The U.S. Supreme Court recently heard arguments in a 4th U.S. Circuit Court of Appeals case holding that the settlement of a lawsuit claiming fraud converted the defendant’s obligation from a potentially nondischargeable debt for fraud to a contract obligation that is dischargeable under bankruptcy law. In a misguided attempt to encourage settlements, the 4th Circuit in Archer v. Warneradopted the approach taken by the 7th and 9th Circuits and rejected the opposite result reached by the D.C. and 11th Circuits.
The facts are these: Elliott and Carol Archer purchased a business owned by Arlene Warner and her then-husband, Leonard Warner. Several months later, the Archers sued the Warners for fraud and misrepresentation in connection with the sale. After extensive pretrial discovery, the suit was settled.
