SoftBank-backed servicer of a Kabbage portfolio goes bankrupt amid fraud probes

KServicing, a SoftBank-backed small-business loan servicer, filed for bankruptcy after the company, which holds old loans made by the online lender Kabbage, was weighed down by allegations of overly lax lending under the U.S. government's Paycheck Protection Program.

KServicing is in the process of winding down after Kabbage's teams and technology were sold to American Express about two years ago for around $750 million. KServicing's business now mostly consists of servicing a $1.3 billion portfolio of COVID-era small-business loans backstopped by the federal government, court papers show. 

The company is focused on minimizing any impact the bankruptcy filing will have on borrowers, according to a statement. KServicing plans to continue paying employees during the bankruptcy, per the statement.

KServicing is facing a bevy of state and federal investigations into its lending practices, according to bankruptcy court documents. The Small Business Administration, for example, alleges KServicing lent PPP money too freely and that the company should be liable for wrongly disbursed loans. 

Good faith

From April 2020 to September 2021, the company doled out more than $7 billion in PPP loans to more than 300,000 borrowers, according to court papers. That made KServicing, formerly known as Kabbage, the second-biggest PPP lender by application volume.

The company processed loan applications in good faith as quickly as possible despite shifting guidance from the SBA, Deborah Rieger-Paganis, a KServicing restructuring advisor, said in a sworn court declaration. Almost all the discussions and disputes surrounding KServicing's PPP activities are "vigorously disputed" by the company, she said. 

"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," Rieger-Paganis wrote. 

KServicing accused American Express of contributing to its problems, claiming the credit card giant refused to honor a transition services agreement worked out as part of the sale of Kabbage affiliates, according to court documents. The company may sue American Express for any damage the bankrupt company suffered related to the services agreement, it said in a court filing.

Kabbage was founded in 2008. KServicing — the bankrupt unit — still counts the SoftBank Vision Fund as it largest shareholder, with 14.62% stake, court papers show.

The case is Kabbage Inc., 22-10951, U.S. Bankruptcy Court for the District of Delaware.

— With assistance from Steven Church.