Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-60080/USCOURTS-ca9-14-60080-0/pdf.json

Parties Involved:
Augustine C. Bustos
Appellant
Steven D. Molasky
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE STEVEN D. MOLASKY,

Debtor,

AUGUSTINE C. BUSTOS,

Appellant,

v.

STEVEN D. MOLASKY,

Appellee.

No. 14-60080

BAP No.

14-1109

OPINION

Appeal from the Ninth Circuit

Bankruptcy Appellate Panel

Pappas, Jury, and Houle, Bankruptcy Judges, Presiding

Argued and Submitted November 17, 2016

San Francisco, California

Before: Sidney R. Thomas, Chief Judge, and Ronald Lee

Gilman*

 and Michelle T. Friedland, Circuit Judges.

Filed December 12, 2016

Opinion by Chief Judge Thomas

* The Honorable Ronald Lee Gilman, United States CircuitJudge for

the U.S. Court of Appeals for the Sixth Circuit, sitting by designation.

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2 IN RE MOLASKY

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.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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IN RE MOLASKY 3

COUNSEL

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.

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.1In 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

1 Unless otherwise specified, all section and chapter references are to

the Bankruptcy Code, 11. U.S.C. §§ 101 et seq.

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4 IN RE MOLASKY

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

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IN RE MOLASKY 5

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 complaint with the OneCap representatives.” 

Molasky’s counsel agreed with this description of the

settlement terms, and the bankruptcy court approved them as

part of the settlement agreement.

Bustos moved to intervene in the § 523 adversary

proceeding on September 8, 2008, filing his own § 523

adversary complaint in accordance with Federal Rule of Civil

Procedure 24(c). Bustos’s complaint almost exactlymirrored

the portions of the OneCap complaint relating to the

promissory note disputed here. Molasky did not object to

Bustos’s intervention but objected to his filing this separate

complaint in intervention.

Looking to the terms of the settlement agreement, the

bankruptcy court allowed Bustos “to intervene in the

complaint in the action brought by OneCap” under

Bankruptcy Rule 7024,2but it did not allow Bustos to file his

own, separate complaint. In granting Bustos’s motion, the

bankruptcy court ordered that Bustos be “afforded all the

rights and remedies as those granted to OneCap Holding

Corporation in this Adversary Proceeding insofar as they

pertain to any and all of the claims of Augustine C. Bustos

against the Debtor/Defandant.”3

2 Bankruptcy Rule 7024 incorporates Civil Rule 24 into adversary

proceedings in bankruptcy.

3 At around the same time, the bankruptcy court approved a

stipulation allowing another party, the W. Leslie Sully, Jr., Chtd. Profit

SharingPlan, to intervene in the OneCap adversary proceeding. The Sully

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6 IN RE MOLASKY

Several months later, the bankruptcy court allowed

counsel for OneCap to withdraw, and no replacement counsel

appeared on OneCap’s behalf at a status conference the

following month. The court ordered OneCap to appear and

explain why it should not be dismissed from the adversary

proceeding for failure to prosecute. When OneCap did not

appear at the show-cause hearing, the court “dismiss[ed]

OneCap from the proceeding” and explained that this

situation “le[ft] Mr. Bustos . . . as the lone party . . . to carry

the flag in this matter.”

Molasky then moved to dismiss Bustos and the adversary

proceeding entirely. The motion alleged that, following

OneCap’s dismissal, “there [was] no party for Bustos to

assist” as an intervenor in the action. Because Bustos had not

filed his own § 523 claim, Molasky argued that Bustos could

show “no independent basis for jurisdiction against

Molasky.” Bustos opposed the motion to dismiss, arguing

that he should be able to proceed on the basis of the OneCap

complaint, which he had effectively adopted when the court

allowed him to intervene but prohibited him from filing his

own complaint.

After holding a hearing, the bankruptcy court granted

Molasky’s motion to dismiss. Looking to Benavidez v. Eu,

34 F.3d 825, 830 (9th Cir. 1994), the bankruptcy court

explained that an intervenor “can proceed after dismissal of

[the] original party only if . . . an independent basis for

jurisdiction exists,” and it concluded that there was no such

basis here because Bustos had not filed his own § 523

Plan proceedings largely mirrored the Bustos appeals, but the Sully Plan

has since voluntarily dismissed its claims against Molasky, so we do not

discuss those proceedings further here.

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IN RE MOLASKY 7

complaint. Bustos appealed to the district court, which

reversed the dismissal, concluding that “[t]he adversary

proceeding underlying this appeal and the bankruptcy court’s

subject matter jurisdiction survived the dismissal of OneCap

as a plaintiff.”

Molasky then appealed to this Court, and a three-judge

panel issued a memorandum disposition vacating the district

court’s order. The panel held that the bankruptcy court had

correctly stated the applicable legal standard under

Benavidez. Molasky v. Bustos (In re Molasky) (“Molasky I”),

492 F. App’x 801, 802 (9th Cir. 2012) (citing Benavidez, 34

F.3d at 830). But in applying this standard to Bustos — in

light of his failure to file a timely § 523 complaint — the

panel concluded that the bankruptcy court had erred in failing

to consider equitable factors that might justify extending the

§ 523 deadline or otherwise allowing Bustos to pursue the

OneCap complaint. Id. at 802–03. As an example, the panel

pointed to Fasson v. Magouirk (In re Magouirk), 693 F.2d

948, 951 (9th Cir. 1982), which laid out five equitable factors

that courts have previously considered in deciding whether to

extend bankruptcy deadlines. Molasky I, 492 F. App’x at

802–03. The panel therefore remanded “to the bankruptcy

court for a determination of jurisdiction over Bustos” under

Bankruptcy Rule 4007, which sets the deadline for § 523

claims. Id. at 803.

On remand, the bankruptcy court considered an

intervening precedential decision from this Court, Anwar v.

Johnson, 720 F.3d 1183 (9th Cir. 2013), which clarified that

bankruptcy courts do not have equitable discretion to extend

the Rule 4007 deadline retroactively. In light of this

intervening precedent, the bankruptcy court concluded “that

equitable relief from the deadline under FRBP 4007(c) [was]

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8 IN RE MOLASKY

not available to Bustos” and that, having “failed to timely

assert a separate objection to dischargeability” before the

deadline expired, Bustos could not continue to prosecute the

action. On appeal, the Bankruptcy Appellate Panel (“BAP”)

affirmed this decision in all respects. Bustos timely appealed

to this Court. We have jurisdiction to hear his appeal under

28 U.S.C. § 158(d).

“We review decisions of the Bankruptcy Appellate Panel

de novo and apply the same standard of review that the

BankruptcyAppellate Panel applied to the bankruptcycourt’s

ruling.” Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193,

1198 (9th Cir. 2012) (citing Americredit Fin. Srvs. v. Penrod

(In re Penrod), 611 F.3d 1158, 1160 (9th Cir. 2010)). In

doing so, “[w]e review conclusions of law de novo and

findings of fact for clear error.” Id. (citing Countrywide

Home Loans, Inc. v. Hoopai (In re Hoopai), 581 F.3d 1090,

1095 (9th Cir. 2009)). Because interpretation of a prior

decision is a question of law, we “review[] de novo a [lower]

court’s compliance with the mandate of an appellate court,”

such as the bankruptcy court’s interpretation of our Molasky

I decision here. United States v. Perez, 475 F.3d 1110, 1112

(9th Cir. 2007) (citation omitted).

II

Section 523 of the BankruptcyCode provides that certain

categories of debts may not be discharged in a bankruptcy

proceeding. 11 U.S.C. § 523(a). Specifically, § 523(a)(2)(A)

excepts from discharge certain debts obtained through fraud

or false representation. To utilize this provision, § 523(c)

requires a creditor to file an exception-to-discharge claim in

the bankruptcy court. Bankruptcy Rule 4007 sets a 60-day

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IN RE MOLASKY 9

deadline for filing such a § 523(c) claim, beginning on the

date of the first creditor meeting.

In the present case, it is undisputed that OneCap filed its

§ 523(c) complaint within the 60-day deadline set by Rule

4007 and that Bustos did not move to intervene or file his

own complaint until after that period had passed. The

primary question, then, is whether Bustos’s intervention and

adoption of the OneCap complaint allow him to continue

prosecuting the action even after OneCap’s dismissal. We

answer this question in the affirmative.

A

As we explained in Molasky I, our precedent establishes

that an intervenor may continue to litigate an action after the

dismissal of the original party “when 1) an independent basis

for jurisdiction exists, and 2) unnecessary delay would

otherwise result,” such that allowing the intervenor to

continue “promotes judicial economy and preserves litigant

resources.”4 Benavidez, 34 F.3d at 830–31.

Molasky I remanded for a determination of jurisdiction

under the first prong of this test. 492 F. App’x at 803. The

bankruptcy court and the BAP correctly concluded that our

intervening decision in Anwar precluded extension of the

Rule 4007 deadline to allow Bustos to file his own complaint. 

4 This standard originally arose in the context of Civil Rule 24

intervention, but it applies equally in the bankruptcy context. Because

Bankruptcy Rule 7024 simply incorporates Civil Rule 24, courts apply

Rule 24 jurisprudence to intervention in bankruptcy proceedings. Educ.

Credit Mgmt. Corp. v. Bernal (In re Bernal), 207 F.3d 595, 597 (9th Cir.

2000).

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10 IN RE MOLASKY

That conclusion leaves open the question of whether some

other source of jurisdiction might allow Bustos to continue

litigating the action even without his own complaint. See

Anwar, 720 F.3d at 1187; see also Willms v. Sanderson,

723 F.3d 1094, 1100 (9th Cir. 2013) (confirming Anwar’s

strict interpretation of Rule 4007).

The bankruptcy court and the BAP seemed to assume that

the court necessarily lacked jurisdiction if the Rule 4007

deadline could not be extended to allow Bustos to file his

own complaint.5 This assumption is not supported by

precedent; our case law does not require an intervenor such

as Bustos to file his own complaint in order for the court to

have jurisdiction over his claim. Rather, an intervenor need

not file separate pleadings “[i]f the intervenor is content to

stand on the pleading an existing party has filed.” 

Westchester Fire Ins. Co. v. Mendez, 585 F.3d 1183, 1188

(9th Cir. 2009) (quoting 7C Charles Alan Wright, Arthur R.

Miller & Mary Kay Kane, Federal Practice & Procedure

§ 1914 (3d ed. 2009)). We therefore conclude that the

bankruptcy court and the BAP interpreted Molaksy I too

narrowly, erroneously foreclosing the ultimate question of

whether the court retained jurisdiction over Bustos without a

deadline extension.

5 Molasky argues that the mandate fromour court after the first appeal

“limited the scope of remand to assessing whether there was an

independent basis for jurisdiction in light of Magouirk.” We do not think

the mandate was so limited. But even if it were, there are exceptions to

the mandate rule and to the law of the case doctrine for an intervening

change in controlling authority, as Molasky concedes. See United States

v. Bad Marriage, 439 F.3d 534, 537–38 (9th Cir. 2006). Under those

exceptions, the intervening precedent of Anwar, 720 F.3d 1183, defeats

any argument that the bankruptcy court on remand was limited by our

prior decision to applying Magouirk, which Anwar overruled.

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IN RE MOLASKY 11

B

Here, the bankruptcycourtretained an independent source

of jurisdiction over Bustos after OneCap’s dismissal, thereby

satisfying the first prong of the Benavidez test. The

“independent basis for jurisdiction” prong of the test stems

from the Article III necessity of ensuring continued subjectmatter jurisdiction over the intervenor’s claim. Benavidez,

34 F.3d at 830; see also Diamond v. Charles, 476 U.S. 54, 68

(1986) (“[A]n intervenor’s right to continue a suit in the

absence of the party on whose side intervention was

permitted is contingent upon a showing by the intervenor that

he fulfills the requirements of Art. III.”). The first Benavidez

prong can therefore be understood as a temporal extension of

the case-or-controversy requirement, applied at the point

where the intervenor is the lone remaining party.

6

This requirement demands higher scrutiny where the

original party’s claim was dismissed on the merits or for lack

of jurisdiction, but the analysis is somewhat different where

6 Although Benavidezinvolved a permissive intervenor, the test itself

and the analysis supporting it do not draw a distinction between

permissive intervenors under Civil Rule 24(b) and intervenors of right

under Rule 24(a). See 34 F.3d at 830–31. Similarly, the decisions from

other Courts of Appeals cited by Benavidez do not distinguish between

permissive intervenors and intervenors of right. See, e.g., Arkoma Assoc.

v. Carden, 904 F.2d 5, 7 (5th Cir. 1990); Horn v. Eltra Corp., 686 F.2d

439, 440 (6th Cir. 1982); Fuller v. Volk, 351 F.2d 323, 328 (3d Cir. 1965). 

Thus, while the parties dispute whether Bustos should be considered an

intervenor of right or a permissive intervenor, in fact Bustos would need

to demonstrate continued jurisdiction in either case. The Molasky I panel

impliedly reached this conclusion when, after repeated questioning at oral

argument about whether Bustos was a permissive intervenor or an

intervenor of right, it ultimately concluded that the Benavideztest applied

without reaching this question. See 492 F. App’x at 802.

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12 IN RE MOLASKY

the original party was dismissed for a procedural reason, such

as for failure to prosecute. In such cases, a claim joined by an

intervenor may survive the dismissal of the original party if

the court retains jurisdiction over the claim and the intervenor

has standing to continue litigating it. See Westchester Fire

Ins. Co., 585 F.3d at 1189 (holding that “the district court

should not have entered a default judgment” against an

intervenor based on the original party’s failure to appear).

There is no question that OneCap timely filed its § 523

complaint and that the bankruptcy court initially had

jurisdiction over this claim. SeeRein v. Providian Fin. Corp.,

270 F.3d 895, 904 (9th Cir. 2001) (“Bankruptcy courts have

exclusive jurisdiction over nondischargeability actions

brought pursuant to 11 U.S.C. § 523(a)(2) . . . .”). The

bankruptcy court, in its own words, permitted Bustos to

“intervene in the complaint in the action brought by OneCap

Holding Corporation.” At that point, as explained above,

Bustos necessarily adopted OneCap’s complaint — he had a

valid claim against Molasky and was not required to file his

own § 523 complaint because he was “content to stand on the

pleading an existing party ha[d] filed.” See Westchester Fire

Ins. Co., 585 F.3d at 1188 (quoting 7C Wright, Miller &

Kane, supra, at § 1914).

Thus, OneCap’s timely filing satisfied the Rule 4007

deadline, and Bustos is simply “treated as if he filed the

complaint with the OneCap representatives,” in accordance

with the parties’ settlement agreement. We note that there is

no unfairness in this result, particularly given that Molasky

expressly agreed to waive any timeliness defense in his

settlement agreement with Bustos; Molasky cannot now

argue that it is too late for Bustos to pursue his own § 523

claim that originally formed part of OneCap’s complaint. See

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IN RE MOLASKY 13

Doi v. Halekulani Corp., 276 F.3d 1131, 1138 (9th Cir. 2002)

(first citing Sargent v. Dep’t of Health & Human Servs.,

229 F.3d 1088, 1090 (Fed. Cir. 2000); then citing In re

Christie, 173 B.R. 890, 891 (Bankr. E.D. Tex.1994))

(explaining that the parties are bound by the terms of a

settlement agreement once it is announced to the court).

Logic and equitable principles counsel the same result. In

a similar case where a creditor sought to be substituted for the

original party after the Rule 4007 deadline had run, the

Seventh Circuit aptly recognized that the thrust of the

timeliness inquiry as to § 523 claims “should fall first and

foremost on whether a complaint was filed against a specific

debt, not so much on who makes the complaint.” FDIC v.

Meyer (In re Meyer), 120 F.3d 66, 68 (7th Cir. 1997). This

approach serves Rule 4007’s purpose of ensuring that “[a]fter

the 60 days are over, all the demands for non-discharge that

can be made, have been made. The debtor can relax.” Id.

Our Circuit has similarly recognized the need for flexibility

in allowing § 523 claims to go forward despite issues

requiring party substitution or other procedural adjustments,

even after the deadline for filing a new claim has passed. 

Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088,

1092 (9th Cir. 2009). When two creditors share a claim

against a debtor, there is no reason why the procedural

dismissal of one creditor should divest the court of

jurisdiction over the other party, when it retains jurisdiction

over the claim.

Applying those principles to the current case — even if

Molasky had not agreed to waive timeliness defenses —

OneCap’s timely filed complaint gave Molasky notice of the

§ 523 claim within the time prescribed by Rule 4007. 

Bustos’s intervention and adoption of that complaint did not

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14 IN RE MOLASKY

prejudice Molasky or expose him to any additional claims

after the expiration of the deadline. When the bankruptcy

court dismissed OneCap from the proceeding for failure to

appear, it did not dismiss or otherwise adjudicate the § 523

claim itself. Thus, that claim remained live and justiciable.

Ultimately, the bankruptcycourt’s intervention order gave

Bustos “all the rights and remedies as those granted to

OneCap” to adjudicate this claim. The court’s dismissal of

OneCap as a party did not divest the court of jurisdiction over

the § 523 claim as it pertained to Bustos. Bustos has

therefore satisfied the “independent basis for jurisdiction”

prong of the Benavidez test, and the bankruptcy court and

BAP erred in concluding otherwise.

C

Bustos also satisfies the second prong of the Benavidez

test. The second Benavidez prong “asks whether refusing to

allow the intervenors to continue would lead to senseless

delay, because a new suit would inevitably bring the parties,

at a much later date, to the point where they are now.” 

34 F.3d at 830–31. Benavidez also emphasized that the

underlying goal of the rule is to “promote[] judicial economy

and preserve[] litigant resources.” Id. at 831. Delay and refiling as described in Benavidez are not the only ways in

which judicial resources may be wasted, and thus we

understand Benavidez to counsel against other forms of

judicial waste as well.

In a § 523 case, as Bustos correctly points out, creditors

should be entitled to rely on their representatives to litigate

the adversary proceeding on their behalf. Here Bustos has a

direct financial interest in the claim initiated by OneCap on

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IN RE MOLASKY 15

behalf of Bustos and the other investors, and he timely

intervened to protect that interest. If an intervenor like

Bustos cannot pursue an action initially filed by his or her

representative at the point when the representative fails to

prosecute the action, it creates an incentive for all of the

individual creditors in a fractionalized debt instrument to

hedge their bets by filing their own § 523 complaints before

the 60-day deadline, just in case their representative later fails

to prosecute adequately. Such an outcome could vastly

increase the number of complaints filed in these cases,

creatingan unnecessaryadministrative burden for bankruptcy

courts.

This result runs counter to the Benavidez goals of

“judicial economy and preserv[ation of] litigant resources,”

see 34 F.3d at 831, and would impose exactly the type of

administrative burden that the Benavidez rule seeks to avoid. 

For these reasons, we believe the goal of judicial economy is

best served by allowing a party in Bustos’s position to

continue litigating the timely filed § 523 claim that is before

the court. We therefore conclude that Bustos has satisfied

this second prong of the Benavidez test.

III

In sum, Bustos was permitted to intervene in the action

initially filed by OneCap and was “afforded all the rights and

remedies as those granted to OneCap.” By adopting

OneCap’s timely filed § 523 complaint, Bustos satisfied the

Rule 4007 deadline and established that the court had subjectmatter jurisdiction over his claim. Both precedent and

common sense dictate that Bustos should be permitted to

continue litigating the claim after OneCap’s dismissal on

procedural grounds. Ultimately, Bustos satisfies the

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16 IN RE MOLASKY

Benavidez test because the court retains a subject-matter

jurisdiction over his claim, and allowing him to pursue the

claim promotes judicial economy. Accordingly, Bustos is

entitled to continue prosecuting the § 523 claim originally

filed by OneCap. The bankruptcy court and BAP erred in

concluding otherwise.

REVERSED and REMANDED.

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