|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 Breyer delivered 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 creditors 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.
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 Bs 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 also id., 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 6768, 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 Warners 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, compare In re West, 22 F.3d 775, 778 (CA7 1994) (supporting the novation theory), with United States v. Spicer, 57 F.3d 1152, 1155 (CADC 1995) (The weight of recent authority rejects the novation theory), cert. denied, 516 U.S. 1043 (1996).
We agree with the Court of Appeals and the dissent, post, at 12 (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 state law claim. 283 F.3d, at 237. That agreement left only one relevant debt: a debt for money promised in the settlement agreement itself. To recognize that fact, however, does not end our inquiry. We must decide whether that same debt can also amount to a debt for money obtained by fraud, within the terms of the nondischargeability statute. Given this Courts precedent, we believe that it can.
Brown v. Felsen, 442 U.S. 127 (1979), governs the outcome here. The circumstances there were the following: (1) Brown sued Felsen in state court seeking money that (Brown said) Felsen had obtained through fraud; (2) the state court entered a consent decree embodying 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 to hold that the debt was nondischargeable because it was a debt for money obtained by fraud. Id., at 128129.
The lower courts had held against Brown. They pointed out that the relevant debt was for money owed pursuant to a consent judgment; they noted that the relevant judgment-related documents did not refer to fraud; they added that the doctrine of res judicata prevented the Bankruptcy Court from looking behind those documents to uncover the nature of the claim that had led to their creation; and they consequently concluded that the relevant debt could not be characterized as one for money obtained by fraud. Id., at 130131.
This Court unanimously rejected the lower courts reasoning. The Court conceded that the state law of claim preclusion would bar Brown from making any claim
As a matter of logic, Browns holding means that the Fourth Circuits novation theory cannot be right. The reduction of Browns state-court fraud claim to a stipulation (embodied in a consent decree) worked the same kind of novation as the novation at issue here. (Despite the dissents suggestions to the contrary, post, at 56, it did so by an agreement of the parties that would seem to have sever[ed] the causal relationship, post, at 5, between liquidated debt and underlying fraud no more and no less than did the settlement and releases at issue here.) Yet, in Brown, this Court held that the Bankruptcy Court should look behind that stipulation to determine whether it reflected settlement of a valid claim for fraud. If the Fourth Circuits view were correctif reducing a fraud claim to settlement definitively changed the nature of the debt for dischargeability purposesthe nature of the debt in Brown would have changed similarly, thereby rendering the debt dischargeable. This Courts instruction that the Bankruptcy Court could weigh all the evidence, id., at 138, would have been pointless. There would have been nothing for the Bankruptcy Court to examine.
Moreover, the Courts language in Brown strongly favors the Archers position here. The Court said 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.; accord, Grogan v. Garner, 498 U.S. 279, 290 (1991) (assuming that the Bankruptcy Code seeks to permit exception from discharge of all fraud claims creditors have successfully reduced to judgment). If we substitute the word settlement for the word judgment, the Courts statement describes this case.
Finally, the Courts basic reasoning in Brown applies here. The Court pointed out that the Bankruptcy Codes nondischargeability provision had originally covered only judgments sounding in fraud. 442 U.S., at 138. Congress later changed the language so that it covered all such
The only difference we can find between Brown and the present case consists of the fact that the relevant debt here is embodied in a settlement, not in a stipulation and consent judgment. But we do not see how that difference could prove determinative. The dischargeability provision applies to all debts that aris[e] out of fraud. Id., at 138; see also Cohen v. de la Cruz, 523 U.S. 213, 215 (1998). A debt embodied in the settlement of a fraud case arises no less out of the underlying fraud than a debt embodied in a stipulation and consent decree. Policies that favor the settlement of disputes, like those that favor repose, are neither any more nor any less at issue here than in Brown. See 442 U.S., at 133135. In Brown, the doctrine of res judicata itself ensured a blanket release of the underlying claim of fraud, just as the contractual releases did here, post, at 23. See supra, at 4. Despite the dissents protests to the contrary, post, at 13, what has not been established here, as in Brown, is that the parties meant to resolve the issue of fraud or, more narrowly, to resolve that issue for purposes of a later claim of nondischargeability in bankruptcy. In a word, we can find no significant difference between Brown and the case now before us.
Arlene Warner argues that we should affirm the Court of Appeals decision on alternative grounds. She says that the settlement agreement and releases not only worked a novation by converting potential tort liabilities into a contract debt, but also included a promise that the Archers would not make the present claim of nondischargeability for fraud. She adds that, in any event, because the Archers dismissed the original fraud action with prejudice, North Carolina law treats the fraud issue as having been litigated and determined in her favor, thereby barring the Archers from making their present claim on grounds of collateral estoppel. But cf. Arizona v. California, 530 U.S. 392, 414 (2000) ([S]ettlements ordinarily occasion no issue preclusion . . . unless it is clear . . . that the parties intend their agreement to have such an effect).
Without suggesting that these additional arguments are meritorious, we note that the Court of Appeals did not determine the merits of either argument, both of which are, in any event, outside the scope of the question presented and insufficiently addressed below. See Roberts v. Galen of Va., Inc., 525 U.S. 249, 253254 (1999) (per curiam). We choose to leave initial evaluation of these arguments to [t]he federal judges who deal regularly with questions of state law in their respective districts and circuits, and who are in a better position than we, Butner v. United States, 440 U.S. 48, 58 (1979), to determine, for example, whether the parties intended their agreement and dismissal to have issue-preclusive, as well as claim-preclusive, effect, and to what extent such preclusion applies to enforcement of a debt specifically excepted from the releases, supra, at 2; post, at 3. The Court of Appeals remains free, on remand, to determine whether such questions were properly raised or preserved, and, if so, to decide them.
We conclude that the Archers settlement agreement and releases may have worked a kind of novation, but that fact does not bar the Archers from showing that the settlement debt arose out of false pretences, a false representation, or actual fraud, and consequently is nondischargeable, 11 U.S.C. § 523(a)(2)(A). We reverse the Court of Appeals judgment to the contrary. And we remand this case for further proceedings consistent with this opinion.