In a bold move, attorney Austin Smith has filed an involuntary Chapter 11 bankruptcy case against Navient Solutions on behalf of student loan debtors.
While this is early days and Navient has not had an opportunity to wrangle its the massive legal department to respond yet, they will. And I think it is safe to assume the response is going to be some internal screaming and swearing and they will publicly disagree and want the case tossed.
Smith begins the court filing with a description of the mess behind The First Marblehead Company, TERI, and Navient.
The court filing states:
“In the early 2000s, a private student loan company called The First Marblehead Company (“FMC”) introduced a new student loan product aimed at borrowers with riskier credit scores and made outside the financial aid office.
In re The First Marblehead., 639 F. Supp. 2d 145 (D. Mass. 2009). It was widely successful; FMC went public, the stock soared, and 12 months before it collapsed, senior officers and directors liquidated more than $300 million in cash from the company.
In re Mata, 2020 WL 5543716, at *2 (Bankr. C.D. Cal. July 31, 2020). Every major bank, guarantor, and speculator rushed into the bankruptcy court in Boston to file more than $20 billion in claims, representing the debts owed by more than 800,000 student debtors.
TERI had only $300 million in cash, which its parent, FMC, and its various securitizations, managed to appropriate most of after somehow persuading the IRS to reduce its claim against TERI from $99,698,781 to only $914.
We do not know how or why; no explanation was ever made to the court. But nobody bothered to provide legal notice to these 800,000 debtors.
In re Zaman, 621 B.R. 519, 524 (Bankr. S.D. Fla. 2020) (“Absent this opportunity, a creditor has a near iron-clad argument that due process has not been observed, and that he should not be bound by the terms of the plan and any attendant court-ordered or statutory injunction.”).
Among the unnoticed debtors were LaBarron Tate and Sarah Bannister; for due process purposes, the human debtors of corporate Debtors are treated as the collateral; they are only treated as citizens when the time comes to enforce the conclusions made about them behind their backs. In re Medina, 2020 WL 5553451 (Bankr. S.D. Cal. Sept. 10, 2020) (holding unnoticed single mother to terms of TERI’s Fourth Amended Plan).
TERI and FMC then left the market for private student lending almost entirely to Sallie Mae /Navient, who already had a major share of the federal loan market.
And by 2000, “nearly half of the financial assets of the United States government – over a trillion dollars – are promissory notes related to unpaid loans made to America’s students for their loans.” Student Loan Servicing All. v. D.C., 351 F. Supp. 3d 26, 38–39 (D.D.C. 2018).
It is likely for that reason that the Code of Conduct under the Higher Education Act contains the strictest— almost Victorian—ethical guidelines of any federal agency, including “loyalty to the highest moral principles” while prohibiting any “business with the Government, either directly or indirectly, which is inconsistent with the conscientious performance of governmental duties,” or using “ any information gained confidentially in the performance of governmental duties as a means of making private profit.”
Navient discloses that it has approximately $87.4 billion in assets, and $85 billion in liabilities; that is, the company is so highly leveraged its paper is below investment grade.
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Moreover, as Navient’s loan originations grew rapidly from 2000 to 2006, it concentrated on certain particularly risky loan cohorts, “in every year from 2000 to 2007, between 68% and 87% of loans defaulted.” Pennsylvania v. Navient Corp., 354 F. Supp. 3d 529, 536 (M.D. Pa. 2018).
Navient has been evading repaying more than $20 million in overcharges to the federal government for a decade and brazenly operates under the color of the sovereign when pursuing its purely private commercial affairs. U.S. v. Podell, 436 F.Supp. 1039, 1042 (S.D.N.Y. 1977)(“If he secretly advances interests adverse to those of the government which he serves, it is a breach of confidence and he must account to his ‘master’ for the benefits received as a result, irrespective of consideration of fraud or damage.”) And yet it is currently a fiduciary for more than half this nation’s assets.
It is difficult to imagine a TSA employee passing a background check with that level of debt; and it is shocking that an avowed perjurer and unrepentant embezzler has not been disciplined, suspended, disbarred or even asked to mind its tone. 48 C.F.R. § 9.406-2 (“Commission of any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor or subcontractor.”).
And yet for years, Senators Warren, Durbin and Blumenthal were the only members of the Senate prepared to call a spade a spade. But this is a new regime: the government must be repaid—it must be repaid now, and Navient’s arrogant defiance of law must end.
That’s a Bold Move
The involuntary bankruptcy filed by these Plaintiffs is clearly a bold move at attempting to get some clear answers on the history of some Navient loans.
But there is some reasoning behind the suit that appears to be an effort to get a standard that demonstrates not all private student loans are protected in bankruptcy and can be discharged.
“But the Petitioning Creditors, like this court, are not policy makers or armchair ethicists. They are suffering from concrete, particularized, and ongoing injuries. And the hundreds of thousands of others who have been psychologically tortured will be lumped together with everyone else. But there are major differences in the legal posture between the average student debtor and the Petitioning Creditors, including:
- Fifth Circuit said these debts were discharged and Navient did not appeal to the Supreme Court. Crocker v. Navient Solutions, LLC, 941 F.3d 206, 224 (5th Cir. 2019) (“We AFFIRM the determination that loans such as those in issue here are dischargeable.”); McDaniel v. Navient Solutions LLC, 97 F.3d 1083 (10th Cir. 2020);
- The OCC has told lenders under its supervision that these debts are dischargeable since at least 2016 OCC Student Lending Handbook, 2016 WL 2770153, at *6 (“Private student loans extended to students in programs without access to federal funding (i.e., certain trade schools) may be dischargeable in bankruptcy.”);
- Navient’s statements against interest, including the Career Training investor disclosures (“Career training loans are generally dischargeable by a borrower in bankruptcy”);
- Navient CEO’s acknowledgement of Crocker (“Recently, an appeals court found that, while these loans may in fact be dischargeable, the judge was wrong when he found that the plaintiffs had jurisdiction to bring these claims outside of the bankruptcy court that originally heard their bankruptcy.”);
- A federal court order prohibits Navient from denying the Discharged Debts were discharged. Crocker v. Navient Sols., LLC, 2020 WL 5579607, at *1 (Bankr. S.D. Tex. Aug. 27, 2020) (“this Agreed Order explicitly prohibits the rights and ability of NSL or NCFC or any of their Agents to accept payments made by a Bankrupt Non-Title-IV Educational Loan Borrower who has received, since bankruptcy discharge, a notification from NSL or NCFC or any of their Agents that such Bankrupt Non-Title-IV Educational Loan Borrower’s debt was not discharged in his or her bankruptcy.”).