The trustee in Myrtle Beach-based Direct Air’s bankruptcy case has struck a deal with Marshall and Kay Ellison, two of the charter air carrier’s founders, that would drop all claims against the husband and wife in exchange for a $92,000 payment — or about 7.8 percent of what the trustee says the Ellisons actually owe.
The proposed settlement was filed Thursday in federal bankruptcy court in Massachusetts. It still needs a judge’s approval before it becomes final.
Trustee Joseph Baldiga said in court documents that it is doubtful he will ever recover the nearly $1.2 million in payments the Ellisons took from Direct Air in the four years leading up to its abrupt grounding and bankruptcy in early 2012.
“The cost of further litigating … would be substantial and would result in a smaller net recovery for the estate,” Baldiga said in the court filing.
In addition to dropping all financial claims against the Ellisons, Baldiga has agreed to drop a civil racketeering charge filed against Kay Ellison, who along with co-founder Judy Tull had access to the charter carrier’s bank accounts.
Tull, the former chief executive officer at Direct Air, recently completed a settlement with Baldiga that dropped financial claims and a civil racketeering charge against her. Tull paid $10,000 — about 1.5 percent of the $657,252 she allegedly owed — in the settlement.
Baldiga said in court documents that the Ellisons‘ financial situation precludes them from paying the full amount they allegedly owe. Marshall Ellison, Direct Air’s chairman, is retired and does not work while Kay Ellison, the charter’s managing partner, now is unemployed after having worked as an hourly employee at a restaurant. Their Myrtle Beach home “has significant negative equity,” according to court documents and commercial property they own in Beckley, W.Va., has a $1.4 million mortgage against $500,000 in equity.
The settlement amount is “largely based on contributions from [the Ellisons’] family and friends,” Baldiga said.
Under the agreement, the Ellisons must make a $92,000 wire transfer to Baldiga’s office by Monday. The couple has agreed to have a $1 million judgment entered against them if they do not make the payment.
The Ellisons also have agreed to dismiss any financial claims they might have against Direct Air’s bankruptcy estate.
Baldiga still is suing two other Direct Air founders — Ed Warneck, the carrier’s president, and Chief Financial Officer Robert Keilman, the only founder to invest money in the charter service — for nearly $1.4 million in payments they took from Direct Air.
Direct Air’s payments to the founders were made for salaries, consulting fees and other services, according to court documents.
Warneck has filed for bankruptcy protection and any recovery Baldiga seeks must go through those proceedings. It is not clear whether Keilman is negotiating a settlement agreement with Baldiga.
The civil racketeering charges against Tull and Kay Ellison were related to nearly $30.4 million that was missing from Direct Air’s escrow account when the carrier filed for bankruptcy protection. Baldiga also has accused all of the founders of fraud and breach of fiduciary duty.
In a report filed last month, Baldiga identified three ways in which Tull and Kay Ellison improperly drained the escrow account, which was kept at Valley National Bank in New Jersey.
Among those was their practice of over-reporting passenger revenues for individual flights by adding passengers to its reporting system who actually never took the flight. Those “ghost passengers” falsely inflated the revenue figures Direct Air reported to the bank holding its escrow account, allowing Direct Air to withdraw more money per flight than it should have been allowed to take.
Another way the escrow funds were taken involved the carrier’s Family Ties program, which allowed customers to purchase low-priced vouchers for any upcoming flight. Each voucher included a membership fee that ranged from $40 to $60. Direct Air’s founders believed the membership fee portion of the voucher did not have to be kept in escrow, so those fees were immediately withdrawn. Then, after the flights took place, Direct Air withdrew the full voucher total, which included the membership fee.
“That resulted in Direct Air being paid twice from the depository accounts for Family Ties membership fees,” the report states.
A third way money was taken improperly was through withdrawal requests Direct Air’s founders made for funds they never actually deposited into the Valley National Bank escrow account. For example, Direct Air’s executives would file withdrawal requests for passenger fares paid with cash even though cash payments were not deposited into the escrow account. The bank gave that money to Direct Air’s founders even though it knew cash was never deposited into the account.
Direct Air – which was formed to help bring tourists to the Myrtle Beach area – announced in 2006 that it would start offering air charter services with its first flight on March 7, 2007. The charter service stopped flying five years later after running up $80 million in unpaid bills, according to bankruptcy documents. Direct Air accounted for more than 10 percent of all traffic at Myrtle Beach International Airport in the year before it abruptly stopped flying tourists from 17 destinations.
There were about 93,000 people who bought tickets for Direct Air flights that did not occur. Most of those people received refunds through credit card chargebacks. The bank that handled those chargebacks — Merrick Bank — is suing Direct Air’s founders and Valley National Bank to get back about $25 million it lost due to the refunds.
Baldiga has entered into an agreement with Merrick Bank in which the bankruptcy estate would get 5 percent of any money the bank recovers in its lawsuit against Valley National Bank. That money would go to pay passengers who haven’t yet received full refunds for their unused Direct Air tickets.
A bankruptcy judge previously approved $250,000 in payments to passengers who bought tickets with cash or other means instead of a credit card.
Contact DAVID WREN at 626-0281 or via twitter at @David_Wren_