Court Opinion

ID: 2967749
Source: CourtListenerOpinion
Date Created: 2015-09-22 03:18:58.997441+00
Date Added: 2024-06-11T15:01:55.763299
License: Public Domain

Case reversed and remanded by
Supreme Court opinion filed 3/31/03
Cert granted by Supreme Court
order filed 6/24/02
                            PUBLISHED

             UNITED STATES COURT OF APPEALS

                   FOR THE FOURTH CIRCUIT

4444444444444444444444444444444444444444444444447
In Re: LEONARD L. WARNER and
ARLENE L. WARNER,
Debtors.

A. ELLIOTT ARCHER; CAROL A.
ARCHER,
     Plaintiffs-Appellants,                               No. 00-2525

      v.

ARLENE L. WARNER,
    Defendant-Appellee,

      and

LEONARD L. WARNER
     Defendant.
4444444444444444444444444444444444444444444444448

              Appeal from the United States District Court
       for the Middle District of North Carolina, at Greensboro.
                 Frank W. Bullock, Jr., District Judge.
              (CA-99-924, BK-96-10373, AP-A-97-2003)

                     Argued: September 27, 2001

                       Decided: March 8, 2002

  Before WIDENER, NIEMEYER, and TRAXLER, Circuit Judges.

_________________________________________________________
___

Affirmed by published opinion. Judge Widener wrote the majority
opinion, in which Judge Niemeyer joined. Judge Traxler wrote a dis-
senting opinion.

_________________________________________________________
___
                              COUNSEL

ARGUED: Harry Glen Gordon, GORDON LAW OFFICES, Greens-
boro, North Carolina, for Appellants. Rayford Kennedy Adams, III,
TURNER, ENOCHS & LLOYD, P.A., Greensboro, North Carolina,
for Appellee. ON BRIEF: Chad A. Sharkey, TURNER, ENOCHS &
LLOYD, P.A., Greensboro, North Carolina, for Appellee.

_________________________________________________________
___

                              OPINION

WIDENER, Circuit Judge:

    Elliot and Carol Archer appeal from the district court's order
affirming the bankruptcy court. The district court held that Arlene
Warner's affirmative defense of settlement in a state suit, involving
the same facts upon which rest the non-dischargeability claim at issue
here, created a novation substituting a contract debt which was dis-
chargeable for the tort claims which arguably were not. For the fol-
lowing reasons, we affirm.

                                   I.

    On May 22, 1992, Warner Manufacturing, Inc. and Leonard L. and
Arlene Warner, his wife, the owners thereof, sold the corporate assets
of Warner Manufacturing to a corporation formed by the Archers for
a total of $685,000.1 In late 1992, the Archers filed suit in Superior
Court of Guilford County, North Carolina against Leonard Warner
and Warner Manufacturing for fraudulent misrepresentation and like
misconduct arising out of the sale. An amended complaint, filed in the
state court in March 1994, asserted fraud, misrepresentation, conspir-
acy, and fraudulent conveyance, among other claims, and added
Arlene Warner and two other parties as named defendants. On May
8, 1995, the Archers again amended their complaint to include inten-
tional and negligent infliction of emotional distress, and asserted that
_________________________________________________________
___
   1
     The assets of Warner Manufacturing sold for $610,000; there was
included in the transaction a $70,000 consulting fee to Leonard Warner
and a $5000 non-competition agreement.

                                   2
they had suffered mental and emotional distress, pain and suffering,
and loss of enjoyment of life as a consequence of the Warners'
alleged acts. Three days later, on May 11, after extensive pre-trial dis-
covery, the parties settled the state court litigation.

    The settlement consisted of an agreement, an addendum to the
agreement, two releases, a promissory note, and two deeds of trust.
The settlement agreement provided that the Archers would receive
$300,000, consisting of a $200,000 cash payment which was paid,
and a $100,000 promissory note to be paid in two installments over
the next year. The agreement stated that the willingness of the Arch-
ers to resolve the case stemmed from both the non-taxable nature of
a part of the consideration for the settlement and the numerous
defenses asserted by the Warners. An addendum to the settlement
agreement specified that the agreement would be declared null and
void if the criminal charges pending against Leonard Warner were not
dismissed by the State of North Carolina. The promissory note, from
Leonard and Arlene Warner and Hosiery Industries, Inc., was secured
by two deeds of trust—one on the Warners' home and another on
business property owned by Hosiery Industries, Inc. The Warners
received both a general and mutual release of all pending and future
claims by the Archers. Specifically, the general release stated the
Archers "do hereby release and forever discharge the . . . [Warners]
from the beginning of the world to the date of this release arising out
of or relating to the matter of the litigation in Guilford County Supe-
rior Court, File No. 92-CVS-7777. . . ." In both releases, neither party
admitted liability or wrongdoing; moreover, specific clauses stated
that the payment of money should not be construed as an admission
of liability. There was no mention of bankruptcy in the settlement
package.

    On November 11, 1995, the first payment on the $100,000 promis-
sory note became due. When the Warners defaulted on this payment,
the Archers sued in Superior Court in Guilford County on December
4, 1995.2 The suit was for collection on the note. On February 5,
1996, while this collection suit was still pending, Leonard and Arlene
Warner filed for relief under Chapter 13 of the Bankruptcy Code,
_________________________________________________________
___
   2
    The second payment was due on May 11, 1996. The Warners
defaulted on this payment as well, being in bankruptcy.

                                    3
which was converted to a case under Chapter 7 on October 29, 1996.
The present dispute originated on January 29, 1997 when the Archers
filed an adversary proceeding in the United States Bankruptcy Court
for the Middle District of North Carolina, seeking a judgment for the
amount due under the promissory note and a determination that such
indebtedness was non-dischargeable under Section 523(a) of the
Bankruptcy Code, 11 U.S.C. § 523(a). As grounds for asserting the
non-dischargeability of this indebtedness, the Archers incorporated by
reference in the bankruptcy adversary complaint the multiple allega-
tions contained in their suit in the state court.3 These were the only
grounds there stated for asserting non-dischargeability.4 Defendant
_________________________________________________________
___
  3
    In the Archers' adversary complaint to determine dischargeability of
debt, Section 13 of the complaint states:

           Plaintiffs expressly incorporate by reference the terms and
         conditions of the Amended Complaint plaintiffs filed against
         defendants in Guilford County Superior Court, case no. 92 CVS
         7777, setting forth causes of action for, among other matters,
         fraud, misrepresentation, conspiracy to defraud, conspiracy to
         take plaintiffs' property by false pretenses in violation of crimi-
         nal statute G.S. §14-100, and, in general, for deliberate, inten-
         tional, willful, wanton, malicious, and wrongful acts of
         defendants in an elaborate scheme by which defendants took
         hundreds of thousands of dollars from plaintiffs by false pre-
         tenses.
  4
     The Archers attempted later to claim fraud-in-the-inducement of the
settlement as well. On June 25, 1998 the Archers moved to amend their
adversary complaint to show, among other things, that Mrs. Warner had
committed fraud when she and her husband induced the Archers to
accept the $100,000.00 note. The proposed amended complaint was filed
with the motion, but, when the motion came on for hearing, no attorney
appeared for either side and the bankruptcy court justifiably denied the
motion to amend the complaint, a plaintiff's motion for discovery, and
a motion by Arlene Warner for summary judgment. This order was filed
October 6, 1998.

   On February 2, 1999 the court set the adversary proceeding for trial on
June 1, 1999, and on May 27, 1999 the Archers renewed their motion to
amend the complaint. The trial having been continued at the instance of
the Archers, the pending motions to amend the complaint came on before
the bankruptcy court for hearing on June 1, 1999, along with other

                                    4
Arlene Warner denied any misconduct on her part and asserted an
affirmative defense of settlement of the original state court suit.5 She
_________________________________________________________
___
motions and objections by both the Archers and Mrs. Warner, all of
whom were represented by their attorneys at that hearing. The court
denied all of the motions and its order filed June 2, 1999 provided as the
reasons: "For the reasons stated in open court." Among the motions
denied was the renewed motion to amend the complaint. Although the
reasons were stated in open court, they are not included in the record in
this case, and we are left to speculate as to what they were. We are asked
to decide, in effect, that the bankruptcy court abused its discretion when
it did not permit the amendment of the complaint in the adversary pro-
ceeding.

   A reading of the amended complaint presented to the bankruptcy court
on May 27, 1999 does not charge any fact that Mrs. Warner misrepre-
sented to the Archers, unless it be that she and her husband could only
borrow or otherwise come up with $200,000.00 of the agreed
$300,000.00 settlement, leaving $100,000.00 to be paid under the note,
as has been mentioned before. While the Archers now argue that the rea-
son the note is not dischargeable in bankruptcy is because Mrs. Archer
intended at the outset not to pay it, that reason was not presented to the
bankruptcy judge in the amended complaint at the hearing on June 1,
1999 resulting in the June 2, 1999 order.

   While the amended complaint contains many conclusions charging
fraudulent or like conduct against Mrs. Warner, a reading of that paper
does not contain sufficient factual allegations for us to conclude that the
bankruptcy court abused its discretion when it did not permit the amend-
ment. In that respect, we note that the prayer of the amended complaint
includes the following:

          5. That in the alternative, if defendant Arlene Warner's obliga-
          tion to plaintiffs is determined to be discharged in Bankruptcy,
          that plaintiffs be declared released from any agreement and
          obli-
          gation to take no action to cause criminal proceedings to be
          brought against Arlene Warner or her son, Stuart Warner.

   That aspect of the prayer alone would seem to be sufficient reason to
justify the action of the bankruptcy court in denying the sought for
amendment of the complaint, but, again, since the record does not dis-
close the reasons, we decline to find the bankruptcy court abused its dis-
cretion in its denial of the motion to amend the complaint, and do not
speculate as to its reasons.
   5
     Arlene Warner contested this issue of non-dischargeability in the
bankruptcy court. We are told her husband, Leonard Warner, did not. No

                                    5
argued that the Archers may not rely upon the same alleged miscon-
duct in the original suit in the state court as grounds for non-
dischargeability because that suit was settled in toto.

    On August 24, 1999 the bankruptcy court had ordered the trial
bifurcated, first hearing issues on what it called the affirmative defense.6
On August 26, 1999 the case was tried on the affirmative defense of
the dischargeability action. The bankruptcy court decided in favor of
Mrs. Warner, upholding her affirmative defense. The Archers
appealed this decision contending that the bankruptcy court misinter-
preted the exception to dischargeability under 11 U.S.C.
§ 523(a)(2)(A). The district court affirmed the bankruptcy court's
decision. It concluded that the releases and settlement agreement cre-
ated a novation, substituting a dischargeable contract debt for a fraud-
based tort claim which may not have been dischargeable. The district
court continued by holding that the argument of fraud-in-the-
inducement of the settlement agreement was not properly before the
court because such claim was not presented to or decided by the bank-
ruptcy court. Nevertheless, the district court commented that any suc-
cessful fraud-in-the-inducement contention must establish that Mrs.
Warner planned all along to file bankruptcy to escape her contractual
settlement commitments with the Archers. The district court doubted
such a plan because the Warners had ready paid $200,000 in cash pur-
suant to the settlement agreement, and had given deeds of trust on real
estate to secure the payment of the note as well. In any event, because
of the novation which we affirm, see infra, and our opinion that the
Archers have not shown an abuse of discretion by the bankruptcy
court in its refusal to permit the amendment to the adversary com-
plaint, that is a contention upon which we express no opinion.
_________________________________________________________
___
issue with respect to the liability of Leonard Warner is before this court
on appeal, and, again, we are told that the Warners are divorced.
    6
      As previously noted, the Archers' motion to amend their complaint
was last denied by the bankruptcy court on June 2, 1999. Whether the
bankruptcy court has foreclosed such a claim is a question we do not
decide. The bankruptcy court called for trial the issue presented here,
which was whether the settlement agreement effected a novation of the
dischargeability claim which might have existed into a claim upon the
settlement which does exist. No evidence was offered in the bankruptcy
court as to fraudulently inducing the settlement.

                                     6
                                       II.

   We have jurisdiction to hear this case under 28 U.S.C. § 158(d).
This court "reviews the judgment of a district court sitting in review
of a bankruptcy court de novo, applying the same standards of review
that were applied in the district court." In Re Biondo, 180 F.3d 126,
130 (4th Cir. 1999).7 Specifically, we review the factual findings of
the bankruptcy court for clear error, while we review questions of law
de novo. In Re Biondo, 180 F.3d at 130.

   The pertinent bankruptcy code, 11 U.S.C. § 523, provides:

            § 523. Exceptions to discharge

            (a) A discharge under section 727, 1141, 1228(a), 1228(b)
            or 1328(b) of this title does not discharge an individual
            debtor from any debt . . . .

            (2) for money, property, services, or an extension,
            renewal, or refinancing of credit, to the extent
            obtained by —

             (A) false pretenses, a false representation, or
            actual fraud, other than a statement respecting
            debtor's or an insider's financial condition; . . .

            (6) for willful and malicious injury by the debtor
            to another entity or to the property of another
            entity . . . .

   The issue we address is whether the district court erred in deter-
mining that a prepetition settlement of claims involving the same
claims pursued here, alleged fraud or intentional tort, extinguished the
Archers' subsequent non-dischargeability claims under Section
523(a)(2)(A) when Mrs. Warner filed for bankruptcy relief without
having paid the settlement promissory note. As noted by the district
court, there is a split among the circuits concerning this issue. Under
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___
   7
       We note in passing that the Archers do not depend on Biondo.

                                        7
one line of cases, a settlement agreement does not distinguish a dis-
chargeability claim under Section 523(a). See United States v. Spicer,
57 F.3d 1152 (D.C. Cir. 1995); Greenberg v. Schools, 711 F.2d 152
(11th Cir. 1983). According to this line of cases, examining the under-
lying fraudulent allegations leading to the settlement agreement best
effectuates Congressional policy by its construction of the statutes as
not permitting the discharge of debts that Congress intended to sur-
vive bankruptcy. Greenberg v. Schools, 711 F.2d 152 (11th Cir.
1983). The opposing line of cases favors the basic principle of
encouraging settlements by way of freedom to enter into settlement
agreements, regardless of the nature of the claim subject to the settle-
ment agreement. See In re Fischer, 116 F.3d 388 (9th Cir. 1997); In
re West, 22 F.3d 775 (7th Cir. 1994); Maryland Casualty Co. v. Cush-
ing, 171 F.2d 257 (7th Cir. 1948). Under this theory, parties willing
to settle disputes over fraud, misrepresentation, or like tort claims
may do so by way of settlement through contract, and such contrac-
tual claims are then dischargeable in bankruptcy. Otherwise, the
incentive to settle is gone.

   We agree with the district court and the bankruptcy court that the
better reasoned decisions are those of the Seventh and Ninth Circuits
rather than those of the District of Columbia and Eleventh Circuits.
So we follow West, Md. Casualty, and Fischer. We are of opinion that
Congress did not intend that 11 U.S.C. § 523(a) be construed, as a
reversal here would require, so as to discourage the settlement of
claims because they might be subject to freedom from discharge
under § 523(a).

   When following the novation theory,8 the terms of the settlement
should be examined to determine whether the non-dischargeability
claims under Section 523(a)(2)(A) were released. The Archers would
have us hold that courts must determine whether the underlying fac-
tual basis for the settlement agreement consisted of fraud; however,
under the novation theory, courts need only address the validity and
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___
  8
     While novation is sometimes interpreted to mean the replacement of
a third party to an existing contract, see Black's Law Dictionary, 7th Ed.,
1999, p. 1091, we, like the Ninth Circuit, use the term in the context of
§ 523(a)(2)(A) to express the substitution of a contract claim for a tort
claim through a settlement agreement, the Seventh Circuit use.

                                    8
completeness of the bargained for agreement and release. We review
these factual issues for clear error.

   The settlement package, consisting of the settlement agreement
with addendum, two releases, a promissory note, and two deeds of
trust, completely released Arlene Warner from potential non-
dischargeability claims under Section 523(a)(2)(A). The settlement
agreement referred explicitly to the general and mutual releases. The
general release further announced the complete waiver of all pending
and future related personal claims against Arlene Warner. It provides
that the Archers

         do hereby release and forever discharge the [Warners] from
         any and every right, claim, or demand . . . arising out of or
         relating to the matter in Guilford County Superior Court,
         excepting only obligations under a Note and deeds of trust
         executed contemporaneously herewith.

This release continued by specifying the claims released:

         The payment of the sum of $300,000 . . . is paid to [the
         Archers] in settlement of their personal claims for emotional
         distress/personal-injury-type damages they claim to have
         suffered for the torts of fraud, intentional misrepresentation,
         intentional infliction of emotional distress, and negligent
         infliction of emotional distress. The parties further acknowl-
         edge that all sums set forth above constitute payment for
         claims of damages resulting from personal injuries or sick-
         ness or mental and emotional distress in a case involving
         prosecution of a legal suit or action based upon tort or tort-
         type rights . . . .

As noted in West, "A promissory note does not discharge the underly-
ing obligation unless the parties expressly release the old and substi-
tute the new." West, 22 F.3d at 778. The 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.

                                   9
   We therefore follow Fischer, West, and Md. Casualty and affirm
the judgment of the district court that the prepetition settlement of
claims involving alleged fraud and intentional tort extinguished the
Archers' subsequent non-dischargeability claim under Section 523(a)
when Mrs. Warner filed for bankruptcy relief without having paid the
entire amount of the settlement.

   The judgment of the district court is accordingly

                                                           AFFIRMED.

TRAXLER, Circuit Judge, dissenting:

   A unanimous Supreme Court reminded us as recently as four years
ago that "[t]he Bankruptcy Code has long prohibited debtors from dis-
charging liabilities incurred on account of their fraud, embodying a
basic policy animating the Code of affording relief only to an `honest
but unfortunate debtor.'" Cohen v. de la Cruz, 523 U.S. 213, 217
(1998) (quoting Grogan v. Garner, 498 U.S. 279, 287 (1991)). To this
end, "Congress intended the fullest possible inquiry" into the nature
of debts for purposes of determining dischargeability. Brown v. Fel-
sen, 442 U.S. 127, 138 (1979). Because I believe the approach
employed by the D.C. and Eleventh Circuits in United States v.
Spicer, 57 F.3d 1152 (D.C. Cir. 1995), and Greenberg v. Schools, 711
F.2d 152 (11th Cir. 1983) (per curiam), ultimately accomplishes the
congressionally enacted policy objective embodied in the nondischar-
geability provisions, I respectfully dissent.

                                   I.

   There are two competing views to the main issue in this case and
both have much to commend them. The bankruptcy court adopted the
approach of the Ninth and Seventh Circuits reflected in In re West,
22 F.3d 775 (7th Cir. 1994), and Key Bar Invs., Inc. v. Fischer (In re
Fischer), 116 F.3d 388 (9th Cir. 1997) (per curiam). The analysis
employed in those cases is best illustrated by the test articulated by
the Ninth Circuit in Fischer: "[I]f it is shown that the [promissory]
note, by express agreement is given and received, as a discharge of
the original obligation or tort action, then the execution of the note

                                  10
extinguishes the tort action and it would be error for the court to look
behind the note." Fischer, 116 F.3d at 390 (internal quotation marks
omitted); accord West, 22 F.3d at 778 ("[I]f it is shown that the
[promissory] note [that was executed pursuant to the settlement] 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 nondischargea-
bility of the original debt does not affect the dischargeability of the
obligation under the note."). The basic rationale of these cases is that,
having accepted a settlement and released the underlying tort action,
the plaintiff voluntarily accepted a contract debt, which is discharge-
able under the bankruptcy laws, in lieu of pursuing a potentially non-
dischargeable tort debt.

   The competing approach adopted by the D.C. and Eleventh Cir-
cuits in Spicer and Greenberg can be quickly illustrated by examining
Spicer. In that case, John Spicer had been convicted of one count of
interstate transportation of money obtained by fraud from the United
States Department of Housing and Urban Development and had there-
after settled the government's multiple civil claims against him. In
accord with the civil settlement agreement, Spicer executed two
promissory notes and the government expressly released its civil
claims against him. Spicer later filed for bankruptcy protection and,
relying on West, sought to have the promissory notes discharged.
Addressing West directly, the D.C. Circuit declared that it could not
"agree with a rule under which, through the alchemy of a settlement
agreement, a fraudulent debtor may transform himself into a non-
fraudulent one, and thereby immunize himself from the strictures of
§ 523(a)(2)(A)." Spicer, 57 F.3d at 1155. The court found the govern-
ment's release of the underlying tort action immaterial, declaring that
"a fraudulent debtor may not escape nondischargeability, imposed as
a matter of public policy by Congress . . ., merely by altering the form
of his debt through a settlement agreement." Id. at 1156. Accordingly,
the court affirmed the bankruptcy court's holding that the promissory
notes executed by Spicer were not dischargeable. Id. at 1157. Thus,
simply stated, the Spicer approach is a policy-based approach
intended to effectuate the considered judgment of Congress.

                                   II.

   The Archers urge us to adopt the Spicer approach and allow them
the opportunity to prove in bankruptcy court that Arlene Warner com-

                                   11
mitted fraud against them and that the promissory note executed as
part of the settlement of the state-court tort action is therefore nondis-
chargeable under § 523(a)(2)(A). In my judgment, Supreme Court
precedent strongly suggests that the Spicer approach is the correct
one.

    In 1979, for example, the Supreme Court decided Brown. In that
case, G. Garvin Brown had been guarantor of a loan that financed
Mark Paul Felsen's business. When the creditor instituted a collection
action against Brown and Felsen, Brown filed a counterclaim against
Felsen alleging that Felsen had induced Brown to sign the guarantee
"by misrepresentations and non-disclosures of material facts." Brown,
442 U.S. at 128 (internal quotation marks omitted). The suit settled
and was reduced to a consent judgment indicating that Brown should
have judgment against Felsen but not indicating the cause of action
upon which the liability was based or whether Felsen had in fact
engaged in fraud. Felsen subsequently filed for bankruptcy, and
Brown sought to challenge in bankruptcy court the dischargeability of
Felsen's debt to him. Felsen argued that because the state-court suit
had been reduced to a consent judgment and the documents evidenc-
ing that judgment did not result in a finding that he had in fact com-
mitted fraud, res judicata barred further inquiry into the nature of the
debts. Gleaning from the legislative history of the Bankruptcy Act
"[s]ome indication that Congress intended the fullest possible inquiry"
into the true nature of debts for purposes of determining dischargea-
bility, the Supreme Court unanimously rejected that argument. Id. at
138. After "careful inquiry," the Court concluded that "the policies of
the Bankruptcy Act" would best be served by allowing Brown to
"submit[ ] additional evidence to prove his case." Id. at 132.

    Twelve years after Brown, the Supreme Court was asked in Gro-
gan to resolve a circuit split on the question of whether, in bankruptcy
court, a creditor was required to prove the nondischargeability of his
claim by a preponderance of the evidence or by clear and convincing
evidence. The Court unanimously found that the preponderance stan-
dard best reflected the "congressional decision to exclude from the
general policy of discharge certain categories of debts—such as . . .
liabilities for fraud," and the Court therefore held that a creditor need
only prove that his claim was nondischargeable under the preponder-
ance standard. Grogan, 498 U.S. at 287. "We think it unlikely," the

                                    12
Court declared, "that Congress, in fashioning the standard of proof
that governs the applicability of these provisions, would have favored
the interest in giving perpetrators of fraud a fresh start over the inter-
est in protecting victims of fraud." Id.

    And finally, in 1998, in Cohen, a unanimous Supreme Court yet
again stressed the importance of reinforcing the congressional policy
objective underlying the nondischargeability provisions. In Cohen,
the Court decided that a treble damages award that was imposed as
punishment for a state-court defendant's fraudulent conduct was non-
dischargeable under the fraud exception to dischargeability, rejecting
the debtor's argument that only an amount equal to the actual value
obtained by fraud should be nondischargeable. Cohen, 523 U.S. at
219. In support of its decision, the Court cited "the historical pedigree
of the fraud exception, and the general policy underlying the excep-
tions to discharge." Id. at 223.

   Thus, the message delivered by a unanimous Supreme Court on
three separate occasions has been clear. In deciding cases dealing
with the fraud exceptions to dischargeability, courts should effectuate
congressional policy objectives by conducting the fullest possible
inquiry into the nature of the debt and limiting relief to the honest but
unfortunate debtor. The Spicer approach is squarely grounded in these
policy interests.

    Under any other approach, a defendant can completely immunize
himself from § 523 by simply settling any fraud claims against him
with a promise to pay, having the plaintiff release the underlying tort
action as part of the settlement, and then filing for bankruptcy. The
acceptance of the defendant's promise to make payment should not
prevent the plaintiff, upon a default by the defendant and subsequent
filing of bankruptcy, from showing the bankruptcy court that the debt
had its genesis in fraud. If, as the Supreme Court has declared, "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," Brown, 442 U.S. at 138, then I see no reason why the
mere fact that a conscientious creditor has previously reduced his
claim to settlement should bar such an inquiry. See Ed Schory & Sons,
Inc. v. Francis (In re Francis), 226 B.R. 385, 391 (B.A.P. 6th Cir.
1998) (choosing to "follow[ ] Spicer because Brown v. Felsen com-

                                    13
pels the Spicer result"); see also Giaimo v. Detrano (In re Detrano),
266 B.R. 282, 288 (E.D.N.Y. 2001) (finding Brown "[i]nstructive").
Moreover, because the nondischargeability provisions of the Bank-
ruptcy Code evidence a considered congressional policy to favor "the
interest in protecting victims of fraud" over "the interest in giving per-
petrators of fraud a fresh start," Grogan, 498 U.S. at 287, and because
the Supreme Court has so strongly and unwaveringly signalled
through three uninamimous opinions over the course of twenty years
that that policy objective is to be jealously protected, I would adopt
the Spicer approach.* Cf. Foley & Lardner v. Biondo (In re Biondo),
180 F.3d 126, 130 (4th Cir. 1999) (noting the importance of "ensuring
that perpetrators of fraud are not allowed to hide behind the skirts of
the Bankruptcy Code").

                                    III.

   For these reasons, I would elevate substance over form and allow
the Archers to offer such proof as they might have to show that
Arlene Warner's debt resulted from a fraud perpetrated upon them.
Therefore, I respectfully dissent.
_________________________________________________________
___
   *I do not view the settlement documents as forbidding the Archers
from proving in bankruptcy court the nondischargeability of the debt
because, among other things, the releases specifically excepted the
Warners' obligations under the promissory note and deeds of trust, (J.A.
45, 48), which I would interpret as permitting a full and fair hearing on
the dischargeability of the debt in bankruptcy court.

                                    14