506. It states approximately 280 proofs of claim have been filed. Counsel are Richards, Layton & Finger, P.A. and Weil, Gotshal & Manges LLP.
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Case 22-10951-CTG Doc 679 Filed 03/14/23 Page 1 of 12
UNITED STATES BANKRUPTCY COURT
DISTRICT OF DELAWARE
------------------------------------------------------------ x
:
In re : Chapter 11
:
KABBAGE, INC. d/b/a KSERVICING, et al., : Case No. 22-10951 (CTG)
:
:
1
Debtors. : (Jointly Administered)
:
Obj. Deadline: April 3, 2023 at 4:00 p.m. (ET)
------------------------------------------------------------ x Hearing Date: April 13, 2023 at 10:00 a.m. (ET)
DEBTORS’ SECOND OMNIBUS
OBJECTION (SUBSTANTIVE) TO CERTAIN MISCLASSIFIED CLAIMS
THIS OBJECTION SEEKS TO RECLASSIFY CERTAIN FILED PROOFS OF CLAIM.
CLAIMANTS SHOULD CAREFULLY REVIEW THIS OBJECTION AND THE
ATTACHMENTS TO THIS OBJECTION TO DETERMINE WHETHER THIS
OBJECTION AFFECTS THEIR CLAIMS. CLAIMANTS SHOULD LOCATE THEIR
NAMES AND CLAIMS ON THE SCHEDULES ATTACHED TO THIS OBJECTION.
Kabbage, Inc. d/b/a KServicing and its debtor affiliates, as debtors and debtors in
possession in the above-captioned chapter 11 cases (collectively, the “Debtors”), hereby file this
omnibus objection (the “Objection”)2 and respectfully represent as follows:
Relief Requested
1. By this Objection, the Debtors seek entry of an order, substantially in the
form attached hereto as Exhibit A (the “Proposed Order”), pursuant to section 502 of title 11 of
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
The facts and circumstances supporting the relief requested herein are set forth in the Thoroddsen Declaration
(defined herein). Capitalized terms used but not defined herein shall have the respective meanings ascribed to such
terms in the Thoroddsen Declaration or the First Day Declaration (defined herein), as applicable.
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the United States Code (the “Bankruptcy Code”), Rule 3007 of the Federal Rules of Bankruptcy
Procedure (the “Bankruptcy Rules”), and Rule 3007-1 of the Local Rules of Bankruptcy Practice
and Procedure of the United States Bankruptcy Court for the District of Delaware (the “Local
Rules”), reclassifying the misclassified claims identified on Schedule 1 annexed hereto (the
“Misclassified Claims”), and (ii) granting related relief.
2. In support of this Objection, the Debtors submit the Declaration of Thora
Thoroddsen in Support of the Debtors’ Second Omnibus Objection (Substantive) to Certain
Misclassified Claims (the “Thoroddsen Declaration”), annexed hereto as Exhibit B.
Jurisdiction
3. The Court has jurisdiction to consider this matter pursuant to
28 U.S.C. §§ 157 and 1334, and the Amended Standing Order of Reference from the United States
District Court for the District of Delaware, dated February 29, 2012. This is a core proceeding
pursuant to 28 U.S.C. § 157(b). Pursuant to Rule 9013-1(f) of the Local Rules, the Debtors consent
to the entry of a final order by the Court in connection with this Objection to the extent it is later
determined that the Court, absent consent of the parties, cannot enter final orders or judgments
consistent with Article III of the United States Constitution. Venue is proper before the Court
pursuant to 28 U.S.C. §§ 1408 and 1409.
Background
4. On October 3, 2022 (the “Petition Date”), the Debtors each commenced
with this Court a voluntary case under chapter 11 of the Bankruptcy Code
(the “Chapter 11 Cases”). The Debtors are authorized to continue to operate their business as
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debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No trustee,
examiner, or statutory committee of creditors has been appointed in these Chapter 11 Cases.
5. Pursuant to Bankruptcy Rule 1015(b), the Chapter 11 Cases are being
jointly administered under the above captioned case.
6. Additional information regarding the Debtors’ businesses, capital structure,
and the circumstances leading to the commencement of these Chapter 11 Cases is set forth in the
Declaration of Deborah Rieger-Paganis in Support of the Chapter 11 Petitions and First-Day
Pleadings [Docket No. 13] (the “First Day Declaration”).
7. On January 19, 2023, the Debtors filed the solicitation versions of the
Amended Joint Chapter 11 Plan of Liquidation of Kabbage, Inc. (d/b/a KServicing) and its
Affiliated Debtors [Docket No. 466] and the Amended Disclosure Statement for the Amended Joint
Chapter 11 Plan of Liquidation of Kabbage, Inc. (d/b/a KServicing) and its Affiliated Debtors
[Docket No. 467] (the “Disclosure Statement”). On March 9, 2023 the Debtors filed an amended
version of the Amended Joint Chapter 11 Plan of Liquidation of Kabbage, Inc. (d/b/a KServicing)
and its Affiliated Debtors [Docket No. 627] (the “Plan”).
8. On January 19, 2023, the Court entered the Order (I) Approving the
Disclosure Statement of the Debtors, (II) Establishing Solicitation, Voting, and Related
Procedures, (III) Scheduling Confirmation Hearing, (IV) Establishing Notice and Objection
Procedures for Confirmation of Plan, (V) Approving Special Electronic Noticing Procedures, (VI)
Approving Debtors’ Proposed Cure Procedures for Unexpired Leases and Executory Contracts,
and (VII) Granting Related Relief [Docket No. 470] (the “Disclosure Statement Order”) that,
among other things, approved the Disclosure Statement and authorized the Debtors to solicit votes
on the Plan.
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9. On March 13, 2023, the Court held a confirmation hearing on the Plan and
confirmed the Plan subject to certain changes to the Plan and the confirmation order, which are
discussed on the record [Docket No. 673].
Claims Process
10. On October 24, 2022, the Debtors filed their schedules of assets and
liabilities and statements of financial affairs [Docket Nos. 144–155 & 157] (the “Schedules
and Statements”), in accordance with Local Rule 1007-1. In the ordinary course of business, the
Debtors maintain books and records that reflect, among other things, the Debtors’ aggregate
liabilities and amounts due and owing to their creditors.
11. On October 26, 2022, the Court entered the Order (I) Establishing a
General Bar Date to File Proofs of Claim, (II) Establishing a Bar Date to File Proofs of Claim by
Governmental Units, (III) Establishing an Amended Schedules Bar Date, (IV) Establishing a
Rejection Damages Bar Date, (V) Approving the Form and Manner for Filing Proofs of Claim,
(VI) Approving the Proposed Notice of Bar Dates, (VII) Approving Procedures with Respect to
Service of the Proposed Notice of Bar Dates, and (VIII) Granting Related Relief [Docket No. 161]
(the “Bar Date Order”). Among other things, the Bar Date Order established November 30,
2022 at 5:00 p.m. (Prevailing Eastern Time) as the deadline by which all entities, not including
governmental units, holding claims (whether secured, unsecured priority (including claims under
section 503(b)(9) of the Bankruptcy Code), or unsecured nonpriority) against the Debtors that
arose prior to the Petition Date must file proofs of claim (the “General Bar Date”).
12. In accordance with the Bar Date Order, Omni Agent Solutions, Inc.
(“Omni”), the Debtors’ claims and noticing agent, provided notice of the Bar Dates [Docket No.
169] and proof of claim forms to, among others, all of the Debtors’ creditors and other known
parties in interest as of the Petition Date [Docket No. 254]. Notice of the Bar Dates was also
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published once in each of the national editions of The New York Times and USA Today [Docket
No. 234].
13. On January 27, 2023, the Debtors filed the Debtors’ First Omnibus Objection
(Substantive) to Certain Misclassified Claims [Docket No. 491] (the “First Omnibus
Objection”). On February 17, 2023, the Court entered the Order Granting Debtors’ First
Omnibus Objection (Substantive) to Certain Misclassified Claims [Docket No. 546] reclassifying
certain misclassified priority, administrative expense, and secured claims filed against the Debtors
as general unsecured claims.
14. As of the date of this Objection, approximately 280 proofs of claim have
been filed in the Chapter 11 Cases by persons purporting to be holders of claims. The Debtors,
with the assistance of their advisors, are continuing to review and reconcile all filed proofs of claim
with the Debtors’ books and records. The ongoing claims reconciliation process involves the
collective effort of the Debtors’ management team; counsel to the Debtors, Weil, Gotshal &
Manges LLP and Richards, Layton & Finger, P.A.; and the Debtors’ financial advisor,
AlixPartners, LLP.
Basis for Relief
15. Section 502(a) of the Bankruptcy Code provides that a filed proof of claim
is “deemed allowed, unless a party in interest . . . objects.” 11 U.S.C. § 502(a). The framework
for assessing whether to overrule or sustain an objection to a claim filed in bankruptcy is a burden
shifting one. In re Allegheny Int’l, Inc., 954 F.2d 167, 173 (3d Cir. 1992). Generally, when a
claimant files a proof of claim against a bankrupt estate, the claimant must allege facts that, if true,
would support a finding that the debtor is legally liable to the claimant. Id.; see also In re F-
Squared Investment Management, LLC, 546 B.R. 538, 542 n. 21 (Bankr. D. Del. 2016) (noting that
Allegheny provides the standards for reviewing claims objections) (citing In re Nortel Networks,
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Inc., 469 B.R. 478, 497 (Bankr. D. Del. 2012)). Absent an objection, the filed claim is afforded
prima facie validity pursuant to Bankruptcy Rule 3001(f). Allegheny, 954 F.2d at 173. However,
when a party objects to a filed claim, the burden shifts to the objecting party, and the objector must
provide evidence sufficient to negate the claim’s prima facie validity. Id. at 173–74. Once an
objecting party produces such evidence, the burden shifts back to the claimant to prove the validity
of their claim by a preponderance of the evidence. Id. at 174; see also F-Squared, 546 B.R. at 544
(“If an objector meets its burden of production, then the claimant must satisfy its ultimate burden
of persuasion.”).
16. As set forth in the Thoroddsen Declaration, based upon a careful review of
the Misclassified Claims, the Debtors’ books and records, the Schedules and Statements, and the
claims register prepared by Omni (the “Claims Register”), the Debtors, in conjunction with their
advisors, determined that each of the Misclassified Claims was filed incorrectly as either: (i) a
priority claim pursuant to certain subsections of section 507(a) of the Bankruptcy Code; (ii) an
administrative expense claim pursuant to section 503(b)(9) of the Bankruptcy Code; and/or (iii) a
secured claim under section 506 of the Bankruptcy Code. Moreover, all of the Misclassified
Claims were filed after the General Bar Date and are not governmental claims subject to the
Governmental Bar Date (as defined in the Bar Date Order). The Debtors served the holders of the
Misclassified Claims in accordance with the contact information in their books and records and
also confirmed with Omni that the holders of the Misclassified Claims received notice of the
General Bar Date. Additionally, in the First Omnibus Objection, the Debtors determined that
substantially all of the claims listed in the objection were filed by borrowers of either Paycheck
Protection Program loans (“PPP Loans”) or small business loans (“Legacy Loans”) that the
Debtors service. Similarly, in this case, the Debtors determined that all of the Misclassified Claims
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were filed by PPP Loan borrowers that the Debtors service and there is no basis in the Debtors’
books and records or in the Bankruptcy Code to support any of the Misclassified Claims’ asserted
priority, administrative expense, and/or secured status based on the claimants’ borrower status.
Therefore, the Debtors respectfully request the Court reclassify the Misclassified Claims as general
unsecured claims. The specific classification errors for each of the Misclassified Claims are noted
on Schedule 1 and are summarized more fully in the Thoroddsen Declaration.
17. As discussed in the Thoroddsen Declaration, the Debtors have determined
that the Misclassified Claims listed on Schedule 1 are incorrectly asserted as priority claims
pursuant to one or more of the following subsections of section 507(a) of the Bankruptcy Code:3
i. Section 507(a)(1)(A) or (a)(1)(B): Section 507(a)(1)(A) and (a)(1)(B) of the
Bankruptcy Code provides priority status for allowed unsecured claims for domestic
support obligations including alimony and child support. See 11 U.S.C. § 507(a)(1)(A)
and (a)(1)(B).
ii. Section 507(a)(4): Section 507(a)(4) provides priority status for allowed unsecured
claims up to $15,150* for wages, salaries, or commissions earned within 180 days
before the earlier of (i) the filing of the bankruptcy petition, or (ii) the end of the
debtor’s business. See 11 U.S.C. § 507(a)(4).
iii. Section 507(a)(5): Section 507(a)(5) provides priority status for allowed unsecured
claims for certain contributions to an employee benefit plan. See 11 U.S.C. § 507(a)(5).
iv. Section 507(a)(7): Section 507(a)(7) of the Bankruptcy Code provides priority status
for allowed unsecured claims of amounts up to $3,350* for deposits toward the
purchase, lease, or rental of property or services for personal, family, or household use.
See 11 U.S.C. § 507(a)(7).
3
Amounts noted with an asterisk are subject to adjustment on April 1, 2025 and every three years after that for cases
begun on or after the date of adjustment.
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v. Section 507(a)(8): Section 507(a)(8) provides priority status for allowed unsecured
claims of governmental units for taxes or penalties owed. See 11 U.S.C. § 507(a)(8).
vi. An unspecified subsection of 507(a).
18. In addition to the asserted priority status, two of the Misclassified Claims,
also incorrectly assert administrative expense priority pursuant to section 503(b)(9) of the
Bankruptcy Code. Section 503(b)(9) of the Bankruptcy Code provides priority status for the value
of any goods received by a debtor, in the ordinary course of the debtor’s business, within the twenty
days prior to the debtor’s petition date. 11 U.S.C. § 503(b)(9). As explained in the Thoroddsen
Declaration, a thorough review of the Debtors’ books and records, the Schedules and Statements,
and the Claims Register revealed that no evidence exists to support the administrative expense
priority status asserted by certain of the Misclassified Claims; in particular, no evidence exists that
any of the Misclassified Claims are on account of goods received by the Debtors in the ordinary
course of business within the 20-day period prior to the Petition Date.
19. Further, as explained in the Thoroddsen Declaration, certain of the
Misclassified Claims also assert a secured claim. As explained in the Thoroddsen Declaration,
based on a review of the Misclassified Claims, the Debtors’ books and records, the Schedules and
Statements, and the Claims Register, the Debtors do not believe that the Misclassified Claims that
assert a secured claim are entitled to secured status under section 506 of the Bankruptcy Code.
20. Accordingly, the Misclassified Claims listed on Schedule 1 are ineligible
for their asserted priority, administrative, and/or secured status and should be reclassified as
general unsecured claims. Failure to reclassify the Misclassified Claims will result in these
claimants receiving improper recoveries on account of the claims to the detriment of the Debtors’
other creditors and in contravention of the Bankruptcy Code’s priority scheme.
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Responses to this Objection
21. To contest the determinations made as to the Misclassified Claims included
in this Objection, a claimant must file with the Office of the Clerk of the United States Bankruptcy
Court for the District of Delaware, 824 Market Street, 3rd Floor, Wilmington, Delaware 19801 a
written response to this Objection (a “Response”) no later than April 3, 2023 at 4:00 p.m.
(Prevailing Eastern Time) (the “Response Deadline”) and serve the Response to Richards,
Layton & Finger, P.A., One Rodney Square, 920 North King Street, Wilmington, DE 19801, Attn:
Zachary I. Shapiro (shapiro@rlf.com) and Amanda R. Steele (steele@rlf.com); and Weil, Gotshal
& Manges LLP, 767 Fifth Avenue, New York, New York 10153, Attn: Natasha S. Hwangpo
(natasha.hwangpo@weil.com) and Lauren Castillo (lauren.castillo@weil.com).
22. Each Response to this Objection must, at a minimum, contain the following
information:
i. a caption setting forth the name of the Bankruptcy Court, the name of the Debtor, the
case number, and the title of the Objection to which the Response is directed;
ii. the name of the claimant, the claim number, and a description of the basis for the
amount of the claim;
iii. the specific factual basis and supporting legal argument upon which the party will rely
in opposing this Objection;
iv. all documentation and other evidence in support of the claim, not previously filed with
the Bankruptcy Court or the claims agent, upon which the claimant will rely in opposing
this Objection; and
v. the name, address, telephone number, fax number, and/or email address of the person(s)
(which may be the claimant or the claimant’s legal representative) with whom counsel
for the Debtors should communicate with respect to the claim subject to this Objection,
and who possesses authority to reconcile, settle, or otherwise resolve the objection to
the claim on behalf of the claimant.
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23. If a claimant fails to timely file and serve a Response by the Response
Deadline, the Debtors may present to the Court an appropriate order reclassifying the Misclassified
Claims and sustaining this Objection without further notice to the claimant or a hearing.
24. The Debtors may file and serve a reply to any Response in accordance with
the Local Rules. The Debtors reserve the right to seek an adjournment of the hearing on any
Response to this Objection, which adjournment will be noted on the notice of agenda for the
hearing.
Compliance with Local Rule 3007-1
25. To the best of the Debtors’ knowledge and belief, this Objection and
Schedule 1 attached hereto, comply with Local Rule 3007-1. To the extent this Objection does
not comply in all respects with the requirements of Local Rule 3007-1, the undersigned believe
such deviations are not material and respectfully request that any such requirement be waived.
Separate Contested Matters
26. To the extent a Response is filed regarding any claim listed in this Objection
and the Debtors are unable to resolve the Response, the objection by the Debtors to such claim
shall constitute a separate contested matter as contemplated by Bankruptcy Rule 9014. Any order
entered by the Court regarding an objection asserted in this Objection shall be deemed a separate
order with respect to each claim subject thereto.
Reservation of Rights
27. Nothing contained herein is intended or shall be construed as (a) an
admission as to the validity of any claim against the Debtors; (b) a waiver of the Debtors’ or any
appropriate party in interest’s rights to dispute the amount of, basis for, or validity of any claim
against the Debtors; (c) a waiver of any claim or cause of action which may exist against any
creditor or interest holder, including but not limited to, any future objections on substantive and/or
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non-substantive grounds; or (d) an approval, assumption, adoption, or rejection of any agreement,
contract, lease, program, or policy between the Debtors and any third party under section 365 of
the Bankruptcy Code. Likewise, if the Court grants the relief sought herein, any payment made
pursuant to the Court’s order is not intended to be and should not be construed as an admission to
the validity of any claim or a waiver of the Debtors’ rights to dispute such claim subsequently on
any and all substantive and/or non-substantive grounds.
Notice
28. Notice of this Objection 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) Customers
Bank; (e) Cross River Bank; (f) the United States Department of Justice; (g) the Federal Trade
Commission; (h) the Small Business Administration; (i) the Internal Revenue Service; (j) the
Securities and Exchange Commission; (k) the United States Attorney’s Office for the District of
Delaware; (l) each of the claimants whose claims are Misclassified Claims subject to this
Objection; and (m) any party that has requested notice pursuant to Bankruptcy Rule 2002
(collectively, the “Notice Parties”). The Debtors believe that no further notice is required.
No Prior Request
29. No previous request for the relief sought herein has been made by the
Debtors to this or any other court.
[Remainder of page intentionally left blank]
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WHEREFORE the Debtors respectfully request entry of the Proposed Order
granting the relief requested herein and such other and further relief as the Court may deem just
and appropriate.
Dated: March 14, 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)
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
chase.bentley@weil.com
Attorneys for Debtors and Debtors in Possession
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