KServicing’s deal with Customers Bank is flawed, Cross River says

By Sarah Lizee

Olympia, Wash., Nov. 4 – Kabbage, Inc.’s, which does business as KServicing, motion seeking approval of a settlement with Customers Bank drew a limited objection from Cross River Bank on Friday, according to court documents filed with the U.S. Bankruptcy Court for the District of Delaware.

Customers Bank and Cross River Bank are both lenders the company services Paycheck Protection Program loans on behalf of.

Cross River Bank said it doesn’t object to Customers Bank returning funds it withheld from KServicing, which starved the debtors of needed liquidity and helped precipitate the bankruptcy filing.

However, the proposed settlement would permit Customers Bank to retain $8 million in cash that it owes to the debtors without showing to why the bank is entitled to retain that amount, Cross River said.

Cross River also said the motion doesn’t justify why Customers Bank will effectively be receiving cash now on its prepetition claims, long before any plan is confirmed.

As previously reported, the company said approval of the settlement will resolve contractual disputes between the company and Customers Bank that arose in connection with the parties’ participation in the Paycheck Protection Program.

For almost two years, the company has attempted to recover about $65.5 million from Customers Bank on account of servicing and referral fees due to the company and, in response, Customers Bank has alleged a number of claims against the company in connection with the company’s performance of servicing obligations.

KServicing said the settlement will allow it to recover $58 million in outstanding fees, with a roughly $23 million cash infusion to the debtors shortly after approval by the court.

The company will also receive a release of potentially significant contingent and unliquidated claims asserted by Customers Bank against the debtors and their estates.

The settlement also results in the company reaching an agreement with Customers Bank with respect to servicing obligations under applicable contracts, and ending the costs and expended resources attendant in protracted negotiations and litigation.

“The settlement agreement is a key step forward in the Chapter 11 cases and reflects a reasonable exercise of the debtors’ business judgment,” the company said in its motion.

“The proposed settlement provides critical liquidity necessary for the debtors to administer the Chapter 11 cases and effectuate an orderly wind down of their remaining loan portfolio for the benefit of all parties in interest.”

The company said it will be able to put forward a more definitive plan and provide more clarity to creditors, now that it has reached agreements with both Customers Bank and the Federal Reserve Bank of San Francisco.

The Atlanta-based servicer and subservicer of small business Paycheck Protection Program loans filed bankruptcy on Oct. 3 under Chapter 11 case number 22-10951.

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