InkStop trustee : Accounting Firm Accused Of Negligence

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InkStop trustee, investors target Skoda in lawsuits
Failed retailer’s accounting firm accused of negligence
Two-and-a-half years after InkStop Inc. filed to liquidate in U.S. Bankruptcy Court, the company’s court-appointed trustee and disgruntled investors separately are turning their legal attention to the role they allege accounting firm Skoda, Minotti & Co. played in the demise of the ink and toner retailer.

Three lawsuits contend that the Mayfield Village firm, which was InkStop’s accountant and auditor, was negligent and failed to audit and report accurately InkStop’s financial condition. The largest known amount sought in the lawsuits is $15.5 million.

In a lawsuit transferred to U.S. District Court in Cleveland from Bankruptcy Court last Nov. 2, bankruptcy trustee Mary Ann Rabin charges Skoda Minotti with professional negligence. Ms. Rabin said the accounting firm failed to discover and report that InkStop’s officers had misstated InkStop’s financial statements. Her lawsuit also alleges that for two years prior to the bankruptcy filing, InkStop’s financial condition was “tenuous at best” and that the accounting firm failed to note in its audit opinions that “InkStop was clearly a failing business.”

The trustee in a bankruptcy liquidation is administrator of what is called the bankruptcy estate and is charged with doing what he or she can to repay money owed to creditors and, if possible, lost by its stockholders. The job includes selling assets and collecting debts.

Bankruptcy law also allows a trustee to void some payments made in the period before the bankruptcy filing — 90 days or as much as a year before the filing, depending upon who received the payment — and to demand repayment of whatever was paid.

Ms. Rabin’s lawsuit does not specify damages beyond asking for the return of $1.1 million in fees paid to Skoda Minotti for accounting and auditing services.

Skoda Minotti attorney Brent Silverman of Reminger Co. LPA declined to comment on the pending litigation.
Investors sue, too

In addition, two lawsuits filed by a total of 11 InkStop investors charge Skoda Minotti with professional negligence, omitting a going concern opinion in its audits, and violating Ohio securities law.

One lawsuit seeks $15.5 million in compensatory damages from Skoda Minotti. The complaint for the other lawsuit was not available for inspection last week. Both suits were filed by John Chapman & Associates LLC, a Cleveland law firm specializing in investment fraud and broker misconduct.

Among the Chapman firm’s clients in the cases are J. Sheldon Artz, a Moreland Hills plastic surgeon; Ara Bagdasarian, vice president of TravelCenters of America Inc.; Bruce Blake, president of R.H. Blake Inc., a Warrensville Heights marketing firm; James DiLella, president of Conneaut Leather Inc. of Conneaut; James Hummer, founder and former CEO of Whole Health Management Inc.; and Michael Southard, national sales manager for Kichler Lighting of Independence.

While he wouldn’t speak about the cases he has filed against Skoda Minotti, attorney John Chapman was willing to talk about the similar lawsuit filed by the bankruptcy trustee.

Mr. Chapman said Ms. Rabin’s suit argues that because of the allegedly incomplete financial statements, InkStop’s officers could continue “deceiving and misleading (potential investors), and therefore Skoda Minotti has responsibility to the estate in bankruptcy for some of the very substantial debt” still owed by InkStop.

More broadly, Mr. Chapman said potential investors feel burned when they believe they were deceived by clean audits by independent accounting firms.

“Where’s the guy with the green eyeshades?” he asked. “Where’s the guy who says the numbers don’t add up?”
Awash in red ink

The suits filed against Skoda Minotti are only the latest in a series of legal actions to follow the bankruptcy of InkStop, a company that rose and fell quickly.

When Cleveland-based OfficeMax Inc. was sold to Boise Cascade Corp. in 2003 and its headquarters staff moved to Chicago, OfficeMax operations vice president Dirk Kettlewell chose to stay in Cleveland and to open a niche retailer that specialized in consumable computer printer ink cartridges.

According to a story that appeared in Crain’s in April 2009, Mr. Kettlewell bootstrapped the startup with a six-figure home equity loan in 2005. The story appeared less than seven months before InkStop filed for Chapter 7 bankruptcy liquidation.

The first InkStop store opened in Independence in January 2006; a year later, the retailer had 29 stores in eight states, according to court documents. By January 2009, it had grown to 161 stores in 14 states.

In the Crain’s story, Mr. Kettlewell said that he had financed the growth not with debt but by raising $80 million from 150 investors, including many prominent Northeast Ohioans. Mr. Kettlewell envisioned a chain of 2,500 to 3,000 stores, he said at the time, which would require even more investment to build the infrastructure for a larger company, including a sophisticated computer system and sizable inventories for the stores.

Mr. Kettlewell continued to be successful in raising money even though the company was showing investors financial statements that showed significant year-to-year losses. In financial statements attached to an August 2009 private stock offering, InkStop reported a loss of $30.3 million on net sales of $35.2 million for the fiscal year that ended Jan. 31, 2009. A year earlier, the company reported a net loss of $16.9 million on sales of $26.1 million.

The InkStop stores closed abruptly on Oct. 2, 2009, and on Nov. 5, 2009, the Chapter 7 liquidation petition was filed. The bankruptcy filing listed nearly $48 million in debts and $30 million in assets.
Legal actions pile up

Even before the bankruptcy filing, InkStop employees filed suit for wages owed. That case was settled in March 2010 when a group of officers and directors agreed to contribute to a $660,000 fund that would pay a substantial portion of the wages owed.

Then the bankruptcy trustee and the investors weighed in.

The first major litigation began in August 2010, when Ms. Rabin filed a complaint in Bankruptcy Court against a group of InkStop officers and directors. She claimed the officials breached their fiduciary duties by multiplying the company’s debt, hiding Inkstop’s financial condition and misstating InkStop’s financial performance.

That litigation was settled in April 2011 when Twin City Fire Insurance Co., which issued a directors and officers liability policy to InkStop, agreed to pay the trustee $4.5 million to cover that claim. Among the directors and officers who agreed to the settlement were Mr. Kettlewell; his wife Dawn, who was an officer and director of InkStop; B. Charles Ames, chairman of InkStop’s board; Michael Clegg, former president of the Colliers Ostendorf Morris real estate brokerage; James Hummer; Norbert Lewandowski, a retired accounting firm owner; James Mastrian, a former OfficeMax, Revco D.S. Inc. and Rite Aid executive; Michael Shaughnessy, a co-founder of ColorMatrix Corp. of Berea; and Norman “Boomer” Esiason, a former professional quarterback and television sports broadcaster.

But lawsuits continued to pile up in Cuyahoga County Common Pleas Court.
Since 2010, at least 19 lawsuits have been filed against InkStop officers and directors by outside investors. All the suits center around allegations that the suing investors were induced to put money into InkStop because of various misrepresentations by the defendants.Most of these cases have been consolidated into a single action in the courtroom of visiting judge Michael Corrigan.

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March 27, 2012 at 9:18 AM