NEW YORK, NY -- In a prior release, available on our What's New page, dated April 11, 2002, Michael Moskowitz, a New York bankruptcy practitioner counseled that even bankruptcy experts and courts can and often do disagree about how best to advise a potential bankruptcy debtor facing substantial, arguably non-dischargeable, fraud or intentional, tort claims. Until now it has largely depended on where a debtor lives.
Confirming our prior advice that suggested this contentious issue was likely to reach the United States Supreme Court during its 2003 term, the Supreme Court indeed granted certiorari in Archer v. Warner (Docket No. 01-1418), 2002 WL 496658. The decision is expected later this Spring, and is likely to affect debtors all over the country facing a tough decision whether to settle certain pre-bankruptcy claims and then include such unpaid obligations in a subsequent bankruptcy petition.
In the case below, In re Warner, 283 F.3d 230 (4th Cir. 2002), the United States Court of Appeals for Fourth Circuit in Richmond, Virginia, held that a prepetition settlement of alleged fraud or intentional tort claims against a debtor creates a new contractual agreement, or novation, substituting dischargeable contract claims for arguably non-dischargeable tort claims when the debtor later files for bankruptcy relief without having funded the entire settlement amount. Noting a split among the circuits concerning the issue, the Fourth Circuit followed decisions of the Seventh and Ninth Circuits. A dissenting opinion would have followed the contrary approach of the District of the Columbia and Eleventh Circuits. In declining to follow the line of cases holding that a settlement agreement does not extinguish a non-dischargeability claim under 11 U.S.C. §523(a), the Fourth Circuit reasoned Congress did not intend section 523(a) be construed to discourage settlement claims.
According to Moskowitz, any party facing bankruptcy and also needing advice concerning a potential settlement of fraud or intentional tort litigation should first confer with competent bankruptcy counsel. Until this issue has been finally settled by the Supreme Court, litigants are cautioned to be aware of the uncertainty before signing compromises or settlement agreements, and to suggest to their counsel the implications of bankruptcy be factored in. Litigants and their attorneys should pay close attention to this issue and seek specialized bankruptcy counsel to help plan their options and preserve their rights in settling potentially non-dischargeable claims in this unsettled area.
Michael L. Moskowitz, is a member of the firm of Weltman & Moskowitz, LLP, having offices for the practice of law in New York and New Jersey, where it handles cases involving bankruptcy and creditors' rights, business litigation, organization, sale and transfer, intellectual property protection, real estate, and other transactional matters. He can be reached at 212.684.7800 or 201.794.7500 or by e-mail.
