IOI declares bankruptcy amid wire fraud claims, new lawsuit

Najeeb Khan

ELKHART — Interlogic Outsourcing Inc. now seeks federal bankruptcy protection as the Elkhart-based payroll processing company struggles with the financial fallout of a wire fraud lawsuit. A group of companies is also suing IOI for damages.

IOI, through newly installed interim president Daniel Wikel, filed for Chapter 11 bankruptcy restructuring in the U.S. Bankruptcy Court in South Bend Sunday.

Jones Law Office of South Bend then filed a civil suit in Elkhart County Monday. The law firm named itself along with six other companies as plaintiffs against IOI and owner Najeeb Khan, alleging charges that include fraud, negligence and theft, court documents show.

IOI and its six affiliates declared bankruptcy for relief while working to secure financial assistance for keeping the business running, continuing to provide services, pursuing a sale of the company and preserving close to 200 local jobs.

“Without increased availability of funds, the debtors will be unable to continue to operate their businesses, continue the necessary payroll processing for thousands of customers, conduct the sale, address litigation and claim adjudication, and implement an orderly wind-down process post-sale,” Wikel wrote in the declaration document.

The bankruptcy filing came after KeyBank sued IOI and Khan on claims of fraud and breach of contract in a federal case in Cleveland on July 9. IOI used KeyBank for a significant portion of payroll processing transactions, according to court documents.

The bank alleged Khan transferred about $250 million from Lake City Bank accounts into KeyBank, and then dozens of wire transfers of more than $200 million from KeyBank to other banks. But, Lake City stopped its checks due to insufficient funds, leading to a large overdraft in IOI’s KeyBank accounts from the wire transfers.

KeyBank estimated a shortfall of approximately $122 million that could cost the bank, its lawsuit showed. Wikel noted in the bankruptcy declaration KeyBank disclosed its exposure could “be up to $90 million, net of tax” in a form filed July 16.

“Mr. Khan organized and orchestrated a complex scheme of deliberate financial mismanagement that now leaves the debtors in need of the protections of the automatic stay, and seeking a buyer through a structured sale process,” Wikel wrote, noting IOI was flooded with a “near unsustainable volume” of calls from clients demanding answers when news of the lawsuit broke.

Khan soon resigned as CEO of IOI and is no longer involved with the business. He’s still listed as the owner, the bankruptcy documents show.

DECLARING BANKRUPTCY

Wikel, who directs restructuring consulting firm Huron Consulting Group, was brought on to serve as interim president and chief restructuring officer. The company went to work seeking a new owner and securing financing to continue processing payroll services.

IOI reached out to 28 potential buyers. Of them, 12 expressed interest, and five are still in preliminary talks with the company as of the bankruptcy declaration, the document shows.

IOI also reached agreements with KeyBank to secure $1.475 million in financing for business operations, plus a $7.8 million financing mechanism to provide funds for the bankruptcy proceedings.

In addition to the $1.475 million loan, Wikel listed IOI also has a $641,520 loan through Lake City bank as secured debt, as well as approximately $1.3 million in trade payables, fees and claims in unsecured debt, and about $12 million in “outstanding subordinated notes” to Khan.

He pointed out IOI’s total cash balance is less than $50 due to a lack of additional financing.

“The debtors’ payroll processing accounts contain a cumulative overdraft that remains to be reconciled as payroll processing funds continue to be collected and disbursed from these accounts,” Wikel also wrote in the bankruptcy declaration. “This overdraft has been accumulating for years and had been effectively hidden by the series of carefully timed account transfers orchestrated by Mr. Khan on a daily basis."

BUSINESS ON THE BRINK

Wikel said IOI continued to provide payroll services since the lawsuit through KeyBank accounts, which let the company stay afloat and manage client payroll and tax withholding services. However, there were and still are delays, as well as penalties and fees owed to “relevant taxing authorities,” according to the document.

But without Chapter 11 protection, the company would have insufficient funds to continue operations and services, including paying employee wages which could lead to job cuts, the document shows.

IOI and its affiliates have more than 170 employees, and at its height, the company had nearly 5,500 clients nationwide, including Catholic archdioceses and the Boy Scouts of America. About 200 clients have severed ties since the lawsuit was filed last month, according to the bankruptcy document.

LOCAL LAWSUIT

Other clients include the seven named as plaintiffs in the local lawsuit Monday: Jones Law Office of South Bend, Granger-based Dscription Inc., Elkhart-based Blue Byte Technology Solutions, LaSalle Hospitality Group of South Bend, Active Health and Wellness Center in South Bend, MJS Electrical Contractors Inc., apparently of Bensalem, Pennsylvania, and MKS2 LLC, a tech firm based in Austin, Texas.

The suit targets notices clients received at the beginning of August that IOI hadn’t paid federal and state payroll taxes for those businesses even though funds were withdrawn from their accounts, the suit shows.

Attorney Andrew Jones, founder of Jones Law Office, and Brendan Mullen, CEO of MSK2, complained of the notices in a South Bend Tribune story last week.

Mullen told the paper more than $83,000 was withdrawn from MSK2’s accounts last month for federal taxes, but no payments were made to the Internal Revenue Service.

Jones’ lawsuit Monday charges IOI with counts of negligence, breach of contract, fraud and conversion for accessing and withdrawing funds while failing to pay taxes and/or wages, the lawsuit shows. He also charged interference with a business relationship as well as constructive fraud for misrepresenting facts.

The suit seeks a jury trial with demands including compensatory, punitive and triple damages, as well as a temporary restraining order on deposited funds, according to case information.

The case was filed in Elkhart County Superior Court 2.

The company did post a newsletter to its site Monday, informing users of the bankruptcy filing. The notice assures customers the business is still operating as normal with a claim of providing “uninterrupted payroll services,” as well as customer services for those affected by issues arising from the federal lawsuit.

“A this time, payroll and related tax functions are operating consistently with past practices, and the issues are not related to security or systematic payroll breach,” the notice states.

A call to IOI for comment was not returned Monday.

Aimee Ambrose can be reached at aimee.ambrose@goshennews.com or 574-533-2151, ext. 316.