Perhaps not unexpectedly, on February 25, 2021, a New York bankruptcy court dismissed the involuntary bankruptcy petition brought earlier in the month by three student loan borrowers against Navient Solutions (see our prior post on the borrowers’ petition here).  Navient is the student loan servicing arm of Navient Corporation, one of the world’s largest student loan-originators.

Media reports indicate that Bankruptcy Judge Martin Glenn dismissed the case on the basis that the student loan borrowers’ claims against Navient were in fact “the subject of a bona fide dispute.”  Section 303(b)(1) of the Bankruptcy Code requires that claims filed against a potential debtor be undisputed to successfully force a company into involuntary bankruptcy, among other requirements.

In their petition seeking to force Navient Solutions into bankruptcy, the three borrowers alleged they were owed a combined $45,683.64 in payments they claimed Navient wrongfully collected from them after their student loans had been discharged in their own bankruptcies.  Navient countered in its motion to dismiss the petition that the borrowers’ claims were in fact in dispute (i.e., Navient did not acknowledge that the amounts had been improperly collected) and that the involuntary petition was frivolous, filed in bad faith, and an improper attempt to gain leverage in ongoing litigation.

In addition to dismissing the petition, Judge Glenn’s order also confirmed that, consistent with Section 303(i) of the Bankruptcy Code, Navient retained the right to seek damages against the borrowers, their counsel, Public Interest Capital, LLC (a litigation finance firm who sought to join the case in support of the student loan borrowers) and Public Interest Capital’s lawyer.  In accordance with Section 303(i), such damages could potentially include Navient’s costs and reasonable attorneys’ fees, incurred in connection with fighting the involuntary petition, and any other damages proximately caused to by the petition, including potential punitive damages, if Navient were to prove that the involuntary petition was brought in bad faith.

Navient has not yet filed a motion seeking damages as of this post’s publication, and it is unclear if it will pursue them.  However, what is clear from this case is the continued high bar for involuntary petitions – petitioning creditors have to clear many hurdles to successfully force a company into bankruptcy, which the student loan borrowers here were unable to do.

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