Navient’s Expedited Motion to Dismiss Student Loan Borrowers’ Involuntary Chapter 11 Petition

February 25, 2021Herrick Restructuring Review

The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.

Earlier this month, three student loan borrowers filed an involuntary Chapter 11 petition under 11 U.S.C. § 303(b)(1) for Navient Solutions LLC, a student loan servicer. Three or more entities who each hold a claim against an involuntary debtor can file an involuntary bankruptcy petition on that debtor’s behalf if each claim is neither a contingent liability nor the subject of a bona fide dispute as to liability or amount. The borrowers alleged that Navient is insolvent and wrongfully collected about $45,000 in loan repayments from the petitioners after their loans were discharged in bankruptcy. On February 17, 2021, Navient filed an expedited motion to dismiss the petition, arguing that it was frivolous and filed in bad faith by petitioners’ counsel: for an advantage in other Navient suits and to harm Navient’s reputation. Navient asserted that the petitioners failed to allege specific facts or provide documentary evidence supporting the debtors’ right to file under section 303(b)(1).

Navient sought an expedited hearing because the bankruptcy may interfere with its servicing contracts, mar its reputation, and sink its equity value. Navient’s motion also sought damages, court costs, and attorneys’ fees from the petitioners and their counsel (focusing on a recovery from the petitioners’ counsel).

The court granted Navient’s motion to expedite the hearing, currently scheduled for today at 10 am Eastern. But, on February 23, another alleged Navient creditor, Public Interest Capital, LLC, moved to adjourn the hearing and to join the involuntary petition (individually, and as a proposed creditor-class claim representative). Public Interest Capital also alleged that Navient wrongfully collected student debt repayments from its predecessor-in-interest and the creditor class it seeks to represent after those debts were discharged in bankruptcy.

Both the initial petitioners and Public Interest Capital vituperate Navient in their filings and Navient returned the favor in its motion to dismiss. Whether the hearing occurs today or sometime in the future, bankruptcy observers will be in for a rare show.

For more information on this alert or other restructuring & finance litigation matters please contact:

Elizabeth Plowman at +1 212 592 1586 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.