By Deb Patterson
InkFreeNews

David M. Findlay, Lake City Bank Chief Executive Officer

GRAND RAPIDS, MICH. — Lake City Bank has been dismissed from a multiple count civil claim by Mark T. Iammartino as liquidating trustee for the consolidated estate trust for the bankruptcy estate of Najeeb A. Khan, the Khan Entity Debtors and the Interlogic Outsourcing Inc. debtors. U.S. Bankruptcy Court Western District of Michigan Honorable Scott W. Dales, chief United States Bankruptcy Judge, rendered his decision Tuesday, May 30.

The civil case was filed against Lake City Bank;, Lakeland Financial Corporation; Bradley Toothaker, company director of Lakeland Financial Corporation; Kristin Pruitt, LCB president; Eric Ottinger, LCB executive vice president and chief commercial banking officer; Lisa O’Neill, LCB executive vice president and chief financial officer; David Findlay, LCB chief executive officer; all officials associated with Lake City Bank; and Khan.

A statement released Wednesday, May 31, by Lake City Bank stated “Lake City Bank is pleased to report that the most critically important portion of its motion to dismiss certain civil claims related to the July 2019 check kiting scheme orchestrated by Najeeb Khan was granted by Judge Dales with the United States Bankruptcy Court for the Western District of Michigan on May 30. This 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.”

David M. Findlay, chief executive officer of Lake City Bank, commented, “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 accounts.

Kristin Pruitt, Lake City Bank President

“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,” added Findlay.

Iammartino sought judgment avoiding and recovering numerous transfers, disallowance or subordination of claims, and damages based on the role that each defendant allegedly played in “a capacious check kiting scheme” that ended abruptly in the summer of 2019, resulting in the numerous bankruptcies identified.

The defendants sought dismissal of the trustee’s second amended complaint for failure to state a claim under Fed. R. Civ. P. 12 (b) (6). Khan never responded to the claims.

Oral arguments in the case were heard on April 17, 2023, in Grand Rapids, Mich., and taken under advisement by the court.

Bradley Toothaker, company director of Lakeland Financial Corporation

The 43-page Memorandum of Decision and Order, granted all counts against Toothaker are dismissed as well as Lake City Bank’s motion to dismiss the second amended complaint as to Lakeland Financial Corporation and all counts naming Lakeland Financial Corporation as a defendant are dismissed as to that entity and granted in part and denied in part as to the defendants other than Lakeland Financial Corporation. Nine counts in the second amended complaint were dismissed.

Dales ordered any counts not enumerated in the order remain for decision, subject to and as limited by the rulings reflected in the text of the Memorandum of Decision and Order. Other orders issued included: Iammartino may amend the second amended complaint, if so advise, within 21 days from the decisions and the defendants will have 21 days to respond to the amendment; set proposed dates for a pretrial conference.

Dales noted the defendants mounted numerous attacks on the Second Amended Complaint, some general and others more tailored to particular causes of action or defendants. Dales addressed the most general attacks.

Background

Noting the background, Dales stated Kahn and IOI are the “principal protagonists in this unhappy saga.” IOI provided payroll processing services to employers around the country. Because of the nature of IOI’s business, large amounts of money passed into and out of IOI’s accounts daily at several banks including Lake City Bank and non-parties Berkshire Bank and KeyBank, “creating the opportunities for mischief that Mr. Khan, who allegedly controlled IOI and its financial transactions could not resist.”

Najeeb Kahn

Iammartino alleges between 2011 and 2019 Khan masterminded “what may be the largest and longest-running check kiting case in United States history.” 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 were sold at auction for approximately $40 million, airplanes, yachts and other vessels, resort properties and more.

The second amended complaint stated Khan’s multi-year check kiting scheme collapsed in July 2019, when Lake City Bank, after years of covering IOI’s “obviously worrisome overdrafts” declined to cover the last one “and the last one was a humdinger.” The trustee refers to that date, July 8, 2019, as the disruption date. Dales wrote “but it is fair to infer that KeyBank, a regional banking giant, regarded the resulting $142 million shortfall as more than merely disruptive.”

Information on the background noted that within a month of the disruption date, IOI and its affiliates filed voluntary chapter 11 petitions in the U.S. Bankruptcy Court for Northern District of Indiana. A few months later, Khan filed voluntary petitions for himself and several related entities. Following the sale of substantially all of the IOI Debtors’ assets, the judge in the Northern District of Indiana transferred the cases to the Western District of Michigan.

“A little over a year after the transfer of the cases, the court confirmed a joining chapter 11 plan of liquidation” for Kahn, Khan Entity Debtors and IOI Debtors. That plan created a trust that succeeded to the property of the various debtors’ estates, appointed the trustee as liquidating trustee and authorized the trustee to continue liquidating the trust’s assets. The trustee filed the Second Amended Complaint 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 with treble damages.

The judge in length addressed the defendants dismissal claims based on “in Pari Delicto” Doctrine, dismissal based on Rule 9(b) specificity requirement regarding overdraft fees and diverted funds, dismissal of claims against Toothaker, dismissal of claims against Lakeland Financial; dismissal based on failure to properly plead constructive fraudulent transfers with respect to the overdraft fees, the Lake City Banks Loans, the KRW Loan, the KRW mortgage and the Khan Guaranty, dismissal of claims related to deposit transactions; dismissal of the preference claim (this was denied); dismissal based on the uniform fiduciaries act’s failure to create a private right of action; dismissal based on the absence of any fiduciary duty and failure to state a claim for aiding and abetting breach of fiduciary duty; dismissal based on the Racketeer Influenced and Corrupt Organization Act and Indiana Counterpart.

The bank’s statement further stated:

“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 of 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 2022 and his arraignment that resulted in a guilty plea in January 2023. 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.

“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. Further, at no time during the public legal proceedings against him has Kahn implicated any other people or organizations, including KeyBank, Berkshire Bank or Lake City Bank as coconspirators in committing these crimes.”

Kristin L. Pruitt, Lake City Bank’s President, commented, “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.”

Pruitt 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.”