In 1992, the Archer family purchased the assets of a company owned by the Warner family. The Archers later sued the Warners for fraud and misconduct regarding the sale; a settlement agreement was reached in which the Warners promised to pay the Archers $100,000. Not long afterward, the Warners failed to make the promised payment and then filed for bankruptcy.

Ordinarily, bankruptcy proceedings restructure debt and declare many debts "discharged" (that is, most or all of the debt is wiped out). However, for public policy reasons there are a number of debts that are "non dischargeable" under law. This is because public policy favors that some debts be honored (e.g., federal student loan repayments), and because the law tries to prevent people and companies from using bankruptcy proceedings to provide a shield for any prior fraudulent conduct.

The Archers contended that the debt the Warners owed them was non-dischargeable, citing several well-established precedents protecting claims that stem from fraud. These precedents include explicit language from the U.S. Supreme Court that the bankruptcy law "has long prohibited debtors from discharging liability incurred on account of their fraud, embodying a basic policy . . . of affording relief only to an 'honest but unfortunate debtor.'"

The Bankruptcy Court disagreed, ruling that the pre-petition settlement changed the fraud claim into a contract-based debt, which is dischargeable. The court refused to differentiate pre-bankruptcy activities that were fraudulent from those that are honest. A divided U.S. Court of Appeals for the 4th Circuit affirmed this decision -- setting it in direct contrast to other appellate courts.

The case came to the U.S. Supreme Court in an effort to establish a single rule among all courts for handling the disposition of these types of debts. The Court ruled for the Archers, holding that a debt for money obtained by fraud does not becomes dischargeable merely because the debtor enters into a settlement agreement that involves return of the money.

That is precisely the ruling AARP had sought when it filed a "friend of the court" brief before the U.S. Supreme Court in Archer v. Warner. The brief noted that corporate bankruptcy filings have become commonplace, especially with predatory mortgage lenders. Allowing the 4th Circuit's opinion to stand would have had a devastating impact upon older people who have been victimized by fraud schemes. It would provide a shield for unscrupulous companies, allowing them to first victimize people and then when caught, lull victims of fraud into entering agreements upon which they will never be able to collect.