Kabbage Failed to Process PPP Loan Forgiveness Applications in a Timely Manner, Class Action Claims [DISMISSED]
by Erin Shaak
Last Updated on February 19, 2024
Carr et al. v. Kabbage, Inc.
Filed: March 30, 2022 ◆§ 1:22-cv-01249
A lawsuit claims Kabbage failed to timely and properly process thousands of forgiveness applications for the Paycheck Protection Program loans it originated.
Georgia
April 27, 2023 - Kabbage PPP Loans Forgiveness Applications Lawsuit Dismissed
The proposed class action detailed on this page was dismissed with prejudice on March 31, 2023.
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In a 23-page order, U.S. District Judge Victoria M. Calvert granted Kabbage’s motion to dismiss the case, ruling, as other federal courts have, that there is no private right of action under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In other words, the judge found that private citizens do not have the ability to sue a company for alleged violations of the CARES Act.
In a footnote, Judge Calvert wrote that the court was “inclined to agree” with Kabbage’s argument that the plaintiffs’ unjust enrichment and state law claims were preempted by the CARES Act, and amounted to an attempt to circumvent the fact that the federal law does not provide citizens with a private right of action. That argument aside, the court nevertheless found that the plaintiffs’ unjust enrichment claim did not hold up given that the PPP loan origination fees Kabbage earned and retained were paid by the Small Business Administration (SBA), not consumers.
Moreover, the court dismissed for failure to state a claim all five of the plaintiffs’ claims brought under Georgia, Michigan, California, North Carolina and Florida laws.
Judge Calvert found that the Georgia statute does not apply to “[c]onduct in compliance with orders or rules of or a statute administered by a federal state, or local governmental agency,” and that the Michigan law exempts transactions specifically authorized by a federal statute. Similarly, the court determined that Kabbage’s actions were not considered unfair, deceptive or fraudulent under California or North Carolina law because the company acted within the scope of SBA guidance, which allows PPP loan servicers to collect additional documentation from applicants and instructs them to input $0.00 as a consumer’s forgiveness amount when their application is denied.
Finally, the court found that none of the allegedly deceptive statements Kabbage made on its website regarding the PPP loan forgiveness process that the plaintiffs relied on are considered fraudulent under Florida law.
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Kabbage, Inc. faces a proposed class action that claims the fintech lender has failed to timely and properly process thousands of forgiveness applications for the Paycheck Protection Program (PPP) loans it originated.
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The 84-page lawsuit claims that while Kabbage used the PPP to save its “floundering business” by generating millions of dollars in loan origination fees and making the lender an attractive acquisition target, the company has failed to apply “the same ingenuity or competence when it came to actually servicing the PPP loans it originated.” According to the suit, Kabbage’s 2021 acquisition by American Express left a “shell of a company,” renamed K Servicing, that has wholly failed to timely and competently process its borrowers’ PPP loan forgiveness applications.
Now that the dust has settled on the PPP and all the funding has been exhausted, Kabbage’s clients have been left “frustrated, confused and searching for answers as their businesses hang on by a thread,” the complaint scathes. According to the suit, K Servicing has continuously asked borrowers seeking loan forgiveness to provide unnecessary and duplicate documentation, sign inaccurate forgiveness documents and make payments on loans that should have already been forgiven.
“Simply put,” the case summarizes, “Kabbage is one of the most opportunistic profiteers to emerge from the COVID-19 global pandemic. Yet, despite its own financial gain, Kabbage has so badly mismanaged the [Small Business Administration] PPP loan forgiveness process that it has financially and emotionally devastated the very people Congress intended to help.”
The lawsuit states that at the beginning of 2020, Atlanta-based Kabbage was nearly bankrupt and had taken “drastic measures” in an attempt to save its lending business. At the same time, the fintech firm was lobbying the U.S. Treasury Department to become a PPP lender as part of the federal government’s Coronavirus Aid, Relief, and Economic Security (CARES) Act, a stimulus package that would ultimately provide $800 billion in loan guarantees for small businesses, the suit relays.
Per the case, Kabbage’s efforts were successful and, by early August 2020, the lender had originated the second-largest number of PPP loans in the country, generating between $330 million and $340 million in fees. As a result, American Express agreed in 2021 to acquire nearly all of Kabbage’s assets for $850 million, with the exception of the lender’s PPP loan servicing arm, the suit says. The acquisition left the “newly orphaned company,” renamed K Servicing, “completely bereft of competent employees and necessary resources” to service the thousands of PPP loans it had originated, according to the complaint.
The lawsuit alleges that K Servicing “inexplicably” declined to participate in the Small Business Administration’s direct borrower forgiveness portal, which would have allowed the lender to streamline the loan forgiveness process for borrowers with loans of $150,000 or less. Despite deciding not to participate in the portal, a means through which borrowers could submit documentation and lenders could review applications and issue their decisions directly to the Small Business Administration, K Servicing has nevertheless “continuously failed” to timely and competently process borrowers’ loan forgiveness applications, the case claims.
Instead, the suit alleges, borrowers have “faced tremendous (and avoidable) uncertainty and stress” while trying to navigate K Servicing’s loan forgiveness process, with the company’s outsourced customer service department proving largely unhelpful. Per the case, borrowers have been asked to provide documentation beyond what the federal government requires, send in duplicate copies of documents that were already provided, sign fraudulently altered documents stating $0 as their forgiveness amount, and make payments on loans that should have been forgiven.
Moreover, although the Small Business Administration requires servicers to make a determination on loan forgiveness applications within 60 days, K Servicing has “routinely failed” to respond at all or has continued to demand additional documentation from borrowers in order to restart the clock, the lawsuit says.
The lawsuit claims Kabbage has by far the lowest PPP loan forgiveness rate among the top PPP lenders in 2020 at 54 percent. According to the suit, Kabbage’s failures have added “yet another layer of difficulty” for small businesses seeking loan forgiveness and placed an inordinate burden on minority-run businesses. From the complaint:
“The ongoing impact of Kabbage’s sheer incompetence cannot be overstated; simply put, the lingering debt of outstanding PPP loans—about $28 billion—is creating a burden for the smallest businesses, including many run by minority entrepreneurs. … Kabbage’s avarice, evidenced by its rush to process as many loans as possible and thereby rack up origination fees at the highest rates, continues to crush these small businesses, which were already facing their most challenging years to date.”
The lawsuit looks to represent all borrowers of PPP loans in the amount of $150,000 or less serviced by K Servicing for which the borrower applied but has not received forgiveness for the entire amount of the loan.
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