Civil Claims Against Lake City Bank Dismissed By Judge
May 31, 2023 at 11:28 p.m.
Civil Claims Against Lake City Bank Dismissed By Judge
By David [email protected]
U.S. Bankruptcy Court for the Western District of Michigan Chief U.S. Bankruptcy Judge Scott W. Dales granted the dismissals May 30 as part of a 43-page ruling.
Check kiting is a form of check fraud, involving taking advantage of the float to make use of non-existent funds in a checking or other bank account.
In a news release Wednesday afternoon from Lake City Bank, it states that Dales’ decision “significantly narrows the scope of the trustee’s overly broad and legally and factually insufficient claims. If the trustee decides to continue pursuing this meritless case, despite having failed - over three complaints spanning two years - to provide evidence to support its allegations, the court has acknowledged that Lake City Bank will have several strong defenses.”
Lake City Bank Chief Executive Officer David M. Findlay stated, “With two hands legally and procedurally tied behind our back, the bank knocked out the greatest alleged exposure at the very beginning of the judicial process. At this early stage, the trustee benefits from the legal position that requires the court to presume that all allegations as plead are true. Despite this favorable presumption, the court agreed with the bank’s argument and dismissed four counts from the complaint that sought recovery of $73 million Khan diverted from IOI (Interlogic Outsourcing Inc.) accounts.”
He continued, “From the very beginning, this lawsuit has been a transparent manipulation of the legal system and an attempt by KeyBank, through the court-appointed bankruptcy liquidation trustee, to recoup its $142 million loss that resulted from Najeeb Khan’s illegal actions. This baseless lawsuit was filed by the trustee more than two years after Khan’s crime was discovered with a single goal: to intimidate Lake City Bank through a calculated legal strategy to force a resolution favorable to KeyBank as the largest creditor to the bankruptcy. We have consistently maintained that we have the truth on our side. The court’s opinion dismissing what we believe are the most substantive claims is a significant victory for the bank. We have patiently waited for the opportunity to share our side of the story and the court’s opinion is a first step in bringing this long-running thread of false allegations to an appropriate resolution.”
According to court documents from the U.S. Bankruptcy Court, the plaintiff in the case, Mark T. Iammartino, the liquidating trustee for the consolidated estate trust for the bankruptcy estates of Najeeb A. Khan, the Khan Entity Debtors and the IOI debtors is seeking judgment avoiding and recovering numerous transfers, disallowance or subordination of claims and damages based on the role that each defendant allegedly played in the capacious check kiting scheme that ended abruptly in summer 2019, resulting in numerous bankruptcies.
Defendants are Lake City Bank, Lakeland Financial Corporation, Findlay, Lisa O’Neill, Eric Ottinger, Kristin Pruitt and Bradley Toothaker, who sought the dismissal of the trustee’s complaint.
The principal protagonists in this saga are Khan and his wholly-owned payroll services company, IOI, according to court documents. IOI provided payroll processing services to employers around the country, collecting funds from its customers, calculating deductions for taxes and other withholdings for the customers’ employees and remitting funds to employees and taxing authorities. Given the nature of IOI’s business, large amounts of money passed into and out of IOI’s accounts daily at several banks, including defendant Lake City Bank and nonparties Berkshire Bank and KeyBank, “creating the opportunities for mischief that Mr. Khan, who allegedly controlled IOI and its financial transactions, could not resist.”
The trustee alleged that between 2011 and 2019, Khan masterminded “what may be the largest and longest-running check kiting case in the United States history,” the court documents state. While the scheme persisted, Khan enriched himself by misappropriating funds from IOI, its customers and their employees, amassing a fleet of collectible motor vehicles (which the trustee sold at auction for approximately $40 million), airplanes, yachts and other vessels, resort properties and more.
Khan initiated his fraudulent check kiting scheme in or around 2011 by causing Interlogic to deposit checks drawn from Interlogic’s accounts at Berkshire into the fraud accounts at Lake City. He would then cause checks drawn on the fraud accounts in comparable amounts to be deposited into Interlogic’s accounts at KeyBank and would then arrange for the funds represented by those checks to be wired from KeyBank back to Berkshire to complete the circuit and ensure there were sufficient funds in the Berkshire accounts to allow the initial checks to clear.
Over time, Khan caused Interlogic to deposit hundreds of sequentially numbered checks in similar, large-dollar amounts. He was not taking these checks to the bank himself, but he and certain select employees were putting them in a bag(s) and having a courier drop them off at a Lake City branch in South Bend for deposit. These checks were in the hundreds of thousands of dollars each, totaling on average more than $100 million a day by June 2019.
Khan’s check kiting scheme collapsed suddenly in July 2019 when Lake City Bank, after years of covering IOI’s overdrafts, informed KeyBank that it would not cover the last batch of deposits. The shortfall was $142 million.
Many of IOI’s customers and the customers’ employees eventually learned that their payroll processing company or its mastermind had embezzled funds earmarked to pay employee taxes and other obligations.
Within a month, IOI and its affiliates filed voluntary chapter 11 petitions in the U.S. Bankruptcy Court for the Northern District of Indiana. A few months later, Khan filed voluntary petitions for himself and several related entities. On motion, and after supervising a sale of substantially all of the IOI Debtors’ assets, the judge transferred those cases to the Western District of Michigan.
A little over a year after the transfer of the cases, the court confirmed a joint chapter 11 plan of liquidation for Khan, the Khan Entity Debtors and the IOI Debtors. The liquidating plan created a trust that succeeded to the property of the various debtors’ estates, appointed the trustee as liquidating trustee under that trust and authorized the trustee to continue liquidating the trust’s assets for the trust’s beneficiaries - the creditors and others with claims against the debtors. The trustee filed the SAC to assert various powers under chapter 5 of the bankruptcy code and to liquidate various causes of action under state and federal law to the tune of at least $180 million and perhaps as much as $540 million if he succeeds in prosecuting counts under the Racketeer Influenced and Corrupt Organizations Act, court documents state.
The news release from Lake City Bank states that after more than a three-year investigation, federal prosecutors charged Khan in December 2022 with operating “the largest and longest-running case of blatant check kiting in United States history” from 2014 to 2019. Unable to pay its debts, IOI caused an economic loss of approximately $170 million. This loss resulted in IOI’s clients, largely charitable foundations, nonprofits, religious organizations and small Main Street businesses to lose approximately $28 million. KeyBank, as IOI’s largest creditor, bore the brunt of the loss at approximately $142 million.
Immediately upon terminating the kiting scheme in July 2019, Lake City Bank began working with law enforcement to provide evidence of Khan’s criminal activity, which substantially contributed to his indictment in December and his arraignment that resulted in a guilty plea in January, the release states. As part of its coordination with law enforcement, Lake City Bank provided thousands of documents and extensive information related to Khan’s crimes that were perpetuated through his business activity with KeyBank, Berkshire Bank and Lake City Bank. “All three banks had long-standing business relationships with IOI and Khan, and all three banks were victims of his crimes,” the release states.
Nearly four years after Khan admitted to the kiting scheme, no law enforcement agencies have accused Lake City Bank or its employees of any improprieties related to Khan’s scheme. At no time during the public legal proceedings against him has Khan implicated any other person or organizations, including KeyBank, Berkshire Bank or Lake City Bank as co-conspirators in committing these crimes.
Lake City Bank President Kristin Pruitt said, “For more than 150 years, Lake City Bank has operated with a commitment to doing the right thing and serving our communities with integrity. We would never engage in any activities that could jeopardize the trust and goodwill we have built over generations of serving Hoosiers.”
She concluded, “We look forward to resolving this frivolous lawsuit. It’s time for the trustee to take a reasonable position and bring this to an appropriate resolution. This false pursuit of Lake City Bank has been profitable to the trustee, the trustee’s legal counsel and other professional service providers, who have collectively been paid more than $16.6 million in fees, with an astounding $12.3 million of these fees going to legal professionals. The fees continue to rise every single day that these fabricated claims are pursued. This represents real money that could have gone to IOI’s clients, who are the real victims of Khan’s crimes.”
U.S. Bankruptcy Court for the Western District of Michigan Chief U.S. Bankruptcy Judge Scott W. Dales granted the dismissals May 30 as part of a 43-page ruling.
Check kiting is a form of check fraud, involving taking advantage of the float to make use of non-existent funds in a checking or other bank account.
In a news release Wednesday afternoon from Lake City Bank, it states that Dales’ decision “significantly narrows the scope of the trustee’s overly broad and legally and factually insufficient claims. If the trustee decides to continue pursuing this meritless case, despite having failed - over three complaints spanning two years - to provide evidence to support its allegations, the court has acknowledged that Lake City Bank will have several strong defenses.”
Lake City Bank Chief Executive Officer David M. Findlay stated, “With two hands legally and procedurally tied behind our back, the bank knocked out the greatest alleged exposure at the very beginning of the judicial process. At this early stage, the trustee benefits from the legal position that requires the court to presume that all allegations as plead are true. Despite this favorable presumption, the court agreed with the bank’s argument and dismissed four counts from the complaint that sought recovery of $73 million Khan diverted from IOI (Interlogic Outsourcing Inc.) accounts.”
He continued, “From the very beginning, this lawsuit has been a transparent manipulation of the legal system and an attempt by KeyBank, through the court-appointed bankruptcy liquidation trustee, to recoup its $142 million loss that resulted from Najeeb Khan’s illegal actions. This baseless lawsuit was filed by the trustee more than two years after Khan’s crime was discovered with a single goal: to intimidate Lake City Bank through a calculated legal strategy to force a resolution favorable to KeyBank as the largest creditor to the bankruptcy. We have consistently maintained that we have the truth on our side. The court’s opinion dismissing what we believe are the most substantive claims is a significant victory for the bank. We have patiently waited for the opportunity to share our side of the story and the court’s opinion is a first step in bringing this long-running thread of false allegations to an appropriate resolution.”
According to court documents from the U.S. Bankruptcy Court, the plaintiff in the case, Mark T. Iammartino, the liquidating trustee for the consolidated estate trust for the bankruptcy estates of Najeeb A. Khan, the Khan Entity Debtors and the IOI debtors is seeking judgment avoiding and recovering numerous transfers, disallowance or subordination of claims and damages based on the role that each defendant allegedly played in the capacious check kiting scheme that ended abruptly in summer 2019, resulting in numerous bankruptcies.
Defendants are Lake City Bank, Lakeland Financial Corporation, Findlay, Lisa O’Neill, Eric Ottinger, Kristin Pruitt and Bradley Toothaker, who sought the dismissal of the trustee’s complaint.
The principal protagonists in this saga are Khan and his wholly-owned payroll services company, IOI, according to court documents. IOI provided payroll processing services to employers around the country, collecting funds from its customers, calculating deductions for taxes and other withholdings for the customers’ employees and remitting funds to employees and taxing authorities. Given the nature of IOI’s business, large amounts of money passed into and out of IOI’s accounts daily at several banks, including defendant Lake City Bank and nonparties Berkshire Bank and KeyBank, “creating the opportunities for mischief that Mr. Khan, who allegedly controlled IOI and its financial transactions, could not resist.”
The trustee alleged that between 2011 and 2019, Khan masterminded “what may be the largest and longest-running check kiting case in the United States history,” the court documents state. While the scheme persisted, Khan enriched himself by misappropriating funds from IOI, its customers and their employees, amassing a fleet of collectible motor vehicles (which the trustee sold at auction for approximately $40 million), airplanes, yachts and other vessels, resort properties and more.
Khan initiated his fraudulent check kiting scheme in or around 2011 by causing Interlogic to deposit checks drawn from Interlogic’s accounts at Berkshire into the fraud accounts at Lake City. He would then cause checks drawn on the fraud accounts in comparable amounts to be deposited into Interlogic’s accounts at KeyBank and would then arrange for the funds represented by those checks to be wired from KeyBank back to Berkshire to complete the circuit and ensure there were sufficient funds in the Berkshire accounts to allow the initial checks to clear.
Over time, Khan caused Interlogic to deposit hundreds of sequentially numbered checks in similar, large-dollar amounts. He was not taking these checks to the bank himself, but he and certain select employees were putting them in a bag(s) and having a courier drop them off at a Lake City branch in South Bend for deposit. These checks were in the hundreds of thousands of dollars each, totaling on average more than $100 million a day by June 2019.
Khan’s check kiting scheme collapsed suddenly in July 2019 when Lake City Bank, after years of covering IOI’s overdrafts, informed KeyBank that it would not cover the last batch of deposits. The shortfall was $142 million.
Many of IOI’s customers and the customers’ employees eventually learned that their payroll processing company or its mastermind had embezzled funds earmarked to pay employee taxes and other obligations.
Within a month, IOI and its affiliates filed voluntary chapter 11 petitions in the U.S. Bankruptcy Court for the Northern District of Indiana. A few months later, Khan filed voluntary petitions for himself and several related entities. On motion, and after supervising a sale of substantially all of the IOI Debtors’ assets, the judge transferred those cases to the Western District of Michigan.
A little over a year after the transfer of the cases, the court confirmed a joint chapter 11 plan of liquidation for Khan, the Khan Entity Debtors and the IOI Debtors. The liquidating plan created a trust that succeeded to the property of the various debtors’ estates, appointed the trustee as liquidating trustee under that trust and authorized the trustee to continue liquidating the trust’s assets for the trust’s beneficiaries - the creditors and others with claims against the debtors. The trustee filed the SAC to assert various powers under chapter 5 of the bankruptcy code and to liquidate various causes of action under state and federal law to the tune of at least $180 million and perhaps as much as $540 million if he succeeds in prosecuting counts under the Racketeer Influenced and Corrupt Organizations Act, court documents state.
The news release from Lake City Bank states that after more than a three-year investigation, federal prosecutors charged Khan in December 2022 with operating “the largest and longest-running case of blatant check kiting in United States history” from 2014 to 2019. Unable to pay its debts, IOI caused an economic loss of approximately $170 million. This loss resulted in IOI’s clients, largely charitable foundations, nonprofits, religious organizations and small Main Street businesses to lose approximately $28 million. KeyBank, as IOI’s largest creditor, bore the brunt of the loss at approximately $142 million.
Immediately upon terminating the kiting scheme in July 2019, Lake City Bank began working with law enforcement to provide evidence of Khan’s criminal activity, which substantially contributed to his indictment in December and his arraignment that resulted in a guilty plea in January, the release states. As part of its coordination with law enforcement, Lake City Bank provided thousands of documents and extensive information related to Khan’s crimes that were perpetuated through his business activity with KeyBank, Berkshire Bank and Lake City Bank. “All three banks had long-standing business relationships with IOI and Khan, and all three banks were victims of his crimes,” the release states.
Nearly four years after Khan admitted to the kiting scheme, no law enforcement agencies have accused Lake City Bank or its employees of any improprieties related to Khan’s scheme. At no time during the public legal proceedings against him has Khan implicated any other person or organizations, including KeyBank, Berkshire Bank or Lake City Bank as co-conspirators in committing these crimes.
Lake City Bank President Kristin Pruitt said, “For more than 150 years, Lake City Bank has operated with a commitment to doing the right thing and serving our communities with integrity. We would never engage in any activities that could jeopardize the trust and goodwill we have built over generations of serving Hoosiers.”
She concluded, “We look forward to resolving this frivolous lawsuit. It’s time for the trustee to take a reasonable position and bring this to an appropriate resolution. This false pursuit of Lake City Bank has been profitable to the trustee, the trustee’s legal counsel and other professional service providers, who have collectively been paid more than $16.6 million in fees, with an astounding $12.3 million of these fees going to legal professionals. The fees continue to rise every single day that these fabricated claims are pursued. This represents real money that could have gone to IOI’s clients, who are the real victims of Khan’s crimes.”
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