Supreme Court Docket Report - 2001 Term, Number 20 / June 24, 2002

Co-authored by Mr Robert L. Bronston and Mr Andrew H. Schapiro.

The Supreme Court granted certiorari in one case of potential interest to the business community. Amicus briefs in support of the petitioners are due on Thursday, August 8, 2002, and amicus briefs in support of the respondent are due on Monday, September 9, 2002. We also report on a recent decision of the Supreme Court that may have significance for our clients and friends.

Bankruptcy - Dischargeability of Debt - Fraud Claims Resolved By Settlement. Section 523(a)(2)(A) of the Bankruptcy Code provides that "[a] discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt * * * for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by * * * false pretenses, a false representation, or actual fraud." 11 U.S.C. 523(a)(2)(A). The Supreme Court granted certiorari in Archer v. Warner, No. 01-1418, to determine whether a debt that is otherwise nondischargeable in bankruptcy under Section 523(a)(2) becomes dischargeable if the parties enter into a settlement agreement resolving the amount of the debt.

Elliott and Carol Archer sued Leonard and Arlene Warner in North Carolina state court alleging fraud in connection with their purchase of the Warners' business. On the eve of trial, the Archers agreed to release their claims against the Warners in exchange for a $200,000 cash payment and a secured promissory note for $100,000, payable in two installments over a year. The Warners defaulted on the first payment under the promissory note, prompting the Archers to sue in state court to recover the outstanding debt. While that action was pending, the Warners filed in bankruptcy court an action seeking relief under Chapter 13 of the Bankruptcy Code. Their case was later converted to a Chapter 7 case.

The Archers filed in the bankruptcy court an adversary proceeding seeking a declaration that the debt on the promissory note was for money owed on account of fraud and therefore was nondischargeable under Section 523(a)(2)(A). Arlene Warner contested dischargeability. The bankruptcy court concluded that the settlement agreement effected a "novation" so that the debt Arlene Warner owed to the Archers was no longer a debt owed on account of fraud, but instead a debt due on a contract. The district court affirmed, agreeing with the bankruptcy court that the settlement agreement...