A Delaware bankruptcy judge held that a D&O insurer can clawback more than $6 million in advancements of costs to the director’s criminal defence lawyers even if some charges against the director were dropped for practical reasons, not because of the director’s innocence.

The case stems from the notorious conduct of the CEO of Insys Therapeutics who was convicted on a racketeering conspiracy and other counts on his part in what prosecutors said was a massive illegal campaign to boost the sales of Insys opioid products through bribery, kickbacks and insurance fraud. His sentence included a 66 month jail term and nearly $60 million of restitution. The director argued that he was entitled to at least partial indemnification because the ultimate charges against him were fewer than in the original indictment, showing that he was partially successful. Under Delaware law the statute prohibits a corporation from indemnifying a corporate official who was not “successful” in the underlying proceedings and has acted, essentially, in bad faith. The court held there was no partial success. The director was convicted on the entirety of the charges in the indictment on which he was tried. There were no counts on which he was found not guilty or entered a plea. The court refused to go behind the result to the background of the charges. The only question the courts ask is what the result was, not why it was. The director did not escape from an adverse judgment but was sentenced to prison and fined. That is not a success. How that result came to be is irrelevant.

Insys Liquidation Trust v John N Kapoor, case no 1:21-ap-50557 in the US Bankruptcy Court for the District of Delaware