Leonard and Arlene Warner sold the Warner Manufacturing
Company to Elliott and Carol Archer for $610,000. A few
months later, the Archers sued the Warners in a State court
for fraud connected with the sale. The parties settled the law-
suit for $300,000. The Warners paid the Archers $200,000
and executed a promissory note for the remaining $100,000.
After the Warners failed to make the first payment on the
$100,000 promissory note, the Archers sued for the payment
in State court. The Warners then filed for bankruptcy under
Chapter 7 of the Bankruptcy Code. The Archers claimed that
the $100,000 debt was nondischargeable because it was for
“money obtained by fraud.” Arlene Warner claimed that the
$100,000 debt was dischargeable in bankruptcy because it
was a new debt for money promised in a settlement contract
and thus was not a debt for money obtained by fraud.
a. What are the arguments that the debt is dischargeable in
bankruptcy?
b. What are the arguments that the debt is not dischargeable
in bankruptcy?
c. Explain whether the debt is dischargeable in bankruptcy.
