As you may know, 3 student loan borrowers joined forces recently to file an involuntary petition against Navient Solutions LLC on February 8, 2021 in the United States Bankruptcy Court for the Southern District of New York. Navient Solutions is the student loan servicing company affiliated with Navient Corp., the student loan originator. Navient manages approximately $300 billion in student loan debt issued to over 12 million borrowers.
Requirements for Involuntary Filing
If you look at an involuntary petition form, you might think it is a very simple process. You would be wrong, and the consequences are drastic. While the rules and requirements to file an involuntary case may seem simple, you’d be surprised how bogged down you can get into the weeds on the necessary elements.
First, if the “putative debtor” (not yet a debtor until the court says so) has more than 12 creditors, then at least 3 must file and sign the petition. If less than 12 creditors, then only 1 needs to sign. When in doubt, assume you need minimum of three. The claims of the three creditors must collectively total at least $16,750 of non-contingent, unsecured claims that are not subject to a bona fide dispute.
Second, the form requires those signing to verify that the putative debtor is “generally not paying its debts as they come due.”
Challenges from the Putative Debtor
Once filed and served, a putative debtor may challenge the filing and seek its dismissal, or may answer and admit that it will remain in bankruptcy court. The challenges can be on the required elements mentioned above, or more generally “for cause” including an improper motive or bad faith in the filing of the petition. Battles over these issues can be protracted, expensive and very fact intensive. Multi-day trials have been held over whether an involuntary is properly before a court.
On February 25, the court ruled that the Navient filing was improper. Navient argued that the three creditors’ claims were subject to “bona fide dispute”. They claimed that there was no evidence that Navient was not paying its debts as they came due. They also said that the case was filed in bad faith for improper motives. These challenges were upheld.
Now for the drastic part/more to follow. Under the Bankruptcy Code, if a petition is found to be wrongfully filed, a putative debtor may seek damages. This includes costs and reasonable attorneys’ fees incurred in fighting the petition, and possible punitive damages. Petitioning creditors are exposed to these risks in all involuntary filings. As an attorney, be sure you advise your clients accordingly.
Our attorneys at DelCotto Law are experienced in both filing and defending against involuntary filings. We would be happy to discuss this process further with you.
About DelCotto Law Group
DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call 859-231-5800, email [email protected] or reach us on our contact page.