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In re Molasky

United States Court of Appeals, Ninth Circuit

December 12, 2016

In re Steven D. Molasky, Debtor,
v.
Steven D. Molasky, Appellee. Augustine C. Bustos, Appellant,

          Argued and Submitted November 17, 2016 San Francisco, California

         Appeal from the Ninth Circuit Bankruptcy BAP No. 14-1109 Appellate Panel Pappas, Jury, and Houle, Bankruptcy Judges, Presiding

          John M. Netzorg (argued), Las Vegas, Nevada, for Appellant.

          Todd L. Bice (argued), Jordan T. Smith, Debra L. Spinelli, and James J. Pisanelli, Pisanelli Bice PLLC, Las Vegas, Nevada, for Appellee.

          Before: Sidney R. Thomas, Chief Judge, and Ronald Lee Gilman [*] and Michelle T. Friedland, Circuit Judges.

         SUMMARY [**]

         Bankruptcy

         The panel reversed the Bankruptcy Appellate Panel's affirmance of the bankruptcy court's dismissal of an adversary proceeding against a chapter 11 debtor, seeking exception to discharge of debts pursuant to 11 U.S.C. § 523(c).

         The panel held that an intervenor can continue to litigate as the sole remaining party in a bankruptcy proceeding involving his own claim, when the original party who represented his interest, and whose adversary complaint he adopted without filing his own, was dismissed for failure to prosecute. The panel held that after the dismissal of the original party, an independent basis for subject matter jurisdiction existed because the bankruptcy court did not dismiss or otherwise adjudicate the § 523 claim itself. In addition, the goal of judicial economy was best served by allowing the intervenor to continue litigating the timely filed § 523 claim.

          OPINION

          THOMAS, Chief Judge:

         In this case we are asked to decide whether an intervenor can continue to litigate as the sole remaining party in a bankruptcy proceeding involving his own claim, when the original party who represented his interest, and whose adversary complaint he adopted without filing his own, was dismissed for failure to prosecute. Because we conclude that he can proceed, we reverse and remand.

         I

         This appeal, the second in this bankruptcy proceeding, concerns Augustine Bustos's ongoing efforts to pursue an exception-to-discharge claim under 11 U.S.C. § 523(c) against Steven Molasky, the debtor.[1] In May 2007, a corporate entity controlled by Molasky took out a loan and executed a promissory note for $17 million in favor of OneCap Funding Corporation ("OneCap"). Molasky also executed a Continuing Guarantee that obligated him personally on this debt. Bustos was an investor in this debt instrument through OneCap; his funds accounted for $800, 000 of the $17 million loaned to Molasky.

         The loan-servicing agreement between Bustos and OneCap provided that OneCap would represent Bustos in any court proceedings as long as the agreement was still in effect and "while any amounts [we]re still outstanding under the Note(s)." It provided that Bustos was "not to represent [himself] in any courts unless [the] agreement is terminated."

         Molasky filed for chapter 11 bankruptcy on May 3, 2008. Under the deadline set by Federal Rule of Bankruptcy Procedure 4007(c), creditors received notice that the last day to file a complaint objecting to the discharge of a debt under 11 U.S.C. § 523(c) was August 11, 2008. In accordance with the loan-servicing agreement, OneCap filed a timely § 523 complaint on behalf of the lenders who had invested in the promissory note. In its adversary complaint, OneCap raised a claim under § 523(a)(2)(A), alleging that Molasky's debt on the promissory note was not dischargeable because Molasky had knowingly made false representations on which OneCap had relied when making the loan.

         A number of parties subsequently reached a settlement with Molasky in the main bankruptcy case regarding a separate group of debts that indirectly related to Bustos. As part of that settlement, the parties stipulated that Bustos would be allowed to intervene in the § 523 adversary proceeding initiated by OneCap. At a hearing on whether to approve the settlement agreement, counsel for OneCap explained that Molasky had "agreed . . . that Mr. Bustos may . . . file a motion to intervene in the OneCap adversary proceeding regarding the 523 claim[] . . ., and the debtor will not raise any affirmative defenses regarding timeliness or Statute of Limitations." Bustos's counsel further described the agreement as providing that Bustos would "be treated as if he filed the ...


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