Purdue and the Sacklers and the Limits of Fraudulent Transfer Law


One of the major issues in the Purdue Pharma bankruptcy is how much the Sackler family, which (indirectly) controls Purdue will contribute in order to get releases from opioid liability. (Relatedly, are such non-debtor releases allowed outside of the asbestos context, where they are specifically authorized by statute? Second Circuit law says "sometimes.") 

The question I have is why the Sacklers would contribute anything? Do the Sacklers themselves really have any opioid liability?  As far as I'm aware, the only suits filed so far against the Sacklers or their non-Purdue entities are for fraudulent transfers or unjust enrichment.  

The former claim allege that the Sacklers received assets that were transferred from Purdue with actual intent to hinder, delay, or defraud creditors. It is not a "fraud" claim involving a misrepresentation, but a claim based on intentional evasion of creditors. It's sometimes also called fraudulent conveyance or voidable transfer.  (There are also constructive fraudulent transfer allegations, but that's just a bunch of valuation questions.) The later claim is really a Hail Mary sort of claim, but the fraudulent transfer suits have some legs, and given that they are alleging actual fraudulent transfers, the crime/fraud exception to attorney-client privilege shouldn't apply under the Supreme Court's recent Husky Electronics ruling. (Also some states have criminal fraudulent transfer statutes, although none of have used them vis-à-vis the Sacklers...the statutes are pretty weak.  Maybe there's an argument for a federal bankruptcy criminal under 18 USC 152(7) as well, but a lot more facts would need to be known.) Without attorney-client privilege, the actual fraudulent transfer case gets a lot easier. But what it does mean practically?  

It means that the Sacklers will probably keep some, but not all of the funds they received from Purdue during the statute of limitations period (and everything they got outside of the limitations period). The situation underscores two problems with  fraudulent transfer statutes and the need for legislative fixes.

First, fraudulent transfer laws are merely rescissory, getting the parties back to status quo before the transfers. As a result, they fail to disincentize fraudulent transfers.  For example, if the Sacklers transferred out, say, $1 billion from Purdue during the statute of limitations period, they would only have to give back $1 billion. But that assumes a successful lawsuit.  Assume now that the suit settles, say for $700 million.  That would mean that the Sacklers would keep $400 million.  The worst case for a transferee is status quo ex ante minus legal costs. But because a settlement offer will likely be accepted, a transferee with good counsel can usually keep at least part of the transferred value. That's outcome is wrong. A party that knowingly receives a fraudulent transfer should have additional liability to disincentivized being a fraudulent receiver. This is something that both states and the federal government could and should address.   

Second, statutes of limitation on fraudulent transfer statutes are too short generally.  New York has a six-year statute of limitations, which all of the other states will benefit from in Purdue because any avoided transfers go back to Purdue for the benefit of all creditors, not to New York State.  But New York is the outlier. Most jurisdictions have a two-year statute of limitations. It's understandable that states might not want too long of a statute of limitations in order to create certainty about past transactions, but there really ought to be an exception for transfers where the receiver knowingly took an actual fraudulent transfer. That is have a shorter statute of limitations for innocent transferees and a longer one for complicit ones. 

Those are my suggestions for any legislators who might be lurking. It's too late to do anything here for Purdue, but going forward fraudulent transfer law could use some sprucing up.  (Also, there really ought to be a federal criminal fraudulent transfer statute.)