This story has been edited to correct an error.
As an investigation continues into how $28.5 million disappeared from defunct charter service Direct Air’s escrow account, court records from around the country show the executives and consultants brought in to help run the Myrtle Beach-based air carrier in the months before its bankruptcy were at the helm when similar financial tailspins hit other air carriers.
Financially troubled carriers TradeWinds Airlines, Sky King, Arrow Air and Swift Air all have ties to individuals associated with Washington, D.C.-based Avondale Ventures, which took a controlling interest in Direct Air six months before its failure. Avondale’s founder, Hank Torbert, and his associates – Jeff Conry, Donald Stukes and Boris Van Lier – also face allegations in a civil lawsuit of racketeering and fraud in the demise of Saipan Air, a carrier with a storyline “strikingly similar,” one court official said in a document, to Direct Air’s failure.
Tolbert, Stukes and Conry deny any wrongdoing.
Tolbert and the others have blamed Direct Air’s founders – Judy Tull, Ed Warneck, Marshall Ellison and Kay Ellison – for the disappearance of Direct Air’s escrow account. Tull and the others say Avondale’s associates share the blame for the missing money, and their counterparts’ financial problems at other carriers has been ignored.
At stake is tens of millions of dollars owed to Direct Air’s creditors and thousands of would-be passengers who paid for tickets they couldn’t use when Direct Air was grounded in March 2012. Direct Air, which started flying in 2007, was one of the top carriers at Myrtle Beach International by the time Avondale took over, accounting for nearly 100,000 passengers in its final full year of operation.
Tolbert and Steven Fox, a lawyer representing the Direct Air entity that filed for bankruptcy protection under Avondale’s management, did not return telephone calls seeking comment on the allegations. Reese Boyd III, a lawyer representing some of Direct Air’s founders, declined to discuss the escrow account because of pending and possible future litigation over the matter.
Conry told The Sun News that he had nothing to do with Direct Air’s escrow account or its day-to-day operations.
“These are just allegations,” Conry said. “They can’t prove anything because it isn’t true.”
Stukes could not be reached for comment.
Past financial woes
Court records dating to at least 2008 show Avondale’s associates had been involved in other airline failures before taking over Direct Air’s operations. For example:
Stukes was a minority owner and board member of Direct Air before its bankruptcy filing. Avondale wanted to hire Stukes’ investment firm after the Direct Air bankruptcy to provide restructuring advice for a minimum retainer of $15,000 but a judge denied the request when the bankruptcy was converted to a liquidation. Stukes’ firm received at least $7,000 from Direct Air for other financial services prior to the bankruptcy filing.
TMC Avion accuses Sky King executives of falsifying financial and payroll records and taking Sky King assets for their personal use, including thousands of dollars spent at an adult nightclub in Guam. TMC Avion says Conry took $25,000 of the carrier’s money, purportedly to negotiate a fuel contract, and instead used it to make payments on his 17,000-square-foot home in Stokesdale, N.C., which was in danger of foreclosure.
Direct Air had used Sky King aircraft for some of its charter flights and TMC Avion was in negotiations to acquire Direct Air in the summer of 2011. TMC Avion says Conry sabotaged those negotiations and steered Direct Air toward his friends and partners at Avondale.
Conry says he was a consultant for Direct Air’s owners. The charter’s founders say Conry took over daily operations at Direct Air – including oversight of the charter’s financials – after Avondale became the majority owner in late September 2011.
All told, Torbert and Avondale’s associates had ownership of at least two carriers – including Direct Air – and were negotiating to provide services for a third at the same time in late 2011. All of those ventures failed.
High hopes for charter service
Saipan Air – established in November 2011, just as Direct Air was skidding toward bankruptcy court – had at least one primary goal in common with its Myrtle Beach counterpart: attracting tourists.
Saipan is a tropical island located about 1,200 miles from Japan in the Western Pacific Ocean. With its own international airport, sandy beaches and more than 2,500 hotel rooms, Saipan is a popular destination for tourists from Japan, South Korea and China. The airline was seen as a panacea for a commonwealth government decimated by the loss of tax revenues from a once-thriving – but now mostly shuttered – garment industry. An economic impact study conducted for the airline showed that it could bring 180,000 tourists per year to the island, and those tourists would spend an estimated $80 million, not counting their hotel and air fares.
As a start-up carrier, Saipan Air was in the same predicament as Direct Air – having to lease aircraft, flight and maintenance crews and other services from established carriers that already had U.S. Department of Transportation certification.
Saipan Air began soliciting proposals from established carriers, and Avondale’s Swift Air – represented by Conry, Stukes and Van Lier – was among those that responded.
By mid-March 2012, the two sides were close to making a deal, based on Conry’s assertion – which turned out to be false, court records show – that Avondale had $70 million to support Saipan Air’s program, according to the affidavit. On April 9, 2012, Saipan Air sent a $900,000 wire transfer to Swift Air to ensure aircraft and crew were available for Saipan Air’s July 1, 2012, start date.
Missing money, broken promises
About a month after Direct Air’s March 13, 2012, grounding, Adam Ferguson – Saipan Air’s chief operating officer – said he learned the Boeing 757 aircraft he was counting on for Saipan Air had not been leased and the money he had sent to Swift Air was missing.
“I learned the . . . funds were converted and misappropriated” by Avondale and its associates, according to Ferguson’s affidavit. Conry “pleaded with me” for more money to keep the July 1 start date on track, Ferguson said, adding that Saipan Air wired another $367,000 to Swift Air after Conry and Van Lier assured him the flights would start on schedule.
By the end of May 2012, it was becoming clear that Avondale and Swift Air were not going to be able to fulfill their contractual obligations with Saipan Air, court records show. Ferguson, in an affidavit, said Conry and Stukes told him they urgently needed a $1.5 million bridge loan or the deal would fall apart.
On June 24, 2012, Ferguson said he received a letter from Van Lier terminating the contract. Swift Air did not return the money it had received from Saipan Air. Swift Air filed for bankruptcy protection on June 27, 2012, leaving Saipan Air fighting more than 100 other creditors for its money.
First a failure, then finger pointing
Direct Air’s bankruptcy dealt a blow to the Myrtle Beach area economy as well. The charter service accounted for more than 10 percent of all traffic at Myrtle Beach International Airport in the year before it stopped flying tourists from 17 destinations to the Grand Strand.
Direct Air’s decision to partner with Avondale during the late summer of 2011 was based on the investment group’s promise that it could combine the charter with an established carrier, allowing Direct Air to shed the burden of maintaining an escrow account for its flights.
The U.S. Department of Transportation requires charter carriers to keep passengers’ ticket funds in an escrow account until after those passengers’ flights are concluded, thus ensuring that money is available for refunds if a flight is canceled. Normal air carriers, such as Spirit Airlines or US Airways, are not bound by those restrictions and can immediately use money from ticket purchases to help pay for operating expenses.
Avondale obtained a 55 percent ownership interest in Direct Air upon signing the Sept. 29, 2011 contract promising to provide such a carrier. Avondale was supposed to get 95 percent of Direct Air once a merger was complete. That never happened.
It didn’t take long after Direct Air’s failure for both sides – the charter’s founders and Avondale’s management – to start pointing fingers at each other over the $28.5 million missing from the charter’s escrow account.
Fox – the lawyer representing Direct Air in the bankruptcy case, and who also represented Swift Air – said during a bankruptcy court hearing that the escrow account “was invaded . . . it may have been invaded in an unlawful manner.”
Lawyers pointed to problems the Ellisons had in 1993 when they misappropriated money that was supposed to go into an escrow account for airline ticket purchases to shore up their failing travel agency. The Ellisons and their travel agency filed for bankruptcy protection the following year.
“It is amazing how similar the two defalcations are to one another – both involve trust or escrow funds, both involve airline operations and both involve the Ellisons,” David Haber, a lawyer for one of Direct Air’s creditors, stated in court documents. Haber also said in a court document that he does not believe Avondale’s associates were ignorant of the missing escrow funds, calling their claim “preposterous.”
Who was running the show?
Fox said the charter’s founders had been making all of the financial decisions until they abruptly abandoned the business a few days before it was grounded. Fox said the founders’ unannounced departure forced the shocked Avondale ownership to “parachute in a new team” at the last minute to try to save Direct Air.
Tull disputed that account during a telephone interview she gave to the Worcester (Mass.) Telegram & Gazette. Tull told that newspaper that she and the other former owners did not leave their posts but were locked out of the company’s offices by Avondale executives.
“They have been running the company since September , making all the financial decisions,” Tull told the newspaper. “On the Monday that they decided to close, Mr. Torbert came in and said, ‘This is my company. I’m shutting this company down.’”
Avondale’s associates have said they didn’t learn about the missing escrow money until after Direct Air stopped flying. Court documents filed by Haber, however, indicate Avondale was “well aware” of the missing funds months before they put the carrier into bankruptcy court, and “were complicit in the continuing depletion” of the account, according to court documents.
A Direct Air financial statement shows the charter’s escrow account was missing $12.5 million as of Dec. 31, 2011 – three months after Avondale took control of the company and more than three months before the charter was shut down. Printed at the bottom of the financial statement are the words “King/Williams,” an aviation consulting business Conry was running out of Direct Air’s offices on Oak Street.
Conry told The Sun News he has no idea what happened to the escrow money.
“I had nothing to do with Direct Air,” he said. “I was a consultant for the owners of that company. I had nothing to do with the money or the day-to-day operations.”
Boyd, the lawyer representing some of Direct Air’s founders, said the charter’s failure and ensuing litigation has been “devastating” for his clients.
“It really is a tragedy the deal went the way it did,” he said.
It could take several months before there are any answers about the missing escrow funds. Joseph Baldiga, the trustee in Direct Air’s bankruptcy case, is conducting an investigation into the missing money and said he expects to release his findings late this year or early next year.
Until then, Baldiga said, “it is premature to offer conclusions.”