Grounded

Hopefully in jail...

Worcester Telegram & Gazette - telegram.com - Charges fly in Direct Air debacle hearing



Charges fly in Direct Air debacle hearing

Company: Execs deserted ‘under cover of darkness'


By Thomas Caywood TELEGRAM & GAZETTE STAFF



WORCESTER — As a fuller picture of Direct Air's financial ruin emerged at a hearing in U.S. Bankruptcy Court here yesterday, the charter air service's current and former owners began blaming each other for the company's dramatic collapse.

With Direct Air losing money, suffocating under mounting debt and teetering on the edge of financial collapse last week, its former president, Judy K. Tull, and other top executives left their posts without warning, according to a lawyer for the company.

“Like the Baltimore Colts, they left under the cover of darkness, packed up their offices and took what they took, and we don't know what they took, and abandoned the debtor,” said Steven E. Fox, one of several lawyers representing Direct Air in its bankruptcy.

What's more, Mr. Fox said at the hearing, it appears that millions of dollars are missing from an escrow account set up by Direct Air under U.S. Department of Transportation regulations intended to protect ticket holders in the event of flight cancellations.

Ms. Tull, Direct Air's former president and chief executive officer and one of its founders, shot back in a telephone interview yesterday evening saying that she and other former owners did not leave their posts as Mr. Fox claimed, but rather were locked out of the company's Myrtle Beach, S.C., offices by the new owners.

Ms. Tull said she resigned in February following the purchase of Direct Air last September by Avondale Ventures LLC, a private equity firm based in Washington, D.C.

She said that she had been serving as a consultant to Direct Air recently but that Avondale Managing Partner Hank L. Torbert had installed several of his own executives at Direct Air, including a chief financial officer who was well aware of company's mounting losses.

“They have been running the company since September, making all the financial decisions,” Ms. Tull said. “On the Monday that they decided to close, Mr. Torbert came in and said, ‘This is my company. I'm shutting this company down.' ”

Another of the former executives and founders, Kay Ellison, said in an interview that she pleaded unsuccessfully with Mr. Torbert to use the airplanes of another aviation company he owns, Swift Air LLC of Phoenix, to get stranded Direct Air passengers home.

While it remains unclear amid all the finger pointing on whose watch the company failed, there is no question that Direct Air's assets are nowhere near sufficient to pay off its creditors and refund fares paid by passengers.

A lawyer for the New Jersey bank that held the escrow account into which fares were supposed to have been deposited told Judge Melvin S. Hoffman that the account balance is little more than $1 million, far short of the potentially tens of millions of dollars that it should contain to pay refunds to consumers.

Federal transportation regulations require that fares paid by charter air passengers be deposited into an escrow account and not released to the charter service, Direct Air in this case, until the flights are completed. That means Direct Air's escrow account at Valley National Bank should contain enough money to pay refunds to all the passengers left holding useless tickets, even any paid for with cash, checks or debit cards.

But Mr. Fox, one of Direct Air's lawyers in the bankruptcy case, told the judge that Avondale Ventures has uncovered “irregularities” in the handling of the escrow account.

“It is our belief that the escrow account was invaded. It may have been invaded in an unlawful manner,” said Mr. Fox, who did not elaborate on who his client believes raided the account.

While none of the numerous lawyers representing banks, credit card companies and others who spoke during a two-hour emergency hearing yesterday morning in Judge Hoffman's Worcester courtroom could say for sure how much money the charter air service owes to customers, several said it was clear that the amount far exceeds Direct Air's assets and the money left in the escrow account, which together total roughly $2 million.

That's bad news for passengers who didn't use a credit card to buy their tickets and for credit card processors, who were expecting to be reimbursed from the escrow account for refunds they already have paid to credit card customers.

The only other potential source of refunds for consumers is a $200,000 surety bond held on behalf of Direct Air by Platte River Insurance Co. of Ramsey, N.J.

Lawyers for the insurance company were not present at the hearing yesterday. But the president of Platte River's surety operation, Rick Allen, said in an interview that the company has received or is aware of roughly 750 specific claims against the bond and has been told to expect as many as some 2,000 claims.

Because the total dollar value of those claims likely will far exceed the $200,000 value of the bond, Platte River is evaluating how to handle the claims. It could pay them as they come in until the money runs out or seek to turn the entire sum over to the bankruptcy court to disburse to consumers as it sees fit, Mr. Allen said.

“Theoretically, there should be enough money in the escrow account to pay everybody back, and the bond is just there as a backstop in case anything falls through the cracks,” he said. “If there's a big shortfall in the escrow account, that creates a problem.”

The problem is especially acute, as it turns out, for credit card processors.

A lawyer for a division of American Express said the company so far has paid out about $1.8 million in refunds to customers who used their AmEx cards to buy Direct Air tickets. A lawyer for JetPay Merchant Services LLC of Texas, which processed Master Card, Visa and Discover transactions online for Direct Air, said it has paid out roughly $4 million and counting in chargebacks to credit card companies since last week with no reimbursement from the escrow account.

It was JetPay's emergency motion asking Judge Hoffman to rule that the escrow account was outside the scope of the bankruptcy proceeding that prompted yesterday's hearing. Judge Hoffman didn't make a ruling and continued the hearing until April 11.

JetPay argued in its motion that the mounting chargebacks with no reimbursement from the escrow account could threaten its ability to stay in business, a situation that would appear to be largely unavoidable given that there's only $1 million in the account.

But JetPay Chairman and Chief Executive Officer Trent Voigt clarified in an interview yesterday that the company has insurance against such catastrophic chargebacks and that it also has legal recourse against the personal wealth of Direct Air's founders, including Ms. Tull and Ms. Ellison, whom he said signed personal guarantees protecting JetPay from such losses.

Meanwhile, Mr. Fox said it was his understanding that the total amount owed to consumers is at least $10 million and could be as much as $30 million. Direct Air also owes $8.6 million to its largest creditors such as fuel suppliers, aircraft operators and airports.

Given the bleak financial picture, the U.S. Trustee in the bankruptcy case, Richard King, has asked Judge Hoffman to convert the matter from a Chapter 11 bankruptcy reorganization that Direct Air is seeking to a Chapter 7 liquidation of the company's remaining assets.

Mr. Fox acknowledged in court that Direct Air faces major obstacles to resuming operations.

In addition to having to rebuild relationships with aircraft operators, fuel suppliers, airport authorities and others, Mr. Fox said, “We are going to need to rebuild some customer confidence because we assume there is little to none today.”