Tate v. Navient Sols. (In re Navient Sols.)
| Decision Date | 23 March 2022 |
| Docket Number | 21-cv-2897 (JGK) |
| Court | U.S. District Court — Southern District of New York |
| Parties | IN RE NAVIENT SOLUTIONS, LLC, Putative Debtor. v. NAVIENT SOLUTIONS, LLC, Appellee. LABARRON TATE ET AL., Appellants, |
IN RE NAVIENT SOLUTIONS, LLC, Putative Debtor.
LABARRON TATE ET AL., Appellants,
v.
NAVIENT SOLUTIONS, LLC, Appellee.
No. 21-cv-2897 (JGK)
United States District Court, S.D. New York
March 23, 2022
MEMORANDUM OPINION AND ORDER
JOHN G. KOELTL, District Judge
The appellants, LaBarron Tate, Sarah Bannister, and Brandon Hood (also referred to in this Opinion as the "petitioners"), appeal from an order of the United States Bankruptcy Court for the Southern District of New York (Glenn, J.) dismissing the petitioners' petition for involuntary bankruptcy against Navient Solutions, LLC ("Navient," or the "appellee") under 11 U.S.C. § 303, and an order granting the appellee's motion for attorney's fees under 11 U.S.C. § 303(i). For the following reasons, the orders of the bankruptcy court are affirmed.
I. A.
The petitioners are three individuals who at one point took out student loans from Navient. See Supp. to Petition 4, In re Navient Solutions, LLC, No. 21-10249 (Bankr. S.D.N.Y. filed Feb. 10, 2021), ECF No. 2-1 ("Bankr. ECF"). The petitioners later
filed for bankruptcy. See id. at 4, 9. The petitioners argue that their respective bankruptcies discharged their debts to Navient. The petitioners allege that Navient nonetheless continued to seek repayment of the loans, and that the petitioners did in fact repay Navient a portion of their debts after their bankruptcies. See id. The petitioners also allege that Navient is currently being sued by the Consumer Financial Protection Bureau ("CFPB") . Id. at 5.
Several putative class actions are currently pending against Navient based on similar allegations. See, e.g., Crocker v. Navient Solutions, LLC, No. 16-3175 (Bankr. 3-D. Tex. filed Aug. 5, 2016); Homaidan v. Sallie Mae, Inc., 17-1085 (Bankr. E.D.N.Y. filed June 23, 2017); Bolt v. Navient Solutions LLC, No. 20-3040 (Bankr. D. Conn, filed Sept. 8, 2020}; Mazloom v. Navient Solutions, Inc., No. 20-80033 (Bankr. N.D.N.Y. filed July 2, 2020). At the time the petition was filed, no class had been certified. Navient has refused to repay the money to the petitioners. See Supp. to Petition 4, 9.
On February 10, 2021, the petitioners brought a petition for involuntary bankruptcy against Navient, on the theory that Navient owed the petitioners the money Navient had collected from the petitioners after their discharges, making the petitioners creditors of Navient. See Bankr. ECF No. 2. The petition alleged that "Navient is insolvent," supporting this
allegation with a back-of-the-envelope calculation that "$87.4 billion in assets minus $85 billion in liabilities minus $4 billion in damages in CFPB lawsuit equals -$l.6 billion in net worth." Supp. to Petition 6, Bankr. ECF No. 2-1.[1]
B.
On February 17, 2021, Navient moved to dismiss the petition. See Br. ECF No. 14. In letters dated February 18 and 19, 2021, Austin Smith, counsel for the petitioners, stated that "Smith and Smith alone will bear any and.all liability resulting from an adverse finding" of the bankruptcy court as to liability regarding Navient's attorney's fees. Bankr. ECF Nos. 17, 22. On February 23, 2021, Public Interest Capital, LLC ("PICAP") purported to join the involuntary petition pursuant to 11 U.S.C. § 303(c) and Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule") 1003(b) on the theory that it, too, held claims against Navient. See Bankr. ECF No. 35.
On February 25, 2021, the bankruptcy court held a hearing, at which Mr. Smith did not appear. See Bankr. ECF No. 52. On the same day, the bankruptcy court issued an order granting the motion to dismiss, denying PICAP's request for joinder, and noting that "Navient has not waived the right to seek judgment against the Petitioners, Counsel, Public Interest Capital, LLC
(“PICAP"), and counsel for PICAP pursuant to section 303 (i) of the Bankruptcy Code and [the bankruptcy court] may, upon subsequent proceedings initiated by Navient, take under advisement additional proceedings related to the Involuntary Case pursuant to section 303 (i) of the Bankruptcy Code." See Bankr. ECF No. 42.
C.
On March 8, 2021, the bankruptcy court issued an opinion in which it articulated four bases for its dismissal. Bankr. ECF No. 45 ("Dismissal Opinion").
1.
The first ground for dismissal was that the petitioners' claims were not free of bona fide dispute, as required for an involuntary bankruptcy case by 11 U.S.C. § 303(b). While two circuits had found student loans to be dischargeable in bankruptcy, the petitioners' bankruptcies had not occurred in those circuits. The certification of this question to the Court of Appeals for the Second Circuit also "very strongly suggest[ed] that the dispute . . . [wa]s bona fide." Id. at 5. The bankruptcy court went on to recite several legal and factual disputes that bore on Navient's liability to the petitioners and thereby created a bona fide dispute.
2.
The second ground for dismissal was that the petition was filed in bad faith. In re Bayshore Wire Prods. Corp., 209 F.3d100 (2d Cir. 2000),
considered bad faith under four tests: the "improper use" test, which asks whether the petitioners seek to advance an interest outside the goals of bankruptcy, id. at 105; the "improper purpose" test, which asks whether a petitioner was "motivated by ill will, malice, or a desire to embarrass or harass" the putative debtor, id.; the "objective test," which asks whether a "reasonable person" in the petitioner's position would have believed it reasonable to file an involuntary petition, id. at 105-06; and the test used to determine whether sanctions on attorneys are appropriate under Bankruptcy Rule 9011, which considers both objective and subjective elements. Id. at 106. The bankruptcy court also cited In re Murray, 543 B.R. 484, 489-91 (Bankr. S.D.N.Y. 2016), aff'd, 565 B.R. 527 (S.D.N.Y. 2017), and aff'd, 900 F.3d 53 (2d Cir. 2018), which considered several factors to determine bad faith.
The bankruptcy court found, based on Mr. Smith's public statements, that Mr. Smith was using the involuntary petition to circumvent other litigation, and that he "was motivated by ill will, malice, or a desire to embarrass or harass" Navient. The bankruptcy court also pointed out that Mr. Smith, despite listing on his website a summary of "the elements required to commence an involuntary petition," had "blatant[ly] fail[ed]" to heed that information in drafting the petition. The bankruptcy court therefore found that all of the Bayshore tests were met.
3.
The third basis for dismissal was that Navient was not generally failing to pay its undisputed debts as they became due as required by § 303(h). This test does not ask whether a putative debtor is balance-sheet insolvent. Because the petition alleged only a calculation that purported to show that Navient had a negative net worth, the petition alleged, at most, balance-sheet insolvency. The bankruptcy court also reiterated that the pertinent debts.were subject to bona fide dispute. The petitioners had therefore not met the requirements of § 303(h).
4.
Finally, the bankruptcy court found that it would in any event have abstained. 11 U.S.C. § 305(a)(1) authorizes a bankruptcy court to dismiss a petition when "the interests of the creditors and the debtor would be better served by such dismissal." In re Monitor Single Lift I, Ltd., 381 B.R. 455 (Bankr. S.D.N.Y. 2008), outlined seven factors to be considered.
The bankruptcy court analyzed the first six factors together under the rubric of "availability of an alternate forum to efficiently achieve an equitable distribution." Dismissal Opinion 27. The bankruptcy court found such forums to be available, given the pending litigation on these issues. The bankruptcy court further found that "an involuntary proceeding . . . [was] not necessary to reach a just and equitable
solution," "the automatic [bankruptcy] stay would only impede" that litigation. Finally, the bankruptcy court "ha[d] not been presented with any economic justification for placing Navient, a solvent entity, into" bankruptcy, and noted the expense and disruption that an involuntary bankruptcy would cause Navient. Dismissal Opinion 28.
The seventh and most important factor, the purpose for which the petition was filed, also favored abstention, given the bankruptcy court's finding of improper purpose. The'" bankruptcy court thus found that abstention was warranted.
The bankruptcy court thus dismissed the petition, remarking that it was not deciding damages, on which it had reserved jurisdiction.
D.
On March 11, 2021, the petitioners moved for reconsideration. Bankr. ECF No. 49. The following day, the bankruptcy court denied the motion. Bankr. ECF No. 51. On March 26, 2021, the petitioners filed with the bankruptcy court a notice of appeal of the dismissal. Bankr. ECF No. 53.
On March 29, 2021, Navient moved for attorney's fees and costs. Bankr. ECF No. 54. On April 14, 2021, PICAP moved for this Court to withdraw the reference to the bankruptcy court, and sought a stay of the bankruptcy court proceedings until this
Court decided the motion for withdrawal. ECF Nos. 4, 5. The Court denied the request for a stay. ECF No. 10.
On April 22, 2021, the bankruptcy court held a hearing concerning the imposition of attorney's fees, at which Mr. Smith reiterated that he would be responsible for any fees awarded pursuant to § 3O3(i)(l). Transcript at 36:25-37:3, Bankr. ECF No. 73.
E.
On May 11, 2021, the bankruptcy court issued an opinion awarding certain fees and costs to Navient against Smith and PICAP pursuant to § 303(i)(1). Bankr. ECF No. 74 ("Fees Decision").
1.
The bankruptcy court first found that Navient's motion for costs and attorney's fees was timely. While Federal Rule of Civil Procedure 54(d)(2)(B), made applicable in bankruptcy proceedings by Bankruptcy Rule 7054, sets a 14-day limit to move for attorney's fees, several cases had...
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