  Motivated by the recent experimental measurements, we have investigated the
Cabibbo-favored process $\Lambda_c^+ \to p \bar{K}^0\eta$, where the $N(1535)$
resonance is dynamically generated from the $S$-wave pseudoscalar meson-octet
baryon interactions within the chiral unitary approach. The contributions from
the intermediate $N(1650)$ and the predicted low-lying baryon $\Sigma^*(1/2^-)$
are also considered. In addition, a Breit-Wigner amplitude for the $N(1535)$
resonance is checked. By comparing with the measured $\eta p$, $\bar{K}^0
\eta$, and $p \bar{K}^0$ invariant mass squared distributions, our results
support the interpretation of $N(1535)$ as a dynamically generated state.
Furthermore, we demonstrate that, with the contribution from $\Sigma^*(1/2^-)$
taken into account, the calculated invariant mass spectrum agrees with the
Belle measurements. Future precise measurements of the $\Lambda_c^+\to p
\bar{K}^0\eta$ process can further elucidate the existence of the low-lying
baryon $\Sigma^*(1/2^-)$.
