Of The Sackler Family And Fraudulent Transfers

 forbes.com  09/14/2019 02:47:50 

FILE - In this Friday, April 12, 2019, file photo, Cheryl Juaire of Marlborough, Mass., center, leads protesters near the Arthur M. Sackler Museum at Harvard University in Cambridge, Mass. Juaire, whose son was addicted to opioids and died of a heroin overdose in 2011, led the demonstration by parents whove lost children in the addiction epidemic.  (AP Photo/Josh Reynolds)

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According to the various news reports, the New York Attorney General has claimed that various members of the Sackler family, of Perdue Pharma infamy, have lately been involved in transfers in the neighborhood of $1 billion from the company to Swiss accounts. Which means that I'm getting e-mails from folks inquiring as to whether these transfers might be fraudulent transfers, and what the prospects are of the opioid claimants and the States getting at that money.

As to the fraudulent transfer allegations, the Sacklers certainly have claims against them in the fraudulent transfer sense, because there have been events giving rise to liability, i.e., their indiscriminate selling of opioids to the masses. That these claims have not yet been quantified or liquidated is of no consequence.

If the Sacklers transferred money from Perdue Pharma to accounts in Switzerland, that would certainly qualify as transfers in the fraudulent transfer sense, which is that title to the money shifted from a debtor, i.e., either Perdue Pharma or the Sacklers personally under one theory or another, and presumably went into accounts owned by one or more foreign trusts or entities, who would be the transferees.

The next question would be whether the transfers satisfied on of the tests for a fraudulent transfer, the most common being either the Intent Test (sometimes mis-aptly called an "actual fraudulent transfer") or the Insolvency Test (known by the oxymoron "constructive fraudulent transfer").

The Intent Test has but a single element, which is that the debtor intended to hinder, delay or defraud creditors by making the transfers. Since the courts at least as early as Twyne's Case in 1601 realized that debtors are highly incentivized to lie about their intent in making such transfers, the proof of the debtor's intent may be by circumstantial evidence including the consideration of such factors that are historically known as the Badges of Fraud. Here, there would be no shortage of circumstantial evidence to indicate that the transfers to Switzerland were made with the intent of cheating Perdue Pharma's and the Sacker family's creditors, not the least being the highly suspicious timing of the transfers and that assets are being removed from the reach of creditors.

The Insolvency Test has two elements, neither of which has anything to do with anybody's intent. The first element is that the debtor was insolvent, i.e., its liabilities exceeded its assets. Because of the enormous size of the claims against Perdue Pharma, and potentially against the Sackler family as well, even with an estimated $13 billion in wealth, they might be insolvent. At any rate, insolvency is solved by the so-called Balance Sheet Test, i.e., you add up the debtor's assets and liabilities and you come up with either a positive or negative net number.

The second element is that the debtor received reasonably equivalent value in exchange for whatever the debtor gave up, and that value has to be roughly equivalent from the viewpoint of creditors; it has have what is known as utility to creditors meaning that creditors can get about as much by levying on what the debtor received as they would have what the debtor gave up. Here, it is difficult to see what, if anything, Perdue Pharma and the Sackler family received in exchange for the transfers to Switzerland.

So, it is quite possible that creditors will be able to present evidence which satisfies the Insolvency Test as well, and so creditors have two viable avenues to attack these overseas transfers as being violative of the fraudulent transfer laws. But how does that help creditors?

Moving assets out of the United States is not the panacea that one might think, unless the debtor is also willing to flee the country. The reason is that while the assets may be out of the country, the debtor is still in the United States and the courts here can enter what is known as a Repatriation Order which requires the assets to be brought back to the United States so that creditors can satisfy their judgments against them. This is true even where debtors attempt to hide money in offshore trusts, offshore corporations and various types of foreign structures, such as the Liechtenstein Foundation, as the United States courts tend to simply ignore the legal structure and require the debtors to bring the money back whether they have the power to do so or not or else sit in jail for contempt until the assets reappear here. In most of these cases, the debtors have claimed not to have the power to repatriate assets from abroad, but a night in county lockup convinced them otherwise.

Debtors can always just follow their money abroad and flee the United States, and in most civil cases there is not a lot of downside for doing that and of course they can no longer effectively be held in contempt by United States courts. But there is a special problem in these very high profile cases, which is that if a debtor absconds then there will be pressure on prosecutors to bring criminal charges such that the debtors will be subject to extradition back to the United States and other remedies under so-called Mutual Legal Assistant Treaties (also known as MLATs).

To some degree, one cannot blame the Sackler from trying to protect some assets from creditors, since their family name has become about as good as Mengele or Bin Laden and they are simply not going to fare well before juries. Which is to say that a total wipeout for the Sackler family is within the realm of possibility. But the best thing they can do is to not try to hide assets or remove them abroad, but simply come clean on their holdings and then try to cut a deal where they are relieved of all their liabilities and are allowed to keep some small percentage of their vast fortune.

Oh, the horror if they ended up with only a mere $100 million to spread between themselves.

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