A recent Law 360 story by Vince Sullivan, “Ex-Insys CEO Says Legal Fee Clawback Unsupported in Ch. 11,” reports that the former CEO of drugmaker Insys Therapeutics told a Delaware bankruptcy judge that he shouldn't have to return $6 million in legal fees the company advanced to him for criminal defense costs because he was partially successful in his defense, despite a conviction that came with jail time.  During oral arguments over a motion for summary judgment in Wilmington, an attorney for John Kapoor said the attempt to claw back the legal fees by the liquidating trustee of Insys focuses on money spent on the successful defense of certain counts in a federal indictment.

"We've clearly shown that much of the work they're seeking to recoup on has nothing to do with his count of conviction," Brian T. Kelly of Nixon Peabody LLP told the court.  "Just because he got a significant sentence on the ultimate indictment doesn't mean he wasn't successful early on in defeating portions of the first [indictment]."

Kapoor was convicted in May 2019 on racketeering conspiracy and other counts, after a 51-day federal trial on his part in what prosecutors said was a massive, illegal campaign to boost 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.  Liquidating trustee William H. Henrich is seeking to claw back about $6 million in legal fees advanced to Kapoor under corporate indemnification agreements, saying his conviction dissolved the indemnification obligation.

But Kelly argued that since the Insys advancements covered a period between July 2016 and September 2018, Kapoor's success in defending against certain counts in an original indictment during that time should defeat the clawback effort.  After that window, Kapoor paid for his own defense, Kelly argued.  "Not all the work that was being done had anything to do with what he was ultimately convicted of," Kelly said.  Some of the advanced funds were also used in defense of civil actions against Kapoor, Kelly argued, and should not be subject to clawback.

Trustee attorney Morgan M. Menchaca of Reid Collins & Tsai LLP said the two firms retained by Kapoor for his criminal defense — Paul Weiss Rifkind Wharton & Garrison LLP and Ropes & Gray LLP — only made appearances in the criminal matters involving Kapoor and did no identifiable work on the civil matters, for which Kapoor retained separate counsel.  She also said the argument that the trimming of the indictment represented some kind of successful defense for Kapoor doesn't comport with the strategies used by federal authorities in criminal proceedings.

"Kapoor's argument ignores the practical realities of what federal prosecutors do when they indict a criminal defendant," Menchaca argued. "They threw everything at the defendant in the first indictment."  The ultimate superseding indictment that was presented before trial included much more specific and narrowly tailored charges against Kapoor, she said, and led to his conviction on the racketeering count.

U.S. Bankruptcy Judge John T. Dorsey said he would take the matter of partial summary judgment under advisement, and that he would review the counsel engagement agreements between Kapoor and his attorneys before issuing a decision.