Four months after merger, Miami and Boston companies file bankruptcy

In June, Miami-based Centro Group merged with Boston-area firm ProHCM Holdings, with plans to grow their payroll processing, benefits and human resources management business. But now both companies are in bankruptcy court amid allegations of fraud at the Miami company.

Centro Group allegedly did not remit payroll taxes to the IRS on behalf of its clients, according to court filings. A payroll processing firm normally withholds their clients’ payroll taxes for them, then pays the IRS. If those taxes aren’t paid, the IRS will come after the client.

Wrentham, Massachusetts-based ProHCM and Centro Group, which have 30 employees between them, announced their intent to merge in February and closed the merger five months later. At the time of the announcement, they said the combined firm operated in 150 markets across the U.S., and planned to expand to 200 locations by year-end.

Both Centro Group, also known as Simplepay, and ProHCM filed Chapter 11 reorganization in U.S. Bankruptcy Court in Miami on Oct. 23.

In its case management summary, Centro Group said it believed that some of its "prior directors absconded company monies from escrow accounts holdings its customers’ 941 payroll taxes. Upon the debtor’s learning of this fraud, it removed its former management, conducted an audit, and retained a new chief restructuring officer. However, due to the fraud, the debtor is unable to meet its current obligations to its creditors.”

The case summary estimated Centro Group owed $2 million to the IRS on behalf of its clients, but the final amount hasn't been determined.

ProHCM stated in its case summary that Centro Group had an “undisclosed liability” that it became aware of after the merger, and ProHCM wasn’t able to raise the capital to meet the financial obligations of its new subsidiary.

Boca Raton attorney Brad Shraiberg, who represents both Centro Group and ProHCM in bankruptcy court, said ProHCM was not made aware before the merger about the liabilities of Centro Group and had to file Chapter 11 to avoid being taken down by that liability.

Shraiberg said the debtors have not filed any litigation against any parties that might be responsible, but a lawsuit would be strongly considered.

Most of the nearly $2 million in claims against Centro Group were from clients who didn’t have their payroll tax obligations met, Shraiberg said. Those clients include the United Way of Miami-Dade, Miami-based Voices for Children Foundation, and Miami-based BCC Engineering.

Centro Group listed few assets.

ProHCM listed $4.28 million in assets and $4.24 million in liabilities, including the same client tax obligations allegedly owed by Centro Group.

According to their case management summaries, ProHCM had gross income of $2.73 million in 2017 compared to $553,000 for Centro Group.

The ProHCM bankruptcy petition said the largest equity holder is CEO Joseph D. Markland, with 28.9 percent. Former Centro Group President Christopher Green, who is no longer with either company, is a 17.8 percent equity holder in ProHCM.

Green, a Miami resident, told the Business Journal that all payroll taxes at Centro Group were paid while he was at the company. He left in early September, he said. He didn't hear that payroll taxes were not paid until a few weeks ago, he added.

When asked about whether ProHCM was made aware of all of Centro Group's liabilities prior to the merger, Green said that all the information was disclosed and ProHCM had ample resources to do due diligence on the company.

"It's obviously very disappointing to me," Green said of the bankruptcy filing. "I put time, energy and money into the company, but these things happen in business."

ProHCM filed two key motions in bankruptcy court Oct. 24. It asked the court for expedited approval of its sale, free and clear of liens and other debts, to Mino Caposella and 250 Mechanics, which has a secured loan to the debtor. Caposella is currently a principal and board member of ProHCM, so he would be considered an “insider buyer,” the filing said. The proposed purchase price was $4.5 million, with $2 million of that paid to creditors and the rest going to shareholders. There would be a bankruptcy auction in case third parties are willing to make a better offer.

ProHCM also asked the court to approve a working capital loan of $255,00 from Caposella and 250 Mechanics to keep the company going during the Chapter 11 process.

Shraiberg said he’s not sure what would happen to the employees of both ProHCM and Centro Group after the former company is sold, as that would be up to the buyer. There is currently no motion to sell Centro Group.

On Oct. 25, six creditors filed an objection to ProHCM’s motion to sell the company. According to court filings, those creditors said their funds held by the debtor for payroll tax obligations had disappeared, and they want the sales process put on hold so the court can determine what happened. Those six companies received notices from the IRS in September that they failed to pay payroll taxes, according to the motion.

“What happened to the trust funds is unknown, who stole the trust fund taxes is unknown, and how much was stolen is unknown,” the motion by Miami attorney David L. Rosendorf stated on behalf of the six creditors. “Some of the objectors’ payroll tax obligations to the IRS and State of Florida remain outstanding, accruing penalties and interest. Other objectors have been forced to pay their payroll tax obligations a second time.”

The objector creditors provided a letter that ProHCM CEO Markland sent them Sept. 28, saying that “financial irregularities” were found at Centro Group and asking for “a few more days” to finish the discovery process. They were notified about the bankruptcy Oct. 23 in a letter from James Martin, managing partner of ACM Capital Partners in Miami. Martin was retained by the board of Centro Group to determine the amount of “alleged fraud and misappropriation of tax deposits by the previous management.”

Martin advised that the clients directly pay their payroll taxes to the IRS, and then file a bankruptcy claim against Centro Group.