Kabbage was one of the most popular alternative alternative lenders because of their longer term loans and lines of credit which they delivered to small business owners. However, when the Pandemic happened, like many alternative lenders Kabbage threw their hat in the ring and was approved to become private provider of the PPP loan. However, their mis-management and fraudulent operations ended up being in part a cause for their demise. In October 2022, Kabbage entered into Chapter 11 bankruptcy protection.
Earlier this week, the US Department of Justice announced they had reached a settlement in their lawsuit against defunct Kabbage Inc.
By Thomas Tramaglini, Chief Operations Officer
Partner, The Center for MCA Research
According to the press release:
“When the nation was facing a pandemic-induced crisis, Kabbage received tens of millions of dollars through the PPP to help lend taxpayer funds to businesses in need. Instead of safeguarding those funds, Kabbage doled out inflated and fraudulent loans, in an effort to maximize its profits,” said Acting U.S. Attorney Joshua S. Levy for the District of Massachusetts. “Then, Kabbage sold its assets and left the remaining company so low on cash that it ultimately went bankrupt, leaving taxpayers to take the loss for Kabbage’s conduct. This office will continue pursuing any company or individual, like Kabbage, that took advantage of the PPP.”
The resolution announced today addresses two different violations allegedly committed by Kabbage that resulted in the submission and payment of false claims. First, the United States alleged that Kabbage systemically inflated tens of thousands of PPP loans, causing the SBA to guarantee and forgive loans in amounts that exceeded what borrowers were eligible to receive under program rules. As part of the settlement, KServicing Wind Down Corp. admitted and acknowledged that Kabbage: (1) double-counted state and local taxes paid by employees in the calculation of gross wages; (2) failed to exclude annual compensation in excess of $100,000 per employee and (3) improperly calculated payments made by employers for leave and severance. The United States alleged that Kabbage was aware of these errors as early as April 2020, yet Kabbage failed to remedy all incorrect loans that had already been disbursed and continued to approve additional loans with miscalculations.
Second, United States alleged that Kabbage knowingly failed to implement appropriate fraud controls to comply with its PPP and BSA/AML obligations. In particular, the United States alleged that Kabbage removed underwriting steps from its pre-PPP procedures to process a greater number of PPP loan applications and maximize processing fees. The government further alleged that Kabbage knowingly set substandard fraud check thresholds despite knowledge of SBA’s concerns that fraudulent borrowers might seek to benefit from the PPP, relied on automated tools that were inadequate in identifying fraud, devoted insufficient personnel to conduct fraud reviews, discouraged its fraud reviewers from requesting information from borrowers to substantiate their loan requests and submitted to the SBA thousands of PPP loan applications that were fraudulent or highly suspicious for fraud.
As part of the government’s resolution of these claims, the government will receive a total allowed, unsubordinated, general unsecured claim in the bankruptcy proceeding of up to $120 million. The amount the government will recover on this claim will depend on the ultimate amount of assets available to the bankruptcy estate for distribution to unsecured creditors. The resolution also provides for Kabbage Inc. to receive a $12.5 million credit for payments previously returned to the SBA during the department’s investigation of the alleged misconduct.
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Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.
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