Archer v. Warner: Circuit Split Resolution orContractual Quagmire?

I. IntroductionThe Supreme Court's recent holding in Archer v. Warner (In re Warner)1 is an anticontractual decision that threatens autonomy of parties to create valid settlement agreements that have lasting effect within bankruptcy courts. The linchpin of contract law is freedom of parties to bargain for beneficial provisions. Thus, public policy in favor of encouraging settlements not only recognizes importance of encouraging contractual settlements but also enforcement of valid agreements:2 Because contract law presumes that parties will not consensually enter into a contract unless each party perceives a net benefit, courts enforce contracts absent good reason not to do so.3Instead of upholding basic tenets of contract law, Archer stated that bankruptcy courts should look privately contracted settlements to determine if underlying and completely-released original debt was obtained by fraud.4 The factual scenario in Archer, however, did not involve any of circumstances that typically cause courts to override a contract, such as unconscionability or duress. Yet Supreme Court has crafted a decision that ultimately discards release provisions to which both parties have agreed. Thus, question presented is whether Archer offers a compelling reason for allowing a bankruptcy court to derail fundamental core of contract law, or if Archer only creates a contractual quagmire for creditors and debtors who desire to settle an alleged fraud claim.Consider a situation in which A (a buyer) files suit against B (a seller) for fraudulent activity relating to a sale. Prior to litigation of state court claim, A and B, both represented by counsel, agree to a settlement in which B agrees to pay a fixed sum in exchange for buyer's complete release of all claims relating to state court action. B makes a significant cash payment, and rest of settlement is secured by a promissory note. Neither an admission of liability nor a mention of fraud is included in agreement. A dismisses state fraud claim with prejudice. A's only source of remedy is enforcement of note because settlement agreement expressly released all other claims relating to state litigation. B defaults on settlement payments. A attempts to enforce settlement by using released fraud claims. Although B objects to resurrection of claims, court examines circumstances behind settlement agreement to determine if original debt was fraudulent.Under state contract law, examining released original debt and underlying circumstances would be an outrage to basic concept of novation,5 which is [t]he act of substituting for an old obligation a new one that either replaces an existing obligation with a new obligation or replaces original party with a new party.6 A novation immediately extinguishes prior obligation, and the obligee, therefore, has no right to enforce original duty, even on breach by obligor of substituted contract.7 If obligor breaches novation, then obligee is limited to its remedies under substituted contract that has replaced that duty.8In hypothetical, settlement agreement is a novation because it completely substituted earlier alleged tort debt with a new contractual obligation. Upon breach of settlement, A no longer has option to seek enforcement on alleged tort debt. The prior obligation is nonexistent, and a proper state court decision would bar further litigation of released fraud claim. Under terms of novation, A's remedy is limited to enforcement of promissory note as a contractual obligation.Now, consider this revision to hypothetical. B defaults on payment of settlement and files for bankruptcy. B seeks to discharge this debt in bankruptcy. The bankruptcy discharge relieves debtor by operat[ing] as an injunction against all efforts to recover debts owed prior to filing of bankruptcy case as a personal liability of debtor. …