Bankruptcy Court Awards $2.5 Million in Mandatory Indemnification to Director Against Chapter 7 Estate

Sections 145(a) and (b) are permissive. They are commonly implemented through corporate bylaws or indemnification agreements. But section 145(c) is mandatory—if the director prevails, indemnification is required.

In chapter 7 bankruptcy cases, the trustee succeeds to the debtor’s rights and may pursue claims the corporation itself could have brought prepetition, including derivative-style fiduciary duty claims against directors and officers. Because the trustee stands in the corporation’s shoes, those claims are treated as actions “by or in the right of the corporation,” placing sections 145(b) and (c) at issue.

In what it described as an issue of first impression, the Western District of Texas Bankruptcy Court held that Rule 54 provides the proper post-judgment vehicle for seeking indemnification under section 145, and it awarded a prevailing director over $2.5 million in attorneys’ fees and expenses.

Background
Ebersol Sports Media Group, Inc. (ESMG) and several affiliates filed chapter 7 in the Western District of Texas in April 2019, under the lead case name In re Legendary Field Exhibitions, LLC. The companies collectively operated the Alliance of American Football, a short-lived professional football league. On March 28, 2022, the chapter 7 trustee sued former ESMG board members Thomas Dundon and John Zutter for breach of fiduciary duty and related claims.

After a 21-day bench trial, the court found that Dundon had breached his fiduciary duties, but Zutter had not. Both defendants then moved for attorneys’ fees under Federal Rule of Civil Procedure 54, made applicable in adversary proceedings by Bankruptcy Rule 7054. On February 27, 2026, the court awarded Zutter $2,504,286.68 in attorneys’ fees and expenses and denied Dundon any recovery.

The Bankruptcy Court’s Analysis
The trustee argued that indemnification had to be pled at trial or pursued in a separate action. The court disagreed. Rule 54(d)(2) provides that “[a] claim for attorney’s fees must be made by motion unless the substantive law requires those fees to be proved at trial as an element of damages.” The court held that Delaware law does not treat indemnification under section 145 as trial damages, so a post-judgment motion under Rule 54 was proper.

As to the merits, the court analyzed both sections 145(b) and 145(c). Section 145(b) applied because the trustee’s claims were brought on behalf of the estate, and ESMG had enacted indemnification provisions in its bylaws. Section 145(c) applied because, when a director or officer is “successful on the merits or otherwise,” indemnification is mandatory.

Zutter prevailed on all fiduciary duty claims asserted against him. Because he was “successful on the merits,” the court held that section 145(c) required indemnification. Having found mandatory indemnification under section 145(c), the court did not reach whether Zutter was also entitled to indemnification under section 145(b).

Dundon argued that he had “prevailed” in part because the judgment was far lower than the damages sought and so he also was entitled to indemnification. The court rejected that argument. The court reasoned that section 145(c) turns on success, not the degree of liability or the size of the award. The court also denied indemnification for Dundon under section 145(b) because it was unaware of any precedent where discretion had been exercised to permit indemnification in comparable circumstances, that is, where the director was found liable for breach of duty.

Zutter and Dundon were jointly represented for much of the litigation, and the billing records did not neatly segregate time between them. Because Dundon was not entitled to indemnification, the court reduced the requested fees on a pro rata basis. After reduction, the court awarded Zutter $2,504,286.68 in fees and expenses. The court declined to award conditional appellate fees or unsupported “fees on fees.”

Practical Implications and Conclusions
Trustees pursuing fiduciary duty claims against former directors of Delaware corporations may expose the estate to substantial indemnification liability if a defendant prevails. This risk adds further layers of analysis when evaluating the potential benefit of prosecuting fiduciary duty claims. Can the estate satisfy an indemnification claim if the director prevails?

The decision also underscores the importance of directors’ and officers’ liability insurance. Without tail coverage in place, directors and officers may be forced to rely solely on corporate indemnification rights—which, as this case illustrates, can translate into unsecured claims against an estate with limited assets. Conversely, where adequate tail coverage exists, insurance may cover defense costs and indemnification obligations, potentially reducing or eliminating the estate’s exposure to a large post-judgment fee award, but that will depend on specific facts and the details of the insurance coverage. The $2.5 million award here illustrates that coverage planning at the onset of financial distress can materially affect who ultimately bears the cost of unsuccessful fiduciary litigation.

The ruling also confirms that, in federal court, Rule 54 is the appropriate vehicle for post-judgment indemnification requests under Delaware law, where fees are not substantive trial damages.

Finally, mixed outcomes carry significant consequences. A director who avoids liability may recover substantial defense costs under section 145(c), while a co-defendant found liable may be categorically barred under section 145(b). In multi-defendant fiduciary cases, defense strategy and timekeeping should account for potential post-trial indemnification disputes.