Alton Howell Riddle

UNITED STATES BANKRUPTCY COURT

DISTRICT OF NEW MEXICO

In re: ALTON HOWARD RIDDLE, Case No. 23-10827-j7 Debtor.

MEMORANDUM OPINION

Before the Court is the Chapter 7 Trustee's Motion for Order Authorizing Trustee to Assign Estate Property Free and Clear of Claims, Liens, And Interests Pursuant to 11 U.S.C. § 363 ("Motion to Sell" - Doc. 55). The property the Trustee seeks to sell and assign is potential legal malpractice claims ("Legal Malpractice Claims") against Debtor's state court counsel based on their representation of Debtor in a pre-petition lawsuit that resulted in a judgment against the Debtor and in favor of Colby Dwoskin, now a creditor in this bankruptcy case. The Chapter 7 Trustee asks the Court to approve the sale of the Legal Malpractice Claims to Mr. Dwoskin. The targets of the Legal Malpractice Claims, Rainier Legal Advocates, LLC ("Rainier") and Morgan J. Wais (together "Rainier and Wais"), filed the only objection to the Motion to Sell. (Doc. 57 - the "Objection"). The Court held a preliminary hearing on the Motion to Sell on May 14, 2025, heard oral argument, and took the matter under advisement. No evidentiary hearing is required.

The Court will grant the Motion to Sell without considering the merits of the Objection because Rainier and Wais do not have the right to be heard to prosecute their Objection. They are not creditors in this bankruptcy, have no prospect of receiving a distribution from the estate, and have not challenged the integrity of the sale process.

1

-2-

PROCEDURAL AND FACTUAL BACKGROUND

Debtor filed this chapter 7 case on September 26, 2023. The bar date to file claims (except claims of governmental units) was February 20, 2024. On February 20, 2024, Mr. Dwoskin timely filed a proof of claim. The claim, as later amended, is in the amount of $1,737,630 based on the state court judgment in his favor. (See Claim No. 9 - the "Dwoskin Claim"). The Dwoskin Claim is subordinate to all other claims against the estate (See Doc. 22, p. 8 and Doc. 31). Excluding the Dwoskin Claim, the allowed prepetition claims against the estate consist of unsecured nonpriority claims totaling $27,568.68. The Legal Malpractice Claims include claims for legal malpractice and claims for violations of the Washington Consumer Protection Act (including claims against Ranier's managers and officers) that are property of the Debtor's bankruptcy estate pursuant to § 541(a)(1) of the Bankruptcy Code.¹The Motion to Sell seeks to sell the Legal Malpractice Claims pursuant to § 363(b), (f), and (m) and F. R. Bankr. P. 2002(a)(2) and 6004(a).

In the Motion to Sell, the Chapter 7 Trustee seeks to sell the Legal Malpractice Claims to Mr. Dwoskin on the following terms: (a) Mr. Dwoskin will pay the Trustee $25,000.00; (b) the Dwoskin Claim is and shall remain subordinate to all other allowed claims against the bankruptcy estate; (c) the Trustee will convey the Legal Malpractice Claims to Mr. Dwoskin free of all interests and of claims of creditors; (d) the Trustee will cooperate with reasonable requests from Mr. Dwoskin so he may pursue the Legal Malpractice Claims, and Mr. Dwoskin will reimburse the Trustee for costs and compensate the Trustee for his time at $300.00/hour; and (e) the sale is made without any

-3-

representations or warranties (the buyer assumes the risk of whether the Legal Malpractice Claims are assignable).

Rainier and Wais's Objection (Doc. 57) was the only objection to the Motion to Sell. As part of the Objection, Rainer and Wais represented that they are willing to pay $27,500 to purchase the Legal Malpractice Claims. Mr. Dwoskin filed a consent and acknowledgment to the Motion to Sell (Doc. 60), and the Trustee filed a Reply (Doc. 61) to the Objection.

At a preliminary hearing on the Motion to Sell, the Trustee, Rainier and Wais, and Mr. Dwoskin presented oral arguments. No party requested an evidentiary hearing. The Court took this matter under advisement.

DISCUSSION

Ranier and Wais object to the Motion to Sell on two grounds. First, they argue that the Court should not approve a sale of the Legal Malpractice Claims because the claims are not assignable under Washington state law. They assert Washington state law precludes a prevailing party from pursuing its adversary's legal malpractice claim against its attorney. In the alternative, Rainier and Wais argue that if the Court will approve a sale, the Trustee should be required to conduct an auction to achieve the highest price for the asset because they have made a higher bid.

The Trustee contends that Ranier and Wais do not have Article III standing, prudential standing, or statutory standing to object to the Motion to Sell. Standing is a

"threshold issue in every federal case."²Accordingly, the Court will consider the standing

-4-

issues before deciding whether to address the Objection to the Motion to Sell on its merits. The party seeking relief bears the burden of proving standing.³

Article III standing is satisfied as to Ranier and Wais based solely on the Trustee's Article III standing to file the Motion to Sell Article III standing, also known as Constitutional standing, limits the jurisdiction of federal courts to "Cases" and "Controversies." U.S. Const., Article III, § 2.⁴The requirement for Article III standing applies in bankruptcy court, even though the bankruptcy court is not an Article III court.⁵Because Article III standing is jurisdictional, federal courts have an obligation to examine whether Article III standing exists when there is a colorable standing issue.⁶

Here, there is no colorable issue that the Trustee has Article III standing to prosecute the Motion to Sell. The Trustee has Article III standing to prosecute the Motion to Sell because the Trustee has filed the motion pursuant to a Bankruptcy Code section authorizing him to sell bankruptcy estate assets and has a concrete stake in the relief he requests, that

-5-

is, to liquidate a bankruptcy estate asset and distribute the proceeds from the sale to the holders of allowed claims against the bankruptcy estate.

It is unnecessary to determine whether Rainier and Wais independently satisfy the requirements of Article III standing. When a movant with Article III standing invokes the bankruptcy court's jurisdiction in a contested matter in a bankruptcy case, objecting parties need not themselves have Article III standing to prosecute their objections.⁷Consequently, the Trustee's argument that Rainer and Wais lack Article III standing to object to the Motion to Sell is misplaced. The requirements of Article III standing have been satisfied. Prudential Standing

The Trustee next contends that Ranier and Wais do not have prudential standing to object to the Motion to Sell. Prudential standing is not derived from Article III.⁸"Prudential standing represents judicially self-imposed limits on the exercise of federal jurisdiction that [generally] are founded in concern about the proper—and properly limited—role of the courts in a democratic society."⁹In bankruptcy court, "[p]rudential standing consists of 'a judicially-created set of principles that, like constitutional standing, places limits on the class of persons who may invoke the court's decisional and remedial powers.'"¹⁰Although prudential standing has not been "exhaustively defined," traditionally it has encompassed

-6-

at least three broad principles: "[1] the general prohibition on a litigant's raising another person's legal rights, [2] the rule barring adjudication of generalized grievances more appropriately addressed in the representative [governmental] branches, and [3] the requirement that a plaintiff's complaint fall within the zone of interests protected by the law invoked."¹¹

However, in Lexmark, the Supreme Court took a narrower view of the traditional prudential standing doctrines, clarifying that "zone of interests" and "general grievances"

that were previously treated as aspects of prudential standing are not properly classified as prudential standing limitations at all.¹²Instead, the "generalized grievance" test is properly part of the Article III standing inquiry.¹³Although the "zone of interests" test is not a matter of prudential standing, it remains relevant. The "zone of interests" test directs the Court to use "traditional rules of statutory interpretation" to determine "whether a legislatively conferred cause of action encompasses a particular plaintiff's claim."¹⁴ The traditional prudential standing principle that survived Lexmark ‒ the general prohibition on a litigant raising another person's legal rights ‒ is not an issue before the Court. Rainer and Wais are not asking to assert the legal rights of third parties."¹⁵

-7-

Use of the Nomenclature of "Statutory Standing" and the "Zone of Interests" The Tenth Circuit, relying on Lexmark, has abandoned use of the nomenclature of

"statutory standing" or "zone of interests" to refer to non-Article III limits on the right to assert a claim under a federal statute, explaining,

Although traditionally viewed as a prudential- or statutory-standing requirement, the zone-of-interests doctrine isn't actually a matter of standing at all; instead, it merely asks whether a particular federal cause of action

"encompasses a particular plaintiff's claim." Lexmark Int'l v. Static Control Components, Inc., __ U.S.___,134 S.Ct. 1377, 1387, 188 L.Ed.2d 392 (2014); see also United States v. Wells, 873 F.3d 1241, 1261 (10th Cir. 2017) ("[T]he question that courts have misguidedly used the term 'standing' to describe . . . is really whether a particular litigant is a member of a class that Congress has authorized to sue . . . .").¹⁶

Because the Tenth Circuit has abandoned the nomenclature of "statutory standing" to refer to non-Article III/non-prudential limits on the right to assert a claim under a federal statute, this Court will do likewise. Instead, in the context of a bankruptcy case, the Court will refer to that standing concept as the "Right to be Heard."

Rainier and Wais lack standing because they do not

have the Right to be Heard to object to the Motion to Sell

In non-bankruptcy litigation and in adversary proceedings, which are causes of action initiated by a plaintiff against a defendant, the Right to be Heard to assert a claim under a federal statute centers on whether the plaintiff "belong[s] to the class of persons 787 (Bankr. N.D. Ohio 2016); In re Baroni, No. AP 13-01069, 2015 WL 6956664, at *6 (B.A.P. 9th Cir. Nov. 10, 2015).

-8-

to whom the statute grants a right to sue;" that is, " a plaintiff must be within the 'zone of interests' that the statute protects."¹⁷The right of a defendant to be heard to contest a claim against it is not an issue. The defendant has the right to assert defenses to claims against it. Contested matters in bankruptcy cases are different. When a party files a motion in a bankruptcy case seeking relief under the Bankruptcy Code, the relief often is not sought against only a named party.¹⁸Such is the case with the Motion to Sell where the Trustee seeks approval of the sale of the Legal Malpractice Claims under § 363. In that circumstance, to determine who has the right to contest the relief sought requires a limiting principle. Whether a party has the Right to be Heard in a contested matter on an objection to relief sought under the Bankruptcy Code depends on whether the objecting party belongs to the class of persons entitled to participate in the contested matter; that is, whether the interests of the objecting party fall within the "zone of interests" the statute protects.¹⁹ If this bankruptcy case were pending under chapter 11, § 1109(b) would govern whether Rainer and Wais have the Right to be Heard on their objection to the sale. Section 1109(b) provides:

(b) 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.

-9-

The phrase "party in interest" in § 1109 is a broad term.²⁰Thus, when the Bankruptcy Code uses the phrase "party in interest" it contemplates that the broadest category of potential litigants will have the Right to be Heard.²¹But § 1109(b) does not apply in chapter 7 cases because "this chapter" used in § 1109 refers to chapter 11.²²

In chapter 7 cases, there is no counterpart to § 1109 that uses the phrase "party in interest" in a blanket fashion with respect to the right to be heard, although party in interest is used in specific Code sections. A few Code sections applicable in chapter 7 cases specify who may object to relief sought using the phrase "party in interest," such as §§ 502(a), 522(l), and 727(c). But most Code sections applicable in chapter 7 cases, including § 363(b), which governs the Motion to Sell, do not identify who may object to a motion and instead simply allow the Court to grant relief requested in a motion "after notice and a hearing." "After notice and a hearing" means "after such notice as is appropriate in the particular circumstances, and such opportunity for a hearing as is appropriate in the particular circumstances."²³

Rainier and Wais, who are the targets of the Legal Malpractice Claims the Trustee seeks to sell, argue that they have legally protected interests under the Bankruptcy Code in

(i) the proper administration of the Legal Malpractice Claims by the Trustee, which would

-10-

preclude the Trustee from accepting a lower offer for the asset; (ii) preventing an assignment of Legal Malpractice Claims against them to Mr. Dwoskin in violation of Washington state public policy, which precludes a prevailing party from pursuing its adversary's legal malpractice claim against its attorney; and (iii) avoiding the attorney's fees and expenses to obtain a ruling in Washington state court that Mr. Dwoskin is precluded from pursuing the Legal Malpractice Claims, as it would be less expensive for them to buy the claim from the Trustee than to defend the claims in state court. They urge that these interests are sufficient to give them standing to object to the Motion to Sell. This Court disagrees.

With one limited exception, the interests of a disappointed bidder for a bankruptcy estate asset who otherwise is a stranger to the bankruptcy case are not the type of interests protected under the Bankruptcy Code to challenge a § 363 sale.²⁴Recognizing that

"questions about . . . standing to object must not stand as an obstacle to a bankruptcy court's assuring itself that the integrity of the bankruptcy process was not threatened,"²⁵a limited exception exists to the extent that there are allegations of fraud, collusion, bad faith, or other fundamental unfairness that taints the sale.²⁶

-11-

Rainier and Wais have not alleged that fraud, collusion, bad faith, or other fundamental unfairness taints the Trustee's sale to Mr. Dwoskin. Their contention that the Malpractice Claims are not assignable to Mr. Dwoskin because it is against Washington state public policy for a prevailing party to pursue an adversary's legal malpractice claim does not taint the Trustee's sale. That is a litigable state law issue that should be decided by the state court.

In Moran,²⁷Stark, who owned stock in a corporation, objected to the chapter 7 trustee's abandonment of the bankruptcy estate's shares of stock in the corporation to the debtor for a price that was less than what Stark offered to pay for the stock. The Sixth Circuit held that Stark's co-ownership of stock in the corporation, without more, was not an interest protected by the bankruptcy laws that gave him standing to object to the trustee's abandonment of the estate's shares of stock to the debtor for a lower price²⁸Similarly, Ranier and Wais, 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 than the Debtor. Ranier and Wais do not have a Right to be Heard on their Objection to the Motion to Sell.

Rainer and Wais thus lack standing under the Bankruptcy Code to assert their Objection. The Court, therefore, will not address their Objection on the merits.

-12-

CONCLUSION

Because Rainier and Wais are the only objecting parties and they do not have the Right to be Heard on their Objection to the Motion to Sell, the Court will grant the Motion. The Court will enter a separate order reflecting this ruling. __________________________

ROBERT H. JACOBVITZ

United States Bankruptcy Judge Date entered on docket: August 15, 2025

COPY TO:

Wayne OBrien McCook Attorney for Debtor McCook Law Firm, LLC

500 Marquette Ave NW, Suite 1200 Albuquerque, NM 87102

Clarke C. Coll

Chapter 7 Trustee

P.O. Box 2288

Roswell, NM 88202-2288

Spencer Lewis Edelman

Attorney for Ranier Legal Advocates, LLC Modrall Sperling Roehl, Harris & Sisk PA PO Box 2168

Albuquerque, NM 87103-2168

Morgan J. Wais

Rainier Legal Advocates, LLC

465 Rainier Blvd. N., Suite C Issaquah, WA 98027

Ronald E Holmes

Attorney for Colby Dwoskin Davis Miles, PLLC

2440 Louisiana Blvd, Suite 300 Albuquerque, NM 87110