ARCHER ET UX. v. WARNER
No. 01-1418
Supreme Court of the United States
Argued January 13, 2003—Decided March 31, 2003
538 U.S. 314
Craig Goldblatt argued the cause for petitioners. With him on the briefs was Seth P. Waxman.
Lisa Schiavo Blatt argued the cause for the United States as amicus curiae urging reversal. With her on the brief were Solicitor General Olson, Assistant Attorney General
Donald B. Ayer argued the cause for respondent. With him on the brief were Jack W. Campbell IV and Rayford K. Adams III.*
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.”
I
This case arises out of circumstances that we outline as follows: (1) A sues B seeking money that (A says) B obtained
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 67-68, 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
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).
II
We agree with the Court of Appeals and the dissent, post, at 324-325 (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
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 128-129.
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 130-131.
This Court unanimously rejected the lower court‘s reasoning. The Court conceded that the state law of claim preclusion would bar Brown from making any claim “‘based on the same cause of action‘” that Brown had brought in state court. Id., at 131 (quoting Montana v. United States, 440 U. S. 147, 153 (1979)). Indeed, this aspect of res judicata would prevent Brown from litigating “all grounds for
As a matter of logic, Brown‘s holding means that the Fourth Circuit‘s novation theory cannot be right. The reduction of Brown‘s 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 dissent‘s suggestions to the contrary, post, at 327, it did so by an agreement of the parties that would seem to have “sever[ed] the causal relationship,” ibid., 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 Circuit‘s view were correct—if reducing a fraud claim to settlement definitively changed the nature of the debt for dischargeability purposes—the nature of the debt in Brown would have changed similarly, thereby rendering the debt dischargeable. This Court‘s instruction that the Bankruptcy Court could “weigh all the evidence,” 442 U. S., at 138, would have been pointless. There would have been nothing for the Bankruptcy Court to examine.
Moreover, the Court‘s 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
Finally, the Court‘s basic reasoning in Brown applies here. The Court pointed out that the Bankruptcy Code‘s 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 “liabilities.‘” Ibid. This change indicated that “Congress intended the fullest possible inquiry” to ensure that “all debts arising out of” fraud are “excepted from discharge,” no matter what their form. Ibid.; see also
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 133-135. 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 324.
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, 253-254 (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 spe-
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 pretenses, a false representation, or actual fraud,” and consequently is nondischargeable,
It is so ordered.
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.”
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 317 (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
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 respondent‘s 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 case—whether 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.
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.
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 “‘proximate cause’ to label generically the judicial tools used to limit a person‘s responsibility for the consequences of that person‘s own acts.” Holmes v. Securities Investor Protection Corporation, 503 U. S. 258, 268 (1992). The Court has explained that, “[a]t bottom, the notion of proximate cause reflects ‘ideas of what justice demands, or of what is administratively possible and convenient.‘” Ibid. (quoting W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts § 41, p. 264 (5th ed. 1984) (hereinafter Keeton)); see also Palsgraf v. Long Island R. R. Co., 248 N. Y. 339, 352, 162 N. E. 99, 103 (1928) (Andrews, J., dissenting) (“What we do mean by the word ‘proximate’ is, that because of convenience, of public policy, of a rough sense of justice, the law arbitrarily declines to trace a series of events beyond a certain point“). While the concept of proximate cause is somewhat amorphous, see Keeton 279, the common law is clear that certain intervening events—otherwise called “superseding causes“—are sufficient to sever the causal nexus and cut off all liability. See Exxon Co., U. S. A. v. Sofec, Inc., 517 U. S. 830, 837 (1996) (“‘The doctrine of superseding cause is ... applied where the defendant‘s negligence in fact substantially contributed to the plaintiff‘s injury, but the injury was actually brought about by a later cause of independent origin that was not foreseeable‘” (quoting 1 T. Schoenbaum, Admiralty and Maritime Law § 5-3, pp. 165-166 (2d ed. 1994))); 57A Am. Jur. 2d, Negligence § 790, p. 701 (1989) (“The intervention, between the negligence of the defendant and the occurrence of an injury to the plaintiff, of a new, independent, and efficient cause, or of a superseding cause, of the injury renders the negligence of the defendant a remote cause of
In this case, we are faced with the novel situation where the parties have, by agreement, attempted to sever the causal relationship between the debtor‘s 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 respondent‘s 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.
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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 Court‘s conclusion in the text of the Bankruptcy Code, or in the agreements of the parties, I respectfully dissent.