|ARCHER V. WARNER (01-1418) 538 U.S. 314 (2003)
283 F.3d 230, reversed and remanded.
[ Breyer ]
[ Thomas ]
A. ELLIOTT ARCHER, et ux., PETITIONERS v.
ARLENE L. WARNER
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
[March 31, 2003]
Justice Thomas, with whom Justice Stevens joins, dissenting.
Section 523(a)(2) of the Bankruptcy Code excepts from discharge any debt for money, property, [or] services, to the extent obtained by false pretenses, a false representation, or actual fraud. 11 U.S.C. § 523(a)(2)(A) (emphasis added). The Court holds that a debt owed under a settlement agreement was obtained by fraud even though the debt resulted from a contractual arrangement pursuant to which the parties agreed, using the broadest language possible, to release one another from any and every right, claim, or demand arising out of a fraud action filed by petitioners in North Carolina state court. App. 67. Because the Courts conclusion is supported neither by the text of the Bankruptcy Code nor by any of the agreements executed by the parties, I respectfully dissent.
The Court begins its description of this case with the observation that the settlement agreement does not resolve the issue of fraud, but provides that B will pay A a fixed sum. Ante, at 1 (emphasis added). Based on that erroneous premise, the Court goes on to find that there is no significant difference between Brown [v. Felsen, 442 U.S. 127 (1979),] and [this case]. Ante, at 6. The only distinction, the Court explains, is that the relevant debt here is embodied in a settlement, not in a stipulation and consent judgment as in Brown v. Felsen, 442 U.S. 127 (1979). Ibid.
Remarkably, however, the Court fails to address the critical difference between this case and Brown: The parties here executed a blanket release, rather than entered into a consent judgment. And, in my view, if it is shown that [a] note was given and received as payment or waiver of the original debt and the parties agreed that the note was to substitute a new obligation for the old, the note fully discharges the original debt, and the nondischargeability of the original debt does not affect the dischargeability of the obligation under the note. In re West, 22 F.3d 775, 778 (CA7 1994). That is the case before us, and, accordingly, Brown does not control our disposition of this matter.
In Brown, Brown sued Felsen in state court, alleging that Felsen had fraudulently induced him to act as guarantor on a bank loan. 442 U.S., at 128. The suit was settled by stipulation, which was incorporated by the court into a consent judgment, but [n]either the stipulation nor the resulting judgment indicated the cause of action on which respondents liability to petitioner was based. Ibid. The Court held that principles of res judicata did not bar the Bankruptcy Court from looking behind the consent judgment and stipulation to determine the extent to which the debt was obtained by fraud. The Court concluded that it would upset the policy of the Bankruptcy Code for state courts to decide [questions of nondischargeability] at a stage when they are not directly in issue and neither party has a full incentive to litigate them. Id., at 134. Brown did not, however, address the question presented in this casewhether a creditor may, without the participation of the state court, completely release a debtor from any and every right, claim, or demand relating to a state-court fraud action. App. 67.
Based on the sweeping language of the general release, it is inaccurate for the Court to say that the parties did not resolve the issue of fraud. Ante, at 1. To be sure, as in Brown, there is no legally controlling document stating that respondent did (or did not) commit fraud. But, unlike in Brown, where it was not clear which claims were being resolved by the consent judgment, the release in this case clearly demonstrates that the parties intended to resolve conclusively not only the issue of fraud, but also any other right[s], claim[s], or demand[s] related to the state-court litigation, excepting only obligations under [the] Note and deeds of trust.1 App. 67. See McNair v. Goodwin, 262 N. C. 1, 7, 136 S. E. 2d 218, 223 (1964) (
The fact that the parties intended, by the language of the general release, to replace an old fraud debt with a new contract debt is an important distinction from Brown, for the text of the Bankruptcy Code prohibits discharge of any debt to the extent obtained by fraud. 11 U.S.C. § 523(a)(2) (emphasis added). In interpreting this provision, the Court has recognized that, in order for a creditor to establish that a debt is not dischargeable, he must demonstrate that there is a causal nexus between the fraud and the debt. See Cohen v. de la Cruz, 523 U.S. 213, 218 (1998) (describing §523(a)(2)(A) as barring discharge of debts
This Court has been less than clear with respect to the requirements for establishing proximate cause. In the past, the Court has applied the term
In this case, we are faced with the novel situation where the parties have, by agreement, attempted to sever the causal relationship between the debtors fraudulent conduct and the debt.2 In my view, the intervening settlement and release create the equivalent of a superseding cause, no different from the intervening negligent acts of a third party in a negligence action. In this case, the parties have made clear their intent to replace the old fraud debt with a new contract debt. Accordingly, the only debt that remains intact for bankruptcy purposes is the one obtained by voluntary agreement of the parties, not by fraud.
Petitioners own actions in the course of this litigation support this conclusion. Throughout the proceedings below and continuing in this Court, petitioners have sought to recover only the amount of the debt set forth in the settlement agreement, which is lower than the total damages they allegedly suffered as a result of respondents alleged fraud. See Brief for Petitioners 21 ([T]he nondischargeability action was brought solely in order to enforce the agreement to pay [the amount in the settlement agreement]). This crucial fact demonstrates that petitioners seek to recover a debt based only in contract, not in fraud.
The Court concludes otherwise. The Court, however, does not explain why it permits petitioners to look at the settlement agreement for the amount of the debt they seek to recover but not for the character of that debt. Neither this Courts precedents nor the text of the Bankruptcy Code permits such a selective implementation of a valid agreement between the parties.
The Court today ignores the plain intent of the parties, as evidenced by a properly executed settlement agreement and general release, holding that a debt owed by respondent under a contract was obtained by fraud. Because I find no support for the Courts conclusion in the text of the Bankruptcy Code, or in the agreements of the parties, I respectfully dissent.
1. There are no allegations that petitioners were fraudulently induced to execute the settlement agreement or the general release.
2. Petitioners argue that any prepetition waiver of nondischargeability protections should be deemed unenforceable because it is inconsistent with the Bankruptcy Code and impairs the rights of third-party creditors. Brief for Petitioners 24. As respondent points out, however, a creditor forfeits the right to contest dischargeability if it fails to affirmatively request a hearing within 60 days after the first date set for the meeting of the creditors. See 11 U.S.C. § 523(c)(1); Fed. Rule Bkrtcy Proc. 4007(c). Thus, presumably, creditors may choose, for any or no reason at all, to forgo an assertion of nondischargeability under §523(a)(2). Indeed, petitioners have failed to point to any provision of the Bankruptcy Code that specifically bars a creditor from entering into an agreement that impairs its right to contest dischargeability.