Archer v. Warner

• Decision Date: 31 March 2003
• Docket Number: No. 01-1418.,01-1418.
• Citation: Archer v. Warner, 538 U.S. 314 (2003)
• Parties: ARCHER ET UX. v. WARNER.
• Court: U.S. Supreme Court

538 U.S. 314

ARCHER ET UX. v.WARNER.

No. 01-1418.

Supreme Court of United States.

Argued January 13, 2003.

Decided March 31, 2003.

A debt is not dischargeable in bankruptcy "to the extent" it is "for money ... obtained by ... fraud."11 U. S. C. § 523(a)(2)(A).Petitioners, the Archers, sued respondent Warner and her former husband in state court for (among other things) fraud connected with the sale of the Warners' company to the Archers.In settling the lawsuit, the Archers executed releases discharging the Warners from all present and future claims, except for obligations under a $100,000 promissory note and related instruments.The Archers then voluntarily dismissed the lawsuit with prejudice.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 brought the present claim, asking the Bankruptcy Court to find the $100,000 debt nondischargeable, and to order the Warners to pay the sum.Respondent Warner contested nondischargeability.The Bankruptcy Court denied the Archers' claim.The District Court and the Fourth Circuit affirmed.The latter court held that the settlement agreement, releases, and promissory note worked a kind of "novation" that replaced (1) an original potential debt to the Archers for money obtained by fraud with (2) a new debt for money promised in a settlement contract that was dischargeable in bankruptcy.

Held: A debt for money promised in a settlement agreement accompanied by the release of underlying tort claims can amount to a debt for money obtained by fraud, within the nondischargeability statute's terms.Pp. 318-323.

(a) The outcome here is governed by Brown v. Felsen,442 U. S. 127, in which (1) Brown filed a state-court suit seeking money that he said Felsen had obtained through fraud; (2)the court entered a consent decree based on a stipulation providing that Felsen would pay Brown a certain amount; (3) neither the decree nor the stipulation indicated the payment was for fraud; (4) Felsen did not pay; (5) Felsen entered bankruptcy; and (6) Brown asked the Bankruptcy Court to look behind the decree and stipulation and hold that the debt was nondischargeable because it was a debt for money obtained by fraud.Id., at 128-129.This Court found that, although claim preclusion would bar Brown from making any claim "`based on the same cause of action'" that he had brought in state court, id., at 131, it did not prevent the Bankruptcy Court from looking beyond the state-court record and the documents terminating the state-court proceeding to decide whether the debt was a debt for money obtained by fraud, id., at 138-139.As a matter of logic, Brown's holding means that the Fourth Circuit's novation theory cannot be right.If reducing a fraud claim to settlement definitively changed the nature of the debt for dischargeability purposes, the nature of the debt in Brown would have changed similarly, thereby rendering that debt dischargeable.This Court's instruction that the Bankruptcy Court could "weigh all the evidence,"id., at 138, would have been pointless, as there would have been nothing for the court to examine.Moreover, the Court's statement in Brown that "the mere fact that a conscientious creditor has previously reduced his claim to judgment should not bar further inquiry into the true nature of the debt,"ibid., strongly favors the Archers' position.Finally, Brown's basic reasoning applies here.The Court noted that a change in the Bankruptcy Code's nondischargeability provision indicated that "Congress intended the fullest possible inquiry" to ensure that "all debts arising out of" fraud are "excepted from discharge," no matter their form.Ibid.Congress also intended to allow the determination whether a debt arises out of fraud to take place in bankruptcy court, not to force it to occur earlier in state court when nondischargeability concerns "are not directly in issue and neither party has a full incentive to litigate them."Id., at 134.The only difference between Brown and this case — that the relevant debt here is embodied in a settlement, not in a stipulation and consent judgment — is not determinative, since the dischargeability provision applies to all debts that "aris[e] out of" fraud.Id., at 138. Pp. 318-322.

(b) The Fourth Circuit remains free, on remand, to determine whether Warner's additional arguments were properly raised or preserved, and, if so, to decide them.Pp. 322-323.

283 F. 3d 230, reversed and remanded.

BREYER, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and O'CONNOR, SCALIA, KENNEDY, SOUTER, and GINSBURG, JJ., joined.THOMAS, J., filed a dissenting opinion, in which STEVENS, J., joined, post, p. 323.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Craig Goldblatt argued the cause for petitioners.With him on the briefs was Seth P. Waxman.

Lisa Schiavo Blatt argued the cause for the United States as amicus curiae urging reversal.With her on the brief were Solicitor General Olson, Assistant Attorney General McCallum, Deputy Solicitor General Clement, William Kanter, and Robert Kamenshine.

Donald B. Ayer argued the cause for respondent.With him on the brief were Jack W. Campbell IV and Rayford K. Adams III.^*

JUSTICE BREYERdelivered the opinion of the Court.

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."11 U.S.C. § 523(a)(2)(A).Can this language cover a debt embodied in a settlement agreement that settled a creditor's earlier claim "for money ... obtained by ... fraud"?In our view, the statute can cover such a debt, and we reverse a lower court judgment to the contrary.

I

This case arises out of circumstances that we outline as follows: (1)A sues B seeking money that (A says)B obtained through fraud; (2)the parties settle the lawsuit and release related claims; (3) the settlement agreement does not resolve the issue of fraud, but provides that B will pay A a fixed sum; (4)B does not pay the fixed sum; (5)B enters bankruptcy; and (6)A claims that B's obligation to pay the fixed settlement sum is nondischargeable because, like the original debt, it is for "money ... obtained by ... fraud."

This outline summarizes the following circumstances: In late 1991, Leonard and Arlene Warner bought the Warner Manufacturing Company for $250,000.About six months later they sold the company to Elliott and Carol Archer for $610,000.A few months after that the Archers sued the Warners in North Carolina state court for (among other things) fraud connected with the sale.

In May 1995, the parties settled the lawsuit.The settlement agreement specified that the Warners would pay the Archers "$300,000.00 less legal and accounting expenses""as compensation for emotional distress/personal injury type damages."App. 61.It added that the Archers would "execute releases to any and all claims ... arising out of this litigation, except as to amounts set forth in [the] Settlement Agreement."Id., at 63.The Warners paid the Archers $200,000 and executed a promissory note for the remaining $100,000.The Archers executed releases "discharg[ing]" the Warners "from any and every right, claim, or demand" that the Archers "now have or might otherwise hereafter have against" them, "excepting only obligations under" the promissory note and related instruments.Id., at 67;see alsoid., at 70.The releases, signed by all parties, added that the parties did not "admi[t] any liability or wrongdoing," that the settlement was "the compromise of disputed claims, and that payment [was] not to be construed as an admission of liability."Id., at 67-68, 71.A few days later the Archers voluntarily dismissed the state-court lawsuit with prejudice.

In November 1995, the Warners failed to make the first payment on the $100,000 promissory note.The Archers sued for the payment in state court.The Warners filed for bankruptcy.The Bankruptcy Court ordered liquidation under Chapter 7 of the Bankruptcy Code.And the Archers brought the present claim, asking the Bankruptcy Court to find the $100,000 debt nondischargeable, and to order the Warners to pay the $100,000.Leonard Warner agreed to a consent order holding his debt nondischargeable.Arlene Warner contested nondischargeability.The Archers argued that Arlene Warner's promissory note debt was nondischargeable because it was for "money ... obtained by ... fraud."

The Bankruptcy Court, finding the promissory note debt dischargeable, denied the Archers' claim.The District Court affirmed the Bankruptcy Court.And the Court of Appeals for the Fourth Circuit, dividing two to one, affirmed the District Court.283 F. 3d 230(2002).The majority reasoned that the settlement agreement, releases, and promissory note had worked a kind of "novation."This novation replaced (1) an original potential debt to the Archers for money obtained by fraud with (2) a new debt.The new debt was not for money obtained by fraud.It was for money promised in a settlement contract.And it was consequently dischargeable in bankruptcy.

We granted the Archers' petition for certiorari, 536 U. S. 938(2002), because different Circuits have come to different conclusions about this matter, compareIn re West,22 F. 3d 775, 778(CA71994)(supporting the novation theory), with United States v. Spicer,57 F. 3d 1152, 1155(CADC1995)("The weight of recent authority rejects" the novation theory), cert. denied, 516 U. S. 1043(1996).

II

We agree with the Court of Appeals and the dissent, post, at 324-325(opinion of Thomas, J.), that "[t]he settlement agreement and promissory note here, coupled with the broad language of the release, completely addressed and released each and every underlying...