GRAND RAPIDS, Mich. (WANE) – A federal judge last week dismissed several counts in a civil suit against Warsaw-based Lake City Bank which could’ve cost the financial institution upwards of $73 million.
The bank – which has several Fort Wayne locations – is currently embroiled in a bankruptcy suit involving a Michigan man who admitted to using a check-kiting scheme to live a lavish lifestyle that included collector cars, yachts and tropical homes.
Najeeb A. Khan pleaded guilty in federal court after the collapse of his payroll company Interlogic Outsourcing Inc. (IOI) of Elkhart in 2019. IOI also had an office in Fort Wayne.
Khan had been accused of using his businesses to write checks back and forth between at least three banks in order to fraudulently inflate account balances and deceive those banks into honoring checks written without sufficient funds.
One of these banks, KeyBank, lost roughly $142 million in the scheme.
A bankruptcy trustee claimed in U.S. District Court documents filed in Michigan that Lake City Bank, which Khan also used, bore some responsibility for the loss. The trustee filed suit against Lake City Bank and four of its officers seeking to recoup some of that money.
The judge presiding over the case dismissed the heaviest claims against Lake City Bank and dismissed one of its officers as well as its holding company, Lakeland Financial Corporation, from the proceedings completely.
“It was a non-start from the beginning, and we knew it,” David Findlay, Lake City Bank CEO and president, told WANE 15 Monday about the claims that his bank was partially responsible for the losses. “That’s why we were so pleased to see the judge dismiss it.”
Lake City Bank has steadfastly rejected any role in Khan’s schemes and is even credited with blowing the whistle on the missing money.
Khan, 69, had been accused of operating the kite checking scheme from 2011 to 2019. Court documents say the plot might be the “largest and longest-running check kiting case in United States history.”
For years, according to court documents, Khan misappropriated funds from his business to snatch up luxury fleet of collectible motor vehicles that would later sell at auction for roughly $40 million as well as airplanes and resort properties.
The scheme came crashing down in July 2019 when Lake City Bank, increasingly concerned over IOI’s overdraft fees, refused to cover the final one – which the judge overseeing the bankruptcy proceedings called a “humdinger.”
That ended up costing KeyBank the $142 million.
The judge’s decision that Lake City Bank is not on the hook for part of that money took away what Findlay called the most “egregious” claims against the financial institution.
“More importantly, it made a statement, that at the bedrock of the financial services system is the ability of customers to move money from entities they control to other entities they control,” Findlay said. “It was always an irrational claim against us that we shouldn’t have allowed Khan to transfer money from a Lake City Bank account to an account he controlled at First Source Bank.”
“We don’t have that kind of ability with readily available funds to postpone or not affect that transfer,” Findlay continued.
Findlay described KeyBank as “driving the actions” of the trustee since, even though it was one of three banks Khan used in his scheme, it’s the one that took the heaviest loss after the check kite was discovered.
While the judge in the bankruptcy case dismissed the most serious claims against Lake City Bank, he also ruled that some can continue to move forward through the legal system. This includes the trustee in the case seeking roughly $13 million in overdraft fees Khan paid Lake City throughout the years.
Earlier this year, Khan pleaded guilty in federal court to the scheme and has agreed to pay KeyBank $121 million and clients of his company $27 million.
He is scheduled to be sentenced in November.
The trustee overseeing the bankruptcy civil case has about three weeks to refile claims against Lake City Bank if he decides to still try to seek a significant portion of KeyBank’s losses, according to court documents.
The judge ordered KeyBank and Lake City to set a pre-trial conference before moving ahead.
He also added that nothing in last week’s decision should be seen as “forecasting success at trial.”