Augustine Bustos v. Steven Molasky ( 2016 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE STEVEN D. MOLASKY, No. 14-60080
Debtor,
BAP No.
14-1109
AUGUSTINE C. BUSTOS,
Appellant,
OPINION
v.
STEVEN D. MOLASKY,
Appellee.
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 Circuit Judge for
the U.S. Court of Appeals for the Sixth Circuit, sitting by designation.
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.
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.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
1
Unless otherwise specified, all section and chapter references are to
the Bankruptcy Code, 11. U.S.C. §§ 101 et seq.
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
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 exactly mirrored
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 7024,2 but 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
Sharing Plan, to intervene in the OneCap adversary proceeding. The Sully
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.
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]
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
Bankruptcy Appellate Panel applied to the bankruptcy court’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 Bankruptcy Code 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
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).
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 from our 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.
IN RE MOLASKY 11
B
Here, the bankruptcy court retained 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 subject-
matter 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 Benavidez involved 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 Benavidez test applied
without reaching this question. See 492 F. App’x at 802.
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. See Rein 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
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
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 bankruptcy court’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 re-
filing 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
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,
creating an unnecessary administrative 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 subject-
matter 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
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.