## Facts

- The Archers bought Warner Manufacturing Company from Leonard and Arlene Warner and later sued the Warners in North Carolina state court alleging fraud related to the sale.
- In 1995, the parties settled: the Warners paid $200,000 and executed a $100,000 promissory note.
- The Archers executed broad releases discharging the Warners from claims arising from the litigation, except obligations under the promissory note and related instruments, and dismissed the state case with prejudice.
- After the Warners defaulted on the first payment due under the note, the Archers sued to collect; the Warners then filed Chapter 7 bankruptcy.
- The Archers filed an adversary proceeding seeking a determination that the $100,000 debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A) as a debt for money obtained by false pretenses, false representation, or actual fraud.
- The bankruptcy court, district court, and Fourth Circuit held the debt dischargeable, reasoning that the settlement and releases created a novation replacing any fraud-based claim with a dischargeable contract debt.

## Issues

1. Whether a debt embodied in a settlement agreement and promissory note, accompanied by releases of underlying fraud claims, can still be a nondischargeable debt “for money … obtained by … false pretenses, a false representation, or actual fraud” under 11 U.S.C. § 523(a)(2)(A).
2. Whether a “novation” theory or the settlement’s characterization of damages prevents a bankruptcy court from examining the underlying alleged fraud to determine dischargeability.

## Decision

- The Supreme Court reversed and remanded.
- The Court held that a settlement debt and related releases do not bar the creditor from attempting to prove that the debt arose from fraud within the meaning of § 523(a)(2)(A).
- Even if the settlement worked “a kind of novation,” the bankruptcy court may look behind the settlement to determine the debt’s origin.
- The Court did not decide whether the Warners actually committed fraud; it required further proceedings on that factual question.

## Legal Principles

- Under 11 U.S.C. § 523(a)(2)(A), dischargeability turns on whether the debt is “for money … obtained by” fraud, not on whether the obligation is later recorded in a settlement, note, or similar instrument.
- A creditor’s reduction of a fraud claim to settlement, including releases and recharacterized payment terms, does not by itself immunize the debt from nondischargeability analysis.
- Bankruptcy courts may examine the underlying facts and circumstances of the settled dispute to determine whether the debt is of the fraud-based type Congress made nondischargeable.
- A contrary rule would allow parties to convert potentially nondischargeable fraud debts into dischargeable obligations through settlement form alone.

## Conclusion

A settlement agreement, promissory note, and releases may replace earlier litigation positions, but they do not prevent a bankruptcy court from determining whether the resulting debt stems from fraud and is therefore nondischargeable under § 523(a)(2)(A); the creditor remains entitled to prove the debt’s fraudulent origin on remand.


Archer v. Warner, 538 U.S. 314 (2003)