KServicing files Chapter 11 bankruptcy with plans to wind down

By Sarah Lizee

Olympia, Wash., Oct. 4 – Kabbage, Inc., which does business as KServicing, voluntarily filed for Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware, according to a press release issued late Monday.

The company, an online loan servicer founded in 2008, is in the process of winding down its business after the sale of its assets to affiliates of American Express in October 2020.

Following the AmEx transaction, the company’s business only consists of servicing its loan portfolio.

Of the over $7 billion of PPP loans the company originated, the company has serviced about 80%, by total principal amount – meaning, borrowers either repaid their respective PPP loans, loan forgiveness applications were successfully processed, or the PPP lenders were otherwise paid through guaranty purchase.

As of Sept. 30, the company’s loan portfolio contains about 48,000 PPP loans with a total outstanding principal amount of roughly $1.3 billion.

Disputes

The company said processing the remaining PPP loans has presented a number of challenges.

KServicing said that in addition to operational hurdles in processing the balance of the loan portfolio, the company is embroiled in several disputes related to its participation in the PPP, including investigations by the Department of Justice, a congressional subcommittee and the Federal Trade Commission.

The company is also facing allegations by the Small Business Administration that it should be held liable for any loan amounts paid to borrowers that were in excess of what they were statutorily entitled to receive, and that the SBA’s guaranty purchase obligation would not apply to certain PPP loans or excess loan amounts.

There is also a dispute between the company and Customers Bank, one of the two lenders the company services PPP loans on behalf of, in connection with the company’s demand for the lender to remit about $65 million in loan referral and servicing fees contractually owed to the company before the company started providing services and remains unpaid. Customers Bank and Cross River Bank, the other lender the company services PPP loans on behalf of, both allege that the company failed to service the PPP loans in adherence to certain guidelines.

Additionally, some PPP borrowers have filed a class action lawsuit alleging that the company didn’t properly process loan forgiveness applications.

The company also said AmEx has refused to honor its obligations under a transition services agreement, which ahs affected its ability to perform a number of operational functions.

“The hindsight investigations and misdirected scrutiny severely hamper the company’s ability to accomplish its mission of servicing the balance of the PPP loans in its loan portfolio and have caused significant additional costs to winding down its business,” the company said in court documents.

Plan scenarios

The company has filed a Chapter 11 plan of liquidation that addresses two potential scenarios. In the first scenario, the plan provides for the servicing of the loan portfolio throughout the Chapter 11 cases.

Alternatively, if the debtors are unsuccessful in securing funding through negotiations with the federal reserve and Customers Bank in the early days of the Chapter 11 cases, and thus are unable to service the loan portfolio for the duration of the Chapter 11 cases, the plan provides for (a) the rejection of the servicing agreements with the partner banks, and (b) servicing its PPP liquidity facility portfolio, and on the contemplated plan effective date, the debtors will transfer the PPP liquidity facility collateral to the Federal Reserve in satisfaction of its claims.

The company said it is currently “quite close” to an agreement with the Federal Reserve, and discussions with Customers Bank had “progressed significantly” in the days leading up to the Chapter 11 filing.

Creditor treatment

Under the plan, holders of administrative expense claims, fee claims, priority tax claims and priority non-tax claims will be paid in full.

Holders of other secured claims will receive payment in full in cash, the collateral securing their claims or other treatment that will render the claims unimpaired.

Holders of general unsecured claims will receive their pro rata share of the general unsecured creditor pool class B claims, or their pro rata share of the general unsecured creditor trust beneficial B interests, depending on if a funded transaction occurs.

Holders of intercompany claims, intercompany interests, subordinated securities claims and equity interests will receive no distributions.

Other details

KServicing has filed a number of first-day motions with the bankruptcy court that, among other things, seek authorization to continue the operations of the company in the ordinary course of business.

In its petition, the company listed $500 million to $1 billion in assets and $500 million to $1 billion in liabilities.

Weil, Gotshal & Manges LLP is acting as the company's restructuring counsel, Richards Layton & Finger PA is acting as the company's co-counsel and AlixPartners LLP is acting as financial adviser.

The Atlanta-based servicer and subservicer of small business Paycheck Protection Program loans filed bankruptcy under Chapter 11 case number 22-10951.

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