D&O and Shareholder Defendants’ Memorandum of Law in Support of Motion to Dismiss, KServicing Wind Down Corp. v. Frohwein, Adv. No. 25-52372 (Bankr. D. Del.), Doc. 96 (April 9, 2026)
Summary
A memorandum of law filed April 9, 2026 as Doc 96 by the D&O and Shareholder Defendants in KServicing Wind Down Corp. v. Robert Frohwein, et al., Adversary Proceeding No. 25-52372 (CTG), in the United States Bankruptcy Court for the District of Delaware. The jointly administered chapter 11 cases are Case No. 22-10951 (CTG). The memorandum supports a motion to dismiss. Its table of contents lists a statement of facts on the Paycheck Protection Program and Kabbage's BSA/AML compliance program, followed by argument against the Caremark claims. It states that the complaint, filed October 16, 2025, alleges claims for breach of fiduciary duty, recovery of a fraudulent transfer, and disallowance and equitable subordination. The conclusion asks the Court to dismiss the complaint with prejudice.
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Cited in: Kathryn Petralia · Robert Frohwein
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“D&O and Shareholder Defendants’ Memorandum of Law in Support of Motion to Dismiss, KServicing Wind Down Corp. v. Frohwein, Adv. No. 25-52372 (Bankr. D. Del.), Doc. 96 (April 9, 2026).”
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Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 1 of 71
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: Chapter 11
KSERVICING WIND DOWN CORP., et al., 1 Case No. 22-10951 (CTG)
Post-Confirmation Debtors. (Jointly Administered)
KSERVICING WIND DOWN CORP.
(f/k/a Kabbage, Inc.),
Plaintiff,
Adv. Pro. No. 25-52372 (CTG)
v.
ROBERT FROHWEIN, et al.,
Defendants.
D&O AND SHAREHOLDER DEFENDANTS’ MEMORANDUM OF LAW
IN SUPPORT OF MOTION TO DISMISS
1
The post-confirmation Debtors in these chapter 11 cases, along with the last four digits of each
Debtor’s federal tax identification number, as applicable are: KServicing Wind Down Corp. (f/k/a
Kabbage, Inc. d/b/a KServicing) (3937); KServicing Wind Down Canada Holdings LLC (f/k/a
Kabbage Canada Holdings, LLC) (N/A); KServicing Wind Down Asset Securitization LLC (f/k/a
Kabbage Asset Securitization LLC) (N/A); KServicing Wind Down Asset Funding 2017-A LLC
(f/k/a Kabbage Asset Funding 2017-A LLC) (4803); KServicing Wind Down Asset Funding 2019-
A LLC (f/k/a Kabbage Asset Funding 2019-A LLC) (8973); and KServicing Wind Down Diameter
LLC (f/k/a Kabbage Diameter, LLC) (N/A). The Debtors’ mailing and service address is
KServicing Wind Down Corp. c/o Resolute Commercial Services, 6750 E. Camelback Road, Suite
103, Scottsdale, AZ 85251.
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 2 of 71
TABLE OF CONTENTS
Pages
NATURE AND STAGE OF PROCEEDING .................................................................................1
SUMMARY OF ARGUMENT .......................................................................................................2
STATEMENT OF FACTS ..............................................................................................................7
A. Congress Responds To The COVID-19 Pandemic With The Emergency
Paycheck Protection Program ..................................................................................8
B. Kabbage Delivers Urgently Needed Funds To Struggling Small
Businesses ..............................................................................................................12
C. Kabbage’s BSA/AML Compliance Program.........................................................12
1. Kabbage Had An Established Pre-Existing BSA/AML Compliance
Infrastructure ..............................................................................................12
2. Kabbage’s Compliance Policies Were Routinely Audited ........................15
3. Kabbage’s Protocols Met And Were Tailored To PPP
Requirements .............................................................................................16
4. Kabbage’s PPP Loan Distribution System Met The Dire Needs Of
The Pandemic.............................................................................................18
D. American Express Executes A Transaction To Purchase Kabbage’s IP
Assets .....................................................................................................................19
E. Following Changes To PPP, Kabbage’s Successor KServicing Files For
Bankruptcy .............................................................................................................20
F. KServicing Repeatedly Affirms That Kabbage Complied With All
Applicable PPP Requirements ...............................................................................20
ARGUMENT .................................................................................................................................21
I. PLAINTIFF’S CAREMARK CLAIMS FAIL (COUNTS II AND III) ..............................22
A. The Complaint Fails To State An “Information Systems” Claim Against
The Director & Officer Defendants .......................................................................23
1. The Complaint Fails To State An “Information Systems” Claim
Against Directors Butler, Ebinger, Frohwein, and Stolle (Count III) ........24
i
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 3 of 71
a. The Complaint Concedes The Existence Of Information
Systems And Controls....................................................................24
b. Having Conceded The Existence Of Information Systems,
The Complaint’s Remaining Allegations Fail To State An
Information Systems Claim ...........................................................28
2. The Complaint Fails To State An “Information Systems” Claim
Against Officers Frohwein and Petralia (Count II)....................................31
B. The Complaint Fails To State A “Red Flags” Claim Against The D&O
Defendants .............................................................................................................31
1. The D&O Defendants Had No Reason To Believe Kabbage’s
Conduct Was Unlawful ..............................................................................33
2. The Complaint Further Fails To State A “Red Flags” Claim
Against Directors Butler, Ebinger, Frohwein, and Stolle (Count III) ........34
3. The Complaint Fails To State A “Red Flags” Claim Against
Officers Frohwein And Petralia (Count II) ................................................37
II. PLAINTIFF’S DUTY OF CARE CLAIM AGAINST FROHWEIN AND
PETRALIA FAILS (COUNT I) ........................................................................................42
A. Plaintiff Cannot Plead A Duty Of Care Claim By Recycling Its Caremark
Allegations .............................................................................................................43
B. Plaintiff Fails To State Any Non-Caremark Duty Of Care Claim ........................44
III. PLAINTIFF’S FRAUDULENT TRANSFER CLAIM AGAINST THE
SHAREHOLDER DEFENDANTS FAILS (COUNT IV) ................................................46
A. The Shareholder Defendants Cannot Be Held Liable As Fraudulent
Transfer “Beneficiaries” Under Bankruptcy Code Section 550(a)(1) ...................47
1. Bankruptcy Code Section 550 Permits Recovery Only Against
Transferees And A Limited Set Of “Transfer Beneficiaries” ....................47
2. The Complaint Does Not Plead Facts To Support Veil Piercing...............49
3. The Shareholder Defendants Did Not Receive Any Actual, Direct
Benefit From The October 13 Transfer That Is Quantifiable And
Accessible ..................................................................................................50
B. The October 13 Transfer Is Not Avoidable Because It Was Made Pursuant
To A Valid Contractual Obligation........................................................................51
ii
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 4 of 71
IV. PLAINTIFF’S CLAIMS TO DISALLOW OR SUBORDINATE THE D&O
DEFENDANTS’ INDEMNIFICATION CLAIMS SHOULD BE DISMISSED
(COUNTS V–VII) .............................................................................................................55
A. The Complaint’s Section 502(d) Disallowance Claims Fail (Count VI) ...............55
B. The Complaint’s Section 502(e) Disallowance Claims Fail (Count V) ................56
C. The Complaint’s Section 510(c) Equitable Subordination Claims Fail
(Count VII).............................................................................................................58
CONCLUSION ..............................................................................................................................59
iii
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 5 of 71
TABLE OF AUTHORITIES
Page(s)
Cases
Albert v. Alex. Brown Mgmt. Servs., Inc.,
2005 WL 2130607 (Del. Ch. Aug. 26, 2005) ..........................................................................46
Ashcroft v. Iqbal,
556 U.S. 662 (2009) .................................................................................................................21
B.E.L.T., Inc. v. Wachovia Corp.,
403 F.3d 474 (7th Cir. 2005) ...................................................................................................54
In re Baker Hughes Inc. Merger Litig.,
2020 WL 6281427 (Del. Ch. Oct. 27, 2020) ...........................................................................45
Baldi v. Lynch (In re McCook Metals, L.L.C.),
319 B.R. 570 (Bankr. N.D. Ill. 2005) ......................................................................................48
Bank of Am., N.A. v. Knight,
725 F.3d 815 (7th Cir. 2013) ...................................................................................................45
Barber v. Golden Seed Co.,
129 F.3d 382 (7th Cir. 1997) ...................................................................................................53
Bodenstein v. Univ. of N. Iowa (In re Peregrine Fin. Grp., Inc.),
589 B.R. 360 (Bankr. N.D. Ill. 2018) ......................................................................................51
Bonded Fin. Servs., Inc. v. Eur. Am. Bank,
838 F.2d 890 (7th Cir. 1988) ...................................................................................................51
Brewer v. Turner,
2025 WL 2769895 (Del. Ch. Sep. 29, 2025) ...........................................................................26
Bricklayers Pension Fund of W. Pa. v. Brinkley,
2024 WL 3384823 (Del. Ch. July 24, 2024).................................................................... passim
In re Burlington Coat Factory Secs. Litig.,
114 F.3d 1410 (3d Cir. 1997)...................................................................................................13
Burtch v. Opus, LLC (In re Opus E., LLC),
528 B.R. 30 (Bankr. D. Del. 2015) ..........................................................................................44
BYJU’s Alpha, Inc. v. Camshaft Cap. Fund, LP (In re BYJU’s Alpha),
2025 WL 665294 (Bankr. D. Del. Feb. 27, 2025) ...................................................................48
iv
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 6 of 71
In re Caremark Int’l Inc. Deriv. Litig.,
698 A.2d 959 (Del. Ch. 1996)..................................................................................................22
In re Citigroup Inc. S’holders Litig.,
2003 WL 21384599 (Del. Ch. June 5, 2003) ...........................................................................32
City of Birmingham Ret. & Relief Sys. v. Good,
177 A.3d 47 (Del. 2017) ..........................................................................................................27
City of Detroit Police & Fire Ret. Sys. v. Hamrock,
2022 WL 2387653 (Del. Ch. June 30, 2022) ...............................................................24, 25, 35
Clem v. Skinner,
2024 WL 668523 (Del. Ch. Feb. 19, 2024) .......................................................................35, 37
Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube, LLC,
2023 WL 5688392 (Del. Ch. Sep. 5, 2023) .............................................................................49
Constr. Indus. Laborers Pension Fund v. Bingle,
2022 WL 4102492 (Del. Ch. Sep. 6, 2022) .............................................................................30
Dunn v. HPS Inv. Partners, LLC (In re Alta Mesa Res., Inc.),
2024 WL 4379801 (Bankr. S.D. Tex. Oct. 1, 2024) ..............................................48, 49, 50, 51
Firemen’s Ret. Sys. of St. Louis v. Sorenson,
2021 WL 4593777 (Del. Ch. Oct. 5, 2021) .......................................................................25, 36
Fisher v. Sanborn,
2021 WL 1197577 (Del. Ch. Mar. 30, 2021).....................................................................35, 40
Gellert v. Coltec Indus., Inc. (In re Crucible Materials Corp.),
2012 WL 5360945 (Bankr. D. Del. Oct. 31, 2012) .................................................................53
In re Gen. Motors Co. Deriv. Litig.,
2015 WL 3958724 (Del. Ch. June 26, 2015) .........................................................26, 28, 30, 31
Giuliano v. Grenfell-Gardner,
2025 WL 2502176 (Del. Ch. Sep. 2, 2025) .................................................................32, 43, 44
Goodman v. H.I.G. Cap., LLC (In re Gulf Fleet Holdings, Inc.),
491 B.R. 747 (Bankr. W.D. La. 2013) ...............................................................................53, 54
In re GoPro, Inc. S’holder Deriv. Litig.,
2020 WL 2036602 (Del. Ch. Apr. 28, 2020) ...........................................................................43
Gottlieb v. Liebowitz (In re KSL Media, Inc.),
732 F. App’x 535 (9th Cir. 2018) ............................................................................................43
v
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 7 of 71
Gowan v. Wachovia Bank, N.A. (In re Dreier LLP),
453 B.R. 499 (Bankr. S.D.N.Y. 2011) ...............................................................................58, 59
Halperin v. Moreno (In re Green Field Energy Servs., Inc.),
594 B.R. 239 (Bankr. D. Del. 2018) ..................................................................................48, 50
Horman v. Abney,
2017 WL 242571 (Del. Ch. Jan. 19, 2017) ..............................................................................30
Hurwitz v. Mahoney (In re Space Case),
2024 WL 1628440 (Bankr. D. Del. Apr. 15, 2024) .................................................................44
IBEW Loc. Union 481 Defined Contribution Plan & Tr. v. Winborne,
301 A.3d 596 (Del. Ch. 2023)............................................................................................22, 23
IMG Holding LLC v. Dimon,
2024 WL 1634878 (Del. Ch. Apr. 16, 2024) ...........................................................................40
Janvey v. Libyan Inv. Auth.,
840 F.3d 248 (5th Cir. 2016) ...................................................................................................48
JLL Consultants, Inc. v. Gothner (In re AgFeed USA, LLC),
558 B.R. 116 (Bankr. D. Del. 2016) ..................................................................................22, 31
Joseph v. Frank (In re Troll Commc’ns, LLC),
385 B.R. 110 (Bankr. D. Del. 2008) ........................................................................................45
Kaye v. Nath (In re Duke & King Acquisition Corp.),
508 B.R. 107 (Bankr. D. Minn. 2014) ...............................................................................53, 58
Kravitz v. Samson Energy Co. (In re Samson Res. Corp.),
2022 WL 3135288 (Bankr. D. Del. Aug. 4, 2022) ..................................................................48
Kravitz v. Tavlarios,
2020 WL 3871340 (S.D.N.Y. July 8, 2020) ............................................................................43
In re LendingClub Corp. Deriv. Litig.,
2019 WL 5678578 (Del. Ch. Oct. 31, 2019) ...........................................................................26
Lepore v. SelectQuote Ins. Servs., Inc.,
2023 WL 8469761 (3d Cir. Dec. 7, 2023) ...............................................................................13
Leslie v. Hancock Cap. Partners II, L.P. (In re Fitness Holdings Int’l, Inc.),
660 F. App’x 546 (9th Cir. 2016) ............................................................................................54
Marchand v. Barnhill,
212 A.3d 805 (Del. 2019) ................................................................................................ passim
vi
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 8 of 71
Maxus Liquidating Tr. v. YPF S.A. (In re Maxus Energy Corp.),
641 B.R. 467 (Bankr. D. Del. 2022) ........................................................................................54
In re McDonald’s Corp. S’holder Deriv. Litig. (McDonald’s I),
289 A.3d 343 (Del. Ch. 2023)............................................................................................22, 23
McPadden v. Sidhu,
964 A.2d 1262 (Del. Ch. 2008)................................................................................................44
Melbourne Mun. Firefighters’ Pension Tr. Fund v. Jacobs,
2016 WL 4076369 (Del. Ch. Aug. 1, 2016) ......................................................................33, 37
Metro Storage Int’l LLC v. Harron,
275 A.3d 810 (Del. Ch. 2022)..................................................................................................44
Official Comm. of Unsecured Creditors of Fedders N. Am., Inc. v. Goldman Sachs
Credit Partners L.P. (In re Fedders N. Am., Inc.),
405 B.R. 527 (Bankr. D. Del. 2009) ..................................................................................44, 54
Ont. Provincial Council of Carpenters’ Pension Tr. Fund v. Walton,
294 A.3d 65 (Del. Ch. 2023)....................................................................................................43
Pardo v. Gonzaba (In re APF Co.),
308 B.R. 183 (Bankr. D. Del. 2004) ........................................................................................53
Picard v. Merkin (In re Bernard L. Madoff Inv. Sec. LLC),
515 B.R. 117 (Bankr. S.D.N.Y. 2014) .....................................................................................58
In re Plug Power Inc. S’holder Deriv. Litig.,
2025 WL 1277166 (Del. Ch. May 2, 2025) .............................................................................32
In re ProAssurance Corp. S’holder Deriv. Litig.,
2023 WL 6426294 (Del. Ch. Oct. 2, 2023) .......................................................................23, 27
In re Qualcomm Inc. FCPA S’holder Deriv. Litig.,
2017 WL 2608723 (Del. Ch. June 16, 2017) ...........................................................................37
Reily v. Kapila (In re Int’l Mgmt. Assoc.),
399 F.3d 1288 (11th Cir. 2005) ...............................................................................................48
Reiter v. Fairbank,
2016 WL 6081823 (Del. Ch. Oct. 18, 2016) ...............................................................32, 36, 39
Rich v. Yu Kwai Chong,
66 A.3d 963 (Del. Ch. 2013)..............................................................................................23, 26
Rojas v. Ellison,
2019 WL 3408812 (Del. Ch. July 29, 2019)................................................................25, 29, 33
vii
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 9 of 71
Schechter v. 5841 Bldg. Corp. (In re Hansen),
341 B.R. 638 (Bankr. N.D. Ill. 2006) ......................................................................................48
Segway Inc. v. Cai,
349 A.3d 628 (Del. Ch. 2023)............................................................................................31, 41
Sender v. Dutton (In re Clark),
619 B.R. 1 (Bankr. D. Colo. 2020) ..........................................................................................53
Sharp Int’l Corp. v. State St. Bank & Tr. Co. (In re Sharp Int’l. Corp.),
403 F.3d 43 (2d Cir. 2005).......................................................................................................54
Sierra Invs., LLC v. SHC, Inc. (In re SHC, Inc.),
329 B.R. 438 (Bankr. D. Del. 2005) ........................................................................................21
South v. Baker,
62 A.3d 1 (Del. Ch. 2012)........................................................................................................26
Stanziale v. CopperCom, Inc. (In re Conex Holdings, LLC),
518 B.R. 792 (Bankr. D. Del. 2014) ........................................................................................13
Stanziale v. Heico Holdings, Inc. (In re Conex Holdings, LLC),
514 B.R. 405 (Bankr. D. Del. 2014) ..................................................................................45, 46
Stone v. Ritter,
911 A.2d 362 (Del. 2006) ................................................................................................ passim
Swift v. Halimi (In re CL H Winddown LLC),
2023 WL 5740195 (Bankr. D. Del. Sep. 5, 2023) ...................................................................56
Tilton v. MBIA Inc. (In re Zohar III, Corp.),
639 B.R. 73 (Bankr. D. Del. 2022) ..........................................................................................58
In re Touch Am. Holdings, Inc.,
409 B.R. 712 (Bankr. D. Del. 2009) ..................................................................................56, 57
In re TransUnion Deriv. S’holder Litig.,
324 A.3d 869 (Del. Ch. 2024)................................................................................32, 33, 37, 39
United States v. State St. Bank & Tr. Co.,
520 B.R. 29 (Bankr. D. Del. 2014) ..........................................................................................58
Walker v. Sonafi Pasteur (In re Aphton Corp.),
423 B.R. 76 (Bankr. D. Del. 2010) ..........................................................................................21
Wallace v. Wood,
752 A.2d 1175 (Del. Ch. 1999)................................................................................................49
viii
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 10 of 71
In re Wedtech Corp.,
85 B.R. 285 (Bankr. S.D.N.Y. 1988) .......................................................................................57
Weiss v. Arabella Expl. Inc. (In re Arabella Petroleum Co.),
647 B.R. 851 (Bankr. W.D. Tex. 2022) ...................................................................................51
Wood v. Baum,
953 A.2d 136 (Del. 2008) ........................................................................................................32
Statutes
11 U.S.C. § 101 ........................................................................................................................53, 54
11 U.S.C. § 502 ...................................................................................................................... passim
11 U.S.C. § 510 ..............................................................................................................7, 55, 58, 59
11 U.S.C. § 548 ..............................................................................................................................52
11 U.S.C. § 550 ............................................................................................................46, 47, 48, 51
15 U.S.C. § 636 ................................................................................................................................8
8 Del. Code § 141 ....................................................................................................................19–20
Act of July 4, 2020, Pub. L. No. 116-147, 134 Stat. 660.................................................................9
Coronavirus, Aid, Relief, and Economic Security Act, Pub. L. No. 116-136,
134 Stat. 281 (2020)...........................................................................................................3, 8, 9
Paycheck Protection Program and Health Care Enhancement Act,
Pub. L. No. 116-139, 134 Stat. 620 (2020) ................................................................................9
Rules
Fed. R. Civ. P. 12(b)(6)....................................................................................................................2
Regulations
Business Loan Program Temporary Changes; Paycheck Protection Program,
85 Fed. Reg. 20811 (Apr. 15, 2020) ................................................................................ passim
Other Authorities
166 Cong. Rec. H1907 (daily ed. Apr. 23, 2020) ..........................................................................10
Emil A. Kleinhaus & Alexander B. Lees, Debt Repayments as Fraudulent
Transfers, 88 Am. Bankr. L.J. 307 (2014) ...............................................................................55
ix
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 11 of 71
H.R. Rep. No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N. 5963 ..........................................57
U.S. Dep’t of Treasury, Paycheck Protection Program,
https://home.treasury.gov/policy-issues/coronavirus/assistance-for-small-
businesses/paycheck-protection-program [https://perma.cc/S2SH-WP96] ...............................9
x
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 12 of 71
Defendants Donald Butler, Jonathan Ebinger, Robert Frohwein, Bryan Stolle (together, the
“Directors”), Kathryn Petralia (together with Frohwein, the “Officers” and together with the Di-
rectors, the “D&O Defendants”), Bennu Holdings Limited Co. (“Bennu”), BlueRun Ventures IV,
L.P. (“BlueRun”), BRV Opportunities Fund, L.P. (“BRV”), Curieux Limited Co. (“Curieux”), The
Frohwein Family 2015 Trust (“FFT”), MDV IX, L.P. (“MDV”), Raymond James & Associates,
Inc. CSDN FBO Robert Frohwein RIRA U/A/D 5/27/16 A/C 2867A298 (“RJ RIRA”), Thomvest
Ventures Ltd. (“Thomvest”) (together with Frohwein and Petralia, the “Shareholder Defendants”
and together with Butler, Ebinger, and Stolle, the “D&O and Shareholder Defendants”) respect-
fully submit this Memorandum of Law in Support of D&O and Shareholder Defendants’ Motion
to Dismiss. 2
NATURE AND STAGE OF PROCEEDING
Kabbage, Inc. (d/b/a KServicing) (“Kabbage” or “Plaintiff” or “Debtor”) filed for bank-
ruptcy on October 3, 2022. Voluntary Pet. for Non-Individuals Filing for Bankruptcy, D.I. 1. On
March 15, 2023, this Court entered an order confirming Kabbage’s Amended Joint Chapter 11 Plan
of Liquidation (“Plan”). D.I. 680. On October 16, 2025, Kabbage, through its Wind Down Officer,
filed a complaint, Adv. D.I. 1 (the “Complaint”), alleging claims for breach of fiduciary duty,
recovery of a fraudulent transfer, and disallowance and equitable subordination of certain proofs
2
Citations to “Adv. D.I.” refer to the docket for this Adversary Proceeding, Adv. Pro. No. 25-
52372, and citations to “D.I.” refer to the docket for the jointly administered KServicing Chapter
11 Cases, Case No. 22-10951 (CTG).
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 13 of 71
of claim. 3 For the reasons stated herein, the Complaint should be dismissed with prejudice under
Rule 12(b)(6). 4
SUMMARY OF ARGUMENT
The Complaint should be dismissed with prejudice because it fails to state a plausible claim
for relief. Plaintiff’s fiduciary duty claims rest on the flawed premise that Kabbage’s Directors
and Officers turned a blind eye to compliance failures—yet the Complaint’s own allegations and
the documents it incorporates by reference demonstrate the opposite. Kabbage maintained written
compliance policies subject to mandatory board-level reporting, a dedicated audit committee
charged with compliance oversight, and independent third-party auditors who repeatedly con-
firmed the adequacy of Kabbage’s controls. Nor did the Directors and Officers consciously disre-
gard any red flags of illegality. The Complaint’s fraudulent transfer claim fares no better, as it
seeks to recover from minority shareholders who concededly never received the challenged trans-
fer and who cannot be held liable as “beneficiaries” under any recognized theory. And the Com-
plaint’s disallowance and subordination claims are derivative of its failed substantive claims and
must fall with them. In short, the Complaint is an exercise in hindsight, attempting to recast rea-
sonable business judgments made during an unprecedented national crisis as actionable breaches
of fiduciary duty and fraudulent transfer. The law does not permit it.
As the COVID-19 pandemic rapidly evolved into an economic crisis, Congress and the
Small Business Administration (“SBA”) launched an unprecedented public-private partnership:
3
On or before July 20, 2023, Kabbage changed its corporate name to KServicing Wind Down
Corp., the named Plaintiff in this action. Mot. of the Post-Confirmation Debtors for Entry of an
Order Amending Case Caption ¶ 9, D.I. 910.
4
The D&O and Shareholder Defendants consent to entry of final orders or judgments by the Court
if it is determined that the Court, absent consent of the parties, cannot enter final orders or
judgments consistent with Article III of the Constitution.
2
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 14 of 71
the Paycheck Protection Program (“PPP”). The U.S. government committed an initial $349 billion
in emergency capital for distribution as forgivable loans, and tasked lenders with deploying that
capital rapidly to avert the mass layoffs, defaults, and business closures that could cascade the U.S.
economy into depression. With traditional banks prioritizing existing, well-capitalized clients, the
government relied on “fintech” innovators like Kabbage to make funds accessible to the nation’s
smallest and most vulnerable businesses. Answering the government’s call, Kabbage became one
of the nation’s largest PPP lenders, fulfilling over $7 billion in PPP loans for 278,000 small busi-
nesses and sole proprietors, helping the government save hundreds of thousands of jobs.
The regulatory framework for PPP lending was created at breakneck speed—the SBA re-
leased regulatory guidance for PPP lenders on the evening of April 2, and lending began the next
day. The lynchpin of PPP lending was that if borrowers applied for the loans in good faith, those
loans would be forgiven, and if lenders relied on borrower documents and attestations, they would
be held harmless for borrowers’ inaccuracies. To ensure that lending occurred quickly enough to
restabilize the American economy, lenders were not required to conduct verifications of borrower
documentation. Lawmakers contemporaneously acknowledged that the program’s comparably lax
requirements would attract fraudulent borrowers but concluded that was a cost worth the benefit—
and so the CARES Act was passed by a unanimous Senate and signed into law.
But as the immediacy of the crisis passed, lawmakers reversed course, given media cover-
age of borrower fraud, and attempted to cast hindsight blame on lenders and their management
who served borrowers throughout the emergency. Various government entities announced multiple
3
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 15 of 71
expensive and long-running investigations, including into Kabbage. 5 Eventually, these investiga-
tive costs forced Kabbage into bankruptcy.
Kabbage maintained—including in filings before this Court—that the government’s claims
and investigations were baseless, and that Kabbage acted honorably in exceedingly difficult cir-
cumstances. Inexplicably, however, the Wind Down Officer appointed to administer the post-
confirmation estate, entered into hundreds of millions of dollars of settlements in connection with
the government’s unproven allegations. 6 Those questionable settlements now represent almost all
of the estate’s major remaining unpaid claims—and are the sole justification for Plaintiff’s sprawl-
ing litigation.
The revisionist campaign against Kabbage and its management inappropriately attempts to
punish those who answered the government’s call during a crisis. But Plaintiff’s fiduciary duty
and fraudulent transfer claims against the D&O and Shareholder Defendants are not only factually
spurious but also legally flawed. Addressing the Complaint’s claims in the order they are ad-
dressed in this brief: Count III alleges that Kabbage’s Directors Butler, Ebinger, and Stolle (as
well as co-defendant directors) 7 breached both of their Caremark fiduciary duties: (1) failing to
implement adequate “information systems,” and (2) ignoring “red flags” of unlawful conduct.
5
In December 2024, the DOJ intervened in a civil proceeding against three Kabbage officers,
including Frohwein and Petralia (the “Texas Case”). Notably, last month, the District Court for
the Eastern District of Texas stayed discovery in the Texas Case on the ground that the officers’
motions to dismiss “provide substantial arguments for dismissal of many, if not all, of Plaintiff’s
claims.” J.A. Ex. 50 at A00721 (Order Granting Stay).
6
In addition to entering into settlements with the DOJ and SBA, the Wind Down Officer also
entered into a settlement with Cross River Bank, a Kabbage partner bank.
7
Frohwein is not named as a defendant in Count III, but the Complaint nevertheless appears to
allege that Frohwein is liable under Caremark in his capacities as both a director and an officer.
See Compl. ¶ 305.
4
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Count II asserts those same Caremark theories (“information systems” and “red flags”) against
Kabbage Officers Frohwein and Petralia (as well as co-defendant officers). Count I alleges
Frohwein and Petralia (as well as co-defendant officers) breached their duty of care in their capac-
ities as officers. Count IV seeks to recover an alleged fraudulent transfer from certain Kabbage
shareholders, including the Shareholder Defendants (as well as co-defendant shareholders). And
Counts V through VII seek to disallow or equitably subordinate certain defendants’ claims. As set
forth below, each of Plaintiff’s claims fails for multiple reasons.
Counts II and III: “Information Systems” Theory against D&O Defendants. The
claim that the D&O Defendants breached their fiduciary duties because Kabbage failed to maintain
proper oversight systems is contradicted by the Complaint’s own allegations. To plead an “infor-
mation systems” theory under Delaware’s Caremark standard, the Complaint must allege the D&O
Defendants “utterly failed” to implement any reporting or information system or controls in a man-
ner that constitutes bad faith. As the Complaint concedes, Kabbage had written protocols govern-
ing board-level risk reporting, a designated committee to oversee risks, and third-party advisors
who audited and approved its policies. The existence of these processes, systems, and policies
routinely defeats “information systems” claims at the pleading stage. See § I.A, below.
Counts II and III: “Red Flags” Theory against D&O Defendants. The Complaint’s
theory that the D&O Defendants breached their fiduciary duties by ignoring “red flags” likewise
fails. To plead this Caremark theory, a Complaint must allege that defendants observed but con-
sciously and in bad faith ignored the warnings (“red flags”) of unlawful conduct. But the Com-
plaint does not plead that any D&O Defendant was aware of a red flag of unlawful conduct—let
alone ignored one in bad faith—because the D&O Defendants had no reason to suspect Kabbage
was engaging in unlawful conduct by violating SBA guidance. See § I.B.1, below. Considering
5
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the specific allegations against the Directors, the Complaint fails to plead “red flags” of illegality,
rather than “yellow flag” indications of business risk. Nor does the Complaint allege that any such
purported warnings were ignored—rather, the Complaint affirmatively alleges that Kabbage mod-
ified internal policies in response to independent audits and responded to employee concerns.
See § I.B.2, below. Finally, the Complaint’s remaining non-duplicative allegations against the Of-
ficers neither allege “red flags” under Delaware law nor are plausible when considered alongside
the documents that the Complaint incorporates by reference. See § I.B.3, below.
Count I: Duty of Care Claims against Officers. The Complaint attempts to salvage its
Caremark claim against the Officers by labeling those same allegations as duty of care claims. But
Delaware courts routinely dismiss plaintiffs’ attempts to do exactly that. It is well settled that
Caremark “oversight” falls squarely within the duty of loyalty, and that courts dismiss plaintiffs’
attempts to evade the difficult Caremark standard by labeling “oversight” claims as failures of the
duty of care. See § II.A, below. To the extent the Complaint attempts to allege anything in support
of its duty of care claim that is not duplicative of the Caremark claim, it fails because the Complaint
does not plead any non-conclusory facts that either Officer acted with the gross negligence that is
required to state a duty of care claim. See § II.B, below.
Count IV: Fraudulent Transfer Claims against Shareholder Defendants. The Com-
plaint’s attempt to recover an alleged fraudulent transfer from the Shareholder Defendants fails.
The Complaint seeks to avoid one step of the arm’s length merger transaction between American
Express and Kabbage: the October 13 Transfer (defined below), in which Kabbage transferred its
intellectual property assets to its parent. This theory suffers from multiple flaws that each require
dismissal. The Shareholder Defendants did not receive that transfer either as initial or subsequent
transferees—as the Complaint concedes. A plaintiff cannot recover an alleged fraudulent transfer
6
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from shareholders—let alone minority shareholders—who did not actually receive that transfer
absent veil piercing, which the Complaint does not allege. See §§ III.A.1–2, below. To the extent
Plaintiff argues the Shareholder Defendants “benefited” from the October 13 Transfer, such that
Plaintiff could nevertheless recover the transfer from them, that also fails, because Plaintiff cannot
show an actual direct, quantifiable, and accessible benefit. See § III.A.3, below. And, in any event,
the Complaint fails to plead a constructive or actual fraudulent transfer. The Complaint does not
state a constructive fraudulent transfer claim because the October 13 Transfer was made for rea-
sonably equivalent value—i.e., in satisfaction of Kabbage’s valid contractual obligation under the
Merger Agreement; and it does not state a claim for actual fraudulent transfer because the Com-
plaint’s allegations demonstrate that—rather than being made with intent to hinder, delay, or de-
fraud creditors—the October 13 Transfer was made in order to satisfy an obligation to its arm’s
length, third-party creditor American Express. See § III.B, below.
Finally, the Complaint’s remaining claims, asserting disallowance and equitable subordi-
nation (Counts V–VII), fail. The Complaint cannot plead claims for disallowance under Sec-
tion 502(d) (Count VI) without pleading a fraudulent transfer (which it does not), see § IV.A,
below; it does not (and cannot) plead the elements of disallowance under Section 502(e) because
it does not allege the D&O Defendants are co-liable with the Debtor on a separate creditor’s claim
(Count V), see § IV.B, below; and it fails to allege conduct that would warrant equitably subordi-
nating the D&O Defendants’ proofs of claim under Section 510(c) (Count VII), see § IV.C, below.
STATEMENT OF FACTS
In 2009, Frohwein and Petralia founded Kabbage to provide automated lending services to
small, underserved businesses. Compl. ¶¶ 59, 61. Ebinger, Stolle, and Butler joined the Kabbage
Board of Directors (the “Board”) in 2011 and 2012, and each served on the Board until late 2020.
7
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Compl. ¶¶ 39, 40, 42. The Shareholder Defendants were all shareholders of Kabbage. Compl.
¶¶ 34, 35, 45, 46, 48, 50–53, 335.
A. Congress Responds To The COVID-19 Pandemic With The Emergency
Paycheck Protection Program
The COVID-19 pandemic transformed the American economy overnight. On March 27,
2020, the CARES Act was signed into law, providing a $2.2 trillion stimulus package—roughly
ten percent of the total U.S. GDP—to prevent a frozen economy from spiraling into depression.
Compl. ¶ 69. A centerpiece of the CARES Act was the PPP, a $349 billion initiative to provide
small businesses with the liquidity they needed to survive the pandemic without mass layoffs or
salary reductions. 8
As the SBA and lawmakers emphasized, speed was the overriding priority of PPP lending.9
After the PPP was unveiled on April 2, 2020, the SBA directed lenders to begin processing loan
applications almost immediately “using their own systems.” 10 Lending under the PPP launched
the next day, on April 3, 2020. 11 Within just two weeks, all $349 billion in authorized funding was
committed. 12 Recognizing that even this unprecedented fiscal stimulus was insufficient to curb
8
Coronavirus, Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, § 1102(a)–(b), 134
Stat. 281, 286–94 (2020) (codified as amended at 15 U.S.C. § 636(a)).
9
See J.A. Ex. 10 at A00149 (SBA and Treasury joint press release) (emphasizing “[s]peed is the
operative word”). Three days after passage of the CARES Act, Senators Rubio, Collins, Cardin,
and Shaheen stated that “[i]t is critical that this relief is disbursed to small businesses as quickly
as possible to help ensure that no small businesses are forced to choose between solvency and
retaining their employees during this uncertain time.” J.A. Ex. 7 at A00140 (Letter from Senators
to Steven Mnuchin & Jovita Carranza).
10
J.A. Ex. 10 at A00149.
11
J.A. Ex. 13 at A00157 (SBA press release).
12
J.A Ex. 22 at A00238 (Congressional Research Service report); see Compl. ¶¶ 105–06
(describing the onslaught of applications in the initial weeks of PPP).
8
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the economic shock of the pandemic, Congress quickly authorized an additional $310 billion to
continue PPP lending. 13 Once again, administration officials urged lenders to “process loan appli-
cations previously submitted by eligible borrowers and disburse funds expeditiously.” 14 From
April 27 to August 8, 2020, lenders disbursed these additional funds. 15
The regulatory framework governing the PPP was assembled in real time, at a breakneck
pace. The SBA and the Department of Treasury published guidance in the form of interim final
rules (“IFRs”) and an expanding list of frequently asked questions (“FAQs”). This guidance
changed as frequently as daily. 16 Those agencies issued the first IFR guidance the evening of April
2, 2020—the day before PPP lending began. 17 By August 11, 2020, shortly after the first round of
PPP lending, the SBA and the Department of Treasury had published 23 IFRs and 51 FAQs. 18
13
Paycheck Protection Program and Health Care Enhancement Act, Pub. L. No. 116-139,
§ 101(a)(1), 134 Stat. 620, 620 (2020) (amending CARES Act § 1102(b)(1), 134 Stat. at 293).
14
J.A. Ex. 23 at A00244 (Treasury and SBA joint statement).
15
Id.; Act of July 4, 2020, Pub. L. No. 116-147, § 1, 134 Stat. 660, 660 (extending the commitment
period for PPP loans until August 8, 2020).
16
U.S. Dep’t of Treasury, Paycheck Protection Program (“Treasury Homepage”),
https://home.treasury.gov/policy-issues/coronavirus/assistance-for-small-businesses/paycheck-
protection-program [https://perma.cc/S2SH-WP96] (last visited Apr. 9, 2026) (collecting
guidance).
17
See Treasury Homepage (showing “Interim Final Rule 1” as “originally posted April 2, 2020”).
The first IFR became effective two weeks after it was made available, on April 15. See Business
Loan Program Temporary Changes; Paycheck Protection Program (“First IFR”), 85 Fed. Reg.
20811, 20811 (Apr. 15, 2020).
18
See J.A. Ex. 40 at A00411 (PPP FAQs as of Aug. 11, 2020) (containing 51 FAQs); Treasury
Homepage (showing 23 IFRs “originally posted” on or before Aug. 11, 2020).
9
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To ensure rapid approval and disbursement of funds, the PPP guidelines explicitly included
processes for expedited borrower applications and lender review. 19 For borrowers, the SBA re-
quired only a two-page application containing basic information, a good-faith certification that the
requested loan would not be used for an improper purpose, and documentation of payroll costs,
which determined the eligible loan amount. 20 PPP loans would be forgiven “up to the full principal
amount of the loan and any accrued interest” provided that the borrowers maintained or rehired
employees at their existing salary levels and used the loan proceeds for approved purposes. 21
For lenders, underwriting obligations were similarly streamlined, requiring them only to:
(i) “[c]onfirm receipt of borrower certifications” in PPP applications; (ii) “[c]onfirm receipt of
information demonstrating” that the borrower had salaried employees on or around February 15,
2020; (iii) “[c]onfirm the dollar amount of average monthly payroll costs for the preceding calen-
dar year by reviewing the payroll documentation submitted with the borrower’s application;” and
(iv) follow “applicable” Bank Secrecy Act (“BSA”) requirements by “establish[ing] an anti-
money-laundering (AML) compliance program equivalent to that of a comparable federally
19
First IFR § III.1, 85 Fed. Reg. at 20812. Government officials contemporaneously
acknowledged that these expedited processes would inevitably lead to borrower fraud. See 166
Cong. Rec. H1907, H1911 (daily ed. Apr. 23, 2020) (statement of Rep. McGovern, including an
article for the record where former special inspector general of the Troubled Asset Relief Program
stated that “[e]verybody’s acceptance of some or a lot of fraud is going to have to be high, because
it’s going to happen”).
20
J.A. Ex. 29 at A00286–87 (SBA Form 2483); see also J.A. Ex. 8 at A00143 (SBA Borrower Fact
Sheet)
21
First IFR § III.2(o), 85 Fed. Reg. at 20813–14; see also J.A. Ex. 8 at A00143–44 (Borrower Fact
Sheet).
10
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regulated institution” (the “Underwriting Provisions”). 22 Lenders’ underwriting obligations were
expressly “limited to the items above and reviewing [PPP applications].” 23
In other words, lenders were explicitly permitted to rely on the documentation submitted
by borrowers, and “[did] not need to conduct any verification,” so long as the borrower attested he
or she accurately verified information and included supporting documents. 24 Notably, the SBA
promised to “hold harmless any lender that relie[d] on such borrower documents and attestation,”
explaining that such “lender reliance … is necessary and appropriate in light of section 1106(h) of
the [CARES] Act, which prohibits the [SBA] Administrator from taking an enforcement action or
imposing penalties if the lender has received a borrower attestation” (the “Hold Harmless Provi-
sion”). 25 The first FAQ issued by the SBA, published on April 3, 2020, reinforced this framework:
lenders were “expected to perform a good faith review, in a reasonable time, of the borrower’s
calculations and supporting documents,” but “[p]roviding an accurate calculation of payroll costs
[was] the responsibility of the borrower.” 26
22
First IFR § III.3(b), 85 Fed. Reg. at 20815. The First IFR states that a qualifying AML program
“may include a customer identification program (CIP), which includes identifying and verifying
their PPP borrowers’ identities … . [Lenders] should also understand the nature and purpose of
their PPP customer relationships to develop customer risk profiles. Such entities will also
generally have to identify and report certain suspicious activity to the U.S. Department of the
Treasury’s Financial Crimes Enforcement Network (FinCEN).” Id. (emphasis added). As set forth
below, see Statement of Facts § I.C.1, Kabbage’s AML Policy included such programs.
23
First IFR § III.3(b), 85 Fed. Reg. at 20815; see also Compl. ¶ 2. In addition, lenders were
informed that the SBA guaranteed 100% of outstanding PPP loans, backed by the full faith and
credit of the United States. See J.A. Ex. 9 at A00146 (PPP Information Sheet: Lenders).
24
First IFR § III.3(c), 85 Fed. Reg. at 20815.
25
Id. at 20815–16.
26
J.A. Ex. 26 at A00252 & n.2, FAQ No. 1 (PPP FAQs as of Apr. 29, 2020). Notably, this first
FAQ did not define “good faith review.”
11
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Although the FAQs and IFRs multiplied, none of the evolving guidance modified the First
IFR’s Hold Harmless Provision or Underwriting Provisions. The SBA also pledged that “[t]he
U.S. government w[ould] not challenge lender PPP actions that conform” to the FAQs and IFRs.27
B. Kabbage Delivers Urgently Needed Funds To Struggling Small Businesses
Kabbage was well positioned to assist in the PPP because of its existing proprietary auto-
mated lending technology and an established customer base of small businesses. See Compl.
¶¶ 59, 61, 65. Prior to the pandemic, Kabbage’s business model involved partnering with banks
to originate loans while it handled marketing, servicing, and collections. Id. ¶ 60. 28
The SBA urged non-bank lenders, like Kabbage, to apply to become PPP lenders to “in-
crease the scope of PPP lending options and the speed with which PPP loans can be disbursed to
help small businesses across America.” 29 Kabbage answered the government’s call—it applied to
become a non-banking PPP lender on April 9, 2020, and was approved to lend on April 13, 2020.
Compl. ¶ 101. In a matter of months, Kabbage quickly became one of the nation’s largest provid-
ers of PPP loans. Id. ¶ 1.
C. Kabbage’s BSA/AML Compliance Program
1. Kabbage Had An Established Pre-Existing BSA/AML Compliance
Infrastructure
Long before the pandemic, Kabbage established an Enterprise BSA/AML and Office of
Foreign Asset Control (“OFAC”) Policy for “complying with the BSA and all other relevant stat-
utes relating to money laundering and sanctions” (the “BSA/AML Policy”). J.A. Ex. 4 at A00061
27
Id. at A00252.
28
See also J.A. Ex. 5 at A00081, A00083 (2019 Treliant Report).
29
J.A. Ex. 26 at A00258, FAQ No. 22 (FAQs as of April 29).
12
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(2019 Policy) (effective July 24, 2019); 30 see Compl. ¶ 82. Although Kabbage was not itself a
“financial institution” subject to the BSA, it “made a commitment to maintain an effective
BSA/AML program” pursuant to its bank partnerships, since at least 2017. J.A. Ex. 4 at A00061
(2019 Policy); J.A. Ex. 5 at A00081 (2019 Treliant Report); see Compl. ¶¶ 60, 82.
Pursuant to the Policy’s terms, the Board was responsible for overseeing Kabbage’s
BSA/AML program. Compl. ¶ 83. Specifically, the Board was required to: (1) review BSA/AML
reporting, as appropriate; (2) review the annual independent testing of the BSA/AML program and
any corrective action plans; (3) address any BSA/AML issues escalated to the Board; and (4) re-
view feedback from bank partners on the BSA/AML program and receive reports on any remedial
action. Id. While compliance reporting was “provided directly to the full Board,” a separate audit
committee (the “Audit Committee”) was delegated the risk and compliance oversight functions.
J.A. Ex. 5 at A00083 (2019 Treliant Report). The Board also designated a dedicated BSA/AML
Officer—Azba Habib, initially—who was responsible for day-to-day oversight of BSA/AML
compliance. Id. at A00083, A00103; see Compl. ¶ 97. As BSA/AML Officer, she was required
to: “promptly alert[] the Board to any material issues of BSA/AML non-compliance,” “monitor
the effectiveness of BSA/AML compliance … and tak[e] corrective action,,” “ensur[e] Kabbage
personnel receive BSA/AML training,” and “conduct[] an annual risk assessment” to report to the
30
This document, as well as other documents in the Joint Declaration on Behalf of All Defendants,
J.A. Ex. 1, are incorporated into the Complaint by reference. See In re Burlington Coat Factory
Secs. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (“[A] document integral to or explicitly relied
upon in the complaint may be considered without converting [a] motion to dismiss into one for
summary judgment.” (cleaned up)); Lepore v. SelectQuote Ins. Servs., Inc., 2023 WL 8469761, at
*2 (3d Cir. Dec. 7, 2023) (a document is incorporated by reference “if the claims asserted in the
complaint depend on its contents”). Further, Plaintiff “is presumably on notice of” Kabbage’s
documents “by virtue of [its control over] the Debtors’ estates,” making incorporation especially
appropriate. Stanziale v. CopperCom, Inc. (In re Conex Holdings, LLC), 518 B.R. 792, 804 n.66
(Bankr. D. Del. 2014).
13
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Board. J.A. Ex. 4 at A00065 (2019 Policy); see also Compl. ¶ 85. These annual risk assessments
were performed pursuant to a methodology developed by another “independent, third party pro-
vider” commissioned by Kabbage. J.A. Ex. 5 at A00082 (2019 Treliant Report).
The Chief Compliance Officer (“CCO”) was responsible for, among other things, “promot-
ing and implementing a strong culture of BSA/AML compliance,” “holding personnel accountable
for resolution of BSA/AML corrective actions,” and “overseeing annual, or more frequent as nec-
essary, compliance quality assurance, independent control testing, and review of [the BSA/AML]
Policy and reporting results to the Board.” Compl. ¶ 84. In addition to the BSA/AML Officer and
the CCO, all Kabbage employees were “require[d] … to report unusual or potentially suspicious
activity to the BSA/AML Officer or designee.” J.A. Ex. 4 at A00072 (2019 Policy); id. at A00066–
67 (imposing even further reporting requirements on Kabbage employees with “responsibilities
impacting the BSA/AML Program”). Kabbage’s BSA/AML Policy further provided that: (1) all
Kabbage employees had a duty to inform the CCO and BSA/AML Officer of any compliance-
related issues; (2) could report violations anonymously to the BSA/AML Officer; and (3) could
not be retaliated against for reporting violations. Id. at A00066–67, A00074 (2019 Policy); J.A.
Ex. 35 at A00354–55, A00362 (2020 Policy). The CCO was responsible for reviewing the
BSA/AML Officer’s work. Id. at A00354.
Kabbage also employed numerous Know Your Customer (“KYC”) and Know Your Busi-
ness (“KYB”) processes, including: (i) a customer identification program, to verify the identity of
all customers at the time of onboarding, and periodically thereafter, J.A. Ex. 4 at A00061, A00068–
69 (2019 Policy); (ii) a manual and automated third-party screening tool, which screened all ap-
plicants, customers, employees, and vendors on a regular basis, id. at A00071–72; (iii) transaction
monitoring processes through which Kabbage reviewed loan repayments above $5,000 for
14
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detection of possible money laundering, id. at A00073–74; (iv) ongoing review of “questionable
activity reports” by a third party, for any issues that were escalated for further investigation, id. at
A00073; and (v) annual BSA/AML and OFAC training for all board members and company em-
ployees, id. at A00075.
2. Kabbage’s Compliance Policies Were Routinely Audited
Kabbage’s BSA/AML compliance was routinely audited by the independent third-party
consulting and compliance firm Treliant LLC (“Treliant”). Compl. ¶¶ 87, 88. In 2018, Treliant
assessed the “design and effectiveness” of Kabbage’s BSA/AML Policy. J.A. Ex. 3 at A00039
(2018 Treliant Report); see Compl. ¶ 87. Treliant concluded that “[t]he Company’s Board of Di-
rectors maintains sufficient oversight of the BSA/AML Program through the Audit Committee of
the Board, including regular reporting on key [c]ompliance items and receiving escalation of ma-
terial issues.” J.A. Ex. 3 at A00047. Treliant also assigned the BSA/AML Policy elements a grade
reflecting the level of “assurance” that Kabbage’s controls could effectively mitigate an identified
risk. Id. No elements of Kabbage’s BSA/AML Policy were deemed inadequate. Most elements
received the highest “Reasonable Assurance” score, while some received the next-highest “Lim-
ited Assurance.” No element received an “Insufficient Assurance” score. Id. at A00047–48.
In 2019, Treliant conducted another annual audit of Kabbage’s BSA/AML Policy. Compl.
¶ 88. The 2019 Report found that Kabbage’s BSA/AML Policy was “robust,” “thoughtfully con-
structed,” and “adequately cover[ed] the BSA/AML and OFAC standards that would be expected”
of a similar company. J.A. Ex. 5 at A00081, A00083 (2019 Treliant Report). To assess the Board’s
performance, Treliant reviewed BSA/AML reporting to the Board, Board and committee meeting
minutes, the amended charter for the Audit Committee, approval documentation of key BSA/AML
documents, and the formal approval of and professional qualifications of the BSA/AML Officer.
Id. at A00083. Treliant also observed that “Kabbage requires that all Kabbage personnel receive
15
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BSA/AML training appropriate to their roles and responsibilities at least annually.” Id. at A00075.
Treliant “did not find any material concerns or issues,” id., and, once again, Treliant did not assign
any “Insufficient Assurance” ratings, id. at A00086–88. 31 The Board reviewed this audit report in
November 2019. Compl. ¶ 89.
3. Kabbage’s Protocols Met And Were Tailored To PPP Requirements
Kabbage’s established reporting and monitoring systems were effective in advance of, and
appropriate for, PPP lending.
The Board held “multiple formal and informal meetings between April 2020 (the start of
the PPP) and August 2020,” Compl. ¶ 202, including one where it approved an updated annual
BSA/AML Policy with PPP-specific amendments, id. ¶ 82. That updated Policy was drafted at the
start of PPP lending, as evidenced by a Kabbage partner bank approving it just weeks after PPP
lending began, on April 27, 2020. See J.A. Ex. 35 at A00364 (2020 Policy). The updated policy
made two changes to meet new PPP requirements: (1) now that Kabbage was, for the first time, a
direct lender, it would report suspicious activity directly to FinCEN (in addition to its existing
policy of reporting suspicious activity to its partner banks), id. at A00361; see First IFR
§ 3(b)(iv)(II), 85 Fed. Reg. at 20815, and (2) Kabbage decreased its ownership requirement thresh-
olds for its customer identification program, thus enhancing the program by taking a more con-
servative approach, see J.A. Ex. 35 at A00358 & nn.5–6 (2020 Policy); see J.A. Ex. 26 at A00259–
60, FAQ No. 25 (PPP FAQ as of April 29).
During Kabbage’s PPP lending, Frohwein and Petralia also addressed compliance and
staffing issues as they arose. When fraud personnel requested the return of several furloughed
31
Treliant identified areas for improvement but noted that Kabbage “had a number of
enhancements underway” that “were not fully implemented during the period of review.” J.A.
Ex. 5 at A00086 (2019 Treliant Report).
16
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employees, Petralia approved an additional hire to assess fraud risk. Compl. ¶ 106. And when
Kabbage’s BSA/AML Officer, Habib, requested on May 15, 2020, that Frohwein approve engag-
ing an outside consulting firm for BSA/AML support, Frohwein responded: “go for it.” Id. ¶ 170.
Alvarez & Marsal (“A&M”) was engaged three days later to conduct a third-party risk assessment
of Kabbage’s BSA/AML program, specifically focused on PPP lending. Id. ¶ 131.
A&M prepared a draft report (the “A&M Report”), which concluded that Kabbage main-
tained “a PPP compliance program that generally appears to be consistent with the SBA’s PPP
Interim Final Rules guidance and applicable BSA/AML and OFAC requirements and our under-
standing of regulatory expectations.” J.A. Ex. 30 at A00292 (A&M Report). A&M observed that
Kabbage was “currently in the midst of enhancing its controls and making key operational changes
to comply with evolving SBA PPP guidance changes.” Id. A&M also found that Kabbage was
“staffed to handle the volume of applications and risk tickets that are being generated.” Id. at
A00302.
Kabbage’s compliance personnel actively identified and addressed issues that arose in con-
nection with PPP lending. From the beginning of April until June 2020, Kabbage’s BSA/AML
Officer, Habib, acting consistently with the BSA/AML Policy, flagged risks and recommended
improvements to the Policy as novel PPP-related issues arose. Compl. ¶¶ 97, 126, 133–36. When
Habib left the company in June 2020, her direct superior assumed the BSA/AML Officer role on
an interim basis. Id. ¶¶ 36, 85, 194. 32
Moreover, Kabbage used automated fraud screening tools to detect fraud without the need
for human review. Compl. ¶ 111. Emailage, Sentilink, and Threatmetrix each generated a risk
32
J.A. Ex. 4 at A00064 (2019 Policy) (“The BSA/AML Officer reports directly to the CCO, who
is also appointed by the Board.”).
17
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score for each applicant. J.A. Ex. 30 at A00306 (A&M Report). Applications that triggered ele-
vated scores received an “SBA Failed Manual Verification” flag, and loan funds could not be dis-
bursed until the flag was cleared by Kabbage’s Fraud Review team. Id. In addition to these auto-
mated tools, Kabbage maintained detailed manual review procedures for specific customer types,
including general partnerships, seasonal businesses, and professional employer organizations. Id.
at A00304. Approximately 75% of all PPP application reviews were automated; the remaining
25% were subject to manual review. Id. Before any loan could be funded, the borrower was
required to answer knowledge-based authentication questions correctly; borrowers who failed the
authentication were routed to an escalated review process that could result in the application being
flagged and the borrower not getting the funds. Id. at A00306.
Kabbage also maintained automated knock-out rules that declined applicants who failed to
meet PPP eligibility requirements, including applicants who: (1) were non-U.S. citizens; (2) were
in an ineligible industry; (3) had more than 500 employees; (4) started operations after February
15, 2020; or (5) had an associate or owner who was incarcerated, on probation, or had been indicted
for a felony or crime of moral turpitude. Id. at A00303. Kabbage ran queries comparing new
borrower application information to existing customer information, flagging any applications with
duplicate information. Id.
4. Kabbage’s PPP Loan Distribution System Met The Dire Needs Of The
Pandemic
The demand for PPP loans was unprecedented. Kabbage’s existing customer base—made
up of small businesses and sole proprietors, Compl. ¶ 59—needed PPP loans the most because
they were generally unable to seek funding through traditional financial institutions, id. ¶ 61. With
over 12,000 pre-registrations before lending even began, Frohwein observed that Kabbage’s start
to PPP lending was “the absolute craziest thing that [he’d] ever been involved in or could have
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imagined.” Id. ¶ 75. At one point, Kabbage faced a backlog of as many as 35,000 applications
pending review, but it continued tirelessly servicing loans. Id. ¶ 109. In all, Kabbage fulfilled
over $7 billion in PPP loans on behalf of more than 278,000 small businesses and sole proprietors,
helping the government save hundreds of thousands of jobs in the process. Amend. Disclosure
Statement for the Amend. Joint Ch. 11 Plan of Liquidation of Kabbage, Inc. (d/b/a KServicing) &
Its Affiliated Debtors 4, D.I. 467 (“Disclosure Statement”).
D. American Express Executes A Transaction To Purchase Kabbage’s IP Assets
On August 13, 2020, Kabbage and American Express Travel Related Services Company
(“Amex”) entered into a merger agreement (the “Merger Agreement”) setting out a multi-step mer-
ger transaction (the “Merger”). Compl. ¶ 250. The Merger was structured via a series of tax-
efficient steps. Id. ¶ 251. On October 13, 2020, pursuant to its obligations under the Merger
Agreement, Kabbage transferred (the “October 13 Transfer”) technology and intellectual property
to a wholly owned subsidiary, Alpha Kabbage Inc. (“Alpha Kabbage”). Id. (The Complaint does
not allege that the Shareholder Defendants received proceeds from the October 13 Transfer.) Amex
was not interested in acquiring Kabbage’s lending portfolio, which remained at legacy Kabbage
and included PPP lending and non-PPP small- and medium-sized business lending. See id. Then,
a newly formed Amex subsidiary merged into Alpha Kabbage, which would be renamed American
Express Kabbage, Inc. (“Amex Kabbage”), and which survived the Merger as a wholly owned
subsidiary of Amex. Id. ¶¶ 251, 273. In exchange for the cancellation of their existing shares of
Amex Kabbage, all shareholders of Amex Kabbage received a per-share payment of the merger
proceeds. Id.
Duff & Phelps issued a solvency opinion in connection with entry into the Merger Agree-
ment. Id. ¶ 246. As a condition to closing the Merger in October 2020, Duff & Phelps issued a
“bring down” solvency opinion—on which the Board was specifically permitted to rely, see 8 Del.
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Code § 141(e)—opining that post-Merger Kabbage (which, as set forth below, would be renamed
KServicing) would have sufficient cash to fund its remaining loan servicing operations. Id. ¶ 271.
The Complaint does not allege that any of the D&O Defendants were aware of threatened
or pending investigations or litigation before the parties entered into the Merger Agreement.
E. Following Changes To PPP, Kabbage’s Successor KServicing Files For
Bankruptcy
After the Merger, Kabbage continued servicing PPP loans under the new name KServicing.
Id. ¶¶ 270, 278. In the months that followed, a new administration departed from earlier guidance,
and the government began investigating PPP lenders on account of misrepresentations made by
borrowers. Id. ¶¶ 278, 280. Faced with the crippling expense of unanticipated government inves-
tigations and lawsuits, KServicing filed for bankruptcy on October 3, 2022. Id. ¶ 281.
F. KServicing Repeatedly Affirms That Kabbage Complied With All Applicable
PPP Requirements
KServicing’s new management replaced the D&O Defendants in 2020, at the time of the
Merger. From the start of the bankruptcy case through confirmation, management maintained that,
“[u]nder the most difficult of circumstances, [Kabbage] processed loan applications in good faith,
in accordance with [applicable law].” Decl. of Deborah Reiger-Paganis in Supp. of the Ch. 11
Pets. & First-Day Pleadings ¶ 42, D.I. 13 (“First Day Decl.”); Disclosure Statement 30.
Specifically, KServicing’s First Day Declaration and its amended Disclosure Statement ex-
plained that PPP regulations were being issued contemporaneously with, or lagging, actual lend-
ing, generating confusion. First Day Decl. ¶ 42 (“New rules and guidance were issued on a near
daily basis during the first few months of the PPP Loan Program.”); Disclosure Statement 4, 30
(“[T]he now-concluded PPP faces scrutiny due to lender confusion with deciphering unclear and
frequently-evolving SBA guidance, or lack thereof,” and “a distinct lack of clarity and guidance
from the SBA during the PPP’s initial rollout.”). It acknowledged that “[s]peed was the watchword
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of the PPP,” and that lenders faced pressure to approve applications as quickly as possible. First
Day Decl. ¶ 41; see id. ¶ 42 (“[G]overnment officials ... ask[ed] lenders to process loans to eligible
PPP Borrowers on the same day that they applied.”). KServicing further made clear that “[t]he
Debtors believe[d] they adhered to the PPP Loan rules and regulations in good faith,” Disclosure
Statement 34, and “[a]t all times, [Kabbage] complied with PPP lending requirements,” id. 31; see
First Day Decl. ¶ 17. KServicing likewise observed that a hallmark of the PPP program was min-
imal review of PPP borrower applications. Disclosure Statement 30–31 (explaining that pursuant
to the SBA, lenders “were permitted to rely on PPP Borrower representations,” and that requiring
additional review of borrower loan calculations “would … impose more than ‘minimal review’
requirements on lenders, and transfer risk to them that the PPP rules did not contemplate”).
KServicing described the government investigations as “hindsight investigations and misdirected
scrutiny,” id. at 4, and affirmed that “the DOJ’s allegations are wholly without merit,” id. at 31.
ARGUMENT
To survive a motion to dismiss, Plaintiff must allege facts giving rise to a plausible claim
for relief—one that “allows the Court to draw the reasonable inference that defendant is liable for
the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “If the allegations of the
complaint are contradicted by documents made a part thereof, the document controls and the Court
need not accept as true the allegations of the complaint.” Walker v. Sonafi Pasteur (In re Aphton
Corp.), 423 B.R. 76, 87 n.30 (Bankr. D. Del. 2010) (cleaned up) (quoting Sierra Invs., LLC v. SHC,
Inc. (In re SHC, Inc.), 329 B.R. 438, 442 (Bankr. D. Del. 2005)).
Section I of this brief addresses Plaintiff’s Caremark claim against the Directors (Count III)
and Officers (Count II), first addressing the “information systems” theory against the Directors
and then the Officers; and then addressing the “red flags” theory against the Directors and then the
Officers. Section II addresses the claim for breach of the duty of care against the Officers
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(Count I); Section III addresses the constructive and intentional fraudulent transfer claim arising
out of the October 13 Transfer against the Shareholder Defendants (Count IV); and Section IV
addresses the claims for disallowance and equitable subordination of certain defendants’ proofs of
claim filed in KServicing’s bankruptcy (Counts V–VII). Each of these claims fails to state a plau-
sible claim for relief. 33
I. PLAINTIFF’S CAREMARK CLAIMS FAIL (COUNTS II AND III)
The Complaint fails to plead what is “possibly the most difficult theory in corporation
law”—that the D&O Defendants are liable for failing to oversee Kabbage under Delaware’s Care-
mark doctrine. In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996). For a
Caremark claim to survive dismissal, the plaintiff must allege one of two theories—either that the
defendant (1) “utterly failed to implement any reporting or information system or controls” (the
“information systems” theory) or, (2) “having implemented such a system or controls, consciously
failed to monitor or oversee its operations” (the “red flags” theory). Stone v. Ritter, 911 A.2d 362,
370 (Del. 2006). Corporate directors must monitor the whole corporation, but officers need only
oversee operations (and implement reporting systems) that cover their respective “area[s] of au-
thority.” In re McDonald’s Corp. S’holder Deriv. Litig. (McDonald’s I), 289 A.3d 343, 369 (Del.
Ch. 2023).
A complaint must plead bad faith to state a Caremark claim. Marchand v. Barnhill, 212
A.3d 805, 820 (Del. 2019); JLL Consultants, Inc. v. Gothner (In re AgFeed USA, LLC), 558 B.R.
116, 126 (Bankr. D. Del. 2016). Because “[b]ad faith is a state of mind,” IBEW Loc. Union 481
33
The Directors join and incorporate by reference the arguments set forth in the Memorandum of
Law in Support of Motion to Dismiss of Non-Management Director Defendants Ioannis Pipilis and
Alex Chulack, and the Shareholder Defendants join and incorporate by reference the arguments set
forth in the Memorandum of Law in Support of Certain Defendants’ Motion to Dismiss Counts IV,
VI, and VII.
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Defined Contribution Plan & Tr. v. Winborne, 301 A.3d 596, 619 (Del. Ch. 2023), under either
Caremark theory, a complaint must plead a failure to act that is “sufficiently sustained, systemic,
or striking” to support “an inference that the fiduciary consciously failed to take action.” McDon-
ald’s I, 289 A.3d at 376 (emphasis added) (as to red flags); see also id. at 375 (“The officer must
consciously fail to make a good faith effort to establish information systems.”).
Notably, “a bad outcome, without more, does not equate to bad faith.” Bricklayers Pension
Fund of W. Pa. v. Brinkley, 2024 WL 3384823, at *13 (Del. Ch. July 24, 2024) (quoting Rich v. Yu
Kwai Chong, 66 A.3d 963, 980 (Del. Ch. 2013)). Concluding otherwise “would impose liability
by hindsight.” Winborne, 301 A.3d at 621. Caremark only requires that a fiduciary make “a good
faith effort”—i.e., to “try” to put in place a reasonable system of monitoring and reporting and to
oversee the company’s operations. Marchand, 212 A.3d at 821; see In re ProAssurance Corp.
S’holder Deriv. Litig., 2023 WL 6426294, at *1 (Del. Ch. Oct. 2, 2023) (“Oversight claims should
be reserved for extreme events. The point is to maintain a baseline expectation that fiduciaries try,
in good faith, to monitor key corporate risks and ensure that the entity operates lawfully.”).
A. The Complaint Fails To State An “Information Systems” Claim Against The
Director & Officer Defendants
To state a Caremark claim against either directors or officers under an “information sys-
tems” theory, the Complaint must plead facts sufficient to support a reasonable inference that Kab-
bage’s monitoring system was so deficient that “the directors [or officers] knew that they were not
discharging their fiduciary obligations” to perform oversight. Stone, 911 A.2d at 370, 372; see
also Marchand, 212 A.3d at 823 (“In decisions dismissing Caremark claims, the plaintiffs usually
lose because they must concede the existence of board-level systems of monitoring and over-
sight[.]”). Here, Plaintiff cannot satisfy the high burden to plead an “information systems” claim
against any of the D&O Defendants because—even viewing all of the Complaint’s allegations and
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the documents incorporated by reference in the light most favorable to Plaintiff—the Complaint
concedes the existence of a board-level monitoring system, committee, and reporting protocol that
was subject to third-party audit and review.
1. The Complaint Fails To State An “Information Systems” Claim
Against Directors Butler, Ebinger, Frohwein, and Stolle (Count III)
a. The Complaint Concedes The Existence Of Information
Systems And Controls
The Delaware Supreme Court has described systems and controls that, if present, typically
defeat a Caremark information systems claim, including “a regular protocol requiring board-level
reports about the relevant risks,” “a relevant committee,” and/or “third-party monitors, auditors,
or consultants.” Marchand, 212 A.3d at 823; see also Stone, 911 A.2d at 370–72 (noting that
incorporated-by-reference audit report demonstrated that the board designated a BSA/AML of-
ficer, delegated compliance oversight responsibilities to departments and committees, adopted and
periodically updated written BSA/AML policies, required annual compliance reporting to the
board, and directed employees to report suspicious activity—all of which “refut[ed] the assertion
that the directors ‘never took necessary steps … to ensure that a reasonable BSA compliance and
reporting system existed’”); City of Detroit Police & Fire Ret. Sys. v. Hamrock, 2022 WL 2387653,
at *15–16 (Del. Ch. June 30, 2022) (dismissing Caremark claim where the complaint conceded
existence of oversight committee that received reports and oversaw relevant policies, “demon-
strat[ing] the existence of a system rather than its absence”). Here, the Complaint alleges, and the
documents it incorporates show, that all of these systems and controls were present, negating any
claim that Kabbage “utterly failed to implement any reporting or information system or controls.”
Stone, 911 A.2d at 370.
Mandatory Reporting Protocols. Boards can establish oversight systems by “enact[ing]
written policies and procedures designed to ensure compliance with [] BSA and AML regulations.”
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Stone, 911 A.2d at 372. When those reporting protocols “requir[e] board-level reports about the
relevant risks,” they defeat an information systems claim. Marchand, 212 A.3d at 832; Hamrock,
2022 WL 2387653, at *15 (dismissing information systems claim where “Plaintiff does not allege
that board-level reporting on mission critical risks was discretionary”); Bricklayers, 2024 WL
3384823, at *4 (dismissing information systems claim where company had a compliance commit-
tee that was required to “report regularly to the Board”); Firemen’s Ret. Sys. of St. Louis v.
Sorenson, 2021 WL 4593777, at *13 (Del. Ch. Oct. 5, 2021) (dismissing information systems claim
where board received annual risk assessment reports); Rojas v. Ellison, 2019 WL 3408812, at *9
(Del. Ch. July 29, 2019) (dismissing information systems claim where audit committee’s charter
required it to discuss material compliance issues with management).
Here, the Complaint plainly concedes (and the documents incorporated by reference con-
firm) the existence of board-level mandatory reporting protocols. See Compl. ¶¶ 83–85. Before
Kabbage became a PPP lender, the Board established a written BSA/AML Policy. Compl. ¶ 82;
J.A. Ex. 4 at A00061 (2019 Policy); see also Statement of Facts § I.C.1. The Policy specifically
delegated BSA/AML compliance to a BSA/AML Officer—who oversaw Kabbage’s compliance
program, and a Board-appointed CCO—to whom the BSA/AML Officer reported. See Compl.
¶¶ 84, 85; J.A. Ex. 4 at A00065–66 (2019 Policy). The Policy also required the BSA/AML Officer
to provide mandatory reports to the Board regarding BSA/AML compliance. Compl. ¶ 85; J.A.
Ex. 4 at A00065–66 (2019 Policy) (“The BSA/AML Officer owns this Policy and is responsible
for … [p]romptly alerting the Board to any material issues of BSA/AML non-compliance, and
instituting and monitoring corrective action.”); id. at A00068 (requiring BSA/AML Officer to run
an “annual risk assessment” and “report[] the results … to the Board”) (emphases added); J.A.
Ex. 35 at A000353 (2020 Policy) (similar). All Kabbage employees were likewise required under
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the Policy to report BSA/AML compliance issues to the BSA/AML Officer and the CCO. J.A.
Ex. 4 at A00066–67 (2019 Policy) (requiring Kabbage employees “[r]eport[] unusual activity to
the CCO, BSA/AML Officer, or designee”). And the Complaint alleges that, at all relevant times,
Kabbage had an active BSA/AML Officer, Compl. ¶¶ 85, 140—and a fraud department with ded-
icated employees, id. at ¶¶ 37, 178. In addition, employees were able to report anonymously and
were protected from retaliation. See J.A. Ex. 4 at A00074 (2019 Policy); J.A. Ex. 35 at A00362
(2020 Policy); see also Statement of Facts § C.1.
Board Committee. Courts also routinely dismiss information systems claims where a board
establishes an oversight committee that operates in good faith. See, e.g., In re LendingClub Corp.
Deriv. Litig., 2019 WL 5678578, at *10 (Del. Ch. Oct. 31, 2019) (dismissing information systems
claim because company had an audit committee that met regularly); In re Gen. Motors Co. Deriv.
Litig., 2015 WL 3958724, at *15 (Del. Ch. June 26, 2015) (dismissing information systems claim
where audit committee met and received reports); Brewer v. Turner, 2025 WL 2769895, at *10
(Del. Ch. Sep. 29, 2025) (dismissing information systems claim where complaint demonstrated
that company had board committees tasked with monitoring risk); South v. Baker, 62 A.3d 1, 18
(Del. Ch. 2012) (dismissing information systems claim where mining company had a safety com-
mittee overseeing health and environmental compliance); Stone, 911 A.2d at 372 (dismissing in-
formation systems claim where outside report found that an audit committee “oversaw [the com-
pany’s] BSA/AML compliance program on a quarterly basis”). If an oversight committee exists,
a plaintiff can state an information systems claim only in extreme cases—for instance, if an “[a]udit
[c]ommittee [] failed to complete its audits.” Rich, 66 A.3d at 972.
The Complaint fails to plead that Kabbage lacked a functioning compliance committee. To
the contrary, the Complaint relies extensively on Treliant risk assessments, see Compl. ¶¶ 87–93,
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126, which affirmatively state that Kabbage did have a “delegated committee”—the Audit Com-
mittee—for Kabbage’s “risk and compliance oversight function.” J.A. Ex. 5 at A00082–83 (2019
Treliant Report) (“While compliance reporting is provided directly to the full Board, the charter
for the Board’s Audit Committee delegates the risk and compliance oversight function to the Audit
Committee.”). Moreover, Treliant reviewed a sample of the Audit Committee’s minutes and char-
ter, and it “did not find any material concerns or issues.” Id. The presence of a functioning com-
mittee warrants dismissal of Plaintiff’s “information systems” claim.
Third-Party Audits. Courts have also found that a board’s “use of third-party monitors,
auditors, or consultants” to stay apprised of compliance risks, coupled with mandatory board-level
reporting from management, precludes an information systems claim. Marchand, 212 A.3d at 823;
see, e.g., ProAssurance, 2023 WL 6426294, at *13 (information systems claim dismissed where
complaint detailed “engagement of auditors,” “oversight of management,” and “Board-level up-
dates”); City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 59 (Del. 2017) (information
systems claim dismissed where board received presentations from management on status of envi-
ronmental problems); Stone, 911 A.2d at 372–73 (information systems claim dismissed where
board relied on annual presentations from a BSA officer and periodic compliance audits).
The Complaint concedes that Kabbage had third-party auditors independently assess Kab-
bage’s BSA/AML Policy in 2018 and 2019. See Compl. ¶¶ 87–88; see also Statement of Facts
§ I.C.2. Neither report found that any audited elements were insufficient to mitigate identified
risks. J.A. Ex. 3 at A00047–48 (2018 Treliant Report); J.A. Ex. 5 at A00086–88 (2019 Treliant
Report). Together with its “regular protocol requiring board-level reports” and Audit Committee,
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Kabbage’s oversight by “third-party … auditors” more than defeats a Caremark “information sys-
tems” claim. See Marchand, 212 A.3d at 823 & n.112. 34
b. Having Conceded The Existence Of Information Systems, The
Complaint’s Remaining Allegations Fail To State An
Information Systems Claim
Count III also includes a patchwork of other conclusory and post-hoc allegations, see
Compl. ¶¶ 317–19, which fail to salvage the Complaint’s “information systems” theory against the
Directors.
First, the Complaint’s conclusory assertion that “a Board acting in good faith would not
have permitted Kabbage to become a PPP lender,” Compl. ¶ 319, simply is not plausible. Consid-
ering the existence of every “board-level system[] of monitoring and oversight” identified by the
Delaware Supreme Court 35—including mandatory reporting protocols, functioning Audit Com-
mittee, and routine and ongoing third-party audits of existing BSA/AML Policies, which satisfied
all applicable PPP regulations—there is no basis to suggest that “permitting Kabbage to become a
PPP lender” somehow constitutes prima facie evidence of bad faith. See Compl. ¶¶ 82–85, 87–
89; J.A. Ex. 35 at A00351, A00353 (2020 Policy); see also Statement of Facts § I.C.3.
Second, the Complaint’s allegation that the Board acted in bad faith by “utterly fail[ing]”
to implement reporting systems that provided the Board with timely and accurate information re-
lating to PPP lending, see Compl. ¶ 317, is implausible and inconsistent with other allegations and
documents incorporated into the Complaint. This allegation again cannot be squared with
34
At most, the Complaint’s allegations amount to criticism of these systems as imperfect, which
falls far short of alleging the Directors’ “utter failure” to establish them in the first place. See, e.g.,
Gen. Motors, 2015 WL 3958724, at *14 (allegation that defendants “did not receive specific types
of information” insufficient to establish that they utterly failed to inform themselves); Stone, 911
A.2d at 372 (“written policies and procedures designed to ensure compliance” are sufficient).
35
See Marchand, 212 A.3d at 823.
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Kabbage’s robust reporting regime, 36 Kabbage’s continued improvements to its already-adequate
policies (which improvements began immediately after the start of PPP lending), 37 and Kabbage’s
overall compliance with the government’s evolving SBA requirements. 38
Third, the Complaint’s assertion that the Board “did not ask whether there had been an
independent assessment of Kabbage’s PPP compliance program” between March and October
2020, Compl. ¶ 318, is legally insufficient. Caremark does not obligate directors to ask specific
compliance questions—it only requires that they have monitoring systems in place. Marchand,
212 A.3d at 821. 39 A failure to discuss a specific risk “is not enough for the Court to conclude a
36
Kabbage’s directors approved an updated and audited Policy in 2019. Compl. ¶ 82. Treliant
concluded that this updated policy was one “that would be expected for an organization of the type
and complexity of [Kabbage].” J.A. Ex. 5 at A00083 (2019 Treliant Report); J.A. Ex. 4 at A00061
(2019 Policy) (BSA/AML Policy established for “complying with the BSA and all other relevant
statutes related to money laundering and sanctions” as part of Kabbage’s “contractual obligations”
to its partner banks “to comply with regulations”). See also Statement of Facts § I.C.1.
37
Compl. ¶ 82. Although Caremark does not require bespoke information systems when adequate
monitoring systems already exist, see n.38, below—Kabbage began drafting a further updated
Policy at the start of PPP lending, which was approved by a partner bank on April 27, 2020, just
weeks after lending began, and which was approved by Kabbage’s Board thereafter. J.A. Ex. 35
at A00364 (2020 Policy); see also Statement of Facts § I.C.1.
38
See First IFR, 85 Fed. Reg. at 20815. To the extent the Complaint attempts to argue that the
Board acted in bad faith by not instituting a PPP-specific policy, see Compl. ¶ 317, that is
implausible because PPP lending began less than one day after the regulations were released. See
Statement of Facts § I.A. But even absent the exigencies of the pandemic, Caremark would not
have mandated a new set of PPP-specific BSA/AML policies. See Rojas, 2019 WL 3408812, at
*9 (dismissing information systems claim arising out of alleged violation of state consumer
protection law where company had a committee “charged with legal and regulatory compliance”
generally but no monitoring of state consumer protection laws specifically); Bricklayers, 2024 WL
3384823, at *4 (dismissing information systems claim predicated on Medicaid violations where
company had a compliance committee responsible for “oversight of all compliance activities of
[the company] with respect to all lines of business,” not just Medicaid).
39
Although the Delaware Supreme Court held that the plaintiffs in Marchand stated a Caremark
claim, here the facts are different in every material respect. In Marchand, the Delaware Supreme
Court found bad faith plausible because a corporate board did not discuss food safety compliance
and the company lacked both a “board committee that addressed food safety” and “regular
process[es] or protocols that required management to keep the board apprised of … compliance
29
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board of directors acted in bad faith.” Bricklayers, 2024 WL 3384823, at *15 (no discussion of
Medicaid compliance risk by the board of a Medicaid plan administrator between January 2020
and April 2021). Delaware courts have repeatedly held that even multi-year gaps in discussion of
a risk do not support an inference that a reporting system was absent. See, e.g., Horman v. Abney,
2017 WL 242571, at *10 (Del. Ch. Jan. 19, 2017) (a shipping company’s failure to discuss com-
pliance with laws governing shipping cigarettes for four years “is not sufficient to allege that [a]
system was not in place or that the Board was simply going through the motions”); Constr. Indus.
Laborers Pension Fund v. Bingle, 2022 WL 4102492, at *13 (Del. Ch. Sep. 6, 2022) (a software
company’s failure to discuss cybersecurity risks for 26 months insufficient to sustain information
systems claim). 40
Finally, the Complaint’s assertion that “if the Board had acted in good faith, it would have
instituted policies to ensure it received [particular] [r]eport[s],” Compl. ¶ 320, is exactly the sort
of hindsight-driven “could have, should have” speculation Delaware courts reject, see Gen. Mo-
tors, 2015 WL 3958724, at *15. As the Court of Chancery made clear, “[c]ontentions that the
Board did not receive specific types of information do not establish that the Board utterly failed”
to implement reporting systems. Id. at *14. Complaints about the quality, quantity, or frequency
of reports at most suggest the Board could have refined its system, not that it lacked one. Id. at
*15.
practices, risk, or reports.” 212 A.3d at 822. In contrast, as set forth above, Kabbage had a
functioning Audit Committee and a regularly audited BSA/AML Policy that required board-level
reporting. Compl. ¶¶ 83–85, 87–89; J.A. Ex. 3 at A00042, A00047 (2018 Treliant Report); see
also Bricklayers, 2024 WL 3384823, at *15 (distinguishing Marchand because company had
compliance committees and board received reports).
40
Notably, during the eight-month window in which the Complaint alleges that Kabbage did not
ask specifically about Kabbage’s “PPP compliance program,” the Board approved an updated
BSA/AML Policy, which was updated within weeks of the start of PPP lending. See n.37, above.
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2. The Complaint Fails To State An “Information Systems” Claim
Against Officers Frohwein and Petralia (Count II)
The Complaint’s “information systems” theory against the Officers (Frohwein and Petralia)
is based on the same allegations as those against the Directors. See Compl. ¶¶ 303–13. The only
conceivable addition appears to be the Complaint’s allegation that the Officers did not have infor-
mation systems to mandate reporting directly from employees to “themselves.” Id. ¶ 305. To the
extent this allegation is made against Frohwein and Petralia, 41 Delaware law does not require re-
porting directly to a president or a CEO “themselves,” as opposed to delegated officials with par-
ticularized compliance roles, as was the case at Kabbage. See id. ¶¶ 84–85; see also Statement of
Facts § I.C.1. 42 The Complaint thus fails to state an information systems claim against the Officers
for the same reasons that the Complaint fails to state an information systems claim against the
Directors. See § I.A.1, above.
B. The Complaint Fails To State A “Red Flags” Claim Against The D&O
Defendants
To succeed on a Caremark red flags theory, a plaintiff must allege that defendants were
alerted to evidence of illegality—the proverbial “red flag”—and then acted in bad faith by con-
sciously failing to address it. Marchand, 212 A.3d at 820; AgFeed USA, 558 B.R. at 127 (red flags
must be “consciously disregarded” (quoting Gen. Motors, 2015 WL 3958724, at *16)). A plaintiff
41
This allegation is group-pled against all officers. See Compl. ¶ 305.
42
Delaware law does not require every officer to monitor compliance risks in every department.
See Segway Inc. v. Cai, 349 A.3d 628, 635 (Del. Ch. 2023) (“At a minimum, a plaintiff … would
need to demonstrate that the officer failed to make a good faith effort to monitor central compliance
risks within her remit that pose potential harm to the company or others.”). That is consistent with
the principle that a plaintiff cannot state a claim against directors for delegating compliance
responsibilities to certain officers in the first place. See Stone, 911 A.2d at 373 (dismissing
Caremark claims against directors where they “delegated to certain employees and departments
… the responsibility of monitoring compliance”); J.A. Ex. 5 at A00083 (2019 Treliant Report)
(Board delegated “day-to-day management” of compliance to BSA/AML Officer and CCO).
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must show that the red flag put defendants on notice of unlawful conduct and that the defendants’
conscious disregard of the red flag proximately caused “corporate trauma.” In re Plug Power Inc.
S’holder Deriv. Litig., 2025 WL 1277166, at *13 (Del. Ch. May 2, 2025) (“For a red-flag theory
to work, the red flag must be sufficiently connected to the corporate trauma at issue to elevate the
board’s inaction in the face of the red flag to the level of bad faith.”); see also In re TransUnion
Deriv. S’holder Litig., 324 A.3d 869, 887 (Del. Ch. 2024) (“[T]he risks identified and ignored …
must be legal violations so obvious and material that disregarding them amounts to bad faith.”
(emphasis added)). “Corporate trauma” typically refers to legal liabilities flowing from illegal-
ity—i.e., that the company is “violat[ing] statutory requirements or … [is] engag[ing] in fraudulent
or criminal conduct.” Reiter v. Fairbank, 2016 WL 6081823, at *13 (Del. Ch. Oct. 18, 2016).
The red flag must be “waved in one’s face or displayed so that [it is] visible to the careful
observer.” Wood v. Baum, 953 A.2d 136, 143 (Del. 2008) (quoting In re Citigroup Inc. S’holders
Litig., 2003 WL 21384599, at *2 (Del. Ch. June 5, 2003)). Moreover, “liability requires a showing
that the directors knew that they were not discharging their fiduciary obligations”—negligence or
gross negligence is insufficient. Stone, 911 A.2d at 370 (emphasis added); see Giuliano v. Grenfell-
Gardner, 2025 WL 2502176, at *12 (Del. Ch. Sep. 2, 2025) (same as to officers).
None of the Complaint’s sparse allegations meet the exacting standard necessary to trigger
Caremark liability under Delaware law. As set forth below, the Court does not even need to parse
the Complaint’s many implausible allegations of red flags because the entire theory fails for a
threshold reason: The Complaint does not plead that any D&O Defendant had reason to believe
that Kabbage was failing to comply with the SBA’s evolving guidance—and because no D&O
Defendant had reason to infer legal liability that would cause corporate trauma, there was no red
flag that could be ignored in bad faith. That alone is sufficient to dismiss this claim. See § I.B.1,
32
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below. But even if one considers the specific purported red flags pled, both as to the Directors,
see § I.B.2, below, and the Officers, see § I.B.3, below, the Complaint fails to state a claim.
1. The D&O Defendants Had No Reason To Believe Kabbage’s Conduct
Was Unlawful
The Complaint’s red flags theory fails at the outset because the D&O Defendants had no
reason to believe that Kabbage’s conduct was unlawful—let alone in a manner that could expose
the company to corporate trauma. There are no allegations in the Complaint asserting that the
D&O Defendants had “notice of [] ongoing violations of the law.” Rojas, 2019 WL 3408812, at
*10 (emphasis omitted); see also Melbourne Mun. Firefighters’ Pension Tr. Fund v. Jacobs, 2016
WL 4076369, at *12 (Del. Ch. Aug. 1, 2016) (dismissing red flags claim against directors where
the “Board consistently expressed … its view that its business practices were not violative of in-
ternational antitrust laws”); TransUnion, 324 A.3d at 889 (dismissing red flags claim where com-
pany’s board acted under the advice of qualified counsel because “it cannot fairly be inferred that
the [b]oard relied on counsel in bad faith”); Bricklayers, 2024 WL 3384823, at *19 (dismissing
red flags claim where “the [b]oard accepted management’s statements that both the compliance
issues and the regulatory risks were being handled”).
Here, the Complaint does not allege the D&O Defendants ever received notice that Kab-
bage failed to comply with the law. The Complaint incorporates by reference numerous documents
that explicitly confirm the opposite—the D&O Defendants’ good faith belief that Kabbage com-
plied with the law. See, e.g., Compl. ¶ 199 (quoting J.A. Ex. 33 at A00337–41 (texts between
Kabbage executives about A&M Report)); J.A. Ex. 33 at A00341 (informing Frohwein that “eve-
rything we’re doing on PPP we’ve run through our outside coun[se]l focused on SBA…. I have no
problem defending all of it with reference to specific SBA IFR guidance.”); Compl. ¶ 115 (quoting
J.A. Ex. 21 at A00215 (texts between Kabbage executives about Kabbage’s PPP participation));
33
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J.A. Ex. 21 at A00216 (in response to email saying that Kabbage’s calculations were incorrect,
informing Frohwein and Petralia: “fine to listen to him but we’ve gone through this with
coun[se]l”). Where, as here, the Complaint fails to allege that the D&O Defendants had any reason
to believe that Kabbage was violating the law, there is no Caremark red flags liability.
2. The Complaint Further Fails To State A “Red Flags” Claim Against
Directors Butler, Ebinger, Frohwein, and Stolle (Count III)
It is not clear that the Complaint even attempts to plead a cognizable red flags theory
against the Directors. See Compl. ¶¶ 314–25; see also id. ¶ 18 (alleging “Kabbage’s Directors
(except for Frohwein)” were unaware of Kabbage’s purported failures). The Complaint only al-
leges a few threadbare flags that were purportedly “visible” to the Directors: (1) “Kabbage had
just furloughed numerous employees”; (2) the Board “needed to take remedial measures to get its
BSA/AML compliance control ‘equivalent to that of a comparable federally regulated institution’
before making loans”; and (3) a one million dollar reserve for contingent liabilities was insuffi-
cient. Compl. ¶¶ 319, 322. None of these allegations constitutes a Caremark red flag.
Employee Furloughs (Alleged Red Flag #1). The Complaint alleges that, in early 2020,
“[w]ith the entire country quarantined in their homes, commerce” and, therefore, small business
lending, “flatlined.” See Compl. ¶ 65. “As a result, Kabbage had to essentially shutter all but its
most basic operations” and “furloughed a significant number of employees.” Id. ¶ 66. But the
Complaint also specifically alleges that the Directors did not know that these furloughs caused
Kabbage to be “understaffed to conduct reasonable reviews of PPP loan applications.” Id. ¶ 206
(alleging that loan review understaffing was not disclosed to the Board).
This allegation—that the Board knew generally of company-wide employee furloughs—is
not a red flag. Delaware courts consistently hold that generalized, company-wide issues like staff-
ing shortages are too broad to provide the specific notice required to trigger Caremark red flag
34
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liability. See, e.g., Hamrock, 2022 WL 2387653, at *25–26 (pipeline company directors’
knowledge of “general recordkeeping deficiencies” and subsidiary’s safety violations were general
risks that could not constitute red flags that would have put board on notice of specific corporate
trauma resulting from gas explosion at pipeline run by different subsidiary); Clem v. Skinner, 2024
WL 668523, at *9 (Del. Ch. Feb. 19, 2024) (warnings of general compliance program weaknesses
were not red flags of specific corporate trauma arising out of illegal insulin billing practices). Be-
cause Kabbage’s furloughs spanned multiple departments, Compl. ¶ 66, and were part of a broader
cost-saving initiative across the organization, they could not constitute a red flag that is reasonably
tied to the Complaint’s theory of corporate trauma of exposing Kabbage to liability for PPP viola-
tions (and certainly cannot support an inference of bad faith).
Litigation Risk (Alleged Red Flag #2). The Complaint alleges that Frohwein told the Board
about a “risk of law suit[s] around PPP” and acknowledged the existence of “litigation risk.”
Compl. ¶¶ 213, 228. But litigation is one of the most common risks that American businesses face,
and such statements are insufficient to provide notice that Kabbage “was headed for corporate
trauma.” Bricklayers, 2024 WL 3384823, at *17 (observing that “reports of increasing regulatory
scrutiny, state investigations, and threatened litigation” do not, without more, “constitute red
flags”); 43 see also Fisher v. Sanborn, 2021 WL 1197577, at *14 n.137, *16 (Del. Ch. Mar. 30,
2021) (noting that presentations that warned of increasing “‘Level 3’ complaints,” a category of
customer complaint that included threats of litigation, did not constitute a red flag because they
did not “indicate that the Company had violated consumer protection laws”).
43
Here, the alleged references to litigation risk were even more superficial than the red flags
alleged in Bricklayers, where the Court of Chancery held that repeated warnings characterizing
pharmaceutical reimbursement practices as a “regulatory and reputational risk with the possibility
for adverse legal action” were too “devoid of details” to put directors on notice of the fact that
certain officers were illegally inflating reported costs. 2024 WL 3384823, at *18.
35
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2019 Treliant Report (Alleged Red Flag #3). Plaintiff pleads that Treliant’s 2019 Report
was provided to the Board, and that the Board did not “address the issues identified” in it.
Compl. ¶¶ 89–93. But the 2019 Treliant Report found that Kabbage’s BSA/AML program was
“robust,” “thoughtfully constructed,” and “adequately cover[ed] the BSA/AML and OFAC stand-
ards that would be expected for an organization of [its] type and complexity.” 44 It rated no element
of Kabbage’s BSA/AML program as insufficient. J.A. Ex. 5 at A00086–88 (2019 Treliant Report).
Delaware case law confirms the 2019 Treliant Report thus did not provide any red flag warning
that the Directors could have disregarded in bad faith. For example, in Reiter, a report indicated
that a company’s AML compliance risk had escalated from “low” to “high” over two years, but
that court found that the report was not a red flag because the report did not conclude that the
company was violating the law; instead, the report was a non-actionable “yellow flag[] of cau-
tion.” 45 2016 WL 6081823, at *13. The same reasoning should follow here.
Even if the Treliant Report was a red flag (which it was not), the Complaint concedes that
the Directors did not disregard it and instead remedied any purported issues. The Complaint is
clear that the Directors reviewed the report on November 13, 2019, Compl. ¶ 89, and approved an
updated BSA/AML Policy in July 2020, J.A. Ex. 35 at A000346 (2020 Policy). That updated
Policy both (1) improved items that received the middle “Limited Assurance” grade in the 2019
44
J.A. Ex. 5 at A00081, A00083 (2019 Treliant Report).
45
Moreover, even if the Court viewed the Complaint’s cherry-picked statements in the 2019
Treliant Report in a vacuum, they still would not constitute a red flag. See, e.g., Sorenson, 2021
WL 4593777, at *15–16 (“[U]pdates to the [b]oard about aspects of [company’s] cybersecurity
measures that needed improvement” were not “‘red flags’ … of illegality” absent allegations “that
[company’s] standards ran afoul of regulatory or legal requirements”). Again, the lowest rating
Treliant gave Kabbage was “Limited Assurance”—meaning there was some assurance that the
control addressed the identified risk—which it marked yellow (a literal yellow flag). J.A. Ex. 5 at
A00086–88 (2019 Treliant Report).
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Report, 46 and (2) included PPP-specific changes, see, e.g., J.A. Ex. 35 at A00358 nn.5–6 (2020
Policy). Thus, it is no surprise that Kabbage’s Head of Policy believed the Policy was “being
remediated/updated” between November 2019 and July 2020. Compl. ¶ 194. These allegations
preclude a finding that the Board acted in bad faith. See, e.g., Clem, 2024 WL 668523, at *11 (no
conscious disregard of red flags where “in due course, remediation efforts were made” by the
board). Attacks on the Board’s chosen response 47 are precluded by the business judgment rule. 48
3. The Complaint Fails To State A “Red Flags” Claim Against Officers
Frohwein And Petralia (Count II)
The Complaint’s red flag theories against Frohwein and Petralia as Officers appear to be
that they allegedly ignored: (1) statements from subordinate employees about staffing shortages;
(2) references made to PPP-related litigation risk during the Merger diligence process; (3) flaws in
Kabbage’s controls found by the 2019 Treliant Report; (4) supposed PPP violations identified in
the A&M Report; (5) a news article about borrower fraud on Kabbage’s platform; (6) an employee
46
For example, after the Report found that Kabbage’s KYC protocols did not identify prohibited
customer types as well as they could, J.A. Ex. 5 at A00087 (2019 Treliant Report), the July 2020
policy modified those protocols to include new categories of prohibited customers. J.A. Ex. 35 at
A00358–59 (2020 Policy).
47
Notably, as explained above, the Complaint also establishes that the Board’s chosen response
was, in fact, diligent. As documents incorporated by reference show, by April 2020, Kabbage had
already sent the updated 2020 BSA/AML Policy to a partner bank, demonstrating that—contrary
to the Complaint’s allegations, see Compl. ¶ 194—Kabbage set upon updating its BSA/AML
Policy as soon as PPP lending began. See Statement of Facts § I.C.3 (citing J.A. Ex. 35 at A00364
(2020 Policy)).
48
See Melbourne Firefighters, 2016 WL 4076369, at *9 (“Simply alleging that a [fiduciary]
incorrectly exercised its business judgment and made a ‘wrong’ decision in response to red flags
… is insufficient to plead bad faith.”); Transunion, 324 A.3d at 889 (“[A]n inadequate, delayed, or
misguided response to red flags cannot support a claim for breach of the duty of loyalty—no matter
how it is categorized.”); In re Qualcomm Inc. FCPA S’holder Deriv. Litig., 2017 WL 2608723, at
*4 (Del. Ch. June 16, 2017) (“[S]econd-guess[ing] the timing and manner of the board’s response
to [] red flags … fails to state a Caremark claim.”).
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email about a calculation error in Kabbage’s online loan applications involving employee payroll
costs; and (7) Wells Fargo’s termination of its relationship with Kabbage. See Compl. ¶¶ 93, 117–
18, 206, 227, 258–65, 306. 49 These allegations do not state a claim for Caremark liability because:
(1) they are not red flags that actually warned Frohwein or Petralia of alleged corporate trauma;
and (2) the Complaint fails to allege that either Frohwein or Petralia ignored those alleged red flags
in bad faith.
Staffing Shortages (Alleged Red Flag #1). The Complaint alleges that Frohwein and Petra-
lia received warnings from subordinates about inadequate staffing—specifically, that Frohwein
was told by Habib that Kabbage had “very limited resources in compliance,” Compl. ¶ 130 (em-
phasis removed), and that Nicole Hill asked Petralia for “the return of six employees to help with
assessing fraud risk, 50 id. ¶¶ 106, 206. Neither message was a red flag because neither provided
notice of any unlawful conduct.
In addition, Habib and Hill received timely responses. After Habib sent Frohwein an email
noting that hiring A&M could benefit compliance, Kabbage engaged A&M just three days later.
Id. ¶¶ 130–31. Likewise, when Hill asked Petralia to hire furloughed compliance employees back,
Petralia approved an additional hire. Id. ¶ 106. These remediation responses foreclose a red flag
claim. See n.48, above.
Litigation Risk (Alleged Red Flag #2). Plaintiff argues that Frohwein and Petralia ignored
Amex’s concerns about PPP-related litigation risk. Compl. ¶ 227. But abstract concerns about
49
To the extent that the Complaint alleges that Frohwein and Petralia also ignored the same red
flags as other Directors, those claims fail for the reasons set forth above. See § I.B.2, above. The
Complaint does not allege that Frohwein or Petralia knew of the other “red flags” referenced in
the Complaint.
50
The Complaint does not allege that either Frohwein or Petralia were aware of Hill’s other alleged
criticisms of Kabbage’s fraud controls. See Compl. ¶¶ 94–95.
38
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“the possibility for adverse legal action,” especially in the context of transactional due diligence,
are not red flags, see Bricklayers, 2024 WL 3384823, at *18, and do not constitute notice of “ob-
vious and material” illegality, see TransUnion, 324 A.3d at 887. See also § I.B.2, above.
2019 Treliant Report (Alleged Red Flag #3). Plaintiff broadly alleges that “Defendants”
did not address the issues identified in the 2019 Treliant Report. Compl. ¶ 93. But for reasons
stated above, the 2019 Treliant Report was not a red flag, and even if it was, Kabbage responded
to it. See § I.B.2, above.
A&M Report (Alleged Red Flag #4). Plaintiff alleges that the A&M Report was a red flag
and cites Frohwein’s incredulous reaction to the A&M Report and its potential impact on the Amex
deal. 51 Compl. ¶¶ 25, 193, 199. But the A&M Report, like the 2019 Treliant Report, could not
plausibly constitute a red flag because the report itself concluded that Kabbage’s PPP compliance
program “generally appear[ed] to be consistent with the SBA’s PPP Interim Final Rules guidance
and applicable BSA/AML and OFAC requirements.” J.A. Ex. 30 at A00292 (A&M Report). 52 For
all its emphasis on Frohwein’s use of an expletive when responding to the A&M Report, the Com-
plaint does not even attempt to explain how the report’s positive conclusion that Kabbage complied
with applicable rules and regulations, could plausibly constitute a red flag of non-compliance. 53
51
The Complaint does not allege that Petralia ever saw the A&M Report.
52
Plaintiff points to the A&M Report’s references to certain areas “need[ing] improvement,”
Compl. ¶¶ 176–77, J.A. Ex. 30 at A00306 (A&M Report), but the actual warnings are only of
increasing compliance risk, which does not constitute a red flag. See Reiter, 2016 WL 6081823,
at *13 (no red flags liability because, absent any finding of illegality, the compliance report
defendants received was a “yellow flag[] of caution concerning … escalating … compliance risk”).
53
Because, for the reasons identified in the text, the Complaint’s red flag allegation based on the
A&M report, Compl. ¶¶ 25, 193, 199, is not plausible, the Court may end its inquiry there.
Nevertheless, because the Complaint appears fixated on Frohwein’s message about the A&M
Report, and because both the message and the A&M Report are incorporated by reference into the
Complaint, see id., the Court may consider the following: Frohwein’s message expressed
39
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News Article About Borrower Fraud (Alleged Red Flag #5). The Complaint pleads that,
on September 10, 2020, Frohwein and Petralia saw a news article about high rates of fraud on
Kabbage’s lending platform. Compl. ¶¶ 260–61. The Complaint fails to allege that the article (or
the request for comment that preceded it, Compl. ¶¶ 258–59) was a red flag because, again, the
article did not suggest that Kabbage was breaking the law. Reporting about fraudulent borrowers’
use of Kabbage’s platform merely demonstrated that: (1) Kabbage, like every lender (PPP and non-
PPP alike) had a nonzero rate of fraud; and (2) as lawmakers predicted before PPP lending began,
the program would inevitably attract higher fraud than traditional lending by virtue of its design.
See Statement of Facts § I.A n.19. 54 Reports of borrower fraud that parties all treated as inevitable
do not constitute red flags that a lender was violating PPP regulations. See IMG Holding LLC v.
Dimon, 2024 WL 1634878, at *4 (Del. Ch. Apr. 16, 2024) (articles detailing Zelle fraud by cus-
tomers were not red flags because they did not “describe any failures by [company] to investigate
or reimburse customers properly”); Fisher, 2021 WL 1197577, at *14 & n.137, *16 (presentations
that warned of increasing customer complaints and threats of litigation, but did not “indicate that
frustration with a table in the introduction to the draft A&M Report, which contained a misleading
color scheme that gave the reader the (entirely false) impression that A&M opined that Kabbage
was noncompliant when in fact the report concluded that Kabbage was compliant. See Compl.
¶ 199 (alleging Frohwein stated “if you read the report, you’ll see the problems. They’re all in
red—literally.”). A&M’s color-coding emphasized the compliance categories that A&M believed
were most important in bright red coloring, even if Kabbage received the highest “quality” grade
for its performance in that category. See, e.g., J.A. Ex. 30 at A00297–301 (A&M Report) (denoting
“High” importance of identifying regulatory updates in red, while assigning Kabbage a “Quality
of Risk Management” rating of “Strong,” meaning that “Kabbage’s risk management systems fully
identif[ied] and appropriately control[led] all risks posed by the product or process”); id. at A00302
(same for Know Your Customer / Customer Due Diligence risk). Frohwein’s response reflected
frustration with that misleading color scheme because of the misinterpretations that it would
inevitably cause.
54
Notably, given the Hold Harmless Provision, which insulated lenders from liability for relying
on borrower attestations, First IFR § III.3(c), 85 Fed. Reg. at 20815–16, the mere existence of
some degree of fraud was not expected to result in any liability for Kabbage.
40
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the Company had violated consumer protection laws … did not constitute a ‘red flag’”); Cai, 349
A.3d at 628 (dismissing red flags claim because plaintiff failed to allege defendant knew of “ma-
terial legal violations”).
Messages Regarding Online Loan Application Calculation Errors (Alleged Red Flag #6).
The Complaint highlights an email from a Kabbage employee to Petralia (and other officers, but
not Frohwein) raising an issue that Kabbage employees had purportedly identified with its online
loan application. The Complaint alleges that borrowers’ loan eligibility was supposed to be cal-
culated based on a business’s “eligible payroll costs,” which excluded annual salaries in excess of
$100,000. Compl. ¶ 117. It further suggests that Kabbage employees proactively identified that
certain borrowers appeared to be incorrectly certifying that they were entitled to higher loan
amounts by including salaries that were in excess of $100,000, and suggested that Kabbage place
a cap in their automated system. Id. Far from pleading that Petralia and the other officers ignored
this message in bad faith, documents incorporated by reference into the Complaint show that they
took steps to resolve the issue within hours of the purported communication. J.A. Ex. 24 at A00246
(Email chain concerning $100K caps) (“The cap is back in now – getting a full list of impacted
accounts.” (emphasis omitted)); see Bricklayers, 2024 WL 3384823, at *19 (no bad faith where a
board “accepted management’s statements that … [issues] were being handled”). Likewise, the
Complaint alleges—on the basis of a group text message chain—that Frohwein and Petralia were
aware of a “glaring error” in loan calculations, see Compl. ¶ 115, even though that same text chain
establishes that Frohwein approved of further investigation of the alleged error despite having
already discussed it with counsel. See J.A. Ex. 21 at A00215–16.
Communications With Wells Fargo (Alleged Red Flag #7). The Complaint asserts that on
or around June 5, 2020, Wells Fargo terminated its relationship as Kabbage’s corporate bank for
41
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two reasons: (1) “lingering concerns about defaults in Kabbage’s legacy [i.e., non-PPP] loan port-
folio;” and (2) “[i]n part because of its growing concerns about Kabbage’s PPP program.” Compl.
¶ 167. Further, the Complaint alleges that Wells Fargo’s relationship manager “explained the rea-
soning for its decision with Frohwein personally,” but nevertheless allowed Kabbage to keep its
accounts with Wells Fargo for several additional months. Id. ¶¶ 167–68. Neither Wells Fargo’s
decision, nor the Complaint’s vague allegations about what Wells Fargo’s relationship manager
told Frohwein, can constitute red flag warnings of illegality that Frohwein ignored in bad faith.
First, the Complaint does not even attempt to plead that Wells Fargo provided any type of red flag
warning that Kabbage was engaged in illegal conduct. Nor would such an allegation be plausible,
given that the Complaint concedes that Wells Fargo continued doing business with Kabbage for
“several months.” Id. ¶ 168. Second, the Complaint does not allege that Wells Fargo advised
Kabbage of compliance risk—which, even if it had, would not have constituted a red flag under
Delaware law, see n.39, above.
In sum, Plaintiff fails to allege a single red flag that Frohwein or Petralia disregarded in
bad faith. As such, the Complaint fails to state a Caremark red flag claim against the Officers.
II. PLAINTIFF’S DUTY OF CARE CLAIM AGAINST FROHWEIN AND
PETRALIA FAILS (COUNT I)
Plaintiff’s duty of care claim against the Officers fails for two reasons. First, the Complaint
largely attempts to repackage its Caremark allegations as breaches of the duty of care, which is
not permitted under Delaware law. Second, the Complaint fails to plead any viable duty of care
42
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theory, against either Frohwein or Petralia, that is not duplicative of the Complaint’s Caremark
allegations.
A. Plaintiff Cannot Plead A Duty Of Care Claim By Recycling Its Caremark
Allegations
Under Delaware law, the fiduciary duty of oversight “only derives from the duty of loyalty,
with no room for the duty of care.” Ont. Provincial Council of Carpenters’ Pension Tr. Fund v.
Walton, 294 A.3d 65, 89 (Del. Ch. 2023). Courts routinely recharacterize duty of care allegations
about “purported failures to oversee and actively monitor” as Caremark claims and then reject
them under Caremark’s demanding standard. Gottlieb v. Liebowitz (In re KSL Media, Inc.), 732
F. App’x 535, 536 (9th Cir. 2018) (rejecting an argument that “fail[ing] to oversee [a company’s]
operations” could state “a claim for breach of the duty of care”); see, e.g., Grenfell-Gardner, 2025
WL 2502176, at *6, *12 (dismissing duty of care claim that was “in essence” an oversight violation
because “oversight claims require a showing of bad faith”); Kravitz v. Tavlarios, 2020 WL
3871340, at *8 (S.D.N.Y. July 8, 2020) (allegations that “implicate only an alleged failure to mon-
itor the Company … [constitute] a Caremark claim, which implicates only a breach of the duty of
loyalty … [and] fail[] to state a claim for breach of the duty of care”); cf. In re GoPro, Inc. S’holder
Deriv. Litig., 2020 WL 2036602, at *10 (Del. Ch. Apr. 28, 2020) (evaluating a failure-to-disclose
claim under Caremark because “if directors have actual knowledge of wrongdoing and fail to take
corrective action, that is a Caremark claim”) (cleaned up). In short, courts hold that failures of
oversight must be evaluated under the stringent Caremark standard, even if pled as breaches of the
duty of care.
Most of Count I’s allegations are repackaged oversight allegations, which as set forth
above, see §§ I.A, I.B, do not survive Caremark. Count II alleges that Officers “were responsible
… to assure themselves that information and reporting systems existed in the organization,”
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Compl. ¶ 291; “fail[ed] to ensure Kabbage’s compliance with relevant BSA/AML laws and regu-
lations,” id. ¶ 293; “failed to take appropriate action … to prevent Kabbage from violating the
law,” id. ¶ 295; “ignored major compliance issues,” id. ¶ 296; “failed to ensure that Kabbage had
[adequate] information and reporting systems,” id. ¶ 297; and failed to address certain issues that
were the “product of … the lack of reasonable reporting systems,” id. ¶ 298. “Although framed
as a duty of care claim,” these claims “are in essence oversight violations.” See Grenfell-Gardner,
2025 WL 2502176, at *12. Because “oversight claims require a showing of bad faith”—and, for
the reasons stated in § I, the Complaint fails to do so—this claim must be dismissed.
B. Plaintiff Fails To State Any Non-Caremark Duty Of Care Claim
Once the Complaint’s oversight allegations are excised from the duty of care claim in
Count II, two allegations remain—that the Officers acted with gross negligence by (1) improperly
certifying Kabbage’s compliance with PPP regulations, Compl. ¶ 294, and (2) retaining insufficient
assets to cover Kabbage’s legal liabilities, id. ¶ 299. These allegations are insufficient to save the
duty of care claim. “A claim for breach of the duty of care requires a showing of gross negligence
which generally ‘requires directors and officers to fail to inform themselves fully and in a deliber-
ate manner.” Burtch v. Opus, LLC (In re Opus E., LLC), 528 B.R. 30, 66 (Bankr. D. Del. 2015)
(quoting Official Comm. of Unsecured Creditors of Fedders N. Am., Inc. v. Goldman Sachs Credit
Partners L.P. (In re Fedders N. Am., Inc.), 405 B.R. 527, 539 (Bankr. D. Del. 2009)); see also
McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008) (officer’s duty of care is breached by
gross negligence—“conduct that constitutes reckless indifference or actions that are without the
bounds of reason”); Metro Storage Int’l LLC v. Harron, 275 A.3d 810, 845–46 (Del. Ch. 2022)
(same). Because courts focus on process, not results, they do not second-guess officers’ business
judgments or operational choices. See Hurwitz v. Mahoney (In re Space Case), 2024 WL 1628440,
at *8 (Bankr. D. Del. Apr. 15, 2024) (duty of care claim failed because “the facts alleged merely
44
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describe[d] business decisions, some imperfect in hindsight,” and were “not sufficient to rebut …
the business judgment presumption”). The Complaint does not come close to stating a duty of
care claim based on the two remaining allegations.
First, Plaintiff alleges that Frohwein, Petralia, Askins, Robinson, and Taussig “decided to
certify that Kabbage was in compliance with required PPP regulations” even though they knew
that Kabbage “lacked a BSA/AML ‘compliance program equivalent to that of a comparable fed-
erally regulated institution.’” Compl. ¶ 294. This claim fails against Frohwein and Petralia for
multiple reasons. Frohwein and Petralia did not sign the certification 55 and the Complaint does
not plead a single non-conclusory fact suggesting Frohwein or Petralia played any role in preparing
or disseminating the certification. 56 Thus, the Complaint does not actually allege that either of
them “decided to certify” Kabbage’s compliance. Compl. ¶ 294; see Stanziale v. Heico Holdings,
Inc. (In re Conex Holdings, LLC), 514 B.R. 405, 414 (Bankr. D. Del. 2014) (dismissing fiduciary
duty claims that “lump[ed] all [individual defendants] together”). 57 Moreover, even if the Com-
plaint alleged that Frohwein or Petralia had certified Kabbage’s compliance (and it does not), the
55
Compl. ¶ 100; see also J.A. Ex. 17 at A00178, A00183 (SBA Form 3507).
56
See Compl. ¶¶ 289–302. Delaware courts routinely reject conclusory assertions that officers
must have been responsible for a misrepresentation because of their general oversight role. See,
e.g., In re Baker Hughes Inc. Merger Litig., 2020 WL 6281427, at *16 (Del. Ch. Oct. 27, 2020)
(rejecting as insufficient the “unsubstantiated assertion” that a CFO would have reviewed or
authorized the allegedly false statement “because she was CFO”); see also id. (dismissing duty of
care claims under more lenient state law “conceivability” pleading standard).
57
See also Joseph v. Frank (In re Troll Commc’ns, LLC), 385 B.R. 110, 120 (Bankr. D. Del. 2008)
(dismissing fiduciary duty claims that “lack[ed] sufficient detail about which officers, if any,
knowingly participated” in a challenged act); Bank of Am., N.A. v. Knight, 725 F.3d 815, 818–19
(7th Cir. 2013) (Easterbrook, C.J.) (affirming dismissal where complaint pled what “defendants
collectively did, without imputing concrete acts to specific litigants” because “[l]iability is
personal”).
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Complaint and documents it incorporates by reference render it implausible that the SBA certifi-
cation was false in the first place. 58
Second, Plaintiff asserts that “Frohwein, Petralia, Askins, Robinson, and Taussig acted with
gross negligence in failing to ensure that Kabbage retained sufficient assets to cover its legal lia-
bilities” and should have “preserved all Kabbage’s cash to cover these liabilities.” Compl. ¶¶ 299–
300. But other allegations throughout the Complaint demonstrate that matters relating to the post-
Merger capitalization of Kabbage, including obtaining a solvency opinion, were spearheaded by
Kabbage’s CFO, who is not a defendant in this action. See Compl. ¶¶ 246, 248, 250; see also n.56.
Here, too, the Complaint’s group-pleading—replete with generalized assertions about what “Kab-
bage instructed” or “Kabbage insisted,” see Compl. ¶¶ 230–44—fails to state a claim against Of-
ficers Frohwein and Petralia. See Conex Holdings, 514 B.R. at 414 (to satisfy Twombly and Iqbal
pleading standard, plaintiff must “supply[] specific facts as to each defendant’s wrongdoing”); see
also n.57. 59 As such, the duty of care claim must be dismissed.
III. PLAINTIFF’S FRAUDULENT TRANSFER CLAIM AGAINST THE
SHAREHOLDER DEFENDANTS FAILS (COUNT IV)
The Complaint alleges (Compl. ¶¶ 327–32) that the October 13 Transfer constitutes a con-
structive and actual fraudulent transfer, which can be recovered from the Shareholder Defendants
in their capacities as “entit[ies] for whose benefit such transfer was made” under Bankruptcy Code
Section 550(a)(1). Accepting the Complaint’s allegations as true, this theory fails for at least two
58
See, e.g., J.A. Ex. 5 at A00083 (2019 Treliant Report); see also Statement of Facts §§ I.C.1, I.C.3
(explaining that Kabbage’s BSA/AML systems complied with applicable PPP regulations).
59
To the extent the Complaint alleges any facts against Frohwein that are not group-pled, they
demonstrate the opposite of the type of “devil-may-care attitude or indifference to duty amounting
to recklessness” required to plead gross negligence. Albert v. Alex. Brown Mgmt. Servs., Inc., 2005
WL 2130607, at *4 (Del. Ch. Aug. 26, 2005); see Compl. ¶ 244 (Frohwein consulted outside
counsel regarding contingent liabilities); id. ¶ 248 (Frohwein discussed litigation risks with Board).
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reasons. First, the Complaint fails to state a claim under Section 550 against the Shareholder
Defendants (which the Complaint concedes were neither initial nor subsequent transferees of the
October 13 Transfer) because it neither alleges veil piercing nor other elements of “transfer bene-
ficiary” liability. See § III.A, below. Second, recovering from the non-transferee Shareholder De-
fendants as “beneficiaries” requires the existence of an avoidable transfer—which the October 13
Transfer was not, because it was made pursuant to an enforceable antecedent contractual obligation
(the Merger Agreement) executed months earlier. See § III.B, below.
A. The Shareholder Defendants Cannot Be Held Liable As Fraudulent Transfer
“Beneficiaries” Under Bankruptcy Code Section 550(a)(1)
Even if the Complaint did state a plausible prima facie fraudulent transfer claim (which, as
set forth in § III.B, below, it does not), Plaintiff could not recover from the Shareholder Defendants.
The Complaint concedes the Shareholder Defendants were neither initial nor subsequent transfer-
ees of the October 13 Transfer, and the Complaint’s novel and expansive “beneficiary” theory
cannot succeed unless it alleges: (1) facts sufficient to support piercing the corporate veil between
Alpha Kabbage (the initial transferee) on one hand, and the Shareholder Defendants (shareholders
of the initial transferee), on the other hand; and/or (2) an actual, direct benefit that is quantifiable
and accessible.
1. Bankruptcy Code Section 550 Permits Recovery Only Against
Transferees And A Limited Set Of “Transfer Beneficiaries”
Section 550(a) of the Code allows a trustee to recover from (i) the initial transferee or “the
entity for whose benefit such transfer was made” or (ii) “any immediate or mediate transferee.”
11 U.S.C. § 550(a). The Complaint is explicit that the Shareholder Defendants are not initial,
mediate, or immediate transferees. See, e.g., Compl. ¶¶ 32, 251–54, 333–37. As such, the Com-
plaint fails to state a fraudulent transfer claim against the Shareholder Defendants unless it
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establishes that they are “entit[ies] for whose benefit” the October 13 Transfer was made under
Section 550(a)(1), which it does not.
An entity for whose benefit a transfer is made under Section 550(a)(1) “is typically the
guarantor of a debt that was extinguished by the transfer.” Janvey v. Libyan Inv. Auth., 840 F.3d
248, 265 (5th Cir. 2016); see also Reily v. Kapila (In re Int’l Mgmt. Assoc.), 399 F.3d 1288, 1292
(11th Cir. 2005) (benefit to guarantor is “paradigm case”); Dunn v. HPS Inv. Partners, LLC (In re
Alta Mesa Res., Inc.), 2024 WL 4379801, at *4 (Bankr. S.D. Tex. Oct. 1, 2024) (same). Plaintiff
does not suggest the Shareholder Defendants are guarantors.
In the rare instances where courts have held a non-guarantor shareholder of a transferee
liable for a fraudulent transfer, plaintiffs have pierced the corporate veil between the shareholder
(parent) and the transferee (subsidiary). See, e.g., BYJU’s Alpha, Inc. v. Camshaft Cap. Fund, LP
(In re BYJU’s Alpha), 2025 WL 665294, at *15 (Bankr. D. Del. Feb. 27, 2025) (parent of wholly
owned subsidiary that received fraudulent transfer liable as “beneficiary” under Section 550(a)(1)
where veil was pierced as a matter of law). 60 Plaintiff does not even attempt to pierce the corporate
veil to the Shareholder Defendants.
Plaintiff is left to argue that the Shareholder Defendants are liable as beneficiaries because
they received an actual, direct benefit that is quantifiable and accessible under the Illinois McCook
Metals test. See, e.g., Baldi v. Lynch (In re McCook Metals, L.L.C.), 319 B.R. 570 (Bankr. N.D.
Ill. 2005); see also Halperin v. Moreno (In re Green Field Energy Servs., Inc.), 594 B.R. 239, 287–
60
See also Alta Mesa, 2024 WL 4379801, at *6 (“[S]hareholders are not liable for transfers to the
corporation unless (i) they actually received distributions of the transferred property; or (ii) there
is reason to pierce the corporate veil.”); Schechter v. 5841 Bldg. Corp. (In re Hansen), 341 B.R.
638, 645–46 (Bankr. N.D. Ill. 2006) (similar); Kravitz v. Samson Energy Co. (In re Samson Res.
Corp.), 2022 WL 3135288, at *7–8 (Bankr. D. Del. Aug. 4, 2022) (denying summary judgment
because triable issue of fact existed as to whether controlling shareholder and affiliated entities
were alter egos of transferees).
48
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88 (Bankr. D. Del. 2018); Alta Mesa, 2024 WL 4379801, at *7. But McCook Metals does not
apply to shareholders in the absence of veil piercing. The Delaware Court of Chancery observed
that extending liability to a transferee’s majority shareholders absent veil piercing would “be in-
consistent with Delaware’s policy of safeguarding corporate separateness” because it would “ren-
der[] every majority shareholder of a closely-held corporation … liable for transfers to the corpo-
ration, although the corporation is entirely legitimate and all corporate formalities have been care-
fully observed.” Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube, LLC, 2023 WL
5688392, at *14 (Del. Ch. Sep. 5, 2023) (citation omitted) (holding shareholders, directors, and
officers of Delaware corporation liable for fraudulent transfer received by corporation would “ig-
nore the fundamental nature of corporations” as legal entities separate from their shareholders,
officers, and directors (citation omitted)).
Here, the Court does not need to decide whether McCook Metals could extend beneficiary
liability to a shareholder of a transferee in the absence of veil piercing. Because the Complaint
does not allege either (1) facts sufficient to support veil piercing or (2) that the Shareholder De-
fendants received an actual, direct benefit that is both quantifiable and accessible, the constructive
and actual fraudulent transfer claim must be dismissed.
2. The Complaint Does Not Plead Facts To Support Veil Piercing
The Complaint does not even attempt to allege the elements of veil piercing against the
Shareholder Defendants. “Persuading a Delaware court to disregard the corporate entity is a dif-
ficult task” because it requires a plaintiff to state facts that demonstrate “complete domination and
control” to the point that the entity “no longer ha[s] legal or independent significance of [its] own.”
Wallace v. Wood, 752 A.2d 1175, 1183–84 (Del. Ch. 1999) (citations omitted) (“Effectively, the
corporation must be a sham and exist for no other purpose than as a vehicle for fraud.”). Plaintiff
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does not and could not plausibly allege that any of the 16 minority shareholders named in the
Complaint—let alone all of them—were alter egos of Alpha Kabbage.
3. The Shareholder Defendants Did Not Receive Any Actual, Direct
Benefit From The October 13 Transfer That Is Quantifiable And
Accessible
Struggling to meet the McCook Metals test, the Complaint attempts to plead two separate
theories of “benefit”—that the Shareholder Defendants benefitted because the October 13 Transfer
increased the value of the overall “Kabbage enterprise,” Compl. ¶ 253, and because the October
13 Transfer was one of a series of steps that ultimately facilitated their receipt of merger consider-
ation, id. ¶ 333. Neither of these allegations, taken as true, meets the McCook Metals test.
Appreciation of “Kabbage Enterprise” (Transfer “Beneficiary” Theory #1). The Complaint
alleges that the October 13 Transfer benefitted the Shareholder Defendants by increasing the value
of their shares in the overall “Kabbage enterprise” by transferring assets from an indirect subsidi-
ary to a direct subsidiary. Compl. ¶¶ 251–54. Accepting this theory as true, it fails for two reasons.
First, an increase in the value of an enterprise is not an “accessible” benefit to its shareholders.61
Second, this alleged benefit is not “quantifiable” because there is no way to determine the amount
by which share values (in a privately-held company, no less) increased by virtue of an intercom-
pany transfer between subsidiaries. 62 In short, the conclusory allegation that the October 13 Trans-
fer increased the value of the Shareholder Defendants’ equity interests in Kabbage is precisely the
61
See Green Field Energy, 594 B.R. at 288–89 (defendant with 50% ownership interest in two
special purpose entities that received cash transfers from debtor did not have “actual access” to
benefit because he did not actually receive transferred cash; any appreciation of equity interest
insufficient to constitute “accessible” benefit).
62
See Alta Mesa, 2024 WL 4379801, at *5 (private equity firm defendants, which dually owned
both transferor and transferee, not liable as “transfer beneficiaries” even if transfers increased
equity value of entity they owned because such amount was not “quantifiable”).
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type of inaccessible and unquantifiable allegation of benefit that courts have deemed insufficient
to trigger liability under Section 550(a)(1).
Receipt of Merger Consideration (Transfer “Beneficiary” Theory #2). Alternatively, the
Complaint alleges that the Shareholder Defendants benefitted from the October 13 Transfer be-
cause that transfer was a precondition to them receiving eventual merger consideration from Amex.
Compl. ¶ 333; see also id. ¶¶ 251, 273 (alleging October 13 Transfer was made from Kabbage to
Alpha Kabbage, so that Alpha Kabbage could enter into a transaction pursuant to which it merged
with and into a separate subsidiary, so that Amex could purchase the transferred assets, so that
Amex could then pay the Shareholder Defendants). This is an indirect benefit at best, and indirect
benefits “do not transmogrify shareholders into transfer beneficiaries.” Alta Mesa, 2024 WL
4379801, at *5; see also Bonded Fin. Servs., Inc. v. Eur. Am. Bank, 838 F.2d 890, 896 (7th Cir.
1988) (“Someone who receives the money later on is not an entity for whose benefit such transfer
was made; only a person who receives a benefit from the initial transfer is within [§ 550(a)(1)].”)
(cleaned up); Weiss v. Arabella Expl. Inc. (In re Arabella Petroleum Co.), 647 B.R. 851, 872
(Bankr. W.D. Tex. 2022) (noting that plaintiff could not prove defendant was a transfer beneficiary
because he received indirect benefits as a shareholder); Bodenstein v. Univ. of N. Iowa (In re Per-
egrine Fin. Grp., Inc.), 589 B.R. 360, 380 (Bankr. N.D. Ill. 2018) (defendant must benefit “as soon
as the transfer is made”).
B. The October 13 Transfer Is Not Avoidable Because It Was Made Pursuant
To A Valid Contractual Obligation
Even if Plaintiff were able to recover against non-transferee minority shareholders under
the theory that they were “beneficiaries” under Section 550(a)(1), and it cannot, Plaintiff’s fraud-
ulent transfer claims are foreclosed by the fact that there was no avoidable transfer in the first
place. The Complaint alleges that Kabbage effectuated the October 13 Transfer as a required
51
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condition of the Merger Agreement entered into on August 16, 2020. Compl. ¶¶ 250–51, 254–55.
To state a claim for constructive fraudulent transfer, the Complaint must allege that Kabbage re-
ceived less than reasonably equivalent value in exchange for the transfer. See 11 U.S.C.
§ 548(a)(1)(B)(i). And to state a claim for intentional fraudulent transfer, the Complaint must
allege—either through direct evidence or badges of fraud—that the Debtor made the transfer with
an actual intent to hinder, delay, or defraud creditors. See 11 U.S.C. § 548(a)(1)(A). As set forth
below, the Merger Agreement precludes avoidance of the October 13 Transfer under either theory.
Here, there is no question that the Merger Agreement was an enforceable obligation.
Compl. ¶ 251. Plaintiff does not seek to avoid the Merger Agreement’s obligation to effectuate the
October 13 Transfer. 63 Moreover, the Merger Agreement did not afford Kabbage any voluntary
termination rights; after it was executed on August 16, Kabbage was obligated to close the Merger
pursuant to the Agreement’s terms. 64 Had Kabbage declined to effectuate the October 13 Trans-
fer—or to take any other step required to effectuate the multi-step Merger, see Compl. ¶ 251—
Amex had the right to sue Kabbage for specific performance, see J.A. Ex. 42 at A00532 (Merger
Agreement § 9.10), and damages, id. at A00513 (§ 7.2), arising out of Kabbage’s breach.
Thus, by completing the Merger and its attendant steps, Kabbage satisfied an antecedent
contractual obligation, which constitutes reasonably equivalent value and obviates Plaintiff’s con-
structive fraudulent transfer claim. See, e.g., 11 U.S.C. § 548(d)(2)(A) (defining “value” to include
63
By contrast, in its litigation with Amex, Plaintiff does seek to avoid other obligations that
Kabbage incurred in connection with the Merger Agreement. See Original Compl. ¶¶ 265–69,
277–83, KServicing Wind Down Corp. v. Am. Express Kabbage Inc. (In re KServicing Wind Down
Corp.), Adv. Pro. No. 25-52371 (Bankr. D. Del. Oct. 16, 2025), D.I. 1 (seeking to avoid Kabbage’s
indemnification obligations in Merger Agreement as fraudulent).
64
The Agreement provided for a limited set of conditions constituting cause not to close, J.A.
Ex. 42 at A00512 (Merger Agmt. § 7.1), none of which the Complaint alleges occurred.
52
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“satisfaction … of a present or antecedent debt of the debtor”); Gellert v. Coltec Indus., Inc. (In re
Crucible Materials Corp.), 2012 WL 5360945, at *8 (Bankr. D. Del. Oct. 31, 2012) (no construc-
tive fraudulent transfer claim where it was “clear that the payments were made in exchange for
reasonably equivalent value because they were made to pay an obligation assumed” under a pur-
chase agreement); Pardo v. Gonzaba (In re APF Co.), 308 B.R. 183, 187 (Bankr. D. Del. 2004)
(no constructive fraudulent transfer where transfers made pursuant to promissory note because
payments pursuant to enforceable note obligation satisfied antecedent debt); 65 Barber v. Golden
Seed Co., 129 F.3d 382, 388–89 (7th Cir. 1997) (affirming ruling that satisfaction of obligations
performed pursuant to contract constitutes reasonably equivalent value); Sender v. Dutton (In re
Clark), 619 B.R. 1, 5–6 (Bankr. D. Colo. 2020) (where contract “created a legally enforceable
obligation on the Debtor’s part to transfer his entire interest in the Property to the Defendant” and
“the Debtor satisfied this pre-existing obligation,” cancellation of the obligation constituted “‘rea-
sonably equivalent value’ in exchange for the transfer under § 548(d)(2)”); Goodman v. H.I.G.
Cap., LLC (In re Gulf Fleet Holdings, Inc.), 491 B.R. 747, 766 (Bankr. W.D. La. 2013) (dismissing
trustee’s fraudulent transfer claims because “[b]y definition, [debtor] received reasonably equiva-
lent value from the satisfaction of its contractual obligations”); Kaye v. Nath (In re Duke & King
Acquisition Corp.), 508 B.R. 107, 148 (Bankr. D. Minn. 2014) (satisfaction of contractual obliga-
tions conferred reasonably equivalent value where contract imposed a duty that “created a debt in
the sense of the Bankruptcy Code, 11 U.S.C. §§ 101(5)(A) and (12)” because payments made to
satisfy that debt “abated the contractual liability dollar-for-dollar”).
65
In APF, the parties argued that satisfaction of an antecedent debt for reasonably equivalent value
necessitated dismissal only of the constructive fraudulent transfer claim and, as such, the court
held that the intentional fraudulent transfer claim survived. 308 B.R. at 187.
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Nor is the October 13 Transfer an intentional fraudulent transfer. Instead of being made
with an intent to “hinder, delay, or defraud creditors,” the October 13 Transfer had a legitimate
business purpose: to fulfill binding contractual obligations that it owed to a third party—Amex. 66
See Maxus Liquidating Tr. v. YPF S.A. (In re Maxus Energy Corp.), 641 B.R. 467, 527 (Bankr. D.
Del. 2022) (noting evidence of a legitimate business purpose for a transaction—i.e., a purpose
other than an intent to hinder, delay, or defraud—can rebut the implication of fraudulent intent).
Satisfaction of an antecedent obligation may sometimes constitute a preference, but fulfilling an
obligation set forth in a valid arm’s length contract cannot give rise to a claim for actual fraudulent
transfer. See Fedders, 405 B.R. at 545–46 (dismissing debtor’s actual fraudulent transfer claim
seeking to avoid security interest and fees transferred to lenders pursuant to arm’s length credit
agreements); B.E.L.T., Inc. v. Wachovia Corp., 403 F.3d 474, 477 (7th Cir. 2005) (Easterbrook, J.)
(“a preference among creditors,” absent insider dealing, is not a fraudulent conveyance); cf. Sharp
Int’l Corp. v. State St. Bank & Tr. Co. (In re Sharp Int’l. Corp.), 403 F.3d 43, 56 (2d Cir. 2005)
(under New York fraudulent conveyance law, a “payment was at most a preference between cred-
itors and did not ‘hinder, delay, or defraud either present or future creditors’”); id. at 54 (“A con-
veyance which satisfies an antecedent debt made while the debtor is insolvent is neither fraudulent
nor otherwise improper, even if its effect is to prefer one creditor over another.”); see also Gulf
Fleet Holdings, 491 B.R. at 767 (dismissing actual fraudulent transfer claims where transfers “sat-
isfied an antecedent debt” even where trustee pled facts showing transfers were made to an insider
and debtor was insolvent); Leslie v. Hancock Cap. Partners II, L.P. (In re Fitness Holdings Int’l,
Inc.), 660 F. App’x 546, 548 (9th Cir. 2016) (dismissing “actual fraudulent conveyance” claim
66
See 11 U.S.C. § 101(10)(A) (defining “creditor” as any party with “claim” against debtor); id.
§ 101(5) (defining “claim” as any right to payment or right to an equitable remedy for breach of
performance, regardless of whether those rights are contingent, unmatured, or disputed).
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“because the [t]rustee failed to demonstrate that the [t]ransfer was not applied to a valid, antecedent
debt”). 67 Kabbage entered into a Merger Agreement in August 2020 with Amex, an arm’s length
third party. Compl. ¶¶ 73, 255. When Kabbage closed on the Merger in October, it did so with
the intent to comply with its binding contractual obligations—not to hinder, delay, or defraud its
creditors.
Count IV must be dismissed.
IV. PLAINTIFF’S CLAIMS TO DISALLOW OR SUBORDINATE THE D&O
DEFENDANTS’ INDEMNIFICATION CLAIMS SHOULD BE DISMISSED
(COUNTS V–VII)
Finally, the Complaint seeks to disallow the claims of “all Defendants” under Sec-
tion 502(d) of the Bankruptcy Code, see Compl. ¶¶ 350–60, and the D&O Defendants under Sec-
tion 502(e), id. ¶¶ 338–49, and further seeks to equitably subordinate “all Defendants’” claims
under Section 510(c), id. ¶¶ 361–65. These claims should be dismissed along with the rest of the
Complaint.
A. The Complaint’s Section 502(d) Disallowance Claims Fail (Count VI)
Section 502(d) provides that courts “shall disallow any claim of any entity from which
property is recoverable” on account of a fraudulent transfer, unless the entity has returned such
property to the estate. To survive a motion to dismiss, Plaintiff must allege facts establishing (1) an
avoidable transfer occurred, and (2) the defendant from whom property is recoverable has not
satisfied its liability. See 11 U.S.C. § 502(d).
67
See also Emil A. Kleinhaus & Alexander B. Lees, Debt Repayments as Fraudulent Transfers,
88 Am. Bankr. L.J. 307, 310 (2014) (“[A] principle that emerges from a long line of decisions is
that a debtor’s intent to ‘prefer’ one creditor over another is fundamentally different from the intent
to ‘hinder, delay, or defraud’ that is required by the fraudulent transfer statutes.”).
55
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Plaintiff’s Section 502(d) disallowance claims (asserted in Count VI against “all Defend-
ants,” Compl. ¶¶ 350–60) must be dismissed for three reasons: (1) the Complaint fails to plead that
an avoidable transfer occurred, § III.B, above; 68 (2) even if the Complaint did state a fraudulent
transfer claim, which it does not, the Complaint fails to state a claim to recover that transfer from
the Shareholder Defendants as “beneficiaries,” § III.A, above; 69 and (3) even if the Complaint
stated a fraudulent transfer claim against the Shareholder Defendants, which it does not, Count VI
must be dismissed against all remaining defendants who either (a) are not alleged to be beneficiar-
ies of a fraudulent transfer (i.e., Butler, Ebinger, and Stolle), and thus from whom the property
cannot be recovered, or (b) did not file proofs of claim against the Debtor (i.e., Bennu, BlueRun,
BRV, Curieux, FFT, MDV, RJ RIRA, and Thomvest).
B. The Complaint’s Section 502(e) Disallowance Claims Fail (Count V)
The preamble to Section 502(e)(1) provides that “the court shall disallow any claim for
reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim
of a creditor.” In other words, the two threshold requirements for disallowance under Section
502(e)(1) are that: (1) the claim must be for reimbursement or contribution, and (2) the entity filing
the claim (here, the D&O Defendants) must be co-liable with the debtor on a separate creditor’s
claim (or must have secured that separate creditor’s claim). 70 These requirements fulfill the basic
68
See Swift v. Halimi (In re CL H Winddown LLC), 2023 WL 5740195, at *4 (Bankr. D. Del. Sep.
5, 2023) (dismissing Section 502(d) claims where fraudulent transfer and preference claims
dismissed).
69
See also 11 U.S.C. § 502(d) (disallowing only claims of “entity from which property is
recoverable”).
70
See In re Touch Am. Holdings, Inc., 409 B.R. 712, 715–16 (Bankr. D. Del. 2009) (“To achieve
disallowance of a claim under Bankruptcy Code § 502(e)(1)(B), [plaintiff] must prove three
elements: (i) the claim must be contingent, (ii) the claim must be for reimbursement or
contribution, and (iii) the debtor and the claimant must be co-liable on the claim.”). Although the
56
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purpose of Section 502(e)(1) by disallowing the “double payment by the estate” 71 that would occur
if the Bankruptcy Code permitted Creditor A to have a valid claim against the debtor, while also
allowing Creditor B (who was co-liable with the debtor on Creditor A’s claim) to file another claim
against the debtor to obtain reimbursement or indemnification in connection with Creditor B’s
payments to Creditor A.
Those are not the facts alleged here, and as such, the Complaint does not even attempt to
allege the co-liability or security relationship that is the foundation of Section 502(e) disallowance.
Count V’s only allegations are that creditors (including the D&O Defendants) filed proofs of claim
and that the Plan rejected certain Debtor obligations to its former directors and officers. See
Compl. ¶¶ 339–47. 72 Absent allegations that the D&O Defendants are co-liable with the debtor
on another creditor’s claim, or that they have secured a third party’s claim, Count V must be dis-
missed. 73
Complaint does not plead sufficient facts to put the D&O Defendants on notice of which subsection
of Section 502(e) it seeks to rely, it appears that Plaintiff may be attempting to state a claim under
Section 502(e)(1)(B). See Compl. ¶ 348.
71
Touch America, 409 B.R. at 719; see also H.R. Rep. No. 95-595, at 354 (1977), reprinted in
1978 U.S.C.C.A.N. 5963, 6310 (Section 502(e)(1) “prevent[s] competition between a creditor and
his guarantor for the limited proceeds in the estate”).
72
The only other assertion in Count V simply parrots the language of section 502(e)(1)(B). See
Compl. ¶ 348 (alleging claims “are disallowed to the extent that they are ‘contingent as of the time
of allowance or disallowance of such claim for reimbursement or contribution’”).
73
Nor could the Complaint plead these facts. With the bankruptcy case closed, Plaintiff could not
argue now for the first time that the D&O Defendants somehow “secured the claim of a creditor.”
11 U.S.C. § 502(e)(1). Likewise, the Debtor and the D&O Defendants could not be co-liable on
the D&O Defendants’ claims or defense costs. See, e.g., In re Wedtech Corp., 85 B.R. 285, 290
(Bankr. S.D.N.Y. 1988) (debtor “obviously cannot be co-liable with [defendants] on the causes of
action asserted in adversarial proceedings brought by [itself]”).
57
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 69 of 71
C. The Complaint’s Section 510(c) Equitable Subordination Claims Fail (Count
VII)
To prevail on an equitable subordination claim under Bankruptcy Code Section 510(c),
Plaintiff must establish: (1) the claimant engaged in inequitable conduct; (2) that misconduct
caused injury to the debtors’ creditors; and (3) subordination is consistent with the Bankruptcy
Code. United States v. State St. Bank & Tr. Co., 520 B.R. 29, 80 (Bankr. D. Del. 2014).
The Complaint’s allegations—which merely allege that “Defendants’ claims should be eq-
uitably subordinated” because they are liable for breach of fiduciary duty and/or fraudulent trans-
fer, see Compl. ¶¶ 362, 365—are insufficient to invoke this “drastic and unusual remedy.” Tilton
v. MBIA Inc. (In re Zohar III, Corp.), 639 B.R. 73, 90 (Bankr. D. Del. 2022), aff’d, 620 F. Supp.
3d 147 (D. Del. 2022) (citation modified). First, the equitable subordination claims must be dis-
missed because the Complaint fails to state fiduciary duty claims against the D&O Defendants,
§§ I & II, above, or fraudulent transfer claims against the Shareholder Defendants, § III, above.
See Gowan v. Wachovia Bank, N.A. (In re Dreier LLP), 453 B.R. 499, 517 (Bankr. S.D.N.Y. 2011)
(holding that where “Trustee has withdrawn or the Court has dismissed all of the substantive claims
… it follows that the allegations do not support equitable subordination”). Second, the equitable
subordination claims must be dismissed against the Shareholder Defendants because, even if the
Complaint’s allegations were true, (1) receiving a fraudulent transfer (or an indirect “benefit” from
a fraudulent transfer) is insufficient to warrant equitable subordination, and (2) the Complaint does
not allege the Shareholder Defendants (who were all minority shareholders) were “insiders.” See
Duke & King, 508 B.R. at 154 (receipt of fraudulent transfer does not evince “pervasively-tainted
conduct” necessary to warrant equitable subordination); Picard v. Merkin (In re Bernard L. Madoff
Inv. Sec. LLC), 515 B.R. 117, 158 (Bankr. S.D.N.Y. 2014) (pleading equitable subordination
against non-insider requires “‘gross and egregious’ conduct ‘tantamount to fraud,
58
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 70 of 71
misrepresentation, overreaching or spoliation’” (citation omitted)). Third, the equitable subordi-
nation claims against Bennu, Curieux, BlueRun, BRV, FFT, MDV, RJ RIRA, and Thomvest must
be dismissed because the Complaint does not allege that any of these entities filed claims that
could be subordinated. 74
CONCLUSION
For the foregoing reasons, the D&O and Shareholder Defendants respectfully request that
the Court dismiss Plaintiff’s Complaint with prejudice.
Respectfully submitted,
COZEN O’CONNOR
Dated: April 9, 2026 /s/ Gregory F. Fischer
Mark E. Felger (No. 3919)
Gregory F. Fischer (No. 5269)
Marla S. Benedek (No. 6638)
1201 N. Market Street, Suite 1001
Wilmington, DE 19801
(302) 295-2000
mfelger@cozen.com
gfischer@cozen.com
mbenedek@cozen.com
-and-
74
To the extent any disallowance claims are not dismissed, then the equitable subordination claims
must be dismissed as duplicative of surviving disallowance claims. See Dreier, 453 B.R. at 517
(dismissing claim for equitable subordination under section 510(c) where proving fraudulent
transfer would lead to disallowance under section 502(d), because disallowance “provides broader
relief”).
59
Case 25-52372-CTG Doc 96 Filed 04/09/26 Page 71 of 71
SELENDY GAY PLLC
Faith E. Gay (admitted pro hac vice)
Kelley A. Cornish (admitted pro hac vice)
Lena Konanova (admitted pro hac vice)
Jordan M. Harap (admitted pro hac vice)
1290 Avenue of the Americas
New York, NY 10104
(212) 390-9000
fgay@selendygay.com
kcornish@selendygay.com
lkonanova@selendygay.com
jharap@selendygay.com
Attorneys for the D&O and Shareholder
Defendants
60
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