Archer v. Warner

In 1991, Leonard and Arlene Warner (debtors) bought the Warner Manufacturing Company for $250,000. Six months later, the Warners sold the company to Elliott and Carol Archer (creditors) for $610,000. The Archers subsequently sued the Warners in state court, alleging that the Warners had committed fraud in connection with the sale. The Archers and Warners settled the lawsuit and entered into a settlement agreement providing that the Warners would pay the Archers $300,000 to compensate the Archers for emotional distress and personal-injury-type damages. The Warners paid the Archers $200,000 and executed a $100,000 promissory note for the remaining amount. In return, the Archers executed releases discharging the Warners from every claim that the Archers had or could have against them, except for claims relating to the Warners’ promissory-note-based obligations. In November 1995, the Warners failed to make a required payment on the promissory note, and the Archers sued the Warners in state court. The Warners filed for bankruptcy, and the bankruptcy court ordered liquidation under Chapter 7. The Archers brought a claim for $100,000 in the bankruptcy action and asked the bankruptcy court to find the debt nondischargeable under 11 U.S.C. § 523(a)(2)(A) because the debt was for money obtained by fraud. The bankruptcy court denied the Archers’ claim and found the promissory-note debt dischargeable, and the district court affirmed. The Fourth Circuit also affirmed, holding that the settlement agreement, releases, and promissory note had effectuated a novation that replaced the Warners’ original fraud-based debt to the Archers with a new debt. The court reasoned that the new debt had not been obtained by fraud and rather was merely money promised in a settlement agreement. The United States Supreme Court granted certiorari.