Bank going after Myrtle Beach-based Direct Air’s former owners for $25 million debt

11/13/2013 2:03 PM

11/13/2013 3:03 PM

As the trustee in Direct Air’s bankruptcy case seeks permission to refund hundreds of the charter air carrier’s ticket purchasers for flights that never occurred, a bank that handled credit card payment processing for the carrier wants to hold Direct Air’s former owners personally responsible for more than $25 million worth of debt.

Joseph Baldiga, the trustee in Direct Air’s bankruptcy liquidation, told The Sun News that he filed a motion Tuesday that would distribute $250,000 to about 1,900 ticket purchasers whose flights were canceled when the Myrtle Beach-based carrier abruptly shut down in March 2012. A judge is expected to approve the distributions, which would cover about one-fourth of those ticket purchasers’ claims. Payments could be made by the end of this year.

All told, 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.

Those chargebacks are the focus of a separate federal lawsuit filed by Merrick Bank, the Utah-based financial institution that settled credit card transaction for Direct Air ticket purchases. Merrick Bank says Direct Air’s former owners – Judy Tull, Ed Warneck, Kay Ellison and Marshall Ellison – are personally liable for more than $25 million in chargeback payments because they signed personal guarantees to cover the debt as part of a 2006 agreement.

Direct Air’s former owners could not be reached for comment Wednesday and it is not clear whether they are represented by lawyers in the Merrick Bank lawsuit.

Merrick Bank was authorized to charge Direct Air’s operating and reserve accounts whenever customer chargebacks occurred, but those accounts have been frozen since the carrier filed for bankruptcy protection and court records show the accounts don’t have enough cash to cover the chargebacks even if the money were available. Without access to that money, Merrick Bank said it intends to enforce personal guarantees the carrier’s owners signed in 2006.

“The guarantees absolutely and unconditionally guarantee the payment and performance of all obligations identified in the [Direct Air] merchant agreement including, but not limited to, the payment of any chargebacks incurred as a result of Direct Air’s actions or failures,” Merrick Bank lawyer John Hearn stated in the bank’s complaint.

“As a direct result of Direct Air’s suspension of operations, Merrick Bank was forced to refund to Direct Air customers the purchase price of the services not delivered and, in so doing, incurred chargebacks in excess of $25 million,” Hearn stated.

Merrick Bank also is asking a judge to force Direct Air’s owners to pay attorney’s fees and court costs. No court date has been scheduled and the air carrier’s former owners have not filed a response to the bank’s allegations.

A federal bankruptcy judge has given Merrick Bank permission to investigate – along with Baldiga – how about $28.5 million disappeared from the Direct Air’s bank accounts leading up to its bankruptcy filing. Those bank accounts were supposed to hold passengers’ ticket payments in escrow and should have contained $29.5 million when Direct Air’s bankruptcy petition was filed on March 15, 2012. Instead, there was only one cent in one of the accounts and a little more than $1 million in another, according to court documents.

Merrick Bank, by far Direct Air’s largest creditor, now can force witnesses to testify under oath in what are called rule 2004 examinations, the bankruptcy court’s version of a deposition. Some of those examinations occurred last week in Horry County, including interviews with Direct Air’s former owners.

Baldiga said the investigation into Direct Air’s missing money “is continuing and should be wrapped up in a few months.” He said it is premature to speculate about what that investigation will show.

Merrick Bank also is trying to collect the money Direct Air owes from an chargeback insurance policy it had through Chartis Specialty Insurance Co., an affiliate of insurance giant American International Group. Chartis is fighting Merrick’s attempts in federal court in New York, saying its insurance policy only covers chargeback amounts that exceed the $29.5 million that should have been left in Direct Air’s escrow accounts. That case is now in mediation.

Daniel Gurfein, a Merrick Bank lawyer in the insurance case, said during a hearing this year that Direct Air represented one of the riskiest types of merchants for which it handled credit card transactions.

“It is a big risk because any merchant who takes money before they deliver the goods or the services creates a large risk for a chargeback because, of course, they have the money,” Gurfein said. “[If] the service isn’t delivered, the card holder is going to get the money back and if we cannot get the money from the merchant, we are out the money.”

In addition to the carrier’s creditors, Direct Air’s bankruptcy – initially a Chapter 11 reorganization that was converted to a Chapter 7 liquidation within a month – could impact several contractors who received payments in the months leading up to the bankruptcy filing. Under the “preferential payment rule,” anyone who receives a payment from a debtor within 90 days of the debtor’s bankruptcy filing can be forced to return that payment to the bankruptcy estate.

Baldiga has filed six lawsuits seeking the return of such payments from the carrier’s contractors. The trustee says Quickflight Inc., which provided ground handling services for Direct Air flights, received $220,140 in preferential payments while another ground operations company – Niagara Falls Aviation LLC – received $125,676 in preferential payments. The trustee also has filed lawsuits to recover preferential payments against: the Allegheny County, Pa., Airport Authority for $60,000; the Fairfield Inn at Broadway at the Beach in Myrtle Beach for $27,245.49; Progressive Funding Solutions LLC for $20,096.72; and The Station Inc. for $15,100.

Direct Air leased a fire truck from The Station Inc. on March 1, 2012, two weeks before the carrier filed for bankruptcy protection.

Direct Air’s failure prompted the U.S. Department of Transportation, which oversees such carriers, to tweak its rules for charter operators, including not allowing the sale of vouchers for future travel not tied to specific flights because they are not protected under charter escrow requirements. Direct Air regularly sold vouchers through its “Friends and Family” promotion.

DOT also fined several of the carriers for Direct Air flights for their roles in the abrupt shutdown of flights that left thousands of travelers stranded or scrambling to line up alternate means of travel.

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. It is at least the third Myrtle Beach-based air carrier catering to tourists to fail, leaving a string of unpaid bills and unhappy passengers. Myrtle Beach Jet Express started flying routes to Myrtle Beach in 1996 before abruptly halting service and stranding passengers three years later. Direct Air’s Tull also was an executive with Jet Express. Hooters Air, founded by Hooters restaurant owner Bob Brooks, lasted three years after it started flying in 2003.

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