South-Western Legal Studies in Business

Debt That May Have Been Obtained by Fraud Not Dischargeable in Bankruptcy
Description Supreme Court held that where parties had agreed to a settlement of a suit that claimed fraud, and then the debtor filed for bankruptcy, the settlement agreement was not dischargeable in bankruptcy because it may have been obtained by fraud.
Topic Bankruptcy
Key Words Fraud; Nondischargeability
C A S E   S U M M A R Y
Facts “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.” The lower courts held that the debt owed by B is discharged in bankruptcy. A, the creditor, appealed to the Supreme Court.
Decision

Reversed. The settlement agreement does not bar the creditors from showing that the settlement debt arose out of “false pretences, a false representation, or actual fraud” and so is nondischargeable. Debt for money promised in a settlement agreement, which released the creditors’ prior claim against Chapter 7 debtors for fraud could amount to debt for money obtained by fraud within the meaning of the Bankruptcy Code’s discharge exception for debt for money obtained by fraud.

Citation Archer v. Warner, 123 S.Ct., 1462 (Sup. Ct., U.S., 2003)

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