SOUTH BEND — A lawsuit against an Elkhart payroll company has more than doubled in size with of 32 additional clients claiming financial loss.

In turn, Interlogic Outsourcing Inc. has asked a federal bankruptcy court to force a pause on the litigation in Elkhart County. It also notified the court that the sale of the company for $3.5 million is pending.

IOI and owner Najeeb Khan are the subject of multiple court actions, including a bank’s claims they owe over $100 million and the company’s own bankruptcy proceedings as it sought a buyer. Both actions are taking place in federal district courts.

The lawsuit involving about 50 clients, including several from around northern Indiana, claims that IOI didn’t make state and federal tax payments on their behalf for at least six months. It was filed in Elkhart County court.

The clients also lodged a complaint over how Khan is selling off his assets, including private aircraft, saying he may have a relationship with the buyer in one case. 

Unanswered questions

KeyBank filed the first lawsuit in July, saying it could lose at least $122 million after Khan made a series of wire transfers through IOI and related businesses but didn’t have the funds to cover them. Khan answered many of the claims in the lawsuit by invoking his right to remain silent, saying the issues are being investigated by a U.S. district attorney.

The new acting directors of Interlogic then filed for Chapter 11 bankruptcy protection while negotiations for the sale of the company are under way. They say the company owes between $10 million and $50 million to between 5,000 and 10,000 creditors, but has assets worth only $1 million to $10 million.

They also say the company was victimized by Khan engaging in a “significant and ongoing scheme of intentional financial mismanagement.”

The lawsuit brought on by dozens of clients claims that IOI withdrew money to cover payroll taxes but never made those payments. It accuses the company of negligence and fraud.

It names Interlogic itself as well as Khan and several other individuals now involved in directing the company.

It was amended twice since it was filed in mid-August. In the latest amendment, filed Thursday, 32 more companies signed on.

The new businesses include bars, restaurants, law offices, technology companies and manufacturers, lawn care services and tree nurseries, and senior care facilities. They represent a fraction of the more than 7,000 clients that IOI has listed with the court as creditors.

The latest version of the clients’ lawsuit acknowledges that claims against IOI are on hold while the bankruptcy issue proceeds.

In separate court filings, attorneys objected to the private sale of Khan’s two airplanes.

On Tuesday, attorneys with Jones Law Office LLC of South Bend filed an objection saying that Khan hasn’t provided enough information to show that the sales are being made at arm’s length, to ensure a fair price, as set out in a temporary restraining order the court issued. Attorneys for Khan responded later that day, saying they provided that information and pointing out that the buyer is an unrelated third party and that the plane is being sold for more than Khan bought it for.

Attorneys for the former clients pressed the issue Wednesday, telling the court they still have unanswered questions about Khan’s relationship with the buyer of one of the two airplanes. They asked his lawyers whether Khan is an investor or co-owner of properties with the proposed buyer, and say they never got a response.

They asked the judge to accept their objection to the sale and to set a hearing for Khan to be placed under oath and answer questions.

Extend of stay

On Sept. 10, Interlogic Outsourcing Inc. asked the U.S. Bankruptcy Court in Northern Indiana to step in and stop the lawsuit brought on by the former clients, for now. 

The filing asks the court to extend the automatic stay that accompanies the bankruptcy to also cover the individuals named in the lawsuit. The stay prevents actions being brought against the company by creditors during the bankruptcy process.

Alternatively, they’re asking the court to enter an injunction against the plaintiffs in the Elkhart County litigation for the same period as the bankruptcy.

They argue that the lawsuit is a costly distraction from the bankruptcy. They also base their request on a claim that the clients’ lawsuit contains no specific factual allegations against the individuals, that the lawsuit would expose them to potential liabilities and that it could hurt the company’s ability to defend itself against certain claims.

“(A)llowing the Elkhart litigation to continue will drain estate resources and distract from the debtors’ efforts to successfully and expeditiously move through these bankruptcy proceedings, and, thwarting the statutory purpose of these chapter 11 proceedings, fail to provide the debtors with a breathing spell from litigation pressures in their efforts to achieve a resolution that advances the interests of all constituents,” the request states. “A stay of the Elkhart litigation would allow the debtors’ directors and officers to focus on their primary responsibility to the debtors’ stakeholders and shepherd the debtors through these chapter 11 proceedings.”

IOI SALE PROPOSED 

Interlogic Outsourcing Inc. would be sold to a Pennsylvania payroll company for $3.5 million under an agreement awaiting court approval.

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