Supreme Court rules debt on contract settling fraud claim non-dischargeable

The Supreme Court held today in this split decision that the debts arising out of the breach of a settlement agreement covering claims of fraud were non-dischargeable in bankruptcy. The vote was 7-2, with the rare alignment of Justice Stevens joining in Justice Thomas's dissenting opinion.

The case calls to mind some recent research I did in a case on the Tennessee side, and that is - what do you get when a settlement agreement is breached? Apparently, the intention of the parties controls how the settlement is supposed to work; i.e., whether the parties intended for the new promise to replace the old one, or whether their intent was that the new promise must be performed for the old one to be discharged. See Rhea v. Marko Construction Company, 652 S.W.2d 332, 334 (Tenn. 1983); Douglas v. General Motors Acceptance Corp., 326 S.W.2d 846, 850 (Tenn. 1959); Poster v. Andrews, 167 S.W.2d 1001, 1003 (Tenn. App. 1942), rev’d on other grounds, 189 S.W.2d 580 (Tenn. 1943).

Some of these accord and satisfaction principles were involved in today's decision. Justice Thomas in his dissent pointed out that "[i]n 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." Moreover, Justice Thomas noted that "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." Maybe I'm wrong, but Justice Thomas (and the Fourth Circuit) seem to have the better position to me, that under normal accord and satisfaction principles, in the particular case before the court, the facts about the intentions of the parties show that the fraud claim was wiped out leaving on the contract claim, which would not be dischargeable. (I can't pick winners in the NCAA tournament, either.)