SOUTH BEND — Executives leading Interlogic Outsourcing Inc. plan to rely on an auction to potentially juice the sale of the company as part of its Chapter 11 bankruptcy restructuring. The move comes as IOI and owner and former CEO Najeeb Khan remain embroiled in a federal wire fraud lawsuit and a local civil fraud suit.

A federal bankruptcy judge in South Bend, in an order Aug. 29, approved plans for a proposed auction to sell the assets of the Elkhart-based payroll processing company and its six subsidiaries, court documents show. Bids will be taken through Friday, followed by a potential auction Sept. 18, court documents show. IOI leaders hope the auction will draw out a buyer for the company and its subsidiaries.

“The debtors have determined that a sale of all or substantially all of their assets to one or more well-capitalized strategic or financial buyers will maximize the value of their estates, allow the debtors’ business to take advantage of favorable market conditions, and provide the best possible path forward for their customers, creditors, employees, vendors and other stakeholders,” attorneys stated in an Aug. 19 motion for an auction.

From mid-July up to the date of the auction motion, IOI reached out to more than 70 potential buyers and stayed in talks with 10 of them, though no deal has since been reached, the document shows.

IOI declared bankruptcy Aug. 12 following the resignation of Khan as chairman and CEO. Tim Daileader was named independent director in his place, and consultant Daniel Wikel was brought in as chief restructuring officer.

The filing came after Cleveland-based KeyBank filed a federal case in Ohio July 9, suing Khan and IOI on claims of wire fraud and breach of contract. The bank alleged Khan ordered more than $200 million in wire transfers using insufficient funds transferred from another bank, resulting in a shortfall of an estimated $122 million.

Khan replied to many of the claims in the suit by pleading the Fifth Aug. 27, in that he exercised his Fifth Amendment right to not incriminate himself while the case is under investigation by the U.S. attorney’s office in northern Ohio, the document shows. Khan’s response also included arguments that he shouldn’t be held responsible because KeyBank didn’t mitigate its own damages; that the bank has “unclean hands” in the case; and the court doesn’t have personal jurisdiction over him.

Meanwhile, a South Bend law firm sued Khan and IOI in a local civil case on counts including fraud, theft, breach of contract and negligence stemming from KeyBank’s federal suit.

The case, filed in Elkhart County Superior Court 2 on Aug. 12, alleges IOI withdrew funds from client accounts but failed to pay their federal and state payroll taxes as part of its payroll processing service.

The suit started with seven plaintiffs, including the firm that filed the case, and has since grown with nearly two dozen plaintiffs now.

In the bankruptcy documents, IOI listed estimated assets of $1 million to $10 million, and estimated liabilities of $10 million to $50 million. Another 178-page document, filed Aug. 30, lists IOI’s creditors. Of them, 7,251 are identified as “Customer” with a number, while several more are identified as businesses, individuals and government departments on local, state and federal levels.

Heading into the planned auction, IOI sought a so-called “stalking-horse” process, in which a party from the bidding pool can be selected to make the first bid and set the lowest acceptable price.

Tuesday was the deadline for submitting a proposed “stalking-horse” bidder. The deadline for receiving bids is Friday afternoon, and the potential auction is set for Sept. 18. The federal bankruptcy court then plans to hold a hearing Sept. 26 on whether to approve a potential winning bid, documents show.

Aimee Ambrose can be reached at aimee.ambrose@goshennews.com or 574-533-2151, ext. 316. Follow her on Twitter at @aambrose_TGN.

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