§ 363(b) Sale: Standing Of A Bidder To Object? (In re Riddle)

Here’s an interesting case: In re Riddle, Case No. 23-10827, New Mexico Bankruptcy Court (decided August 15, 2025; Doc. 70).

Facts

Debtor has a car crash.

Long story short: the Other Driver gets a $2,000,000 judgment against Debtor, and Debtor files Chapter 7 bankruptcy.

Claims & Assets

Other Driver files a $1,737,630 proof of unsecured claim, after insurance proceeds are applied to the judgment.

All other proofs of claim in the bankruptcy assert general unsecured claims totaling $27,568.68. And a $14,672.67 interim application for compensation for the Chapter 7 Trustee’s attorney is allowed.

Among Debtor’s assets are:

a potential bad faith claim against Debtor’s insurance company, which claim Debtor schedules as an “unknown” value (the “Bad Faith Claims”); and
potential legal malpractice and consumer protection claims against Debtor’s attorneys, arising from their unsuccessful efforts to defend Debtor in the Other Driver’s lawsuit (the “Malpractice Claims”).

Trustee’s Sale Efforts

Chapter 7 Trustee sells the Bad Faith Claims to the Other Driver, upon receiving Court Approval, for $50,000 and with an agreement that the Other Driver’s proof of claim is subordinated to payment in full of all other claims in the bankruptcy (see Docs. 22 & 33).

Then, Chapter 7 Trustee files a second sale Motion—to sell the Malpractice Claims to the Other Driver for $25,000 and with the same subordination terms. Further, the Trustee represents that such sale price, if approved by the Court, will result in a payment in full of all administrative claims and all general unsecured claims (other than the claim of the Other Driver) in the bankruptcy (see Doc. 55).

Objection & Reply

An objection (Doc. 57) to the second sale Motion is filed by the attorneys who are the Intended Defendants under the Malpractice Claims, in which the Intended Defendants offer to purchase the Malpractice Claims for $27,500.

The Chapter 7 Trustee files a Reply (Doc. 61), arguing that the Intended Defendants do not have standing to object.

The Trustee’s Reply also makes the following comments about the Intended Defendants’ offer (which is for $2,500 more than what the Trustee already agreed to accept):

the Trustee is not offering the Legal Malpractice Claims for auction and is not entertaining bids;
so, the Intended Defendants’ only interest in the Trustee’s sale Motion is as “an uninvited offeror”;
there is “a troubling, offensive, and even disgraceful aspect” to the higher offer—it is to buy the Legal Malpractice Claims for only 1.4% of the $2,000,000 judgment amount;
such offer would in effect “bury the claims from further scrutiny”; and
any acceptance of such an offer by the Trustee “would be facially outrageous.”

Bankruptcy Court Ruling

The Bankruptcy Court grants the Chapter 7 Trustee’s second sale Motion, without a hearing, declaring that the Intended Defendants “do not have a right” to prosecute their objection because they:

are not creditors;
have no prospect of receiving a distribution; and
have not challenged the integrity of the sale process.

Summary of Arguments

The Intended Defendants object to the proposed sale of the Malpractice Claims on two grounds:

the claims are not assignable under state law, which law precludes a prevailing party from pursuing its adversary’s legal malpractice claim against the adversary’s attorney; and
alternatively, the Trustee should be required to conduct an auction to achieve the highest price—because of the Intended Defendants’ higher bid.

The Trustee contends, in response, that the Intended Defendants have no Article III standing, no prudential standing, and no statutory standing to object.

Since standing is a threshold issue in every federal case, the Bankruptcy Court considers the standing issues first—which issues are dispositive.

Constitutional Standing Exists

Constitutional standing for the Intended Defendants’ objection does exist.

For starters, the Chapter 7 Trustee has Constitutional standing to prosecute the Motion to sell the Malpractice Claims under § 363—there is no colorable issue to the contrary.

And when a movant with Article III standing invokes a bankruptcy court’s jurisdiction in a contested matter, objecting parties need not themselves have Article III standing to prosecute their objections.

Consequently, Article III standing DOES EXIST for the Intended Defendants’ objection to the Trustee’s second sale Motion.

But a Right to be Heard DOES NOT Exist

However, the Intended Defendants DO NOT HAVE a right to be heard on their objection to the second sale Motion.

–Outside Bankruptcy

Outside bankruptcy, the right to be heard on a claim under a federal statute centers on whether the plaintiff belongs to the class of persons to whom the statute grants a right to sue (i.e., a plaintiff must be within the zone of interests that the statute protects). But once that suit is filed, the defendant has a right to assert and to be heard on defenses to those claims.

–In Bankruptcy

Contested matters in bankruptcy are different because:

a motion in a bankruptcy case often seeks relief against multiple and unnamed parties (such is the case with the second sale Motion here); and
in such circumstances, the limiting principle is this:
- whether a party has the right to be heard depends on whether the objecting party belongs to the class of persons entitled to participate in the contested matter—i.e., whether the interests of the objecting party fall within the zone of interests the statute protects.

–Chapter 11 Contrasted with Chapter 7

Were this case under Chapter 11 of the Bankruptcy Code, the question of whether the Intended Defendants have the right to be heard on their objection would be governed by § 1109(b), which provides:

“A party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.”

The phrase “party in interest” in § 1109 is a broad term, contemplating that the broadest category of potential litigants will have the right to be heard. But § 1109(b) does not apply in chapter 7 cases:

Chapter 7 has no counterpart to § 1109; and
most Bankruptcy Code sections that apply in Chapter 7 (including § 363(b)), do not identify who may object—instead, such sections simply allow the bankruptcy court to grant the relief requested in a motion after appropriate notice and opportunity for hearing are given.

–An Erroneous Contention

The Intended Defendants contend that they have legally protected interests under the Bankruptcy Code in:

a proper administration of the Legal Malpractice Claims by the Trustee—which precludes the Trustee from accepting a lower offer for the asset; and
preventing an assignment of Legal Malpractice Claims against them to the Other Driver in violation of state public policy—which precludes a prevailing party from pursuing its adversary’s legal malpractice claim against the adversary’s attorney.

However, the Bankruptcy Court declares, such interests are NOT sufficient to give the Intended Defendants standing to object to the second sale Motion. The rule is this:

the interests of a disappointed bidder, who is otherwise a stranger to the bankruptcy case, are not the type of interests protected under the Bankruptcy Code to challenge a § 363 sale.

One exception to such rule is when allegations are made of fraud, collusion, bad faith, or other fundamental unfairness that taint the sale:

but the Intended Defendants have not alleged any such fraud, collusion, bad faith, or other fundamental unfairness; and
their contention is that the Malpractice Claims are not assignable to the Other Driver under state public policy—which is a litigable state law issue that should be decided by the state court.

–Court’s Summary

Here, the Intended Defendants, as disappointed bidders and targets of the Legal Malpractice Claims, do not fall within the class of persons protected by § 363, even though they have offered to pay more for the Legal Malpractice Claims.

Accordingly, the Intended Defendants do not have a right to be heard on their objection to the second sale Motion.

Conclusion

Very interesting!

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