On February 8, 2021, three student loan borrowers filed an involuntary petition against Navient Solutions LLC in New York bankruptcy court seeking to force Navient into bankruptcy.1 Navient Solutions is the loan servicing arm of Navient Corporation, a student loan originator which manages approximately $300 billion in student loan debt for more than 12 million borrowers. Involuntary petitions like the one instituted by the borrowers here are somewhat rare, at least in the case of larger companies like Navient, and the Bankruptcy Code provides special procedural rules, discussed below, which are designed in part to protect against potential abuses.
First, so long as the potential debtor has at least twelve creditors,2 involuntary cases may only be jointly instituted by no fewer than three petitioning creditors, who must collectively have at least $16,750 of non-contingent, unsecured claims against the potential debtor that are not subject to a bona fide dispute. Second, a bankruptcy court must determine that the potential debtor is generally not paying its debts as they become due.3 Finally, even if these statutory requirements are met, a bankruptcy court may still dismiss an involuntary petition for "cause" after notice and a hearing - e.g., if it finds that the petition was filed for inappropriate reasons or in bad faith.4 In the event a bankruptcy court dismisses the petition, it can order the petitioning creditors to pay the costs and attorneys' fees incurred by the potential debtor in fighting the involuntary petition and, in advance of such a decision, can also order the petitioning creditors to post a bond to cover these potential amounts. In short, the bar to a successful involuntary case is high, and attempts to file involuntary petitions are typically strictly scrutinized because "the filing of an involuntary petition is an extreme remedy with serious consequences to the alleged debtor, such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment."5
In the case of Navient Solutions, the three petitioning student loan borrowers claimed that they were owed a combined $45,683.64 for money wrongfully collected from them after each had had their respective student loans discharged in bankruptcy. Combining that liability with what the borrowers claimed was over $4 billion of potential additional liability faced by Navient with respect to actions brought by the US Department of Education, state attorneys general, the Consumer Financial Protection Board and other class action claimants, the petitioning borrowers claimed that Navient was unable to pay its debts as they become due.
On February 17, 2021, Navient filed an expedited motion to dismiss the borrowers' petition along with a request for damages. In its motion, Navient argued that the petitioning creditors' involuntary petition was frivolous, filed in bad faith, and an improper attempt to gain leverage in ongoing litigation. Specifically, Navient alleged that it was not even clear that the borrowers' student loans had in fact been fully discharged in the borrowers' own bankruptcy cases (and thus the borrowers arguably did not hold any debt that was not involved in a bona fide dispute). And, in any case, outside of rank speculation about potential outcomes in unrelated litigation, the petitioning creditors had provided no evidence that Navient was not paying its debt as it became due.
The borrowers' response deadline to Navient's motion was originally due by February 22, 2021, but that deadline was subsequently extended to February 23, 2021. A hearing on the motion is currently scheduled for February 25, 2021. Given the high bar noted above, the petitioning borrowers will likely be hard-pressed to keep their involuntary petition alive, though one would expect that they would fight any attempt to seek damages tooth and nail.
More to come.
1. The involuntary petition was amended on February 10, 2021.
2. Only one petitioning creditor is required if the debtor has fewer than twelve creditors.
3. See 11 U.S.C. § 303(h).
4. See, e.g., In re Murray, 900 F.3d 53, 60 (2d Cir. 2018) (affirming dismissal of involuntary petition for cause even though statutory requirements for filing had been met).
5. See, e.g., In re Cates, 62 B.R. 179, 180 (Bankr. S.D. Tex. 1986) quoting In re Reid, 773 F.2d 945, 946 (7th Cir.1985).
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