625 B.R. 801
Bankr. S.D.N.Y.2021Background
- On Feb. 8–10, 2021, attorney Austin C. Smith filed an involuntary chapter 11 petition against Navient Solutions, LLC on behalf of three creditors (Bannister, Hood, Tate); Public Interest Capital, LLC (PICAP) later joined. The asserted claims allege Navient collected post‑discharge on student loans.
- Petitioning creditors and PICAP submitted no documentary proof of their claims; Smith repeatedly sought and missed deadlines and did not file an opposition or appear at the dismissal hearing.
- Navient moved to dismiss, submitting declarations and loan records; Navient’s counsel represented there are no unsatisfied judgments requiring repayment of discharged loans.
- Multiple related suits against Navient (including Crocker and McDaniel) are pending in various jurisdictions and raise the unsettled question whether 11 U.S.C. § 523(a)(8)(A)(ii) covers private student loans.
- The court found the petitioners’ claims were subject to bona fide dispute, the petition was filed in bad faith (including tactical/forum‑shopping and publicity by Smith), and petitioners failed to show Navient is “generally not paying” its debts; the court dismissed and abstained under § 305(a).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether petitioners’ claims are not contingent or the subject of a bona fide dispute under §303(b) | Claims arise from unlawful post‑discharge collections and therefore are undisputed liquidated claims warranting involuntary relief | Claims are disputed on liability and amount; related litigation and legal questions (including §523(a)(8)(A)(ii)) create bona fide disputes; petitioners offered no evidence | Petitioners failed to meet burden; court found claims subject to bona fide dispute and §303(b) not satisfied |
| Whether the involuntary petition was filed in bad faith | (Implicit) filing to vindicate creditors’ rights | Petition was used to obtain leverage, stay parallel litigation, and promote Smith’s public campaign; petition lacked reasonable factual/legal inquiry | Court found petition filed in bad faith under multiple tests (improper‑use, improper‑purpose, objective/Rule 9011) |
| Whether Navient is "generally not paying" its debts under §303(h)(1) | Petitioners alleged Navient insolvency and large potential liabilities (CFPB suit, etc.) implying failure to pay | Navient showed no unsatisfied judgments for the asserted type of claims; petitioners offered no concrete examples of unpaid, liquidated claims | Petitioners did not prove Navient is generally not paying debts; §303(h)(1) not satisfied |
| Whether the court should abstain under §305(a) | Petitioners needed bankruptcy forum to protect creditor class and assets | Ongoing litigation in other forums addresses the same core issues; bankruptcy would be premature, inefficient, and used for tactical advantage | Court exercised permissive abstention under §305(a), finding alternate forums available and the petition filed for improper purpose |
Key Cases Cited
- Crocker v. Navient Sols., LLC, 941 F.3d 206 (5th Cir. 2019) (held §523(a)(8)(A)(ii) is limited to conditional educational benefits, not ordinary private student loans)
- McDaniel v. Navient Sols., LLC, 973 F.3d 1083 (10th Cir. 2020) (agreed with Crocker that §523(a)(8)(A)(ii) targets conditional grants/stipends rather than loans)
- Crest One SpA v. TPG Troy, LLC, 793 F.3d 228 (2d Cir. 2015) (applies objective standard to determine existence of bona fide dispute in involuntary petitions)
- Lubow Mach. Co. v. Bayshore Wire Prods., 209 F.3d 100 (2d Cir. 2000) (discusses various tests for bad faith in involuntary bankruptcy filings)
- Murray (aff’d), 900 F.3d 53 (2d Cir. 2018) (district/bankruptcy‑court factors referenced for bad‑faith analysis in involuntary petitions)
- Brown v. Felsen, 442 U.S. 127 (U.S. 1979) (res judicata bars further claims based on same cause of action)
- Arizona v. California, 530 U.S. 392 (U.S. 2000) (settlements can have issue‑preclusion effect when parties intend such effect)
- Marvel Characters v. Simon, 310 F.3d 280 (2d Cir. 2002) (dismissal with prejudice from settlement operates as res judicata)