SOUTH BEND — A judge will hear arguments this month over whether a bank can recover a $1.5 million overdraft from Interlogic Outsourcing Inc. despite bankruptcy protection.
IOI sought Chapter 11 bankruptcy in August shortly after KeyBank filed a lawsuit alleging that the Elkhart payroll business owes tens of millions of dollars for transactions made in July that weren’t sufficiently funded. Wells Fargo has asked the U.S. Bankruptcy Court in Northern Indiana to allow it to apply funds in accounts held by IOI toward an overdraft that resulted.
Then-owner Najeeb Khan had IOI issue checks totaling $250 million, which drew from Lake City Bank accounts in Warsaw, according to Wells Fargo’s motion. There wasn’t enough money to cover the full amount of the withdrawals, according to KeyBank’s lawsuit.
Wells Fargo says it resulted in an overdraft of just over $1.5 million on one account that IOI holds with them. Other accounts have a positive balance of $720,968 and $2.15 million.
The bank asked the judge to allow it to apply those funds to cover the overdraft as well as attorney’s fees, legal costs and monthly account fees, and to continue to freeze the funds.
The bank would normally be prevented from using the funds by the automatic stay in the Chapter 11 bankruptcy protection. Wells Fargo argues that the money in the account rightfully belongs to the bank under the terms of its service agreement with IOI, and that its value shrinks as Wells Fargo continues to accrue its own fees and expenses.
“Enforcement of Wells Fargo’s perfected security interests would satisfy nearly all of Wells Fargo’s claims against the Debtors – a step toward achieving the Debtors’ fresh start,” the motion states. “Moreover, granting the relief requested herein will not impede the Debtors, jeopardize their plan of reorganization, prejudice other creditors or cause other harm.”
But objections to the motion were made by IOI, KeyBank and a committee of other creditors who say IOI owes them money. Judge Harry Dees Jr. set an evidentiary hearing for Dec. 16 to hear arguments over the request.
A similar request has been lodged in a personal bankruptcy filing that Khan made in October. He filed it in U.S. Bankruptcy Court in Western Michigan.
He says in the Oct. 8 petition that he has assets valued at between $50 million and $100 million, but values his liabilities in the $100 million to $500 million range. The single largest creditor is KeyBank National Association, which has a total unsecured claim of about $122 million.
His wife, Nancy Khan, asked for an order granting relief from the automatic stay in his case. She says in the motion that she “knew absolutely nothing” about his alleged fraud and didn’t participate.
Nancy Khan asked that the stay be lifted to allow her to mediate and litigate property-related and other matters in a separate action she filed in family court in Cass County, Michigan. It would also allow the judge in that other case to divide her and her husband’s assets.
The judge in the personal bankruptcy case set a final hearing for Dec. 13 in Kalamazoo.
KeyBank filed an objection to Nancy Khan’s request, followed by the committee of creditors and IOI itself. They argue that Nancy Khan benefited from her husband’s alleged fraudulent check-kiting scheme and that many of the funds in which she claims an interest are illicitly obtained.
“Mrs. Khan and Mr. Khan have not sought a divorce. There is no indication that they have any intention to end their relationship of nearly 30 years. One can legitimately question whether this, in reality, is an asset preservation plan involving a husband and wife working together to keep assets away from the husband’s creditors so that the wife can continue to enjoy their benefits,” lawyers wrote in KeyBank’s objection. “Through Interlogic, Mr. Kahn perpetrated a massive and complex fraud in which he diverted millions of dollars from Interlogic for his own personal benefit and that of his family. Mrs. Khan has acknowledged that Mr. Khan’s illicit activities had been a source of income and support of herself and her family.”
In its own filing, IOI points to a list of assets Najeeb Khan filed with the court which it says he bought through illegally acquired funds. He remains the subject of an ongoing criminal investigation for his alleged fraudulent activities, according to the objection.
Najeeb Khan’s schedule of property includes $6.8 million worth of real estate in multiple states and $59.5 million in other financial assets.
He also lists $31.3 million worth of vehicles, including hundreds of antique cars. Those include a 1955 Jaguar valued at almost $1.9 million, a 1964 Aston Martin DB5 – the same model as the classic James Bond car – valued at $750,000 and a 1924 Bently valued at $300,000.
Attorneys for IOI say that Najeeb Khan used his fraudulently obtained funds “to live a luxurious lifestyle, including owning multiple homes and numerous luxury cars, boats and airplanes.” They argue that allowing the family court proceedings to run parallel with the Chapter 11 case “would only serve to keep the Debtor’s fraudulent activities shrouded in mystery and his assets beyond the reach of many of those most affected by his fraudulent activities.”