LOCATION:1220 Student Activities Building – Undergraduate Admissions
DOCKET NO.: 01-1418
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Fourth Circuit
CITATION: 538 US 314 (2003)
ARGUED: Jan 13, 2003
DECIDED: Mar 31, 2003
Craig Goldblatt – Argued on behalf of petitioners
Donald B. Ayer – Argued on behalf of respondent
Lisa Schiavo Blatt – argued the cause for the United States as amicus curiae urging reversal
Lisa S. Blatt – Argued the cause for the United States, as amicus curiae, supporting the petitioners
Facts of the case
In 1991, Leonard and Arlene Warner sold the Warner Manufacturing Company to Elliott and Carol Archer. Subsequently, the Archers sued the Warners for fraud connected with the sale. In settling the lawsuit, the Archers executed releases except for obligations under a $100,000 promissory note and then voluntarily dismissed the lawsuit. After the Warners failed to make the first payment on the promissory note, the Archers sued in state court. The Warners filed for bankruptcy, and the Bankruptcy Court ordered liquidation under Chapter 7. The Archers then brought a claim asking the Bankruptcy Court to find the $100,000 debt nondischargeable and to order the Warners to pay the sum. The Bankruptcy Code provides that a debt shall not be dischargeable in bankruptcy “to the extent” it is “for money…obtained by…false pretenses, a false representation, or actual fraud.” The Bankruptcy Court denied the Archers’ claim. The District Court and the Court of Appeals affirmed.
Does the Bankruptcy Code cover a debt embodied in a settlement agreement that settled a creditor’s earlier claim “for money…obtained by…fraud?”
Media for Archer v. Warner
Audio Transcription for Opinion Announcement – March 31, 2003 in Archer v. Warner
William H. Rehnquist:
The opinion of the Court in No. 01-1418 Archer against Warner will be announced by Justice Breyer.
Stephen G. Breyer:
The Bankruptcy Code provides that a debt shall not be dischargeable, and that means the debt survives bankruptcy ”to the extent” it is for money obtained by fraud.
Now, the question in this case is whether, the words that I have just read, can cover a debt under an agreement that settles and releases an earlier fraud claim, and we hold that it can.
The case, in essence, presents the following circumstance: A sues B in state court for money obtained by fraud, A and B then settled the lawsuit.
The settlement agreement provides that A, here said, that B would pay A $300,000, but B paid only $200,000, then B went bankrupt, and A says this remaining $100,000 debt survives bankruptcy because it is for money obtained by fraud.
B says “No it is not, it is not the money obtained by fraud rather it is for money promised in a settlement agreement”.
Now, the lower courts agreed with B; they said this settlement agreement worked a novation, it erased whatever old debt there was for fraud and it substituted a new debt which is really a contract debt and it is that new debt which is not for money obtained by fraud, so it is dischargeable in bankruptcy.
We do not agree with that view.
In our view you do not have to choose one or the other characterization, you do not have to say either for fraud or for contract, the debt could be both a contract related debt, which is embodied in a settlement agreement and it could also and more basically be a debt for money obtained by fraud.
At least, for the settled case itself was about fraud.
This conclusion in our view follows from an earlier Supreme Court case called Brown versus Felsen, there the Court essentially held, as we see it, that the debt embodied in a consent decree could amount to the debt for money obtained by fraud as well wherefore example the case where the consent decree ended was a fraud case.
We cannot find any significant difference between the consent decree in Brown and the settlement agreement here.
In both instances, we would follow Congress’s desire that bankruptcy court makes the fullest possible inquiry to ensure that all debts arising out of fraud are accepted from discharge no matter what their form.
For these and other reasons set forth in the opinions, we reverse the Court of Appeals.
We remand for further proceedings.
Justice Thomas has filed a dissenting opinion which Justice Stevens has joined.