« A Drafting Error in Small Business Reorganization Act? | Main | FDIC and OCC Race to Court to Defend 120.86% Interest Rate Small Business Loan »

Purdue and the Sacklers and the Limits of Fraudulent Transfer Law

posted by Adam Levitin

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.)


Bring back the rigor of 13 Eliz.!

But seriously, do you have an account of how or why the remedy dwindled to mere rescission? Actual FT is more like theft than it is like breach of contract. It's startling to find only a compensatory remedy.

I'd love to know the annual legal fees spent tracking down actual-fraudulently transferred assets. It's a big number.

Adam -- what about old-fashioned veil piercing? The Sacklers have had their eyes on this bankruptcy at least since Purdue's last opioid settlement 13(?) years ago. What if the facts are that they stripped-out and off-shored billions over more than a decade while knowingly operating Purdue as a public nuisance/fraud/criminal enterprise? Pursuing personal liability on a veil-piercing theory would not have time or dollar limitations. Discovery would be boundless. kml

I don’t know of FT having originally been criminal, although Twyne’s case is in the Star Chamber. (Maybe Emily Kadens is lurking and can enlighten us on this).

As far as $ spent on chasing FTs, yeah it’s got to be a lot, but the costs aren’t likely to be proportionate to recoveries. It costs just as much to litigate a $1M transfer as a $1B transfer.

Veil piercing might work. It all depends on the facts. If the Sacklers were well counseled, though, they would have covered their rear on veil piercing too.

13 Eliz. penalized the parties to a FT to the tune of one year's income on the assets transferred (half to the crown; half to the aggrieved parties).

Could you elaborate on the statute of limitations as it applies here? If there is a 2-year statute, I should think the plaintiffs can't get much from Purdue Pharma either, much less from the Sacklers. Or is it that they are suing on the basis of an old harm (say, in 2000) that has continuing damages(still in 2019 and beyond)?


I see it says malice, fraud covyne (?) collusion, or guile in the conveyance. Does this mean the statute requires
(a) an attempt at concealment?
(b) intent to avoid liability?

A good statute would require one or both of those for criminal liability, in my opinion, but neither should be required for simple clawing back of the conveyed assets.

Hi Eric. I'm exceeding my quota of comments on another person's post, but ... FYI: the statute was almost immediately (by 1601) interpreted to allow proof of "intent" through objective facts about a transaction, such as the debtor retaining possession of an asset after transferring title, or selling for below value, so that in practice this law has always prohibited two kinds of conduct--one in which parties hatch a plan to frustrate creditors and another in which they enter a transaction that happens to frustrate creditors even if the parties had innocent reasons. I take it Adam is suggesting criminal liability only for the first.

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.