Plaintiff’s Omnibus Memorandum of Law in Opposition to Defendants’ Motions to Dismiss the Complaint, KServicing Wind Down Corp. v. Frohwein, Adv. No. 25-52372 (Bankr. D. Del.), Doc. 116 (June 9, 2026)
Summary
In this memorandum, dated June 9, 2026, plaintiff KServicing Wind Down Corp. (f/k/a Kabbage, Inc.) opposes motions to dismiss its complaint in Adversary Proceeding No. 25-52372, in the United States Bankruptcy Court for the District of Delaware. The defendants include Robert Frohwein, Kathryn Petralia, Thomvest Ventures Ltd. and BlueRun Ventures IV, LP. The table of contents has statement of facts headings that allege Kabbage approved fraudulent loans, that the Officers knew of or willfully ignored violations of the PPP laws and regulations, that the Board failed to monitor PPP compliance, and that Defendants cashed out with the Amex Merger. The summary of argument calls the case a textbook example of fiduciary abdication. The conclusion says the claims present fact-intensive issues and the motions should be denied in full.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“Plaintiff’s Omnibus Memorandum of Law in Opposition to Defendants’ Motions to Dismiss the Complaint, KServicing Wind Down Corp. v. Frohwein, Adv. No. 25-52372 (Bankr. D. Del.), Doc. 116 (June 9, 2026).”
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Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 1 of 75
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: Chapter 11
1
KSERVICING WIND DOWN CORP., et al., Case No. 22-10951 (CTG)
Post-Confirmation Debtors. (Jointly Administered)
KSERVICING WIND DOWN CORP.
(f/k/a Kabbage, Inc.),
Adversary Proceeding
Plaintiff,
No. 25-52372 (CTG)
v.
ROBERT FROHWEIN, KATHRYN PETRALIA, Re: Adv. D.I.s 92, 94, 96, 100, 103,
LESLIE SCOTT ASKINS, SPENCER ROBINSON, 107
DON BUTLER, JONATHAN EBINGER, ALEX
CHULACK, LAURIE HODRICK, BRYAN
STOLLE, IOANNIS PIPILIS, THOMVEST
VENTURES LTD., BLUERUN VENTURES IV,
LP, BRV OPPORTUNITIES FUND, L.P.,
REVERENCE CAPITAL PARTNERS
OPPORTUNITIES FUND I, L.P., REVERENCE
CAPITAL PARTNERS OPPORTUNITIES FUND I
(CAYMAN), L.P., RCP KICKER CO-INVEST,
L.P., REVERENCE CAPITAL PARTNERS
OPPORTUNITIES FUND I (AI), L.P., MDV IX,
L.P., SOFTBANK VISION FUND (AIV M2) L.P.,
SOFTBANK PRINCEVILLE INVESTMENTS,
L.P., CURIEUX LIMITED CO., BENNU
HOLDINGS LIMITED CO., RAYMOND JAMES
& ASSOCIATES, INC. CSDN FBO ROBERT
FROHWEIN RIRA U/A/D 5/27/16 A/C 2867A298,
and THE FROHWEIN FAMILY 2015 TRUST,
Defendants.
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 116 Filed 06/09/26 Page 2 of 75
PLAINTIFF’S OMNIBUS MEMORANDUM OF LAW IN OPPOSITION
TO DEFENDANTS’ MOTIONS TO DISMISS THE COMPLAINT
REID COLLINS & TSAI LLP
Jessica Zeldin (DE Bar No. 3558)
300 Delaware Ave., Suite 770
Wilmington, Delaware 19801
T: (302) 467-1765
jzeldin@reidcollins.com
Eric D. Madden (PHV granted)
Brian J. Bah (PHV granted)
1445 Ross Avenue, Suite 2900
Dallas, Texas 75202
T: (214) 420-8900
emadden@reidcollins.com
bbah@reidcollins.com
Joshua J. Bruckerhoff (PHV granted)
Jeremy H. Wells (PHV granted)
Emma Culotta (PHV granted)
1301 S. Capital of Texas Highway, C-300
Austin, Texas 78746
T: (512) 647-6100
jbruckerhoff@reidcollins.com
jwells@reidcollins.com
eculotta@reidcollins.com
-and-
MORRIS JAMES LLP
Eric J. Monzo (DE Bar No. 5214)
Tara C. Pakrouh (DE Bar No. 6192)
3205 Avenue North Blvd., Suite 100
Wilmington, Delaware 19803
T: (302) 888-6800
emonzo@morrisjames.com
tpakrouh@morrisjames.com
Attorneys for Plaintiff
Dated: June 9, 2026
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 3 of 75
TABLE OF CONTENTS
NATURE AND STAGE OF PROCEEDING ................................................................................ 1
SUMMARY OF ARGUMENT ...................................................................................................... 1
STATEMENT OF FACTS ............................................................................................................. 5
A. Kabbage Doled Out Hundreds of Millions of Dollars in Fraudulent Loans. .......... 5
1. Kabbage knowingly or recklessly approved inflated loans. ....................... 6
2. Kabbage knowingly or recklessly approved fraudulent loans. ................... 7
B. The Officers Knew of or Willfully Ignored Kabbage’s Violations of the
PPP Laws and Regulations. .................................................................................... 9
1. The Officers knew that Kabbage lacked sufficient compliance staff
to perform the required KYC analyses. ...................................................... 9
2. The Officers knew that Kabbage lacked sufficient controls to detect
and prevent fraud. ....................................................................................... 9
3. The Officers knew that Kabbage lacked appropriate systems to
identify and make the required Suspicious Activity Reports.................... 10
4. The Officers knew about the SALT and related calculation errors. ......... 11
5. The Officers suppressed—rather than escalated—compliance issues. ..... 12
C. The Board Utterly Failed to Monitor Kabbage’s PPP Compliance. ..................... 13
D. Defendants Cash Out with the Amex Merger While Leaving Kabbage
Hopelessly Insolvent. ............................................................................................ 15
1. The Directors and Officers negotiated a sale to Amex that
“orphaned” the PPP liabilities at Kabbage................................................ 15
2. The Officers dictated erroneous assumptions for a solvency opinion
to increase the cash that they could extract from Kabbage. ...................... 16
3. By design, the Merger stripped Kabbage of its assets and transferred
their value to the Shareholders.................................................................. 17
E. As Was Foreseeable, Kabbage Was Hit with Claims and Investigations
Regarding Its PPP Lending Practices. .................................................................. 18
LEGAL STANDARD................................................................................................................... 19
i
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 4 of 75
ARGUMENT ................................................................................................................................ 20
I. The Complaint Adequately Pleads Caremark Claims. ..................................................... 20
A. The Complaint States an “Information Systems” Claim. ..................................... 20
B. The Complaint States a “Red Flags” Claim.......................................................... 34
C. Substantial Personal Payouts to the Officers and to the Directors’
Affiliated Funds Support a Bad-Faith Inference................................................... 41
II. The Complaint Separately States a Duty-of-Care Claim Against the Officers. ............... 42
III. The Complaint Adequately Pleads Claims for Both Actual and Constructive
Fraudulent Transfer........................................................................................................... 44
A. The Pleaded Facts Support a Claim for Actual Fraudulent Transfer. ................... 44
B. The Pleaded Facts Support a Claim for Constructive Fraudulent Transfer. ......... 50
1. The Fraudulent Transfer rendered Kabbage insolvent.............................. 50
2. Kabbage received no value, much less reasonably equivalent value,
from the Fraudulent Transfer. ................................................................... 55
IV. The Complaint States Viable Claims for Recovery of the Fraudulent Transfer
under Section 550. ............................................................................................................ 55
A. Section 550’s Text and Purpose Support Recovery from the Shareholders. ........ 56
B. The Collapsing Doctrine Further Supports Transfer-Beneficiary Liability. ......... 60
V. The Complaint States Viable Claims for Disallowance and Subordination. .................... 61
A. The Section 502(e) Disallowance Claim Is Adequately Stated Against the
Officers (Count V). ............................................................................................... 62
B. The Section 502(d) Disallowance Claim Is Adequately Pleaded Against the
Officers (Count VI). .............................................................................................. 64
C. The Equitable Subordination Claim Is Adequately Pleaded Against the
Officers and Directors (Count VII). ...................................................................... 64
VI. While Kabbage Believes that Complaint More than Sufficiently Pleads the Claims,
Kabbage Is Prepared to Buttress Its Allegations............................................................... 65
CONCLUSION ............................................................................................................................. 65
ii
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 5 of 75
TABLE OF AUTHORITIES
Cases
Adamson v. Bernier (In re Bernier),
282 B.R. 773 (Bankr. D. Del. 2002) ......................................................................................... 48
Adelphia Recovery Tr. v. FPL Grp., Inc. (In re Adelphia Commc’ns Corp.),
512 B.R. 447 (Bankr. S.D.N.Y. 2014) ...................................................................................... 61
Ashcroft v. Iqbal,
556 U.S. 662 (2009) .................................................................................................................. 19
Autobacs Strauss, Inc. v. Autobacs Seven Co. (In re Autobacs Strauss, Inc.),
473 B.R. 525 (Bankr. D. Del. 2012) ......................................................................................... 65
Baldi v. Lynch (In re McCook Metals, L.L.C.),
319 B.R. 570 (Bankr. N.D. Ill. 2005) ....................................................................................... 56
Baxter v. Palmigiano,
425 U.S. 308 (1976) .................................................................................................................. 33
Bell Atl. Corp. v. Twombly,
550 U.S. 544 (2007) .................................................................................................................. 19
Bodenstein v. Univ. of N. Iowa (In re Peregrine Fin. Grp., Inc.),
589 B.R. 360 (Bankr. N.D. Ill. 2018) ....................................................................................... 58
Bonded Fin. Servs., Inc. v. European Am. Bank,
838 F.2d 890 (7th Cir. 1988) .................................................................................................... 56
Bricklayers Pension Fund of W. Pa. ex rel. Centene Corporation v. Brinkley,
2024 WL 3384823 (Del. Ch. July 12, 2024) ............................................................................ 31
Brown v. Third Nat’l Bank (In re Sherman),
67 F.3d 1348 (8th Cir. 1995) .................................................................................................... 47
Canney v. Fisher & Strattner, LLC (In re Turner & Cook, Inc.),
507 B.R. 101 (Bankr. D. Vt. 2014) ..................................................................................... 51, 53
Christian Bros. High School Endowment v. Bayou No Leverage Fund, LLC
(In re Bayou Grp., LLC),
439 B.R. 284 (S.D.N.Y. 2010)............................................................................................ 45, 53
Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube, LLC,
2023 WL 5688392 (Del. Ch. Sept. 5, 2023) ............................................................................. 59
iii
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 6 of 75
Constr. Indus. Laborers Pension Fund v. Bingle,
2022 WL 4102492 (Del. Ch. Sept. 6, 2022) ............................................................................. 32
David B. Shaev Profit Sharing Account v. Armstrong,
2006 WL 391931 (Del. Ch. Feb. 13, 2006) ........................................................................ 29, 30
Drenis v. Haligiannis,
452 F. Supp. 2d 418 (S.D.N.Y. 2006) ...................................................................................... 53
Drivetrain, LLC v. DDE Partners, LLC (In re Cyber Litig. Inc.),
2023 WL 6938144 (Bankr. D. Del. Oct. 19, 2023) ............................................................ 45, 46
Dunn v. HPS Inv. Partners (In re Alta Mesa Res., Inc.),
2024 WL 4379801 (Bankr. S.D. Tex. Oct. 1, 2024) ................................................................. 58
Eurand, Inc. v. Mylan Pharms., Inc.,
266 F.R.D. 79 (D. Del. 2010) ................................................................................................... 19
Faulkner v. Kornman (In re The Heritage Org., L.L.C.),
413 B.R. 438 (Bankr. N.D. Tex. 2009) ..................................................................................... 45
FTX Recovery Tr. v. Farmington State Corp. (In re FTX Trading Ltd.),
676 B.R. 131 (Bankr. D. Del. 2025) ......................................................................................... 56
Giuliano v. Grenfell-Gardner,
2025 WL 2502176 (Del. Ch. Sept. 2, 2025) ....................................................................... 34, 35
Halperin v. Moreno (In re Green Field Energy Servs., Inc.),
594 B.R. 239 (Bankr. D. Del. 2018) ................................................................................... 56, 59
Henry v. Off. Comm. of Unsecured Creditors of Walldesign, Inc. (In re Walldesign, Inc.),
872 F.3d 954 (9th Cir. 2017) .................................................................................................... 56
Hughes v. Hu,
2020 WL 1987029 (Del. Ch. Apr. 27, 2020) ...................................................................... 21, 32
In re Boeing Co. Deriv. Litig.,
2021 WL 4059934 (Del. Ch. Sept. 7, 2021) ........................................................... 21, 25, 26, 41
In re Caremark Int’l Inc. Deriv. Litig.,
698 A.2d 959 (Del. Ch. 1996) ........................................................................................... passim
In re Citigroup Inc. S’holder. Deriv. Litig.,
964 A.2d 106 (Del. Ch. 2009) .................................................................................................. 30
In re Clovis Oncology, Inc. Deriv. Litig.,
2019 WL 4850188 (Del. Ch. Oct. 1, 2019) ............................................................ 20, 36, 38, 39
iv
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 7 of 75
In re Goldman Sachs Group, Inc. S’holder. Litig.,
2011 WL 4826104 (Del. Ch. Oct. 12, 2011) ............................................................................ 30
In re Massey Energy Co.,
2011 WL 2176479 (Del. Ch. May 31, 2011) ............................................................................ 41
In re McDonald’s Corp. S’holder Deriv. Litig.,
289 A.3d 343 (Del. Ch. 2023) ........................................................................................... passim
In re Touch Am. Holdings, Inc.,
409 B.R. 712 (Bankr. D. Del. 2009) ................................................................................... 62, 63
In re Trib. Co. Fraudulent Conv. Litig.,
10 F.4th 147 (2d Cir. 2021) ...................................................................................................... 49
In re Wedtech Corp.,
5 B.R. 285 (Bankr. S.D.N.Y. 1988) .......................................................................................... 63
Indiana Bell Tel. Co., Inc. v. Lovelady,
2008 WL 11408781 (W.D. Tex. Mar. 5, 2008) ........................................................................ 53
Jalbert v. Souza (In re F-Squared Inv. Mgmt., LLC),
2019 WL 4261168 (Bankr. D. Del. Sept. 6, 2019) ................................................................... 54
JLL Consultants, Inc. v. Gothner (In re AgFeed USA, LLC),
546 B.R. 318 (Bankr. D. Del. 2016) ................................................................................... 47, 48
Kirschner v. Large S’holders (In re Tribune Co. Fraudulent Conv. Litig.),
10 F.4th 147 (2d Cir. 2021) ...................................................................................................... 47
Kravitz v. Samson Energy Co. (In re Samson Res. Corp.),
2022 WL 3135288 (Bankr. D. Del. Aug. 4, 2022) ............................................................. 56, 59
Los Angeles City Emps.’ Ret. Sys. v. Sanford,
352 A.3d 276 (Del. Ch. 2026) ............................................................................................ 37, 38
Mansfield v. Pierce,
153 F.3d 721 (4th Cir. 1998) .................................................................................................... 53
Marchand v. Barnhill,
212 A.3d 805 (Del. 2019) .................................................................................................. passim
Maxus Liquidating Tr. v. YPF S.A. (In re Maxus Energy Corp.),
641 B.R. 467 (Bankr. D. Del. 2022) ......................................................................................... 48
Mellon Bank, N.A. v. Off. Comm. of Unsecured Creditors of R.M.L., Inc. (In re R.M.L., Inc.),
92 F.3d 139 (3d Cir. 1996) ....................................................................................................... 52
v
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 8 of 75
Off. Comm. of Asbestos Pers. Inj. Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.),
281 B.R. 852 (Bankr. D. Del. 2002) ................................................................................... 52, 53
Off. Comm. of Unsecured Creditors of Hechinger Inv. Co. of Del. Inc. v. Fleet Retail Fin. Grp.
(In re Hechinger Inv. Co. of Del.),
274 B.R. 71 (D. Del. 2002) ................................................................................................. 60, 61
Off. Comm. of Unsecured Creditors of Pack Liquidating, LLC v. Vagenas (In re Pack
Liquidating, LLC),
2025 WL 2587577 (Bankr. D. Del. Sept. 5, 2025) ................................................................... 47
Ontario Provincial Council of Carpenters’ Pension Tr. Fund v. Walton,
2023 WL 3093500 (Del. Ch. Apr. 26, 2023) ............................................................................ 42
Orr v. Kinderhill Corp.,
991 F.2d 31 (2d Cir. 1993) ....................................................................................................... 60
Piazza v. Pac. Maritime Indus. Corp. (In re George G. Sharp, Inc.),
2022 WL 1714178 (Bankr. S.D.N.Y. May 25, 2022)............................................................... 49
Rich ex rel. Fuqi Int’l, Inc. v. Yu Kwai Chong,
66 A.3d 963 (Del. Ch. 2013) .................................................................................................... 32
Schechter v. 5841 Bldg. Corp. (In re Hansen),
341 B.R. 638 (Bankr. N.D. Ill. 2006) ....................................................................................... 60
SEC v. Antar,
120 F. Supp. 2d 431 (D.N.J. 2000), aff’d, 44 F. App’x 548 (3d Cir. 2002) ....................... 52, 53
Senior Transeastern Lenders v. Off. Comm. of Unsecured Creditors (In re TOUSA, Inc.),
680 F.3d 1298 (11th Cir. 2012) ................................................................................................ 56
Stone v. Ritter,
911 A.2d 362 (Del. 2006) ................................................................................................... 20, 29
Teamsters Loc. 443 Health Servs. & Ins. Plan v. Chou,
2020 WL 5028065 (Del. Ch. Aug. 24, 2020) ........................................................................... 35
Turner v. Phoenix Fin., LLC (In re Imageset, Inc.),
299 B.R. 709 (Bankr. D. Me. 2003) ......................................................................................... 60
United States ex rel. Pietschner v. Petralia, et al.,
C.A. No. 4:21-cv-110 (E.D. Tex. Dec. 20, 2024), ECF No. 40................................................ 33
United States v. Tabor Ct. Realty Corp.,
803 F.2d 1288 (3d Cir. 1986) ................................................................................................... 61
vi
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Weiss v. Arabella Expl. Inc. (In re Arabella Petrol. Co.),
647 B.R. 851 (Bankr. W.D. Tex. 2022) .................................................................................... 60
Wiggains v. Reed (In re Wiggains),
848 F.3d 655 (5th Cir. 2017) .................................................................................................... 45
Yu v. GSM Nation, LLC,
2018 WL 2272708 (Del. Super. Apr. 24, 2018) ....................................................................... 60
Statutes
11 U.S.C. § 101(5)(A)................................................................................................................... 53
11 U.S.C. § 502(d) ........................................................................................................................ 64
11 U.S.C. § 502(e)(1)(B) .............................................................................................................. 62
11 U.S.C. § 548(a)(1)(A) .............................................................................................................. 45
11 U.S.C. § 548(a)(1)(B) .............................................................................................................. 50
11 U.S.C. § 550(a)(1).................................................................................................................... 56
31 U.S.C. § 5311(4) ...................................................................................................................... 40
8 Del. C. § 145(b) ......................................................................................................................... 62
85 Fed. Reg. 20811, 20815 (Apr. 15, 2020) ..................................................................... 24, 39, 40
Ga. Code Ann. § 18-2-74(b) ......................................................................................................... 48
Other Authorities
FinCEN Suspicious Activity Reporting (SAR) Filing Instructions,
https://bsaefiling.fincen.gov/resources/FinCENSARFilingInstructions.pdf ............................. 40
vii
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Plaintiff KServicing Wind Down Corp. (f/k/a Kabbage, Inc.) (“Plaintiff” or “Kabbage”)
respectfully submits this omnibus opposition to the following motions to dismiss: (1) the D&O
and Shareholder Defendants’ Motion to Dismiss (D.I. 95) and supporting memorandum of law
(“D&O Defs. Mot.”) (D.I. 96); 2 (2) the Motion to Dismiss of Non-Management Director
Defendants Ioannis Pipilis and Alex Chulack (D.I. 93) and supporting memorandum of law
(“Add’l Dir. Defs. Mot.”) (D.I. 94); (3) Certain Defendants’ Motion to Dismiss (D.I. 91) and
supporting memorandum of law (“Certain Defs. Mot.”) (D.I. 92); 3 (4) Laurie Hodrick’s Motion to
Dismiss (D.I. 99) and supporting memorandum of law (D.I. 100); (5) L. Scott Askins’ Motion to
Dismiss (D.I. 102) and supporting memorandum of law (“Askins Mot.”) (D.I. 103); and
(6) Spencer Robinson’s Amended Motion to Dismiss (D.I. 106) and supporting memorandum of
law (“Robinson Mot.”) (D.I. 107).
NATURE AND STAGE OF PROCEEDING
Plaintiff agrees with the Defendants’ statement of the nature and stage of this proceeding.
SUMMARY OF ARGUMENT
This case is a textbook example of fiduciary abdication. 4 When Kabbage, a fintech lender
that had staked its entire business on PPP lending during the COVID-19 pandemic, received a
report highlighting a risk that Kabbage “knew or should have known it was transmitting fraudulent
information to the SBA,” its CEO, Defendant Robert Frohwein, did not convene its Board, demand
2
This motion was filed by Robert Frohwein, Kathryn Petralia, Donald Butler, Jonathan Ebinger, Bryan
Stolle, Thomvest Ventures Ltd., BlueRun Ventures IV, LP, BRV Opportunities Fund, L.P., Curieux
Limited Co., Bennu Holdings Limited Co., Raymond James & Associates, Inc. CSDN FBO Robert
Frohwein RIRA U/A/D 5/27/16 A/C 2867A298, The Frohwein Family 2015 Trust, and MDV IX, L.P.
3
This motion was filed by SoftBank Vision Fund (AIV M2) L.P., SoftBank PrinceVille Investments, L.P.,
Reverence Capital Partners Opportunities Fund I, L.P., Reverence Capital Partners Opportunities Fund I
(Cayman), L.P., RCP Kicker Co-Invest, L.P., Reverence Capital Partners Opportunities Fund I (AI), L.P.,
and Spencer Robinson.
4
Unless otherwise stated herein, Plaintiff uses the same defined terms as in its Complaint.
1
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 11 of 75
remediation, or pause lending to resolve the issue. Instead, he flew into a rage, admitting that the
“fucking report is going to kill” a lucrative merger of Kabbage with Amex. Rather than address
the problems, he instructed his team to bury the report: “get with Scott [Askins]—keep it attorney
client privileged and punch them in the fucking face to update that report and pull it back.”
The Directors, meanwhile, consciously chose to remain in the dark to close the Merger
with Amex that would deliver hundreds of millions of dollars to their affiliated investment funds.
The Board knew that Kabbage had transitioned overnight from being a small, struggling lender to
processing over $7 billion in federally guaranteed loans to more than 300,000 borrowers. Yet the
Board never asked how Kabbage, which had just furloughed most of its employees (including
those responsible for fraud reviews), could realistically process such volumes while conducting
appropriate borrower diligence. It could not. Nor did the Board ask whether Kabbage had
appropriate procedures to verify loan calculations in accordance with PPP regulations. It did not.
The Directors understood that the Merger would effectively sell Kabbage’s non-PPP assets
to Amex while “orphaning” its PPP liabilities at the legacy company. They knew that Amex
refused to acquire the PPP portfolio because it was “very worried about legal liability” and
specifically concerned about “liability flowing from fraudulent applicants, anything that would
give the government, applicants and others [reason for] suing them.” In fact, the Directors knew
that Amex was even concerned about its exposure to fraudulent transfer claims if Kabbage did not
leave enough cash behind to cover its known and foreseeable liabilities. For these reasons and
others, Amex demanded and got a $37.5 million holdback as part of the Merger to protect itself.
Yet when Kabbage received a solvency opinion that—based on instructions from its
management—assumed the company needed only $2 million to cover “Potential Legal Liabilities”
and loan buyback obligations relating to its PPP lending, the Directors looked the other way. This
2
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 12 of 75
reserve was so farcically small that it became a running joke with Kabbage’s outside counsel and
its low-level employees who, even without direct knowledge of the solvency opinion, recognized
that the Directors and Officers intended to leave the legacy company holding the proverbial bag.
The Directors and Officers could have left $120 million in cash with Kabbage to cover
foreseeable legal exposure. Amex was indifferent to whether that cash was run through the Merger
(because it was simply paying cash to the Shareholders equal to the amount of cash it received).
But the Officers and Directors (and their affiliated investment vehicles) wanted to extract that cash
immediately, which would, as they discussed, “mitigate risk” of lawsuits around PPP, believing
that no one would go after the remaining shell entity following the Merger.
A fiduciary acting in good faith would have known that the SBA and the DOJ might
eventually target not only fraudulent PPP borrowers, but also PPP lenders who, like Kabbage,
created an environment in which inflated and fraudulent applications ran rampant. Thus, while
the Directors and Officers might not have known with certainty that Kabbage would face lawsuits,
they certainly knew that the natural and probable consequence of their conduct was to leave
Kabbage insolvent when those foreseeable lawsuits arrived.
Predictably, only weeks after the Merger closed in October 2020, Kabbage was hit with
two separate whistleblower lawsuits and claims by the SBA. A second round of PPP loans in 2021
gave Kabbage a temporary lifeline, allowing it to pay $30 million to the SBA to partially resolve
claims arising from its shoddy loan approvals. But the company ultimately had no choice but to
file for bankruptcy. Kabbage now owes more than $240 million to its creditors, including
$120 million to the DOJ, $92 million to the SBA, and $30 million to CRB.
Defendants’ motions to dismiss are baseless for the following reasons:
3
Case 25-52372-CTG Doc 116 Filed 06/09/26 Page 13 of 75
1. The pleaded facts establish precisely the type of egregious, conscious disregard of
known illegality that Delaware courts have held gives rise to oversight liability under Caremark.
The Officers who received warnings about Kabbage approving inflated and likely fraudulent loans
responded by ordering employees to look the other way. These were not “yellow flags” of business
risk, but crimson red flags of actual violations of law. That multiple reports detailing Kabbage’s
major compliance gaps never reached the Board is telling. Although Kabbage had some written
compliance policies, those policies were not enforced. Management’s conduct—burying critical
reports, punishing employees who raised concerns, and prioritizing the Merger over remediation—
sent an unmistakable message that compliance was to be ignored. Simply put, Kabbage utterly
lacked reporting systems reasonably designed to provide the Board with “mission critical”
information. The Directors and Officers were incentivized to ignore these gaps because addressing
them would have jeopardized the lucrative Merger.
2. Beyond oversight failures, the Officers are separately liable for grossly negligent
affirmative acts that breached their duty of care. They collectively approved Kabbage’s
certifications to the SBA to become a PPP lender despite knowing Kabbage’s compliance systems
were riddled with gaps. And they were responsible for supplying the flawed assumptions that
went into the “garbage-in, garbage-out” solvency opinion that was a condition of the Merger.
These grossly negligent operational decisions independently establish liability.
3. The Shareholders 5 attempt to escape fraudulent transfer liability for their receipt of
hundreds of millions of dollars in Merger proceeds is groundless. The Complaint pleads an actual
fraudulent transfer with particularized facts detailing how the Directors and Officers structured the
5
The “Shareholders” are defined in the Complaint as the “Fraudulent Transfer Beneficiaries.” But for
simplicity and clarity here, Kabbage refers to those Defendants as the “Shareholders.”
4
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Fraudulent Transfer to orphan known and knowable liabilities at Kabbage and to maximize
Shareholder payouts. The Complaint sets forth numerous badges of fraud that create a
presumption of fraudulent intent. The pleaded facts also support a claim for constructive
fraudulent transfer. Even a small change to the solvency opinion’s assumptions regarding its PPP
liabilities renders Kabbage insolvent. A good-faith estimate of those liabilities would have been
far higher than $2 million (the amount that the Directors and Officers used), as demonstrated by
the over $210 million in aggregate settlements that Kabbage ultimately reached with the DOJ,
SBA, and others. And because the Fraudulent Transfer was a one-way distribution for no value,
the entire transfer is avoidable under the Bankruptcy Code.
4. Section 550(a)(1) of the Bankruptcy Code permits recovery not only from the actual
transferee—here, Amex Kabbage, the entity that Amex acquired as part of the Merger—but also
from any “entity for whose benefit such transfer was made.” The Fraudulent Transfer—Kabbage’s
October 13, 2020 asset transfer to its parent, Amex Kabbage—was an integrated step in a scheme
designed to deliver hundreds of millions of dollars to the Shareholders, who received quantifiable
benefits from the transfer itself, and immediately accessible cash payments just days later. Plaintiff
need not pierce the corporate veil of Amex Kabbage (an entity formed just months earlier for the
sole purpose of effectuating the Merger) to hold the Shareholders liable for the cash they received,
especially when that was the intended purpose of the Fraudulent Transfer itself.
STATEMENT OF FACTS
A. Kabbage Doled Out Hundreds of Millions of Dollars in Fraudulent Loans.
Kabbage ultimately processed more than $7 billion in PPP loans to over 300,000
borrowers, making it one of the nation’s largest PPP lenders by volume. 6 But Kabbage did so
6
Compl. ¶¶ 1, 9, 247.
5
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without re-hiring sufficient staff to conduct good-faith reviews of loans, updating its BSA/AML
compliance program to be commensurate with its new risk profile as a PPP lender, utilizing
appropriate fraud-detection tools, or testing its platform for PPP compliance. And when Kabbage
identified issues concerning its compliance with PPP regulations, it ignored them so that it could
continue to earn the massive fees that accompanied approving, rather than denying, loans.
1. Kabbage knowingly or recklessly approved inflated loans.
Kabbage knew that its platform allowed borrowers to receive inflated PPP loans.
First, PPP loans were generally calculated based on a business’s average monthly payroll
costs, but Kabbage’s platform asked borrowers to add SALT withholdings (which are already
included in wages) to the payroll calculation, causing thousands of borrowers to double-count.
The DOJ estimated this error resulted in at least 53,111 loans inflated by at least $111 million. 7
Second, PPP regulations excluded “the compensation of an individual employee in excess
of [an annual salary of] $100,000.” But Kabbage knew that it was “not capping sole props/single
LLCs to the appropriate $100K.” 8 The lack of any cap led to absurd results. In one instance, an
employee mused in Slack, “dude we got a guy whose payroll was 25,978.00. Someone put in
2597800.00. Homie got submitted for a $2mm loan.” 9 When asked how Kabbage validated the
amount, the employee responded “cause we removed the cap.” 10 The DOJ estimated these
$100,000-cap errors resulted in at least 1,972 loans inflated by at least $108,488,540.27. 11
7
Id. ¶ 116.
8
Id. ¶ 117.
9
Id. ¶ 118.
10
Id.
11
Id. ¶ 119.
6
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Third, Kabbage’s platform allowed borrowers to include duplicative data from IRS Form
940 Box 4 in calculating average monthly payroll. The DOJ estimated it resulted in at least 783
loans inflated by at least $14 million. 12
2. Kabbage knowingly or recklessly approved fraudulent loans.
Kabbage certified to the SBA that, before engaging in PPP lending activities, it would
maintain a BSA/AML compliance program “equivalent to that of a comparable federally regulated
institution.” 13 A BSA/AML compliance program is the set of internal policies, procedures, and
controls that a financial institution maintains to detect and prevent money laundering, terrorist
financing, and other financial crimes, and then report such crimes to law enforcement through
the filing of Suspicious Activity Reports.
Unlike traditional banks that focused on making PPP loans to existing customers who had
already undergone BSA/AML review, including “Know Your Customer” screening, Kabbage
made more than 90% of its PPP loans to new customers. It did so on a largely automated and
expedited basis, with a small and ill-trained BSA/AML compliance team, and without reasonable
systems to verify customer identities or detect, prevent, and report fraud. 14
From the outset, Kabbage’s Officers pressured employees to prioritize automation and
maximize volume. 15 But Kabbage’s automated fraud review failed to flag obvious indicia of
fraud. 16 Even when a loan was flagged as potentially fraudulent, Kabbage lacked the systems to
12
Id. ¶¶ 120–21.
13
Id. ¶¶ 2, 19, 77.
14
Id. ¶¶ 4, 97, 105–12.
15
Id. ¶¶ 59, 110–12, 222; Pl.’s App’x Ex. G at B000198 (DOJ Proof of Claim) (“[M]ore than 90% of the
more than 260,000 loans Kabbage originated or processed on behalf of its partner banks received no human
review.”).
16
Compl. ¶¶ 134–58. According to the DOJ’s Proof of Claim filed in Kabbage’s bankruptcy, Kabbage
approved borrowers not in existence at the time of application; failed to detect falsified tax forms and
mismatched TINs; approved more than 4,100 loans where borrowers shared a social security number with
7
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handle the flags. 17 Kabbage’s system allowed sales team members to delete fraud flags without
informing the account review team. 18 Moreover, in many cases, Kabbage did not perform fraud
checks until after submitting PPP loan guarantee applications to the SBA, if ever. 19
The actual review team—only seven members without a permanent supervisor—was ill-
equipped to handle the deluge. By late May, the team faced a backlog of 35,000 applications
flagged as potentially fraudulent. 20 Understaffed, overworked, and unguided, the team sought
ways to “automate more of the process.” 21 This automation opened the door even wider for
fraudulent applications. And rather than utilizing adequate systems to address potentially
fraudulent applications, Kabbage sought ways to save costs. 22
In total, Kabbage approved thousands—if not tens of thousands—of fraudulent and likely
fraudulent loans. 23
another PPP borrower; and approved loans of nearly 135,000 borrowers who shared an IP address or device
ID with another PPP borrower. Pl.’s App’x Ex. G at B000198 (DOJ Proof of Claim).
17
Compl. ¶¶ 105–63.
18
Id. ¶ 137.
19
Id. ¶¶ 153–54, 177, 183; see also Pl.’s App’x Ex. G at B000198 (DOJ Proof of Claim).
20
Compl. ¶ 109.
21
Id. ¶ 110.
22
Id. ¶ 110–11. In May 2020, Kabbage changed fraud-detection software parameters because costs were
“skyrocketing.” Pl.’s App’x Ex. G at B000199 (DOJ Proof of Claim). Kabbage lowered its fraud-detection
threshold and made other changes to keep costs down. Id. The company also “chose not to use a third-
party document-reading service because ‘it’s expensive,’ relying instead on a home-grown system which
Kabbage reviewers openly complained about as having allowed significant amounts of fraud through.” Id.
23
See Compl. ¶ 283 (“At that time, the SBA was refusing to make guaranty payments to CRB on loans
affected by the SALT, $100K, and IRS Form 940 issues, as well as on nearly 18,000 loans that Kabbage
and CRB had flagged as potentially fraudulent.”); Pl.’s App’x Ex. G at B000203 (DOJ Proof of Claim)
(“The Debtor is alleged to have made at least 17,224 false claims based on loans it knew or should have
known were fraudulent, resulting in potential penalties between $232,661,792 and $465,358,032.”).
8
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B. The Officers Knew of or Willfully Ignored Kabbage’s Violations of the
PPP Laws and Regulations.
The Officers were aware of each problem in real time, received explicit warnings, and
consciously prioritized the Amex Merger over compliance remediation.
1. The Officers knew that Kabbage lacked sufficient compliance staff
to perform the required KYC analyses.
From the start of the PPP, Kabbage’s BSA Officer, Azba Habib, warned Defendants
Frohwein, Petralia, Robinson, and Askins that the company lacked sufficient compliance staffing
to perform “Know Your Customer” analyses. 24 Habib explained that many customers “have . . .
never been KYB/KYC’d or . . . have not been KYB/KYC’d in years,” meaning Kabbage could
“see a lot of fraud (probably after the $ has left the door).” 25 Rather than hire additional personnel,
the Officers pressed forward, prioritizing volume over legally mandated screening.
2. The Officers knew that Kabbage lacked sufficient controls to detect
and prevent fraud.
Near the outset of PPP, Nicole Hill, then Head of Fraud, raised concerns about Kabbage’s
inadequate fraud controls to Robinson. Her recommendations were rejected; she was told “we do
not have fraud” and instructed “not to impair investors by classifying fraud.” 26 When Hill asked
for additional resources, she was provided one employee and “told to be grateful.” 27 On April 16,
2020, Robinson demoted Hill. The next day, Askins and Petralia received a letter from Hill
detailing these concerns. 28 Hill’s concerns were never addressed. 29
24
Compl. ¶¶ 97–99, 126–30.
25
Id. ¶¶ 97–98.
26
Id. ¶ 94.
27
Id. ¶¶ 95, 106
28
Id. ¶ 95; Pl.’s App’x Ex. A (Email re Hill Complaint).
29
Compl. ¶¶ 95, 196.
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Similarly, on May 13, 2020, recognizing that Kabbage still did not have a formal
monitoring process for KYC and other fraud controls as they related to the PPP, Habib emailed
Amit Kesarwani, the new purported “Head of Fraud,” and others to ask them to develop a
“monitoring process” for, among other things, “KYB/KYC tickets” and “Fraud tickets.”
Kesarwani, however, effectively disregarded the request. 30
The pattern continued. In June 2020, A&M, retained to audit Kabbage’s PPP compliance,
provided a preliminary Risk Assessment Report (the “A&M Report”) to the Officers. Even though
A&M reviewed only ten PPP loans out of tens of thousands, it found significant risk that “Kabbage
knew or should have known it was transmitting fraudulent information to the SBA,” especially
since Kabbage was sending loans to the SBA prior to completing fraud reviews. 31 Like other
warnings, the Officers disregarded A&M’s findings.
By mid-June, Kabbage’s already short-staffed compliance department was in disarray. 32
No one in compliance timely addressed the ongoing issues. 33 Rather, when Kabbage employees
encountered fraudulent applications, the message they received from Robinson and others was,
“gotta let em through.” 34
3. The Officers knew that Kabbage lacked appropriate systems to
identify and make the required Suspicious Activity Reports.
Under the BSA, a financial institution is required to file a SAR within 30 days of learning
about suspicious activity. The Officers knew that Kabbage did not have systems and procedures
30
Id. ¶¶ 134–36.
31
Id. ¶¶ 171–77; J.A. Ex. 9 (A&M Risk Assessment Report) at A00152.
32
Compl. ¶¶ 126, 139.
33
Id. ¶¶ 178, 187.
34
Id. ¶ 157.
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in place to comply with this law. 35 On April 28, 2020, Habib emailed Robinson, Askins, and
others, stating she needed help identifying “what types of characteristics at onboarding and
thereafter we should flag for suspicious activity referrals and reports” and establishing a process
for “internal quality control and testing to ensure that our automated process is working as it
should.” 36 Despite these urgent warnings from Kabbage’s own BSA Officer, the Officers took no
meaningful action. So, on May 11, 2020, Habib explained to others at Kabbage: “I’m a bit
concerned that we have identified a number of instances of suspected fraud (I think) and not yet
filed any SARs.” 37 A&M, unsurprisingly, also found significant risk that “Kabbage did not have
a process in place to identify and report unusual activity.” 38
4. The Officers knew about the SALT and related calculation errors.
The Officers were aware of the inflation errors. On April 12, 2020, Kabbage’s
communications director sent Robinson and other executives a link to a tweet “suggesting we’re
doubling up on the same data points.” 39 Rather than investigating, Robinson was dismissive. 40
Weeks later, the same issue was brought to Petralia and Frohwein, but there was no proper
investigation, and the issue was not fixed. 41 Yet Robinson himself acknowledged concerns about
Kabbage’s calculations, stating: “I’m worried about our calcs.” 42 Despite this worry, Robinson
35
Id. ¶¶ 126–28.
36
Id. ¶ 127.
37
Id. ¶ 133.
38
Id. ¶ 177; J.A. Ex. 9 (A&M Risk Assessment Report) at A00153.
39
Compl. ¶ 115.
40
Id. ¶¶ 115–16.
41
Id.
42
Id. ¶ 120.
11
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did not ensure the methodology was corrected or inform the Board. 43 Instead, he articulated
Kabbage’s strategy for dealing with inflated loans as hoping the problem would never come to
light: “[W]e just did a poor job verifying [PPP loan amounts]. . . . [It] only becomes an issue in
an audit or guarantee scenario. . . . [M]aybe they’ll be auto forgiven .” 44
5. The Officers suppressed—rather than escalated—compliance issues.
The Officers made clear that Kabbage would not tolerate questions about its compliance
controls. Robinson went to such lengths to suppress information that employees viewed him as
an “information barrier.” 45 The treatment of Hill and the A&M Report exemplifies the Officers’
systematic suppression of compliance concerns. After Hill raised concerns, Robinson demoted
her. And when Hill sent a letter to Askins explicitly detailing serious concerns about Kabbage’s
compliance program, including being told to ignore fraud, Askins did not investigate or escalate
her allegations to the Board. 46 Petralia, for her part, refused to bring back more than one single
furloughed employee to assist with the fraud review process. 47 Even when the Officers received
the A&M Report, they did not take remedial action. Rather, Frohwein flew into a rage and
instructed his team to bury the report. 48 To the extent that Askins addressed the red flags in the
A&M Report, it was to push A&M to change its conclusions. 49
43
Id. ¶¶ 121–22.
44
Id. ¶ 123.
45
Id. ¶ 196.
46
Id. ¶¶ 94–95.
47
Id. ¶ 106.
48
Id. ¶¶ 193, 199.
49
Id. ¶¶ 200–01.
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C. The Board Utterly Failed to Monitor Kabbage’s PPP Compliance.
The Board knew that Kabbage had pivoted its entire business to PPP lending but turned a
blind eye to whether Kabbage had the actual systems and personnel—not just written policies—to
effectively perform required BSA/AML reviews and correctly calculate and submit loans to the
SBA. The Board’s abdication was comprehensive: it asked no questions, demanded no reports,
established no committees, and took no action to ensure that Kabbage’s compliance
infrastructure—which it knew was already riddled with gaps—could handle the exponentially
increased volume and risk of PPP lending.
First, the Board knew Kabbage’s BSA/AML compliance program suffered from serious
deficiencies that had not been addressed. In 2018 and 2019, Kabbage had retained Treliant to
conduct “risk-based” testing of the design and effectiveness of its BSA/AML compliance program.
Treliant’s 2019 report, which the Board received before the PPP began, found that Kabbage’s
“BSA/AML Program demonstrates limited evidence of enhancement since [Treliant’s] prior
review” and identified “the lack of enhancements in the Company’s Compliance Program
operational procedures [as] an important weakness that requires prioritization.” 50 Despite this
warning, the Board failed to ensure these deficiencies were remediated before Kabbage certified
compliance to the SBA. 51
Second, despite PPP lending becoming Kabbage’s sole new-loan business in April 2020,
the Board failed to establish any formal mechanism or committee—newly formed or pre-existing,
such as its audit committee—to monitor PPP compliance. 52 Even if PPP lending was only short-
lived, Kabbage would have years of ongoing obligations as a lender.
50
Id. ¶¶ 88–92.
51
Id. ¶ 93.
52
Id. ¶¶ 202–06, 317–21.
13
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Third, although the Board knew that Kabbage’s PPP volume would be enormous, it held
no discussions about compliance between the start of the PPP and one week before the program
ended—when the only action was approving an updated BSA/AML Policy. 53 The meeting
minutes reflect no questions and no concern regarding the timing or substance of the policy. 54
Fourth, during the PPP, the Board did not receive any reports from the Chief Compliance
Officer (Askins) or Kabbage’s BSA/AML Officer (Habib and, later, Askins in an interim capacity)
on compliance matters and risks. 55 There were no reports about A&M’s critical review of
Kabbage’s PPP program. There were no reports about how many SARs had been filed by Kabbage
and the general bases for such filing. There were no reports about how many loans had been made
by Kabbage to borrowers that had already become subjects of criminal investigations or, relatedly,
how many subpoenas had been received. 56
Fifth, the Board did not ask basic questions, such as: (1) whether Kabbage had assessed its
PPP lending practices (it had—and that assessment was not provided to the Board); (2) whether
Kabbage employees had raised compliance concerns (they had—and those concerns were not
escalated to the Board); or (3) how many loans had been flagged as potentially fraudulent
(thousands of loans—and those flagged loans were not disclosed to the Board). 57
Finally, the Board never set a “tone from the top” encouraging compliance reporting. With
no Board oversight, management had free rein to suppress critical issues. When employees raised
compliance concerns, they were marginalized, stripped of titles, or made to fear for their jobs.
53
Id. ¶¶ 82, 202.
54
Id. ¶¶ 202–03, 318–19.
55
Id. ¶¶ 194, 318–20.
56
Id. ¶¶ 21, 205, 318.
57
Id. ¶¶ 202, 205, 213, 248–49, 318.
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Notably, when Paul Pietschner, a Kabbage Legal Analyst, received the A&M Report, he conducted
his own investigation and found even more serious gaps in Kabbage’s fraud controls. 58 He sent
his findings to in-house counsel and senior employees. 59 Despite the red flags raised in the
Kutworm Report, it took nearly two months for anyone to respond—and the only response was to
leave Pietschner with the impression that he would be fired for voicing his legitimate concerns. 60
D. Defendants Cash Out with the Amex Merger While Leaving Kabbage
Hopelessly Insolvent.
1. The Directors and Officers negotiated a sale to Amex that
“orphaned” the PPP liabilities at Kabbage.
Amex made it clear that it would not acquire Kabbage’s loan portfolios, particularly the
rapidly expanding PPP portfolio that Kabbage was churning out with minimal oversight. 61 Thus,
the parties agreed to structure the sale so that Kabbage’s loan portfolio and all associated liabilities
remained at Kabbage. Amex would purchase Kabbage’s non-loan assets—the bulk of Kabbage’s
assets—through a proposed multi-step merger agreement. 62 The parties signed the Merger
Agreement on August 16, 2020. 63
Not only did the Merger Agreement “orphan” Kabbage’s PPP liabilities at the legacy
company, but it also contained protections for Amex against PPP-related liabilities. Notably,
Amex insisted on a $37.5 million holdback because it was “very worried about legal liability” and
58
Id. ¶¶ 24–25, 179–87.
59
Id. ¶¶ 187–89.
60
Id. ¶¶ 188–90.
61
Id. ¶¶ 208–10.
62
Id. ¶¶ 211–14, 250–52.
63
Id. ¶ 255.
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concerned about “liability flowing from fraudulent applicants, anything that would give the
government, applicants and others [reason for] suing them.” 64
2. The Officers dictated erroneous assumptions for a solvency opinion
to increase the cash that they could extract from Kabbage.
A critical condition of the Merger Agreement was obtaining a solvency opinion for post-
transaction Kabbage. 65 Amex demanded this solvency opinion because, among other reasons, it
was “concerned that the burden to prove that enough money was left in legacy co [i.e., Kabbage]
shifts to [Amex] if they push our cash from PPP through the transaction.” 66
Rather than take a good-faith approach to determining how much cash needed to remain at
Kabbage, the Officers viewed it as a “deal within a deal,” pressuring Duff & Phelps to require as
low a number as possible. 67 The Officers decided to reserve only $1 million for litigation—a
figure Askins questioned, noting that even before the PPP, “the defense costs alone for outside
litigation counsel have been higher than $1M annually in the past.” 68 Even more remarkably, the
Officers contemplated only $949,000 in “PPP put back liability” (later increased to $1,058,000 at
closing), representing less than 0.014% of the more than $7 billion in PPP loans processed. 69 This
reserve was supposed to represent a fair estimate of liability in the case where—as would
ultimately happen—Kabbage was not able to “shield [itself] from any liability [by] relying on the
64
Id. ¶¶ 226–27.
65
Id. ¶¶ 229–30; J.A. Ex. 39 (Duff & Phelps Solvency Analysis).
66
Compl. ¶ 225.
67
Id. ¶ 242.
68
Id. ¶ 245.
69
Id. ¶¶ 247, 271. Kabbage made it clear to Duff & Phelps that these numbers were not even “estimates.”
Rather, as Kabbage stated in its management representation letter, “[f]or avoidance of doubt, amount [of
‘Reserve’] represents reserved cash to fund liabilities, not an estimation of liabilities.” Pl.’s App’x Ex. D
at B000031 (Management Rep. Letter) (emphasis added).
16
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SBA’s ‘good faith’ clauses with respect to actions it took reviewing borrower documents when
originating and servicing loans.” 70
On October 15, in anticipation of closing, Duff & Phelps issued its “bring down” solvency
opinion (the “Solvency Opinion”), which found that Kabbage was just barely solvent. 71 But,
contrary to that opinion, it was almost common knowledge at Kabbage that the transfer would
render it insolvent. Kabbage’s attorneys joked that Duff & Phelps was “dumb for issuing the
solvency opinion.” 72 And Kabbage employees shared memes mocking Kabbage’s insolvency. 73
3. By design, the Merger stripped Kabbage of its assets and transferred
their value to the Shareholders.
Pursuant to the Merger Agreement, three days before closing, on October 13, 2020,
Kabbage became a wholly owned subsidiary of Amex Kabbage, with Kabbage equity holders
receiving identical securities in Amex Kabbage. 74 On the same day, Kabbage made the Fraudulent
Transfer, transferring substantially all of its assets to Amex Kabbage, including $120 million in
cash earned through the PPP. 75 Kabbage was left with approximately $17 million—intended to
service its existing loan portfolios and cover all liabilities, including massive contingent liabilities
and wind-down activities. 76 Even according to Duff & Phelps, Kabbage was solvent by only
around $3 million, leaving no margin for error. 77
70
Pl.’s App’x Ex. E at B000053 (Duff & Phelps Oct. 15, 2020 Analysis).
71
Compl. ¶ 271.
72
Id. ¶ 272.
73
Id. ¶ 30.
74
Id. ¶¶ 251, 270.
75
Id. ¶ 270.
76
Id. ¶¶ 8, 244, 248, 271.
77
J.A. Ex. 39 (Duff & Phelps Solvency Analysis) at A00383 (showing Net Asset Value – Kabbage LLC
equal to $503,500).
17
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Three days later, Amex Kabbage merged into an Amex subsidiary, with Amex Kabbage as
the surviving entity. Each Amex Kabbage equity holder received the applicable per-share
purchase price from Amex, and their shares were cancelled. Each equity holder (other than
Reverence and holders of Series F preferred shares) then received a proportional share of common
stock of Kabbage, becoming direct owners of Kabbage again. 78
Thus, over three days and as specifically set forth in the Merger Agreement, Kabbage’s
Shareholders went from owning equity in Kabbage directly to owning identical equity in Amex
Kabbage, and then to receiving hundreds of millions of dollars in cash. On October 16, 2020, the
Merger closed, and Kabbage’s former shareholders received $730,159,391 in merger
consideration, including more than $500 million paid to Defendants. 79
E. As Was Foreseeable, Kabbage Was Hit with Claims and Investigations
Regarding Its PPP Lending Practices.
Shortly after the merger closed, Kabbage was hit with a wave of claims and investigations.
Two separate whistleblowers filed False Claims Act lawsuits on behalf of the DOJ. The SBA
asserted claims arising from Kabbage’s deficient PPP lending practices, and a congressional
investigation culminated in a scathing report. 80 A second round of PPP loans in 2021 gave
Kabbage a temporary lifeline, allowing it to pay $30 million to the SBA to partially resolve claims.
But the claims ultimately proved insurmountable.
Facing hundreds of millions of dollars in legal claims for harm caused by its role in the
PPP—including, almost $800 million by the DOJ, $720 million from the SBA, $536 million from
the Federal Reserve System, and $572 million from CRB—Kabbage filed for bankruptcy on
78
Compl. ¶ 251.
79
Id. ¶ 273.
80
Id. ¶¶ 275–80; Pl.’s App’x Ex. F at B000064, B000121–31 (Congressional Staff Report).
18
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October 3, 2022. 81 Plaintiff then conducted an extensive investigation and reduced these claims
through protracted negotiations. 82 Plaintiff negotiated the DOJ’s two FCA claims down to allowed
claims totaling $120 million. 83 After resolving the DOJ claims, Plaintiff reduced the SBA’s claim
from $720 million to $92 million. 84
LEGAL STANDARD
To survive a Rule 12(b)(6) motion, a complaint “must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” 85 A claim is facially
plausible when its factual allegations permit “the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” 86 This standard demands only “more than a sheer
possibility that a defendant has acted unlawfully.” 87 Where fraud is alleged, Rule 9(b) requires
particularity as to the circumstances of the misconduct, but it does not displace the required
plaintiff-friendly inferences. 88 The Complaint pleads who did what, when, and why through
dozens of internal emails, Slack messages, and deal documents, thereby satisfying both Rules 8
and 9(b).
As explained below, Defendants flout the motion-to-dismiss standard. Not only do they
ignore the Complaint’s allegations, but they also invent non-pleaded facts (e.g., Frohwein claiming
81
Compl. ¶¶ 281–82.
82
Id. ¶¶ 283–85.
83
Id. ¶¶ 285–86.
84
Id. ¶ 287.
85
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)).
86
Id.
87
Id.
88
Eurand, Inc. v. Mylan Pharms., Inc., 266 F.R.D. 79, 82–83 (D. Del. 2010).
19
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to have misunderstood the A&M Report) 89 and invite the Court to adopt defendant-friendly
inferences from the pleaded facts (e.g., Robinson arguing, based on two self-serving statements in
Slack messages, that he had discussed issues with Kabbage’s counsel at the time). 90
ARGUMENT
I. The Complaint Adequately Pleads Caremark Claims.
Defendants invoke the familiar refrain that Caremark claims are “possibly the most
difficult theory in corporation law.” 91 But this is no ordinary case. Courts must impose heightened
oversight duties when externally imposed regulations govern a company’s core operations. 92 PPP
lending was not merely one of Kabbage’s business lines—it was effectively the company’s sole
business activity from April through October 2020. The Directors’ and Officers’ duty to ensure
functioning compliance reporting was therefore at its apex. Yet Kabbage’s compliance reporting
was not merely inadequate; it was nonexistent. The Complaint alleges egregious oversight failures
giving rise to Caremark liability under both the “information systems” and “red flags” prongs.
A. The Complaint States an “Information Systems” Claim.
Under Caremark’s first prong, fiduciaries are liable when they “utterly fail[] to implement
any reporting or information system or controls.” 93 A board must assure “that information and
89
D&O Defs. Mot. at 39–40 n.53.
90
Robinson Mot. at 25–26.
91
D&O Defs. Mot. at 22 (quoting In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch.
1996)).
92
See Marchand v. Barnhill, 212 A.3d 805, 822 (Del. 2019) (“When a plaintiff can plead an inference that
a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to
the company’s business operation, then that supports an inference that the board has not made the good
faith effort that Caremark requires.”); In re Clovis Oncology, Inc. Deriv. Litig., 2019 WL 4850188, at *13
(Del. Ch. Oct. 1, 2019) (“As Marchand makes clear, when a company operates in an environment where
externally imposed regulations govern its ‘mission critical’ operations, the board’s oversight function must
be more rigorously exercised.” (citing Marchand, 212 A.3d at 822, 824)).
93
Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
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reporting systems exist in the organization that are reasonably designed to provide to senior
management and to the board itself timely, accurate information sufficient to allow management
and the board, each within its scope, to reach informed judgments concerning both the
corporation’s compliance with law and its business performance.” 94 Officers “owe the same
[oversight] duties as corporate directors.” 95 This inquiry looks beyond paper structures, or the
“trappings of oversight,” to whether the board ensured that systems actually function to bring
critical information to its attention. 96
The Directors and Officers ignore the context of Kabbage’s shift to PPP lending. Prior to
the PPP, the Board received audit reports documenting systemic gaps in Kabbage’s BSA/AML
compliance infrastructure. While those gaps might not have been “mission critical” for Kabbage’s
typical lending operations, they became mission critical when Kabbage certified to the SBA that
it had a compliance program “equivalent to that of a comparable federally regulated institution”
and prepared to approve billions of dollars of loans to hundreds of thousands of borrowers. 97
The 2018 Treliant Report identified multiple deficiencies, rating Kabbage’s overall
BSA/AML control environment as providing only “Limited Assurance.” 98 Treliant found that “the
94
Caremark, 698 A.2d at 970.
95
In re McDonald’s Corp. S’holder Deriv. Litig., 289 A.3d 343, 364 (Del. Ch. 2023).
96
See Hughes v. Hu, 2020 WL 1987029, at *14–16 (Del. Ch. Apr. 27, 2020) (“The mere existence of an
audit committee and the hiring of an auditor does not provide universal protection against a Caremark
claim.”); see also Marchand, 212 A.3d at 821–22 (holding that board must ensure information systems
actually function to bring critical information to its attention, not merely exist on paper); In re Boeing Co.
Deriv. Litig., 2021 WL 4059934, at *29–31 (Del. Ch. Sept. 7, 2021) (emphasizing that “ad hoc”
communications from management do not substitute for formal compliance reporting systems).
97
Accordingly, the fact that “Treliant found the ultimate output of the risk assessment to be reasonable and
aligned to the risk profile of the Company” prior to PPP lending does not excuse Defendants’ failure to take
remediation measures when Kabbage changed its entire business model PPP lending. J.A. Ex. 5 at A00082;
see, e.g., Askins Mot. at 17 (relying on the Treliant reports while ignoring the fact that Kabbage’s “risk
profile” changed substantially once it became a PPP lender); D&O Defs. Mot. at 26–27, 36, 39 (same).
98
J.A. Ex. 3 (2018 Treliant Report) at A00047. Defendants argue without much conviction that the 2018
Treliant Report may not have been “brought to the Board’s attention.” Add’l Dir. Defs. Mot. at 16. If
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incomplete operational review process documentation is an important weakness that requires
prioritization by the Company to allow for robust independent review of control effectiveness and
ongoing Quality Assurance.” The report warned: “Without adequate review documentation, the
quality of execution of the control cannot be fully tested. This weakness affects testing of CIP,
EDD, OFAC and transaction monitoring controls and is considered a systemic gap.” 99 The report
also identified critical weaknesses in Kabbage’s Quality Assurance function—one of the essential
pillars of any BSA/AML program. Treliant found that “[a] formal QA/QC framework is not yet
in place across all monitoring and screening processes.” 100 The absence of a developed quality
control reporting framework meant Kabbage had no systematic way to verify that its compliance
controls were actually functioning.
The 2019 Treliant Report—provided to the Board on November 13, 2019—found that
Kabbage’s compliance program had deteriorated. 101 The report documented un-remediated
deficiencies directly implicating Kabbage’s ability to detect and prevent fraud. 102 It concluded
that the “BSA/AML Program demonstrates limited evidence of enhancement since [Treliant’s]
prior review” and specifically warned that “the lack of enhancements in the Company’s
Compliance Program operational procedures [is] an important weakness that requires
prioritization.” 103 The overall rating remained “Limited Assurance,” meaning systemic gaps
identified in 2018 remained unaddressed.
anything, this odd argument only reinforces Plaintiff’s prong one claim against the Board. But it also is
factually irrelevant, as the Complaint makes clear that the 2019 Treliant Report, which discusses the issues
raised in the 2018 report in detail, “was provided to the Board on November 13, 2019.” Compl. ¶ 89.
99
J.A. Ex. 3 (2018 Treliant Report) at A00047.
100
Id. at A00051.
101
Compl. ¶¶ 88–89.
102
Id. ¶¶ 88–92; J.A. Ex. 5 (2019 Treliant Report) at A00086-87.
103
Compl. ¶ 90.
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Defendants claim that the Treliant reports are not “red flags” of illegality because they did
not explicitly state Kabbage was violating the law. 104 This argument misunderstands the
information systems prong of Caremark. The Treliant reports are relevant because they
demonstrate that the Board knew that Kabbage’s compliance infrastructure was inadequate to
detect or prevent violations. A board acting in good faith would have known that Kabbage needed
to remediate its BSA/AML compliance program before becoming a PPP lender. But the Board
took no such action, much less made any inquiry whatsoever into these known issues, despite their
mission-critical importance. And as the Board knew (or willfully ignored), false statements in PPP
loan submissions exposed Kabbage to liability under, among other things, the False Claims Act.
Defendants argue that “the Complaint concedes that the Directors . . . remedied any
purported issues” in the Treliant reports, basing this bizarre claim on the fact that the Directors
approved an updated BSA/AML Policy on July 29, 2020. 105 First, the Complaint alleges the
opposite. 106 In fact, Habib told Askins in June 2020 that “corrective actions plans (remediations)
from the 2019 Promontory risk assessment and the related Treliant audit are not complete” and
“will require significant effort to operationalize and validate.” 107 There is no allegation (or
evidence) that any effort, much less “significant effort” was undertaken in June or July to remediate
the issues from the risk assessment report. Second, even if Defendants’ argument was factually
104
See D&O Defs. Mot. at 33–38; Add’l Dir. Defs. Mot. at 19–24 (arguing that the Treliant Reports were
not red flags of illegality but “yellow flags” of business risk).
105
D&O Defs. Mot. at 36; see also id. at 37 n.47.
106
Compl. ¶ 93; see also id. ¶¶ 19–20.
107
Pl.’s App’x Ex. C at B000027 (June 4, 2020 email to Askins) (referenced in Compl. ¶ 20).
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accurate (it is not), the Directors did not receive an updated compliance policy until after Kabbage
had already made more than $6 billion of PPP loans. 108
Defendants point to Treliant’s findings to suggest that the Board “maintain[ed] sufficient
oversight” and that Treliant “did not find any material concerns or issues” with Board governance.
But these statements must be read in context. Treliant was evaluating whether the Board addressed
escalated issues, not whether underlying compliance controls were adequate. 109 The problem was
not that the Board failed to review reports it received; it was that the compliance infrastructure
necessary to generate and deliver those reports to the Board in the first place was non-existent.
In addition, while BSA/AML compliance was certainly intertwined with PPP regulations,
the PPP contained additional requirements for lenders. Among other things, the PPP regulations
required Kabbage to “confirm receipt of information demonstrating that a borrower had employees
for whom the borrower paid salaries and payroll taxes on or around February 15, 2020,” and
confirm, by performing “a good faith review,” “the dollar amount of average monthly payroll costs
for the preceding calendar year by reviewing the payroll documentation submitted with the
borrower’s application.” 110 When Kabbage pivoted its business to PPP lending and specifically
sought to become one of the nation’s largest volume lenders, the Board had a responsibility to
108
Compl. ¶ 82. Relatedly, Defendants also argue that by April 2020, “Kabbage set upon updating its
BSA/AML Policy as soon as PPP lending began.” D&O Defs. Mot. at 37 n.47. What Defendants fail to
mention is that the “update” to the policy in late April was for a new Kabbage Checking product (a product
totally unrelated to the PPP), which gave lip-service to the PPP but clearly stated Kabbage had
“implemented a CRR methodology for Offerings other than [PPP] loans” and was “still refining its
customer risk segmentation process for [PPP] loans.” Pl.’s App’x Ex. B at B000025 n.13 (April 27, 2020
Draft of Compliance Policy). Moreover, Defendants offer no proof—nor would such proof be appropriate
for a motion to dismiss—that the Directors received a copy of the late April updated policy. Thus, this can
hardly be an example of “the Board’s chosen response [being] diligent.” D&O Defs. Mot. at 37 n.47.
109
J.A. Ex. 5 (2019 Treliant Report) at A00083.
110
Compl. ¶ 113 (citing SBA PPP FAQ #1 (Apr. 3, 2020) and 85 Fed. Reg. 20811, 20815 (Apr. 15, 2020)).
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ensure that Kabbage had a reporting and information system in place to comply with the specific
PPP regulations. But no such specific system existed.
The Complaint alleges facts closely paralleling the dispositive oversight deficiencies in
Boeing and Marchand. In Boeing, the Court of Chancery denied dismissal where the board failed
to implement a system to monitor airplane safety—a “mission critical” aspect of the company’s
business. 111 The court held that the plaintiff had pleaded a prong-one Caremark claim because:
(1) the board had no committee charged with direct responsibility to monitor airplane safety;
(2) the board did not monitor, discuss, or address airplane safety on a regular basis; (3) the board
had no regular process or protocols requiring management to apprise the board of airplane safety;
and (4) management saw “red, or at least yellow, flags,” but that information never reached the
board. 112 Here too, compliance with PPP regulations was equally “mission critical” to Kabbage—
failure would result in loss of processing fees, loss of the SBA’s guaranty, billions of dollars in
“put-back” liability, and False Claims Act exposure—but the Board had no committee charged
with PPP oversight, did not monitor, discuss, or address PPP compliance issues, and had no
functioning protocols for management to apprise the Board of PPP compliance concerns. 113
Similar to Boeing, the Officers here “received reports that contained what could be
considered red, or at least yellow, flags,” but “the board minutes of the relevant period revealed
no evidence that these were disclosed to the board.” 114 The court found that this fact made it
“reasonable to infer the absence of a reporting system.” 115 Given the number of issues that were
111
2021 WL 4059934, at *26.
112
Id. at *27–31.
113
Compl. ¶¶ 202–06, 317–21.
114
Boeing, 2021 WL 4059934, at *31.
115
Id.
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not escalated to the Board—from knowledge of the SALT double counting to the A&M Report’s
findings—it is reasonable to infer a lack of a reporting system from management to the Board.
The parallels with Boeing extend further. In Boeing, the court emphasized the “lack of an
internal reporting system by which whistleblowers and employees could bring their safety
concerns to the Board’s attention.” 116 The court found it significant that the board received only
“certain favorable information” from management and that employees who raised safety concerns
had no formal channel to escalate them to the board. 117 That failure—the absence of a reliable
pipeline from employees and whistleblowers to the board—was central to the court’s finding. The
same deficiency pervades the Complaint’s allegations here.
Kabbage had no functioning mechanism for employees to bring compliance concerns to
the Board’s attention. When Hill raised concerns about inadequate fraud controls, she was
“derided” and stripped of her title. 118 When Pietschner prepared the Kutworm Report documenting
systemic compliance failures, he feared he might be fired. 119 When Habib warned about
insufficient compliance staffing and fraud risk, her concerns were ignored. 120 When employees
tried to escalate concerns about inaccurate borrower data, Robinson refused even to “acknowledge
that us having inaccurate borrower data is even of concern.” 121 Just as in Boeing, employees who
attempted to raise compliance concerns met a dead end—confirming that Kabbage lacked any
internal reporting system by which compliance concerns could reach the Board.
116
Id. at *27.
117
Id. at *27, 31.
118
Compl. ¶¶ 95, 106.
119
Id. ¶¶ 189–91.
120
Id. ¶¶ 97–99.
121
Id. ¶ 196.
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The irony of Defendants’ reliance on the BSA/AML Policy’s anonymous reporting
provision is difficult to overstate. The Policy states that “[t]he BSA/AML Officer ensures Kabbage
employees can report violations of this Policy anonymously by telephone” and that “Kabbage
never tolerates retaliation of any type against an employee who reports a potential violation.” 122
Yet the allegations demonstrate the precise opposite. Rather than empowering employees to report
violations, Kabbage’s management systematically punished those who did.
In Marchand, the Delaware Supreme Court reversed dismissal of a Caremark claim where
the plaintiff alleged that Blue Bell’s board failed to implement any board-level system to monitor
food safety—despite food safety being “mission critical” to the company’s business. 123 The court
found the complaint adequately alleged Caremark violations where: (1) no board committee
addressed the mission-critical risk; (2) there was no regular process requiring management to keep
the board apprised of compliance issues; (3) the board did not receive food-safety compliance
information on a regular basis; and (4) the board did not act to ensure management implemented
proper monitoring systems. 124 Here, the parallels are stark, and the allegations are in many respects
more egregious than in Marchand.
The Board never set a tone from the top that would have made any reporting mechanism
effective. The Board did not have a single meeting or discussion about compliance issues between
the start of the PPP and approximately one week before the program ended. This silence during a
period when Kabbage processed billions of dollars in highly regulated loans demonstrates
conscious disregard of oversight duties. Further, for Kabbage, approving PPP loans was akin to
122
J.A. Ex. 35 at A00362.
123
212 A.3d at 809, 824.
124
Id. at 822–24.
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entering a new, highly regulated business. Yet the Board failed to establish a dedicated committee
to monitor PPP compliance. Just as the Marchand court found it significant that “no board
committee that addressed food safety existed,” 125 this Court should find the absence of a committee
addressing PPP compliance similarly concerning.
The Directors contend that the Complaint fails to allege a “sustained and systematic
failure” because Kabbage’s participation in the PPP spanned only approximately six months—too
“short” to establish the pattern of bad faith required under Caremark. 126 This argument
fundamentally misapprehends both the law and the facts. Delaware law does not impose a
minimum durational requirement for Caremark claims. The “sustained, systemic, or striking”
standard describes the quality of the misconduct—whether it reflects a pattern of conscious
disregard rather than an isolated lapse—not the calendar duration. Total board-level oversight
abandonment throughout the entire PPP period—while processing over $7 billion in federally
guaranteed loans to more than 300,000 borrowers—is “striking” and “systemic” by any measure.
Indeed, because Kabbage’s Board knew that the PPP was going to be a short-term program, the
Board consciously chose to have Kabbage enter and exist the PPP without ever implementing any
of the necessary reporting systems to allow the Board to have meaningful oversight. The
Directors’ oversight failure was thus “sustained.” Simply put, there is no durational safe harbor.
Further, the absence of a functioning BSA/AML Officer was not a mere paperwork
deficiency—it was a critical gap during the period when compliance was most critical. When
Kabbage’s BSA/AML Officer, Habib, resigned in early June 2020—less than two months after
Kabbage began processing PPP loans—Askins assumed the role on an “interim” basis without
125
Id. at 822.
126
See Add’l Dir. Defs. Mot. at 24.
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Board approval. 127 But this interim arrangement was a compliance fiction. As BSA/AML Officer,
Askins was responsible for “[m]onitoring the effectiveness of BSA/AML compliance and taking
corrective action to remedy any deficiencies found”; “[p]romptly alerting the Board to any material
issues of BSA/AML non-compliance”; and “[p]roviding annual reporting to the Board on the state
of BSA/AML compliance and significant emerging issues.” 128 Yet Askins did none of these
things. Rather, she admitted that she “focused the bulk of her time on diligence matters related to
the Amex Merger” rather than compliance. 129
Defendants cite Stone v. Ritter, but the facts here are the inverse. In Stone, the Delaware
Supreme Court affirmed dismissal where the board “received and approved relevant policies and
procedures, delegated to certain employees and departments the responsibility for filing SARs and
monitoring compliance, and exercised oversight by relying on periodic reports from them.” 130 The
Kabbage Board did none of these things during the entire PPP period, other than approve an
updated BSA/AML Policy during the last week of PPP lending. 131 Defendants also invoke David
B. Shaev Profit Sharing Account v. Armstrong for the proposition that a board need only engage
in “diligence, not heroism” in exercising oversight. 132 But Shaev is inapposite. There, the plaintiff
alleged that certain directors of Citigroup breached their fiduciary duties by failing to detect and
prevent fraudulent activities involving the company’s relationships with Enron and WorldCom. 133
The plaintiff conceded, however, that Citigroup “had a wide range of compliance systems in
127
Compl. ¶¶ 20, 139–40.
128
Id. ¶ 85.
129
Id. ¶ 11.
130
911 A.2d at 373.
131
Compl. ¶¶ 202–06, 318–21.
132
Add’l Dir. Defs. Mot. at 18 (citing 2006 WL 391931, at *6 (Del. Ch. Feb. 13, 2006)).
133
Shaev, 2006 WL 391931, at *1–2.
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place,” and that the board “had no reason to believe that these systems were not functioning in a
basic sense.” 134 By contrast, Kabbage’s Board failed to assure the existence of reasonable
reporting systems by not establishing any committee or other formal mechanism to monitor PPP
compliance or ask any questions about Kabbage’s PPP lending practices, at least not until after the
company had already approved billions of dollars in federally guaranteed loans. 135
Defendants also rely on In re Goldman Sachs Group, Inc. Shareholder Litigation and In re
Citigroup Inc. Shareholder Derivative Litigation for the proposition that a board’s failure to
anticipate business risks or losses does not give rise to Caremark liability. 136 These cases are
inapposite because they concern allegations that director defendants were liable “for oversight
failure relating to . . . business performance.” 137 The Complaint, by contrast, alleges that the
Directors are liable for oversight failures relating to Kabbage’s compliance with legal
requirements—not for any oversight failures relating to business risk. Federal law requires PPP
lenders to certify compliance with BSA/AML regulations and to implement fraud controls.
Kabbage failed to comply with those regulations or implement the required controls, and the
Directors failed to monitor that compliance (or lack thereof). This case is not about business
134
Id. at *5.
135
Cf. id. (noting such oversight failure “might take the form of facts that show the company entirely lacked
an audit committee or other important supervisory structures”).
136
Add’l Dir. Defs. Mot. at 24 (citing Goldman Sachs, 2011 WL 4826104 (Del. Ch. Oct. 12, 2011);
Citigroup, 964 A.2d 106 (Del. Ch. 2009)). Defendants cite these cases in a section of their brief titled,
“Kabbage’s Board Did Not Consciously Ignore Red Flags.” Defendants apparently misunderstand that the
Complaint pleads only a prong one “information systems” claim—not a prong two “red flags” claim—
against the Directors (other than Frohwein, who was both a Director and an Officer).
137
See Goldman Sachs, 2011 WL 4826104, at *19; Citigroup, 964 A.2d at 130 (“What plaintiffs are asking
the Court to conclude from the presence of these ‘red flags’ is that the directors failed to see the extent of
Citigroup’s business risk and therefore made a ‘wrong’ business decision by allowing Citigroup to be
exposed to the subprime mortgage market.”).
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judgment regarding risk tolerance; it is about legal compliance with mission-critical regulatory
requirements.
Defendants’ reliance on Bricklayers Pension Fund of Western Pennsylvania ex rel.
Centene Corporation v. Brinkley is also misplaced. The Bricklayers court was concerned with
whether a majority of the board knew that the company’s oversight framework was inadequate. 138
The court rejected plaintiff’s argument that the directors “‘turned a blind eye’ to problems with
[the company’s] reporting systems or knew that [it] effectively had no controls in place” because
the committees responsible for overseeing Medicaid compliance “did real work and reported to
the full Board.” 139 Specifically, the court found that (1) management reported to the compliance
committee quarterly; (2) the committee was actually provided with updates on the company’s
health plan compliance program, including updates on Medicaid contracts as well as legal and
regulatory compliance; (3) “the compliance committee was expressly informed of specific
measures management was taking or had taken to address each of the shortcomings identified”;
and (4) the plaintiff did not plead any red flags management was aware of that did not reach the
Board. 140 Thus, the court concluded the proper inference from plaintiff’s allegations was that “the
Board oversaw improvements to Centene’s Medicaid compliance systems for as long as it was
aware of the deficiencies.” 141
Here, by contrast, the Complaint alleges the Board’s complete abdication of oversight
responsibility: zero compliance meetings during the entire PPP period; zero reports on compliance
or risk from the Chief Compliance Officer or BSA/AML Officer to the Board or any Board
138
2024 WL 3384823, at *14 (Del. Ch. July 12, 2024).
139
Id. at *15.
140
Id.
141
Id.
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committee; no approval of a revised BSA/AML policy to address PPP lending until one week
before the PPP ended; zero questions about compliance despite processing billions in federally
guaranteed loans; no dedicated committee or formal mechanism to monitor PPP compliance; and
multiple examples of the Board failing to address problems—such as those identified in the A&M
and Kutworm Reports—that it never heard about because of its own failure to design an actual
reporting system. None of that reflects a good-faith effort “to put in place a reasonable board-level
system of monitoring and reporting” that would amount to anything more than a chimera. 142
Even crediting Defendants’ argument that certain pre-PPP “board-level mandatory
reporting protocols” existed does not mean the Directors discharged their fiduciary obligations.
Courts look beyond the mere existence of a system to some indicia of effectiveness when
determining whether the required good-faith efforts were made. 143 This is not a case where a
functioning system failed to detect isolated wrongdoing—it is a case where the Board utterly failed
to ensure that any meaningful compliance system existed at the board level. 144
142
Marchand, 212 A.3d at 821 (emphasis added).
143
See Rich ex rel. Fuqi Int’l, Inc. v. Yu Kwai Chong, 66 A.3d 963, 982–83 (Del. Ch. 2013) (shareholder
plaintiffs stated information systems claim where complaint alleged that company had no “meaningful”
controls in place, despite existence of audit committee and independent auditor, because “the mechanisms
[the company] had in place appear to have been woefully inadequate”); Hughes, 2020 WL 1987029, at *16
(“Caremark envisions some degree of board-level monitoring system, not blind deference to and complete
dependence on management. The board is obligated to establish information and reporting systems that
‘allow management and the board, each within its own scope, to reach informed judgments concerning both
the corporation's compliance with law and its business performance.’” (citation omitted)).
144
Compare Constr. Indus. Laborers Pension Fund v. Bingle, 2022 WL 4102492, at *12–14 (Del. Ch.
Sept. 6, 2022) (holding “subpar reporting system” not indicative of bad faith where prior to cyberattack,
board charged two subcommittees with cybersecurity oversight, at least one subcommittee received a
management presentation on cybersecurity and held a discussion, and company itself was victim of third-
party crime, not a violator of positive law), with Compl. ¶¶ 202, 205, 319–21 (alleging that Kabbage’s
Board failed to establish any formal mechanism or committee to meaningfully monitor PPP compliance, as
well as failed to have any substantive discussion about PPP compliance or ask management for reports
regarding Kabbage’s compliance with PPP regulations).
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Likewise, each Officer independently failed to discharge his or her own oversight duties.
Frohwein, as CEO, and Petralia, as President, had company-wide oversight responsibility and
failed to ensure any compliance information reached the Board. Both failed to implement any
meaningful mechanisms of PPP loan oversight when Kabbage designed its PPP platform.145
Frohwein actively suppressed information regarding mission-critical compliance failures, like the
A&M Report, from the Board. And Petralia failed to ensure that compliance concerns raised to
her, such as by the former Head of Fraud, were dealt with, and that adequate reporting systems
existed between herself and her reports. As a result, critical information regarding Kabbage’s PPP
non-compliance, such as the Kutworm Report, stopped with her subordinates.
Askins, as General Counsel and Chief Compliance Officer, also had company-wide
oversight responsibility. 146 She knew that Kabbage never remediated the “systemic gaps” in its
compliance program identified by Treliant—but never flagged these compliance insufficiencies in
the context of PPP to the Board. She also failed to alert the Board to the A&M Report’s findings
and did not seek a permanent BSA/AML Officer replacement because it would not “make a lot of
sense” in light of the pending transaction. 147 Moreover, Askins served as interim BSA/AML
145
Petralia asserted her right against self-incrimination under the Fifth Amendment when asked under oath
(i) whether she “approve[d] Kabbage’s fraud controls for PPP” and any changes thereto; (ii) whether she
“approve[d] Kabbage’s BSA/AML procedures for PPP” and any changes thereto; and (iii) whether she
“approve[d] the PPP loan calculation methodology that the data strategy team developed. United States
Complaint in Intervention (the “Compl. in Intervention”) ¶¶ 89 & n.4, 97, United States ex rel. Pietschner
v. Petralia, et al., C.A. No. 4:21-cv-110 (E.D. Tex. Dec. 20, 2024), ECF No. 40. Frohwein asserted his
right against self-incrimination when asked “whether he approved Kabbage’s fraud controls, BSA/AML
process and whether he was the person who approved any changes to those controls and procedures,” and
if he had “oversight of individuals responsible for development and implementation of Kabbage’s PPP loan
calculation methodology.” Id. ¶¶ 85 n.3, 89, 98. See Baxter v. Palmigiano, 425 U.S. 308, 318 (1976)
(permitting adverse inference “against parties to civil actions when they refuse to testify in response to
probative evidence offered against them”).
146
Compl. ¶ 11.
147
Id. ¶ 40.
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Officer from June 2020 until October 2020, and thus bore direct responsibility for BSA/AML
compliance during this critical period of time. Despite taking on this title however, Askins showed
no apparent interest in its responsibilities.
Lastly, Robinson, as de facto Head of Fraud and Head of Risk, was directly responsible for
fraud detection and risk management. Yet, he stripped the Head of Fraud of her title, limited
A&M’s budget to ensure an inadequate review, repeatedly downplayed reports and concerns of
fraud and compliance issues, and acted as an information barrier to such concerns. 148 Indeed,
Robinson acted directly contrary to his oversight duties, such as when he instructed analysts to
approve obviously fraudulent loans, and thus prioritized profit over compliance with the law.
Accordingly, each Officer’s failure to make a good faith effort to oversee compliance
within his or her area of responsibility independently supports a Caremark claim.
B. The Complaint States a “Red Flags” Claim.
Under the second prong of Caremark, directors and officers are liable if, “having
implemented such a system or controls, [they] consciously fail[] to monitor or oversee [the
company’s] operations thus disabling themselves from being informed of risks or problems
requiring their attention.” 149 Plaintiff’s “red flag” claim focuses on the Officers (and Frohwein in
his capacity as both director and officer). 150
148
Robinson argues that the Complaint’s allegation he served as an “information barrier” is conclusory. It
is not. The Complaint alleges the specific conduct just described. See Compl. ¶¶ 95, 129. Robinson also
instructed fraud analysts to approve obviously fraudulent loans. Id. ¶ 157. And when employees tried to
escalate concerns, Robinson refused to “acknowledge that us having inaccurate borrower data is even of
concern.” Id. ¶ 196. Kabbage employees recognized that Robinson was part of a system designed to ensure
that “if truth can’t get in, there’s no duty to report it.” Id. These are not conclusory allegations—they are
specific acts of suppression that, taken together, support the inference that Robinson deliberately prevented
compliance concerns from reaching senior management and the Board.
149
Giuliano v. Grenfell-Gardner, 2025 WL 2502176, at *6 (Del. Ch. Sept. 2, 2025).
150
Id. at *11 (“Plaintiff adequately alleges at least a red-flags claim against Grenfell-Gardner and
Richardson. Just as it is reasonably conceivable that the Board failed to receive notice of red flags, it is
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An officer has a duty, when confronted with red flags, to “either address them or report
upward to more senior officers or to the board.” 151 The Court of Chancery recently reinforced this
principle in Giuliano, holding that officers aware of FDA compliance violations—which were
mission-critical to the company’s pharmaceutical operations—could be held liable for failing to
report those violations to the Board. 152 Frohwein, Petralia, Askins, and Robinson each received
numerous red flags regarding Kabbage’s lack of compliance with PPP regulations. Yet they did
nothing to address these issues.
First, while the Treliant reports are most relevant to the information systems claim, these
reports also provide context for the red flags claim. Because of these reports, Frohwein, Petralia,
Askins, and Robinson were “on notice of gaps in [Kabbage’s] compliance” as early as 2018,
“making the later red flags [of Kabbage’s PPP compliance failures] all the more consequential.” 153
Second, at the outset of the PPP, Askins and Petralia received a complaint in which
Kabbage’s recently-demoted Head of Fraud, Hill, sounded the alarm about inadequate fraud
controls and a corporate culture that squashed attempts to flag fraud issues—with Robinson
specifically mentioned as being part of Hill’s concerns. 154 There is no indication of any
investigation into these allegations taking place.
reasonably conceivable that Grenfell-Gardner and Richardson were aware of the red flags and failed to
report them to the Board.”).
151
McDonald’s, 289 A.3d at 362.
152
2025 WL 2502176, at *11.
153
See Teamsters Loc. 443 Health Servs. & Ins. Plan v. Chou, 2020 WL 5028065, at *20 (Del. Ch. Aug. 24,
2020).
154
Petralia asserted her right against self-incrimination under the Fifth Amendment when asked whether
“[Nicole Hill] told you that she was fired because she had raised these concerns about fraud at Kabbage.”
Compl. in Intervention ¶ 239.
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Askins now argues that Hill’s complaint could not have been a red flag for her because
“fraud controls did not fall within her remit.” 155 As an initial matter, it is a staggering assertion
that the General Counsel would claim that a complaint from the just-demoted Head of Fraud
warning about inadequate fraud controls and an upper management hostile to reports of fraud was
not within her purview. The argument is also completely wrong. Askins was Chief Compliance
Officer, and this officer has broad company-wide oversight responsibilities under Caremark and
progeny. 156 Additionally, Askins also became the interim BSA/AML Officer in the beginning of
June, a point in time in which Kabbage was approving thousands of fraudulent or otherwise
ineligible loan applications—oversight of fraud controls and ensuring management properly
listened to reports of fraud was certainly “within her remit” in this role. 157
Third, Frohwein, Petralia, and Robinson each received multiple red flags regarding
Kabbage’s PPP platform miscalculating—and therefore incorrectly inflating—loans. 158 No proper
investigation was conducted and the issues remained unfixed, resulting in tens of thousands of PPP
loans issued by Kabbage being incorrectly inflated by totals in the hundreds of millions of
155
Askins Mot. at 18.
156
See McDonald’s, 289 A.3d at 369 (explaining that a company’s CEO and Chief Compliance Officer
typically have “company-wide oversight” responsibilities).
157
Coupled with this meritless argument, Askins puts forth a causation argument, asserting that
“independent causation deficiencies defeat the Complaint’s Prong Two theory against Ms. Askins.” Askins
Mot. at 21. First, the Complaint more than adequately alleges a sufficient casual nexus between the failure
of oversight by the Directors and Officers and the corporate trauma suffered by Kabbage, beginning as
early as April 2020. See Compl. ¶¶ 1–5, 9–12, 15–16, 18–21, 28, 31, 95, 115–17, 119, 121, 205–06, 274–
88, 303–25. Mitigation of corporate trauma extends “[e]ven after the first round of PPP loans ended in
August 2020,” which Defendants could have accomplished by preserving significantly more cash in
Kabbage, given the known and knowable massive liabilities Kabbage faced. Id. ¶ 322. Second, and more
importantly, Delaware law is clear that “questions of causation are fact intensive and, as such, cannot be
addressed at the pleading stage.” Clovis, 2019 WL 4850188, at *15 & n.217 (holding that “at this stage,
Plaintiffs’ allegation that this failure of oversight caused monetary and reputational harm to the Company
is sufficient to provide a causal nexus between the breach of fiduciary duty and the corporate trauma”).
158
See Compl. ¶¶ 115–17, 123.
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dollars. 159 Defendants argue that the Officers “took steps to resolve the issue” because Frohwein
responded—internally—“let’s hear what he has to say” to an email warning that Kabbage’s online
PPP application “has a HUGE mistake in how it figures out loan amounts that is gonna get you
guys in trouble.” 160 But as explained in the Complaint, the Officers did not actually conduct any
substantive follow-up and no investigation occurred into these miscalculation issues. As a result,
the inflation issues remained unfixed. 161 Mere words without any effective follow-up actually
“support[s] the inference of a bad-faith decision not to take meaningful action, not the opposite.” 162
Fourth, Frohwein, Askins, and Robinson each received the A&M Report. A&M identified
multiple weaknesses in Kabbage’s policies and procedures. 163 The Officers attempt to parse the
language in the report and pick conclusions that favor their position. They note that A&M found
that Kabbage’s PPP compliance program “generally appear[ed] to be consistent with SBA”
rules. 164 But they ignore the key issues, literally highlighted in red, where A&M found “Kabbage’s
risk management systems do not identify and appropriately control significant risks posed by the
product or process; substantial gaps exist” and “[l]osses, exceptions, and violations of law or
regulation have occurred or are imminent and either have or predictably will result in material
harm to Kabbage’s earnings and capital.” 165 The Officers could not just ignore the specific
159
Id. ¶¶ 116, 119, 121.
160
D&O Defs. Mot. at 41 (citing J.A. Ex. 21 at A0015–16).
161
See, e.g., Compl. ¶¶ 116, 120–22.
162
Los Angeles City Emps.’ Ret. Sys. v. Sanford, 352 A.3d 276, 316–18 (Del. Ch. 2026) (concluding that
minimal action taken in response to red flags was effectively inaction, and explaining that “efforts to
respond to red flags are not sufficient under Caremark when it is reasonably conceivable that those efforts
were nominal, tainted by deliberate heel-dragging, and ran parallel to a campaign of concealment”).
163
Compl. ¶ 176.
164
J.A. Ex. 30 at A00292.
165
Id. at A00299 (defining “Needs Improvement’).
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negative findings while accepting the overall positive conclusion that Kabbage’s compliance
program “generally appear[ed] to be consistent with SBA” rules. Their Caremark duties required
them to make a good-faith inquiry into the literal red flags identified by A&M. 166 Critically, had
they done so, they would have uncovered even more issues, as documented in the Kutworm Report.
Further, if the A&M Report “could not plausibly constitute a red flag,” 167 as the Officers
argue, then they had no reason to suppress the report. But that is exactly what they did. 168
Frohwein remarkably claims that his frustration with the A&M Report was primarily the result of
confusing “color-coding.” 169 But the reasonable inference here is not that a sophisticated CEO
with a law degree had trouble reading the report. Rather, it is that Frohwein wanted this report
buried because A&M assigned a failing grade to three different risk categories, including the
significant risk that “Kabbage knew or should have known it was transmitting fraudulent
information to the SBA.” And as a result, Frohwein, Askins, and Robinson made sure that the
A&M Report was never elevated to the Board or shared with Amex. 170
The circumstances of this case in many ways mirror those in Clovis Oncology. 171 There, a
biopharmaceutical company’s future depended on FDA approval and getting the drug to market
166
See McDonald’s, 289 A.3d at 366 (explaining that “[a] critical part of an officer’s job is to identify red
flags, report upward, and address them if they fall within the officer’s area of responsibility”); Sanford, 352
A.3d at 318 (Del. Ch. 2026).
167
D&O Defs. Mot. at 39. As part of their argument, Defendants miscomprehend the relevant legal
standards, claiming that warnings of “compliance risk” cannot “constitute a red flag.” Id. at 39 n.52.
Delaware courts disagree: “A red flag for Caremark purposes informs the fiduciary of a central compliance
risk.” Sanford, 352 A.3d at 314 (citing Marchand, 212 A.3d at 824; McDonald’s, 289 A.3d at 376).
Moreover, Defendants again simply ignore the A&M finding that “violations of law or regulation have
occurred or are imminent.” J.A. Ex. 30 at A00299, -0306–07.
168
Compl. ¶¶ 199–200.
169
D&O Defs. Mot. at 39–40 n.53.
170
Compl. ¶¶ 21, 193, 199–201.
171
2019 WL 4850188, at *1 (Del. Ch. Oct. 1, 2019).
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faster than its competitors. 172 The company chose a specific clinical drug trial protocol but, as the
directors knew, regularly departed from aspects of the protocol against FDA guidance. 173 The
Court held that the complaint adequately pleaded “that the Board consciously ignored red flags
that revealed a mission critical failure to comply with the [clinical trial] protocol and associated
FDA regulations.” 174 Here too, the Officers consciously ignored evidence that Kabbage was not
in compliance with PPP regulations. Also, like here, the defendants in Clovis groused that “FDA
guidance was not as clear as the Complaint depicts.” 175 But as explained by the court, what matters
is what is alleged—and “[a]s pled, these regulations . . . were not nuanced.” 176
The Officers, and Robinson in particular, devote a considerable portion of their briefs to
attacking the DOJ’s underlying FCA case. 177 But these arguments are inappropriate for a motion
to dismiss and incorrect. Nothing in the SBA guidance suggested that lenders could recklessly
approve inflated and highly suspicious loans and avoid liability for doing so. In fact, the
regulations state that “[l]enders must comply with the applicable lender obligations”—including
having a functioning BSA/AML program and conducting good-faith reviews—and that lenders
would only be “held harmless for borrowers’ failure to comply with program criteria.” 178
172
Id. at *4.
173
Id. at *13.
174
Id. at *15.
175
Id. at *14.
176
Id.; see Compl. ¶ 80 (“[T]he SBA made clear to program participants that a lender would remain liable
in circumstances where it knowingly transmits false information to the SBA.”).
177
See, e.g., Robinson Mot. at 11 (arguing how “materiality is an element of FCA liability”), 17 (“The
Complaint alleges in several places that this multiple device issue was suspicious. Not necessarily. An
accountant or other service provider could have been filing applications for multiple clients.” (emphasis
added)), & 20 (arguing that the “SBA and Kabbage were in the same boat—they knew that the PPP’s need
for speed and reliance on borrower certifications would allow some number of fraudulent applications to
get through the system. That is why the Complaint fails to allege materiality and intent under the FCA.”).
178
85 Fed. Reg. at 20812 (emphasis added). Tellingly, the “hold harmless” language is found in the section
of the regulations pertaining to borrower forgiveness, rather than underwriting. In other words, the
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Moreover, the “hold harmless” and “no enforcement action” clauses apply only to actions taken
by the SBA, and not by other governmental agencies like the DOJ. The DOJ investigated and sued
Kabbage (and its officers) precisely because it determined that Kabbage knowingly or recklessly
made false statements to the government in connection with its PPP lending.
To try to excuse Kabbage’s compliance failures, Robinson misleadingly suggests that
AML policies have nothing to do with the BSA or fraud detection, and that these policies solely
relate to the specific crime of money laundering. 179 Not so. The BSA requires financial
institutions to have an AML program, and is designed to “assess the money laundering, terrorism
finance, tax evasion, and fraud risks to financial institutions, products, or services.” 180 Financial
institutions are required to submit SARs for dozens of types of financial crimes and suspicious
activities, including consumer and commercial loan fraud. 181 By becoming a PPP lender, Kabbage
agreed to comply with these requirements. 182 The DOJ alleges how Kabbage made “false records
and statements” that “Kabbage would comply with PPP lender requirements, when in fact it did
not, and Kabbage attested that it applied the BSA requirements of an equivalent federally regulated
institution, when in fact it did not.” 183
regulations provided that lenders were not responsible if borrowers did not abide by program requirements
and thus failed to qualify for loan forgiveness. See id. at 20815 (“Can lenders rely on borrower
documentation for loan forgiveness? Yes. The lender does not need to conduct any verification if the
borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately
verified the payments for eligible costs. The Administrator will hold harmless any lender that relies on
such borrower documents and attestation from a borrower.”).
179
Robinson Mot. at 7–12.
180
31 U.S.C. § 5311(4) (emphasis added).
181
See FinCEN Suspicious Activity Reporting (SAR) Filing Instructions at 32–42, available at
https://bsaefiling.fincen.gov/resources/FinCENSARFilingInstructions.pdf.
182
85 Fed. Reg. at 20815 (“[PPP lenders] will also generally have to identify and report certain suspicious
activity to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).”).
183
See, e.g., Compl. in Intervention ¶ 341.
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The remainder of the Officers’ arguments are unsupported contentions about their alleged
good faith that are contrary to the Complaint’s allegations. 184 But this is not the juncture to debate
whether, for instance, they actually relied, in good faith, on the non-existent opinion of some
unidentified counsel, or their claim that the SALT error was an “innocent mistake.” 185
C. Substantial Personal Payouts to the Officers and to the Directors’
Affiliated Funds Support a Bad-Faith Inference.
The Directors and Officers were personally incentivized to close the Amex Merger quickly
and to avoid asking hard questions about compliance issues that might delay or derail the
transaction. The Boeing court, in denying the motion to dismiss the Caremark claim, emphasized
that the Board had shifted Boeing’s mission from safety to profits and rapid production. 186 The
Board here similarly prioritized profits over legal compliance. The Directors had a separate
financial incentive to turn a blind eye to PPP regulatory issues: they could pump up PPP fees and
then, pursuant to the planned Merger, quickly extract those funds for themselves and their
Kabbage-shareholder affiliates.
The conduct here contains echoes of In re Massey Energy Co., where fiduciaries prioritized
profits over legal compliance. 187 As the Massey court recognized, corporate management are often
incentivized to maximize profits while externalizing the risk of their operations onto others,
notwithstanding laws designed to prevent such conduct. 188 Here, the Directors and Officers were
highly incentivized to prioritize profits over legal compliance because “[t]he more [PPP] fees
184
See e.g., Robinson Mot. at 20–26; D&O Defs. Mot. at 33–34.
185
E.g., Robinson Mot. at 20–26.
186
2021 WL 4059934, at *3 (“Rather than prioritizing safety, Defendants lent their oversight authority to
Boeing’s agenda of rapid production and profit maximization.”).
187
2011 WL 2176479, at *18–21 (Del. Ch. May 31, 2011).
188
Id. at *29 n.185.
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Kabbage earned, the more that [the Directors] and their shareholders would receive as part of the
anticipated Amex Merger.” 189
Also insightful is Walton, in which plaintiffs brought Caremark claims against Walmart’s
directors and officers for Walmart’s role in the opioid crisis. 190 Central to the court’s decision to
deny a motion to dismiss were the repeated examples of Walmart’s directors and officers
prioritizing profits over legal compliance. 191
In the present case, the Directors and Officers “were focused on short-term profits that
would assist” with closing the Amex Merger, and “neither set of Kabbage’s fiduciaries was
concerned about the fallout from Kabbage’s lax compliance program and flagrant violations of the
law.” 192 Instead, as made clear by Frohwein, the priority was to “ISSUE ISSUE” more PPP loans,
and Kabbage’s compliance issues were downplayed, denied, and often just ignored. 193
II. The Complaint Separately States a Duty-of-Care Claim Against the Officers.
The Officers argue that Kabbage’s duty-of-care claims are merely “repackaged” Caremark
allegations. This argument misunderstands Delaware law. While a claim based on passive
oversight might not state a duty-of-care violation, 194 the duty-of-care claims here rest on
affirmative, grossly negligent acts that extend well beyond the oversight context.
First, Askins signed SBA Form 3507, certifying that Kabbage had a BSA/AML compliance
program “equivalent to that of a comparable federally regulated institution” when she knew or
189
Compl. ¶¶ 309–11, 323–24.
190
Ontario Provincial Council of Carpenters’ Pension Tr. Fund v. Walton, 2023 WL 3093500, at *1 (Del.
Ch. Apr. 26, 2023).
191
See, e.g., id. at *43 (“The extent of the pleading-stage record on this subject and the involvement of the
directors supports an inference that they knew Walmart was sacrificing compliance for profits.”).
192
Compl. ¶¶ 5, 7, 123–25.
193
Id. ¶ 125.
194
McDonald’s, 289 A.3d at 373–75.
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should have known this certification was false. 195 This was grossly negligent. Askins argues that
her certification was qualified by the phrase “to the best of my knowledge” and therefore cannot
support a claim. 196 But the Complaint alleges that Askins knew that the 2019 Treliant Report
found that Kabbage’s BSA/AML program was “an important weakness that require[d]
prioritization.” 197 A certification of compliance made despite known systemic deficiencies is not
a “good faith” statement of belief—it is a reckless disregard of known facts.
Frohwein, Petralia, and Robinson, though they did not physically sign the certification,
participated in the collective decision to pursue PPP lending despite known compliance gaps. In
particular, Robinson, as the officer responsible for fraud detection and risk management, knew
better than anyone that Kabbage’s controls were inadequate—yet raised no objection to Kabbage
applying to become a PPP lender. 198
Second, and more importantly, the Officers’ decision to transfer $120 million in cash to
Amex Kabbage while leaving only $17 million behind, knowing this was grossly insufficient to
cover foreseeable liabilities, was an affirmative operational decision. The Officers controlled
every variable: they selected the solvency firm Duff & Phelps (after Houlihan Lokey declined due
to the “massive assumptions” Kabbage demanded), dictated the unreasonable assumptions Duff &
Phelps would use, and determined how much cash to retain. At every juncture, the Officers chose
the option that maximized shareholder payouts at the expense of Kabbage and its residual
claimants. 199 Each Officer never explained to Kabbage’s CFO, who was working the most closely
195
Compl. ¶¶ 100, 123–25, 294.
196
Askins Mot. at 25–26.
197
Compl. ¶¶ 19–20, 87–93.
198
Id. ¶¶ 147–57, 196, 210, 221–22, 295.
199
Id. ¶ 31.
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with Duff & Phelps, the specific PPP issues of which he or she was aware—from the SALT issue,
to the red flags in the A&M Report, to their recognition in response to subpoenas and news reports
“that seems like we let stuff through” (which is exactly what Robinson instructed Kabbage to do).
The “sensitivity case” in the Solvency Opinion literally assumed a scenario in which Kabbage
would be liable for “improper document review,” and yet none of the Officers provided any advice
to Kabbage’s CFO regarding the known extent of that issue. Accordingly, the Court can easily
reject, for instance, Askins’ argument that she “made sure that the decision maker with respect to
setting the reserve had the relevant information before finalizing that amount.” 200
This was not a business judgment call where reasonable minds might differ—it was a
deliberate decision to ignore the litigation risk the Officers knew or should have known was
looming because of Kabbage’s failure to detect significant amounts of fraud. 201 The inadequacy
of Kabbage’s cash retention was so obvious that it became a running joke. Goodwin attorneys—
Kabbage’s outside counsel—joked on October 15, 2020, that Duff & Phelps was “dumb for issuing
the solvency opinion.” 202 When your own lawyers joke that your solvency opinion is indefensible,
proceeding with the transaction is the epitome of gross negligence.
III. The Complaint Adequately Pleads Claims for Both Actual and Constructive
Fraudulent Transfer.
A. The Pleaded Facts Support a Claim for Actual Fraudulent Transfer.
The Complaint more than sufficiently pleads an actual fraudulent transfer because it details
how the Officers and Directors deliberately structured the Amex Merger to strip Kabbage of
200
Askins Mot. at 10.
201
Compl. ¶ 245.
202
Id. ¶ 272.
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substantially all its assets, including $120 million in cash earned through the PPP, while leaving
only $17 million to cover known and objectively foreseeable liabilities.
An actual fraudulent transfer is a transfer made “with actual intent to hinder, delay, or
defraud any” creditor. 203 The statutory language is disjunctive: any one of these intents is
independently sufficient to render the transfer avoidable. 204 Courts have consistently held that a
general intent to place assets beyond the reach of creditors—even without targeting a particular
creditor—satisfies the statute. 205 Here, even if the Directors and Officers were unaware of exactly
how Kabbage might be burdened with claims, the pleaded facts show they had the intent to place
assets beyond the reach of the very class of creditors—the DOJ and SBA—that ultimately did
bring claims. This is all that is required to sustain an actual intent claim at the pleading stage.
Defendants’ primary retort is that actual fraudulent intent must be established for a majority
of the Board who approved the transaction. 206 But this argument fails for several reasons. First,
as explained herein, the Officers deliberately concealed compliance failures and other material
information from the Board to prevent it from learning facts that might jeopardize the Merger.
Because they concealed material information from the Board, their intent is properly imputed to
203
11 U.S.C. § 548(a)(1)(A).
204
See Wiggains v. Reed (In re Wiggains), 848 F.3d 655, 661 (5th Cir. 2017) (holding that the statutory
phrase “hinder, delay, or defraud” is “stated in the disjunctive, which signifies that an intent to hinder or to
delay or to defraud is sufficient”); Drivetrain, LLC v. DDE Partners, LLC (In re Cyber Litig. Inc.), 2023
WL 6938144, at *7 (Bankr. D. Del. Oct. 19, 2023) (same).
205
Christian Bros. High School Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Grp., LLC),
439 B.R. 284, 304 (S.D.N.Y. 2010) (holding that “intent ‘to hinder, delay, or defraud’ creditors need not
target any particular entity or individual as long as the intent is generally directed toward present or future
creditors of the debtor”); Faulkner v. Kornman (In re The Heritage Org., L.L.C.), 413 B.R. 438, 468 (Bankr.
N.D. Tex. 2009) (“[I]f each of the Transfers was made by Heritage with the actual intent to hinder, delay
or defraud any Heritage creditor, irrespective of whether that creditor can serve as a triggering creditor, the
Transfer(s) is avoidable under TUFTA by the Trustee.”).
206
Certain Defs. Mot. at 18–20.
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the corporation for fraudulent transfer purposes. 207 Second, the Officers determined how much
cash to retain at Kabbage and selected and instructed Duff & Phelps on the solvency opinion
assumptions. If the Officers had instructed Duff & Phelps to include more reserves for contingent
liabilities, then the amount of the Fraudulent Transfer would have been reduced. Simply put, while
the Board approved the Solvency Opinion, that opinion was based on faulty instructions from the
Officers, making the Officers’ intent relevant to the Fraudulent Transfer. Third, even assuming
Board-level intent was required, a majority of the Board members had the requisite intent. Each
outside Director (except Hodrick) was a designee of a major shareholder fund that received tens
of millions of dollars from the merger, creating direct financial incentives to close the deal while
ignoring known and knowable liabilities at Kabbage. 208
The Directors and Officers knew Amex did not want the PPP portfolio because it was “very
worried about legal liability” and specifically concerned about “liability flowing from fraudulent
applicants, anything that would give the government, applicants and others suing them.”209
Multiple aspects of the Merger Agreement were designed to shield Amex from such liabilities.
And, likewise, this recognition of PPP liabilities was why one of the major Shareholders “wanted
nothing to do with ownership interest in the legacy Kabbage entity after the deal.” 210 Yet the
207
See Cyber Litig, 2023 WL 6938144, at *2 (“[W]hen Person A controls Person B, Person A’s intent may
be imputed to Person B. And there can be no stronger case for the application of that principle than where
Person A tricked or deceived Person B into voting in favor of a transaction.”).
208
Indeed, even after receiving Duff & Phelps’ solvency opinion on August 11, 2020—which set out
management’s extraordinary assumptions in plain terms, including only $1 million reserved for litigation
costs—the Board never once followed up on those assumptions between August and October, despite a
flood of DOJ subpoenas, bad press, and mounting evidence that Kabbage’s PPP liabilities would dwarf the
reserve. Compl. ¶¶ 246–48, 256–69, 271, 322. The Directors “failed to question the basis for that minimal
reserve—and ask how much should reasonably be reserved—because they did not want an answer that
would lead to Kabbage having to retain more of its cash.” Id. ¶ 322. This deliberate refusal to revisit
plainly inadequate assumptions is itself powerful evidence of intent to place assets beyond creditors’ reach.
209
Id. ¶ 227.
210
Id. ¶ 228.
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Directors and Officers facilitated and approved the solvency opinion knowing that it essentially
assumed zero risk to Kabbage of liability flowing from fraudulent applications. The reasonable
inference to draw from this conduct is that the Directors and Officers intended to extract as much
cash as possible from Kabbage with little to no regard for the liabilities Kabbage faced. There is
no other reasonable way to interpret Frohwein’s statement that orphaning the PPP liabilities at a
shell entity would “mitigate [the] risk of law suites [sic] around PPP.” 211
This case stands in stark contrast to the facts of In re Tribune and In re Pack Liquidating. 212
In Tribune, the Second Circuit declined to impute fraudulent intent to the debtor because the
challenged transaction was approved by a fully functioning special committee of independent
directors who, with the help of financial advisors, “checked” the relevant information provided to
them and reached an informed decision. 213 In Pack Liquidating, the court rejected plaintiff’s claim
because it alleged only that one director acted with fraudulent intent and did not allege that his
“individual intent drove the board’s decisions.” 214 Unlike the facts of those cases, the Complaint
alleges that the CEO and other senior officers acted with fraudulent intent and actively suppressed
material information to prevent the Board from making an informed decision.
In addition to this direct evidence of fraudulent intent, courts have long held that “[b]ecause
proof of actual intent to hinder, delay or defraud creditors may rarely be established by direct
evidence, courts infer fraudulent intent from the circumstances surrounding the transfer.” 215 The
211
Id. ¶ 213.
212
Kirschner v. Large S’holders (In re Tribune Co. Fraudulent Conv. Litig.), 10 F.4th 147 (2d Cir. 2021);
Off. Comm. of Unsecured Creditors of Pack Liquidating, LLC v. Vagenas (In re Pack Liquidating, LLC),
2025 WL 2587577 (Bankr. D. Del. Sept. 5, 2025).
213
Tribune, 10 F.4th at 161.
214
Pack Liquidating, 2025 WL 2587577 at *7.
215
Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348, 1353 (8th Cir. 1995); JLL Consultants, Inc.
v. Gothner (In re AgFeed USA, LLC), 546 B.R. 318, 335 (Bankr. D. Del. 2016) (“Because direct evidence
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Complaint alleges numerous “badges of fraud” supporting an inference of fraudulent intent, 216
including: (1) the transfer rendered Kabbage insolvent; (2) Kabbage received no consideration for
the transfer; (3) the transfer comprised substantially all of Kabbage’s assets; (4) the transfer was
made to an insider (Amex Kabbage, Kabbage’s sole shareholder at the time) and for the benefit of
insiders (Amex Kabbage’s shareholders, the former shareholders of Kabbage itself); (5) Kabbage
retained insufficient assets to meet known and knowable liabilities; and (6) Kabbage made the
transfer shortly after incurring massive liabilities. 217 These badges demonstrate that Kabbage’s
insiders deliberately structured a transaction to strip the company of its assets while leaving it
saddled with known liabilities—the epitome of actual fraudulent intent. 218
Defendants argue that the transfer was made pursuant to a valid contractual obligation (the
Merger Agreement) and therefore cannot be fraudulent. 219 But a debtor can enter into a contract
with the intent to use that contract as a vehicle for defrauding creditors. The Complaint alleges
that the Officers and Directors structured the Merger to strip Kabbage of its assets while leaving it
of fraudulent intent is often unavailable, courts usually rely on circumstantial evidence to infer fraudulent
intent. In doing so, courts look to common law and statutory badges of fraud.” (internal citations omitted)).
216
See AgFeed USA, 546 B.R. at 335 (“The ‘badges of fraud’ that courts often refer to include, but are not
limited to: (1) the relationship between the debtor and the transferee; (2) consideration for the conveyance;
(3) insolvency or indebtedness of the debtors; (4) how much of the debtor’s estate was transferred; (5)
reservation of benefits, control or dominion by the debtor over the property transferred; and (6) secrecy or
concealment of the transaction.”); Ga. Code Ann. § 18-2-74(b) (listing badges of fraud).
217
Compl. ¶¶ 252–54, 270–73, 275–77, 299–300, 331.
218
See Maxus Liquidating Tr. v. YPF S.A. (In re Maxus Energy Corp.), 641 B.R. 467, 514 (Bankr. D. Del.
2022) (“[I]t is the confluence of several [badges] in one transaction [that] generally provides conclusive
evidence of an actual intent to defraud.” (internal quotations omitted)); AgFeed USA, 546 B.R. at 335
(same). Defendants argue that the court may consider the implications of the absence of certain badges of
fraud in evaluating the totality of the circumstances of the transfers. But, here, the totality of the
circumstances cannot be judged on a motion to dismiss. Further, the case cited by Defendants held that
“the absence of several very significant badges of wrongful intent may disprove actual intent to hinder,
delay or defraud.” Adamson v. Bernier (In re Bernier), 282 B.R. 773, 782 (Bankr. D. Del. 2002) (emphasis
added). But here, the significant badges of fraud are present.
219
D&O Defs. Mot. at 51–55.
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saddled with liabilities they knew could be massive—all while extracting hundreds of millions of
dollars for themselves and their affiliated shareholders.
Moreover, contrary to Defendants’ arguments, Kabbage did not satisfy an “antecedent
debt” when it made the Fraudulent Transfer. “[A] contingent contractual obligation does not give
rise to an ‘antecedent debt’ that is ‘incurred’ or ‘owed’ unless and until the payment obligations
are actually triggered.” 220 The Fraudulent Transfer was made pursuant to a contingent obligation
under the Merger Agreement that did not crystallize until numerous other conditions were satisfied
(some of which, in reality, were not, because Kabbage was insolvent). 221 In addition, the Merger
Agreement was not an “antecedent debt” at the time because provided it could be terminated. 222
The Merger Agreement also did not require Kabbage to transfer $120 million in cash
through the Merger. To the contrary, it required Kabbage to be solvent as of closing, which meant
that Kabbage needed to determine, in good faith, how much cash to leave with the legacy
company. 223 This makes Defendants’ reliance on the Merger Agreement particularly unavailing.
Kabbage did not obtain the Solvency Opinion in good faith. Rather, Defendants manipulated the
220
Piazza v. Pac. Maritime Indus. Corp. (In re George G. Sharp, Inc.), 2022 WL 1714178, at *10 (Bankr.
S.D.N.Y. May 25, 2022) (citing In re Trib. Co. Fraudulent Conv. Litig., 10 F.4th 147, 173 (2d Cir. 2021)).
221
J.A. Ex. 42 (Merger Agreement) at A00509 (closing conditions include, inter alia, accuracy of
representations and warranties “on and as of the Closing,” § 6.3(a)). One of those representations was that
Kabbage “at and immediately after the Effective Time (after giving effect to the Transactions . . .), will be,
Solvent.” Id. at –00482 (§ 2.28).
222
Id. at A00512 (§ 7.1(a)).
223
Id. at A00582 (§ 2.28) (“After giving effect to the Transactions (including the Merger and the
Reorganization), at and immediately after the Effective Time, the Legacy Company, will have sufficient
cash on hand and working capital, in an amount equal to or greater than the Retained Cash, to service the
Retained Loan Assets and to satisfy its obligations under any of its retained Contracts or Liabilities to third-
parties that are known by the Company or are reasonably likely to exist.” (emphasis added)); see also id. at
–00550 (definition of “Merger Consideration”) (“Merger Consideration” means $625 million in cash less
(i) all Unpaid Transaction Expenses, plus (ii) the Tax Opinion Credit, less (iii) the Closing Net Working
Capital Shortfall, if any, plus (iv) the Closing Net Working Capital Surplus, if any, less (v) the aggregate
amount of Target Company Debt, plus (vi) the Target Company Cash, if any.” (emphasis added)).
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Solvency Opinion to facilitate the Fraudulent Transfer so that they could extract more cash for
themselves. It would be absurd to find that the Defendants are protected from fraudulent transfer
liability based on Kabbage’s breaches of the Merger Agreement, especially when those breaches
are what helped facilitate the Fraudulent Transfer and increased cash payments to the Shareholders
that they never should have received.
B. The Pleaded Facts Support a Claim for Constructive Fraudulent Transfer.
A constructive fraudulent transfer is a transfer made for less than reasonably equivalent
value when the debtor was insolvent or became insolvent as a result. 224 The Complaint alleges
that Kabbage received no value for the Fraudulent Transfer—the assets were transferred to Amex
Kabbage, and the merger consideration was paid to the Shareholders, not to Kabbage. 225 The
transfer rendered Kabbage insolvent because, as of the transfer date, Kabbage’s liabilities
(including its massive liabilities to the DOJ and SBA) exceeded the fair value of its assets. 226
1. The Fraudulent Transfer rendered Kabbage insolvent.
Defendants rely on the Solvency Opinion to support their argument that Kabbage was
solvent. But as alleged in the Complaint, the critical flaw in the Solvency Opinion is its assumption
that Kabbage’s PPP-related exposure was limited to approximately $2 million. 227 This figure was
divorced from economic reality. First, regarding legal expenses, Kabbage was already subject to
what one employee called a “subpoena tornado” relating to fraudulent borrowers. 228 Just
responding to those subpoenas would likely consume much of Kabbage’s $1 million legal reserve.
224
11 U.S.C. § 548(a)(1)(B).
225
Compl. ¶¶ 251–54, 270, 332–33.
226
Id. ¶¶ 270–72, 274–88.
227
Id. ¶¶ 29–30, 246–248, 270–72.
228
Id. ¶ 257.
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More importantly, it was foreseeable that the government would, at the very least, investigate
whether Kabbage had submitted false claims to the SBA. The cost of an FCA investigation—even
leaving aside questions of liability—would easily exceed $1 million. 229
Second, a reserve of only $1 million for contractual “put-back liability” was not
reasonable. 230 The mathematical implausibility is staggering: an approximately $1 million reserve
on a $7 billion portfolio assumes only 0.014% of loans would result in put-back liability. Given
the inflated loans and systemic compliance failures documented in the A&M and Kutworm
Reports—and in multiple emails and Slack messages—known to the Officers before the Solvency
Opinion issued, substantial put-back liability was not merely foreseeable but virtually certain.
Kabbage’s actual liabilities proved orders of magnitude higher than $2 million. The DOJ
and SBA settlements alone totaled approximately $212 million. 231 Caselaw holds that when a
legal liability was contingent or disputed at the time of the fraudulent transfer but is later set by
settlement or judgment before the court’s insolvency determination, a court may permissibly use
the settlement or judgment amount in valuing the liability at the time of the transfers. 232 The
229
See id. ¶ 245 (alleging that the “historical benchmark” of $1 million in yearly legal expenses just for
“defense costs” “pre-dated the PPP, where Kabbage originated nearly as much loan value in six months as
the company had underwritten in its entire history before the PPP combined”).
230
Under its contracts with its lending partners, Kabbage was obligated to repurchase any PPP loan for
which the SBA denied forgiveness or a guaranty due to non-compliance. The same exposure applied to
PPP Liquidity Facility loans. Compl. ¶¶ 102–04. The Solvency Opinion reserved only $1.058 for “put-
back” liability and assumed that a “percentage of [PPP] loans [are] projected to be ‘put-back’ as a result of
improper document review, or as a result of a change to the SBA’s view on ‘Safe Harbor.’” Pl.’s App’x
Ex. E at B000048 (Duff & Phelps Oct. 15, 2020 Analysis). This statement suggests management subsumed
Kabbage’s direct liability to the SBA—i.e., the risk that the SBA would claw back forgiveness and guaranty
payments on fraudulent or inflated loans—within its definition of “put-back” liability, making the miniscule
reserve even more inadequate. If instead management treated “put-back” liability as limited to Kabbage’s
contractual repurchase obligations, the result is no better: management reserved nothing at all for what
ultimately became a $720 million proof of claim. Compl. ¶ 282.
231
Compl. ¶¶ 285–87.
232
See Canney v. Fisher & Strattner, LLC (In re Turner & Cook, Inc.), 507 B.R. 101, 109 (Bankr. D. Vt.
2014) (“In determining the proper amount of disputed or contingent liabilities to include in the insolvency
calculation, courts should generally value contingent liabilities based upon the probability of the occurrence
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settlement amounts thus constitute probative evidence of Kabbage’s liabilities at the time of the
Fraudulent Transfer, especially on a motion to dismiss.
Defendants invoke In re R.M.L., Inc. for the proposition that solvency must be assessed
based on “the circumstances as they appeared to the debtor.” 233 But In re R.M.L. has no application
here. As the Delaware bankruptcy court explained in In Re W.R. Grace & Co., the R.M.L case
does not apply to tort and regulatory claims because such claims are not contingent on a “future
event” in the relevant sense. 234 The distinction is critical. Although legal liabilities are often called
“contingent liabilities” in common parlance, such liabilities are better characterized as disputed
liabilities. This is because a contingent claim is one “which the debtor will be called upon to pay
only upon the occurrence or happening of an extrinsic event,” and whether a plaintiff asserts a
claim or is successful on a claim against a debtor are not extrinsic events. 235 Kabbage’s liabilities
arose from conduct that had already occurred—its submission of false claims to the SBA. As the
W.R. Grace court observed: “To say that the act of making the claim was the extrinsic event
stretches the meaning of that phrase too far; the formal claim is not extrinsic to the underlying
liability, nor is it an event creating liability where none existed before.” 236
of the liability. When a liability was contingent at the time of the challenged transfers but is reduced to
judgment before the court’s insolvency determination, however, a court may permissibly use the judgment
amount in valuing the contingent liability at the time of the transfers.” (internal citations omitted)); SEC v.
Antar, 120 F. Supp. 2d 431, 443 (D.N.J. 2000), aff’d, 44 F. App’x 548 (3d Cir. 2002) (“It is now clear that
the value of the SEC’s unliquidated claim against Sam M. was, and is, approximately $15 million.”); Off.
Comm. of Asbestos Pers. Inj. Claimants v. Sealed Air Corp. (In re W.R. Grace & Co.), 281 B.R. 852, 869
(Bankr. D. Del. 2002) (summarizing the “governing principle” that courts “may consider information
originating subsequent to the transfer date if it tends to shed light on a fair and accurate assessment of the
asset or liability as of the pertinent date” (quotations and citation omitted)).
233
See Mellon Bank, N.A. v. Off. Comm. of Unsecured Creditors of R.M.L., Inc. (In re R.M.L., Inc.), 92 F.3d
139, 156 (3d Cir. 1996).
234
See W.R. Grace, 281 B.R. at 862–63.
235
Id.
236
Id. at 863.
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Under the Bankruptcy Code, a “claim” encompasses any “right to payment, whether or not
such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured.” 237 A claim based on tort or
regulatory liability arises when the underlying wrong is committed, not when litigation
commences. Kabbage’s liabilities to the DOJ, SBA, and lending partners existed as of October 13,
2020. 238 Even if the final settlement amounts of these claims are not evidence of their discounted
amounts at the time of the Fraudulent Transfer, even recognizing the liabilities at fractions of their
asserted amounts renders Kabbage woefully insolvent.
On August 11, 2020, the Board received a presentation from Duff & Phelps showing
Kabbage solvent by less than $1 million:
As set forth in the footnotes to this “balance sheet test,” the total estimated PPP-related liabilities
were less than $2 million, even assuming all “legal” liabilities would relate to the PPP. Because
237
11 U.S.C. § 101(5)(A).
238
See Bayou Grp., 439 B.R. at 335 (“[I]n tort cases[,] the relationship of debtor and creditor arises the
moment the cause of action accrues.”); Antar, 120 F. Supp. 2d at 443 (“Because the SEC’s claim was based
on Sam M.’s securities fraud in the 1980s, Sam M. possessed this debt at the time of all of the 1991 and
1997 transfers.”); W.R. Grace, 281 B.R. at 862–63; see also Turner & Cook, 507 B.R. at 109; Drenis v.
Haligiannis, 452 F. Supp. 2d 418, 428 (S.D.N.Y. 2006); Mansfield v. Pierce, 153 F.3d 721 (4th Cir. 1998);
Indiana Bell Tel. Co., Inc. v. Lovelady, 2008 WL 11408781, at *5 (W.D. Tex. Mar. 5, 2008).
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Kabbage’s margin for remaining solvent was so thin, even a modest change in the assumptions
regarding Kabbage’s PPP liabilities would render Kabbage insolvent. 239 For instance, if legal and
PPP put-back liabilities were each increased to $15 million, Kabbage would be balance-sheet
insolvent by nearly $28 million, as shown below:
Duff & Phelps’s bring-down opinion changed little from August 2020. According to that analysis,
Kabbage was balance-sheet solvent by only approximately $3 million. 240
Defendants argue that Kabbage’s post-transaction operations, including nearly two years
of continued business and $65 million in revenue, undermine the insolvency allegations. 241 But,
239
Defendants contend the Complaint lacks allegations about the value of assets remaining at Kabbage
following the Fraudulent Transfer, relying on Jalbert v. Souza (In re F-Squared Inv. Mgmt., LLC), 2019
WL 4261168 (Bankr. D. Del. Sept. 6, 2019). Unlike in F-Squared, the Complaint specifically pleads how
Kabbage was insolvent, and the documents incorporated by reference, including the Solvency Opinion,
further show that Kabbage needed $17 million in cash just to cover the liabilities related to normal servicing
costs. Compl. ¶¶ 242–43, 270–71. And, as set forth herein, just small changes to the Solvency Opinion
prove that Kabbage was balance-sheet insolvent.
240
Pl.’s App’x Ex. E at B000043 (Duff & Phelps Oct. 15, 2020 Analysis). While the October 15 bring-
down analysis presented the value of Kabbage’s assets in more detail than the August presentation, footnote
two continued to represent that the “Sensitivity Case include[d] certain reserves for potential liabilities
including legal ($1.0mn), [and] PPP-related ($0.95mn)[.]” The Bringdown Sensitivity Case Summary in
the presentation actually reflected a minor increase in the PPP Put Back amount to $1.058 million. Id. at
B000049.
241
Certain Defs. Mot. at 33 n.24.
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as alleged in the Complaint, Kabbage survived only because of the second round of PPP lending
in 2021, an unknown lifeline at the time of the merger. 242 That Kabbage required a federal
emergency program to delay bankruptcy confirms—rather than negates—that the Fraudulent
Transfer rendered Kabbage insolvent and left it with unreasonably small capital.
2. Kabbage received no value, much less reasonably equivalent value,
from the Fraudulent Transfer.
Defendants recognize that dividends and LLC distributions, like the Fraudulent Transfer,
provide no value to the entity that makes them: they are a one-way transfer of value. Defendants
thus argue that Kabbage received “reasonably equivalent value” by satisfying its contractual
obligations under the Merger Agreement. But Kabbage had the obligation to deliver a Solvency
Opinion at closing. Had it been unable to do so—as it would have been had it appropriately
accounted for its PPP-related liabilities—Amex would not have had to close on the Merger. There
is no allegation or reason to believe that Amex would have waived this condition. It is nonsensical
for Defendants to argue that Kabbage received “value” by delivering a bogus Solvency Opinion
that enabled Defendants to extract more cash from Kabbage than they otherwise would have.
In sum, the Complaint adequately pleads a claim for constructive fraudulent transfer.
Kabbage received no value for the Fraudulent Transfer; its contingent liabilities vastly exceeded
the $1 million assumed in the solvency opinion; and the transfer rendered Kabbage insolvent or
left it with unreasonably small capital. The Solvency Opinion is no shield at the pleading stage.
IV. The Complaint States Viable Claims for Recovery of the Fraudulent Transfer
under Section 550.
The Shareholders argue that the Complaint fails to state a claim for recovery because they
were neither initial nor subsequent transferees and the Complaint does not plead grounds for veil
242
Compl. ¶ 278–79.
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piercing. These arguments misapprehend section 550’s purpose—which grants bankruptcy
trustees broad power to recover fraudulent transfers from entities who benefited from, but did not
receive, the transfer—and ignore the facts demonstrating the Merger was an integrated transaction
that delivered direct, quantifiable, and accessible benefits to the Shareholders.
A. Section 550’s Text and Purpose Support Recovery from the Shareholders.
Section 550(a)(1) permits recovery not only from the “initial transferee” but also from the
“entity for whose benefit such transfer was made.” 243 This “transfer beneficiary” liability reflects
Congress’s recognition that fraudulent transfers can benefit parties other than those who actually
receive the debtor’s property. 244 While the paradigmatic example of a transfer beneficiary is a
guarantor, courts do not narrowly construe the statutory language. 245 Instead, courts have
articulated a three-part test for transfer-beneficiary liability: the benefit must be (1) actually
received, (2) quantifiable, and (3) accessible. 246 The Complaint satisfies each element.
243
11 U.S.C. § 550(a)(1).
244
See Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 895–96 (7th Cir. 1988) (noting that
the structure of the Code “distinguishes transferees (those who receive the money or other property) from
entities that get a benefit because someone else received the money or property”).
245
See Henry v. Off. Comm. of Unsecured Creditors of Walldesign, Inc. (In re Walldesign, Inc.), 872 F.3d
954, 966–68 (9th Cir. 2017) (holding that a principal who directs a fraudulent transfer for personal gain is
“the entity for whose benefit” the transfer was made under § 550(a)(1), even without receiving the
transferred property directly); Senior Transeastern Lenders v. Off. Comm. of Unsecured Creditors (In re
TOUSA, Inc.), 680 F.3d 1298, 1313 (11th Cir. 2012) (“To be sure, we have stated that the paradigm case
of a benefit under § 550(a) is the benefit to a guarantor by the payment of the underlying debt of the debtor.
. . . Although this relationship may be the paradigmatic case, it is not the only circumstance that can give
rise to ‘for whose benefit’ liability.” (internal quotations and citations omitted)).
246
See Baldi v. Lynch (In re McCook Metals, L.L.C.), 319 B.R. 570, 590 (Bankr. N.D. Ill. 2005) (articulating
a three-part test requiring that the benefit to a transfer beneficiary under § 550(a)(1) be actually received,
quantifiable, and accessible); Halperin v. Moreno (In re Green Field Energy Servs., Inc.), 594 B.R. 239,
287–88 (Bankr. D. Del. 2018) (applying the three-part test for transfer-beneficiary liability under
§ 550(a)(1)); FTX Recovery Tr. v. Farmington State Corp. (In re FTX Trading Ltd.), 676 B.R. 131, 140–41
(Bankr. D. Del. 2025) (“As this Court explained in In re Samson Res. Corp., the test for determining if a
defendant is an entity ‘for whose benefit the transfer was made’ is whether that defendant received an
‘actual, quantifiable, and accessible benefit.’”).
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The benefit was actually received. Prior to the pre-merger reorganization, the Shareholders
owned shares in Kabbage directly. Because Kabbage had incurred massive liabilities from its
reckless PPP lending, the value of the Shareholders’ equity was a fraction of what Amex agreed
to pay. Even after Amex Kabbage became Kabbage’s sole shareholder, the value of Shareholders’
equity was still negatively impacted by the massive liabilities at Kabbage. Kabbage’s assets and
liabilities sat together in a single entity (Kabbage), which was now a wholly owned subsidiary of
Amex Kabbage. But when Kabbage transferred its assets to Amex Kabbage on October 13, the
value of the Shareholders’ equity immediately increased because the PPP liabilities were orphaned
at Kabbage. Kabbage’s creditors could no longer look to those assets for payment of their claims
because those assets were no longer owned, directly or indirectly, by Kabbage. The Fraudulent
Transfer thus conferred an immediate and actual benefit on the Shareholders.
The benefit was quantifiable. Each Shareholder received a specific, identifiable amount of
merger consideration based on its percentage ownership of Amex Kabbage. The Complaint
identifies the precise amounts. Contrary to Defendants’ arguments, this is not a case where the
alleged benefit is speculative or impossible to measure—it can be calculated with mathematical
precision to the dollar: each of the Shareholders received a precise sum in Merger consideration.
Further, to the extent that the benefit conferred on the Shareholders was the difference between
the value of their shares in the Kabbage enterprise pre- and post-Fraudulent Transfer, that benefit
can and will be quantified by expert analysis: it is, at a minimum, the amount by which the
Fraudulent Transfer rendered Kabbage insolvent multiplied by each Shareholders’ ownership
interests in Kabbage.
The benefit was accessible. The Shareholders directly accessed the benefits they obtained
from the Fraudulent Transfer by receiving the Merger consideration within three days of that
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transfer. Unlike an indirect increase in the value of privately held stock—which a shareholder
cannot spend and which might change in the future—the Shareholders received cash in hand. The
Shareholders could immediately use the merger consideration as they wished. This is the key
factor that distinguishes this case from other cases in which trustees have sought to hold
shareholders liable under section 550. 247
Defendants’ reliance on In re Alta Mesa is misplaced. 248 In that case, the trustee sought to
recover from shareholders of a company that received assets from the debtor, based on the theory
that the asset transfer increased the value of the shareholders’ equity. 249 Critically, the only alleged
“benefit” was that shares theoretically became more valuable for a sale three years later. 250 The
court dismissed the claim because the “benefit” was too “attenuated”:
Here, the sale price does not correspond to the value of the transfers in any
ascertainable way. It is an incidental, indirect benefit from agreements that were
entered into years before the Business Combination and sale of [the transferee]
occurred. [The trustee] cannot directly quantify the amount that the transfers
increased the sales price. The sales price alone does not directly reflect the
corresponding benefit from the value of the transfers. The benefit received by the
shareholders is merely an indirect benefit from business agreements. 251
Here, conversely, the sale price directly reflected the benefit from the value of the transfers.
Further, unlike in Alta Mesa, the purpose of the Fraudulent Transfer was to pay the Shareholders
not at some indefinite point in the future, but a mere three days later.
247
See, e.g., Bodenstein v. Univ. of N. Iowa (In re Peregrine Fin. Grp., Inc.), 589 B.R. 360, 381 (Bankr.
N.D. Ill. 2018) (holding that trustee had not proven his claims because the defendant “had only the right to
benefit from the funds in the future” if “the funds were still available”).
248
Dunn v. HPS Inv. Partners (In re Alta Mesa Res., Inc.), 2024 WL 4379801, at *1–2 (Bankr. S.D. Tex.
Oct. 1, 2024).
249
Id.
250
See id. at *6 (“The Business Combination occurred in February 2018, approximately three years after
the first of a series of conveyances that [the trustee] seeks to avoid.”).
251
Id.
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Defendants also rely on Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube, LLC,
another factually inapposite case. 252 In Cleveland-Cliffs, a creditor sought to hold the owner of
the transferee liable under Delaware’s fraudulent transfer statute. 253 The Delaware court rejected
the claim because the owner “was not a party to the sale” in which the fraudulent transfer was
made and there was no allegation that the owner actually accessed any of the benefits from the
fraudulent transfer. 254 The facts at issue here are demonstrably different. The Shareholders were
named and intended beneficiaries of the Merger Agreement. 255 The purpose of that agreement
was to transfer the value of Kabbage’s non-PPP assets to the Shareholders and to convert that value
to immediate cash in the Shareholders’ pockets.
Defendants further contend that transfer-beneficiary liability under section 550(a)(1)
requires pleading grounds for piercing the corporate veil between Amex Kabbage and its
shareholders. 256 But section 550 of the Bankruptcy Code does not require veil piercing; it provides
an independent basis for recovery from “the entity for whose benefit such transfer was made.” 257
The veil-piercing cases cited by Defendants where courts dismissed claims involve factual
scenarios where the shareholders’ only alleged benefit was, at best, an amorphous and unrealized
increase in equity value. 258 But no veil piercing is necessary here. The Fraudulent Transfer did
252
2023 WL 5688392 (Del. Ch. Sept. 5, 2023).
253
See id. at *13.
254
See id.
255
Compl. ¶¶ 251, 273, 333; J.A. Ex. 42 (Merger Agreement) at A00431–32.
256
E.g., Certain Defs. Mot. at 13–15; D&O Defs. Mot. at 47–49.
257
Kravitz v. Samson Energy Co. (In re Samson Res. Corp.), 2022 WL 3135288 (Bankr. D. Del. Aug. 4,
2022), cited by Defendants, does not hold that veil piercing is required to establish liability. Id. at *7–8.
Further, in that case, the trustee appeared to allege that defendant was really a subsequent transferee, as
opposed to the facts here, where the Merger Agreement contemplated Kabbage transferring its assets to
Amex Kabbage to confer an actual, quantifiable, and accessible benefit on the Shareholders. See id.
258
See, e.g., Green Field, 594 B.R. at 287–89 (rejecting claim at trial because the evidence showed that the
transferees, which the defendant partially controlled, “generated no profit, and there is no evidence that [the
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not merely increase the value of the Shareholders’ equity in Amex Kabbage—it enabled them,
pursuant to a contract in which they were intended beneficiaries, to immediately convert that
increase in equity value into hundreds of millions of dollars in cash. The Fraudulent Transfer was
necessary for the merger to close; absent it, the Shareholders would have received nothing. This
causal connection between the Fraudulent Transfer and the Shareholders’ receipt of value is
precisely what section 550(a)(1) targets.
B. The Collapsing Doctrine Further Supports Transfer-Beneficiary Liability.
Courts routinely “collapse” a series of formally distinct but interrelated transactions into a
single transaction for fraudulent transfer analysis. As the Second Circuit explained, “an allegedly
fraudulent conveyance must be evaluated in context; where a transfer is only a step in a general
plan, the plan must be viewed as a whole with all its composite implications.” 259 This doctrine is
particularly applicable to leveraged buyouts and similar multi-step transactions where the
segments, in reality, comprise a single integrated scheme. 260 Courts generally consider three
defendant] drew any form of a salary, dividend or distribution from any of them” or otherwise had “had
access to the funds transferred”); Schechter v. 5841 Bldg. Corp. (In re Hansen), 341 B.R. 638, 645–46
(Bankr. N.D. Ill. 2006) (holding that “[s]omething more than mere status as a shareholder, officer, or
director must be shown” and rejecting plaintiff’s claim because it was solely that the defendant was “an
officer and majority shareholder” of the transferee and “nothing more” (emphasis added)); Weiss v.
Arabella Expl. Inc. (In re Arabella Petrol. Co.), 647 B.R. 851, 872–73 (Bankr. W.D. Tex. 2022) (rejecting
§ 550 claim because the primary basis for recovery against the defendant was his status as a shareholder of
the transferee, without identifying any quantifiable benefit that the defendant actually received and which
was accessible); Turner v. Phoenix Fin., LLC (In re Imageset, Inc.), 299 B.R. 709, 718 (Bankr. D. Me.
2003) (holding that “individuals’ rights as interest holders in the LLC is not alone sufficient to qualify them
as persons ‘for whose benefit [the] transfer[s were] made’” (emphasis added)). Yu v. GSM Nation, LLC,
2018 WL 2272708 (Del. Super. Apr. 24, 2018), is even less on point because the plaintiff did not allege
any facts the defendant benefited from the transfers. See id. at *13.
259
Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir. 1993) (internal quotations and alterations omitted).
260
See Off. Comm. of Unsecured Creditors of Hechinger Inv. Co. of Del. Inc. v. Fleet Retail Fin. Grp. (In
re Hechinger Inv. Co. of Del.), 274 B.R. 71, 89–91 (D. Del. 2002) (“Regardless of the various complex
structures of leveraged buyouts, which often involve various loans, stock purchases, mergers, and
repayment obligations, courts have found that a set of transactions may be viewed as one integrated
transaction if the transactions ‘reasonably collapse into a single integrated plan and either defraud creditors
or leave the debtor with less than equivalent value post-exchange.’” (citation omitted)).
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factors in determining whether to collapse transactions: “(1) whether all of the parties involved
had knowledge of the multiple transactions; (2) whether each transaction would have occurred on
its own; and (3) whether each transaction was dependent or conditioned on other transactions.” 261
All three factors support collapsing the Fraudulent Transfer with the payment of the merger
consideration pursuant to the Merger Agreement.
First, the Shareholder Defendants knew that the Fraudulent Transfer was one step in a
series of transfers designed to deliver value to them while leaving liabilities at Kabbage. Second,
the Fraudulent Transfer would not have occurred on its own; it occurred solely because it was a
condition of the Merger Agreement. Third, each step of the merger was explicitly conditioned on
the other steps. When the transactions are properly viewed as part of an integrated transaction,
the Shareholder Defendants’ receipt of the Merger consideration is directly traceable to the
Fraudulent Transfer of Kabbage’s assets.
V. The Complaint States Viable Claims for Disallowance and Subordination. 262
Defendants argue that Counts V–VII—seeking disallowance under sections 502(d) and
502(e) and equitable subordination under section 510(c)—must be dismissed because the
Complaint fails to plead the elements of each provision and because these claims are “derivative”
of Plaintiff’s substantive claims. These arguments fail for the reasons explained below.
261
See, e.g., Adelphia Recovery Tr. v. FPL Grp., Inc. (In re Adelphia Commc’ns Corp.), 512 B.R. 447, 491
(Bankr. S.D.N.Y. 2014); see also Hechinger, 274 B.R. at 91 (“Courts thus focus ‘not on the structure of the
transaction but the knowledge and intent of the parties involved in the transaction.’” (citation omitted));
United States v. Tabor Ct. Realty Corp., 803 F.2d 1288, 1302–03 (3d Cir. 1986).
262
The Complaint alleges that the Officers (Frohwein, Petralia, Askins, Robinson) and certain Directors
(Frohwein, Butler, Ebinger, Stolle, and Hodrick) filed proofs of claim in the Kabbage bankruptcy. Compl.
¶¶ 339–46, 351–57. Kabbage’s disallowance and equitable subordination claims are therefore directed
against these defendants and their respective proofs of claim.
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A. The Section 502(e) Disallowance Claim Is Adequately Stated Against the
Officers (Count V).
Section 502(e)(1)(B) of the Bankruptcy Code provides that the court “shall disallow any
claim for reimbursement or contribution of an entity that is liable with the debtor on . . . the claim
of a creditor, to the extent that” such claim “is contingent as of the time of [its] allowance or
disallowance.” 263 Disallowance requires three elements: (i) the claim is for reimbursement or
contribution; (ii) the claim is contingent; and (iii) the claimant and the debtor are co-liable on a
creditor’s claim. 264 The Complaint satisfies each element.
First, the Officers’ claims are for reimbursement. Each Officer filed a proof of claim
asserting a right to indemnification from Kabbage. 265 Indemnification is one type of
reimbursement within the meaning of section 502(e). 266
Second, the claims are contingent. The Officers’ indemnification rights depend on whether
they actually incur liability in connection with third-party claims arising from their service to
Kabbage, including in connection with the DOJ’s FCA action against certain former Officers
individually. 267 Because their ultimate liability—and thus their right to indemnification—remains
unresolved, their claims are contingent “as of the time of allowance or disallowance.” 268
263
11 U.S.C. § 502(e)(1)(B).
264
In re Touch Am. Holdings, Inc., 409 B.R. 712, 715–16 (Bankr. D. Del. 2009).
265
Compl. ¶¶ 339–46 (alleging that D&O Defendants filed proofs of claim in the Kabbage bankruptcy
alleging right to indemnification from Kabbage).
266
See Touch Am. at 716.
267
Moreover, under Delaware law, Kabbage cannot indemnify the Officers or Directors for judgments or
settlements of claims brought by the company or on its behalf. 8 Del. C. § 145(b).
268
Compl. ¶ 348. In addition, the Plan itself rejected “any obligations of the Debtors … to indemnify,
reimburse, or limit the liability of any Former Officer and Director.” Id. ¶ 347. The rejection of these
obligations further underscores the contingent nature of any remaining indemnification claims.
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Third, the Officers are co-liable with Kabbage on a creditor’s claim. Defendants protest
that the Complaint “does not even attempt to allege the co-liability or security relationship that is
the foundation of Section 502(e) disallowance.” 269 Wrong. Count V incorporates by reference
the Complaint’s preceding 337 paragraphs of factual allegations, which establish co-liability as
follows: the DOJ settled its FCA claims against Kabbage for allowed claims totaling $120
million. 270 The DOJ intervened in two FCA qui tam actions and is “continuing its pursuit” of those
claims against certain Officers individually. 271 The FCA imposes liability on “any person” who
“knowingly presents, or causes to be presented, a false or fraudulent claim for payment or
approval.” 272 The Complaint alleges the Officers knowingly caused Kabbage to submit fraudulent
and inflated PPP loan applications. 273 Because both the Officers and Kabbage face liability to the
same government creditor for the same underlying conduct, they are co-liable within the meaning
of section 502(e)(1). Permitting the Officers to recover indemnification related to this shared
liability would produce exactly “the double payment by the estate” that section 502(e) prohibits. 274
Defendants’ reliance on In re Wedtech Corp. is misplaced. Wedtech held only that the
debtor “obviously cannot be co-liable with [defendants] on the causes of action asserted in
adversarial proceedings brought by [itself].” 275 Plaintiff does not contend otherwise. The relevant
co-liability here is not on the adversary proceeding claims Kabbage brings against the Officers,
269
D&O Defs. Mot. at 57.
270
Compl. ¶¶ 275–86, 338.
271
Id. ¶ 17.
272
Id. ¶ 4 n.5 (quoting 31 U.S.C. § 3729(a)(1)(A)).
273
Id. ¶¶ 296, 306.
274
See Touch Am., 409 B.R. at 719.
275
5 B.R. 285, 290 (Bankr. S.D.N.Y. 1988).
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but on the government’s claims, on which both Kabbage and its former Officers face independent
liability for the same fraudulent PPP lending conduct.
B. The Section 502(d) Disallowance Claim Is Adequately Pleaded Against the
Officers (Count VI).
As Defendants themselves frame it, to survive a motion to dismiss Plaintiff’s disallowance
claim under section 502(d), Plaintiff must have alleged facts establishing: (1) an avoidable transfer
occurred, and (2) the defendant from whom property is recoverable has not satisfied its liability. 276
As discussed in Part III above, the Complaint more than sufficiently alleges that an avoidable
fraudulent or constructive transfer occurred. The Complaint further alleges that the Officers were
among the “intended and actual beneficiaries,” and specifies the precise dollar amounts each
received as merger consideration. 277 As explained in Part IV, property is recoverable from each
of the Officers under section 550(a)(1) as entities “for whose benefit” the transfer was made. Each
Officer has filed a proof of claim in Kabbage’s bankruptcy, and none has paid the amount for
which they are liable. 278 Thus, at the pleading stage, Plaintiff has stated a plausible section 502(d)
claim against the Officers. 279
C. The Equitable Subordination Claim Is Adequately Pleaded Against the
Officers and Directors (Count VII).
As discussed above, the Complaint adequately pleads claims against the Officers (Count
II) and Directors (Count III) for breaching their fiduciary duties of loyalty and good faith, resulting
in hundreds of millions of dollars in damages to the estate and its creditors. Because the
276
See 11 U.S.C. § 502(d); see also D&O Defs. Mot. at 55.
277
Compl. ¶¶ 333–35.
278
Id. ¶ 360.
279
At bottom, the section 502(d) analysis boils down to whether the Count IV fraudulent transfer claim
survives the motion to dismiss.
64
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Defendants’ inequitable conduct—their conscious disregard of oversight duties, their suppression
of compliance reports, and their self-interested extraction of hundreds of millions of dollars while
leaving the estate insolvent—caused injury to Kabbage’s creditors, equitable subordination is
appropriate to prevent them from asserting indemnification claims pari passu with the creditors
they harmed. Moreover, “determining whether a creditor’s claim should be subordinated is a fact-
intensive inquiry which should not necessarily be determined on a motion to dismiss.” 280 The
Complaint’s allegations of bad faith, self-dealing, and injury to creditors more than provide the
predicate for Plaintiff’s claim for equitable subordination to survive the motions to dismiss.
VI. While Kabbage Believes that Complaint More than Sufficiently Pleads the Claims,
Kabbage Is Prepared to Buttress Its Allegations.
The Complaint is already very detailed. But, as demonstrated by some of the materials
affixed by the parties, there is additional evidence supporting Plaintiff’s allegations. If the Court
finds that additional allegations are necessary, or that the Complaint should specifically respond
to some of Defendants’ arguments, Plaintiff is prepared to file an amended complaint.
CONCLUSION
Plaintiff has more than sufficiently pleaded each of its claims. All these claims present
fact-intensive issues—the Directors’ and Officers’ knowledge and state of mind, the effectiveness
of compliance systems, the reasonableness of the assumptions in the Solvency Opinion, and the
integrated structure of the Merger—that are paradigmatically unsuited to resolution on the
pleadings. Accordingly, the motions should be denied in full.
280
Autobacs Strauss, Inc. v. Autobacs Seven Co. (In re Autobacs Strauss, Inc.), 473 B.R. 525, 583 (Bankr.
D. Del. 2012).
65
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REID COLLINS & TSAI LLP
/s/ Jessica Zeldin
Jessica Zeldin (DE Bar No. 3558)
300 Delaware Ave., Suite 770
Wilmington, DE 19801
T: (302) 467-1765
jzeldin@reidcollins.com
Eric D. Madden (PHV granted)
Brian J. Bah (PHV granted)
1445 Ross Avenue, Suite 2900
Dallas, Texas 75202
T: (214) 420-8900
emadden@reidcollins.com
bbah@reidcollins.com
Joshua J. Bruckerhoff (PHV granted)
Jeremy H. Wells (PHV granted)
Emma Culotta (PHV granted)
1301 S. Capital of Texas Highway, C-300
Austin, Texas 78746
T: (512) 647-6100
jbruckerhoff@reidcollins.com
jwells@reidcollins.com
eculotta@reidcollins.com
-and-
MORRIS JAMES LLP
/s/ Eric J. Monzo
Eric J. Monzo (DE Bar No. 5214)
Tara C. Pakrouh (DE Bar No. 6192)
3205 Avenue North Blvd., Suite 100
Wilmington, DE 19803
T: (302) 888-6800
emonzo@morrisjames.com
tpakrouh@morrisjames.com
Attorneys for Plaintiff
June 9, 2026
66
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Cited in: Kathryn Petralia · Robert Frohwein