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Few things are more frustrating to creditors than debtors transferring assets to affiliated entities in order to avoid collection efforts. Such conduct was the subject of a November 14, 2006 decision by United States Magistrate Judge Christo

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

pher A. Nuechterlein of Indiana’s Northern District. See, Lock Realty Corp. v. U. S. Health LP, 2006 U.S. Dist. LEXIS 84420 (N.D. Ind. 2006).

The facts. In a prior case, Plaintiff Lock Realty Corp. obtained a judgment in excess of $485,000

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

against defendant U.S. Health LP for breach of a lease. Lock later added defendant Americare III LLC to the judgment because U.S. Health unlawfully assigned the lease to Americare, which was part of a single business enterprise with U.S. Hea

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

lth. In fact, U.S. Health utilized roughly eighty-three entities to shelter itself from liability. Lock then filed the current lawsuit against U.S. Health for additional damages (over $10 million) associated with lease breaches that occurre

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

after the entry of the prior judgment. About six weeks after Lock filed the second suit, U.S. Health sold four nursing home units to a third-party for approximately $3 million. U.S. Heath transferred the sale proceeds to Heritage Medical G

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

roup, Inc., the managing partner of U.S. Health and one of the eighty-three entities that made up the U.S. Health enterprise.

Attachment. In an effort to prevent U.S. Health from concealing assets that may be available to satisfy a judgment

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

in the second suit, as well as the judgment from the first case, Lock filed a motion to attach the proceeds of the $3 million sale. Ind. Code § 34-25-2-1(b)(5) [http://www.ai.org/legislative/ic/code/title34/ar25/ch2.html#IC34-25-2-1] is the

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

statute upon which Lock’s motion was based:

(b) The plaintiff may attach property when the action is for the

recovery of money and the defendant:

(5) has sold, conveyed, or otherwise disposed of the

defendant’s property subject to execu

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

ion, or permitted

the property to be sold with the fraudulent intent to cheat,

hinder, or delay the defendant’s creditors . . ..

Attachment generally means “the act or process of taking . . . property, by virtue of a . . . judicial order,

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

and bringing the same into the custody of the court for the purpose of securing satisfaction of the judgment ultimately to be entered in the action.” Blacks Law Dictionary.

Fraudulent intent. The issue was whether U.S. Health acted with fr

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

udulent intent to cheat, hinder or delay. In Indiana, there are eight common law “badges of fraud” from which fraudulent intent in a given transaction may be inferred:

1. Transfer of property by the debtor during the pendency of a suit.

2.

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

Transfer of property that greatly reduces the debtor’s estate.

3. A series of contemporaneous transactions that strip a debtor of all property available for execution.

4. Secret or hurried transactions not in the normal course of business.

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

5. Any transaction not conducted in the normal course of business.

6. A transaction conducted in a manner differing from customary methods.

7. Little or no consideration for the transfer.

8. A transfer of property between family members.

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

No single factor constitutes fraudulent intent. Rather, the facts must be viewed together to determine how many badges of fraud exist and if together they amount to fraudulent intent. (Keep in mind that attachment cannot occur in every cas

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

. For instance, Microsoft may have multiple transactions ongoing during litigation, but those transactions aren’t necessarily fraudulent, in part because few if any transfers would render Microsoft judgment proof.)

Magistrate Nuechterlien g

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

ranted the motion for attachment because Lock established that several badges of fraud existed, including:

• U.S. Health transferred property while the second suit was pending and while it had failed to satisfy the judgment from the first su

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

t.

• The U.S. Health enterprise had been reduced by $3,000,000 after it sold four of its facilities.

• U.S. Health and Americare essentially were one entity, so property Americare transferred was subject to execution by Lock.

• The proximi

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

ty of the final sale appeared “suspect and uncustomary.”

• U.S. Health had retained benefits of the transferred property because the proceeds were given to Heritage, simply another entity in the U.S. Health enterprise. “This is no different

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

than taking money out of one’s left pocket and putting in one’s right pocket.”

The lessons of Lock. The Lock ruling reminds us that attachment can be a valuable tool in cases where a defendant is utilizing affiliate entities to hide money.

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

If you suspect that a borrower, during litigation, is burying assets in associated companies merely to avoid your collection efforts, look for the eight badges of fraud. You might be able to freeze the assets pending the outcome of the suit

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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