The trustee for the insolvent Castleton Group has filed a lawsuit against its founder, Suzanne Clifton, alleging she withdrew at least $3.09 million from the company before its bankruptcy.
The suit also alleges she continued to sign up customers even though Castleton's "financial condition was hopeless" and had been at least since January 2004.
The lawsuit was filed Thursday in U.S. Bankruptcy Court for the Eastern District of North Carolina by Richard D. Sparkman. He was assigned by the court to oversee the liquidation of Castleton, which filed for bankruptcy Dec. 22.
Sparkman could not be reached for comment Friday. Thomas Manning, an attorney for Clifton, declined to comment.
Raleigh-based Castleton sought bankruptcy protection last year after state insurance officials declined to award a license needed to do business and after disclosure that Castleton owed more than $8 million in back taxes to the U.S. government.
Castleton, which began in 1997, was supposed to have paid those taxes on behalf of clients. It managed payroll, benefits and other human resources issues for more than 100 small and mid-size businesses that employed more than 3,500 workers.
The bankruptcy filing shocked many of those customers, who had been led to believe that Castleton was solid. In recent years, it was honored by various publications for rapid growth and just weeks before the bankruptcy filing moved into new offices that Sparkman has described as "palatial."
As founder and president, Clifton, a former kindergarten teacher, was the public face of Castleton and helped foster the image of success. She drove a Mercedes convertible and, with her husband, maintained a 6,865-square-foot estate in North Palm Beach, Fla., and a 6,885-square-foot home in Wrightsville Beach.
By at least 2004, Clifton realized that Castleton was "hopelessly insolvent and would never be economically viable business," the lawsuit alleges. But Clifton "continued to drain money" from Castleton to "pursue her grandiose lifestyle, all while not paying taxes of innocent third party businesses and customers."
Clifton, on average, diverted more than $1 million a year from Castleton between 2003 and 2007, the lawsuit says. She did so through hidden draws, "loan repayments" to herself and transfers to affiliated companies, including Executive Staffing Group of Raleigh, which she also founded.
In the lawsuit, Sparkman listed examples of payments Castleton allegedly made to creditors on Clifton's behalf. They included a $198,907 payment to EMC Mortgage Co, $16,495 to Homecomings Financial and $47,309 to RBC Centura Bank.
All told, Clifton took at least $3.09 million from the company in the two years before its bankruptcy filing, according to calculations in the lawsuit.
Ex-CFO helping probe
For her part, Clifton has said that she was caught off-guard by the problems that brought down Castleton and that she worked diligently to save it. She blamed former chief financial officer Jay McLamb for the troubles and for keeping her in the dark.
McLamb in June pleaded guilty to conspiring to defraud the U.S. government by falsifying forms filed with the Internal Revenue Service. It was part of a negotiated agreement reached in exchange for his cooperation during a separate federal investigation into the demise of Castleton.
"Jay McLamb has accepted his responsibility for what happened to Castleton, and he is pleased to see that the whole story is beginning to come out," his attorney, Joseph B. Cheshire V, said Friday.
Sentencing for McLamb, which had been scheduled for this month, has been postponed at least until February because the federal investigation he is assisting is ongoing, according to documents in U.S. District Court for the Eastern District of North Carolina.
For former clients, the Clifton lawsuit marks another chapter in the Castleton saga but shows the fallout is far from over.
Among the concerns: Whether the IRS will pursue the businesses individually to get the taxes it is owed. Sparkman's lawsuit suggests that is a possibility.
Money due those businesses' employees is still missing. In November and December 2007, Castleton received at least $261,961 from its clients to be applied to a 401(k) plan. The money was not submitted, according to the lawsuit.
Don Lane, founder of Dr. Lane & Associates, which owns dentist offices throughout North Carolina, hired Castleton in 2005. He said Friday that if he knew about any of the company's troubles, he never would have done so.
"All we heard about was how wonderful Suzanne Clifton was -- woman of the year," he said. "It was basically smoke and mirrors. We didn't know anything."