The executives at Myrtle Beach-based Direct Air drained more than $30 million from an escrow account that was supposed to keep passengers’ money safe by submitting false reports to the bank that held the account, according to a complaint filed Wednesday in the charter air carrier’s bankruptcy case.
Those false reports allowed Direct Air to improperly withdraw money for flights that had not yet occurred, make multiple withdrawals for the same flights and withdraw cash that actually had never been deposited, the complaint states.
The escrow account – which, by federal law, was to hold passengers’ ticket funds until after their flights took place – was supposed to have $32 million in it when Direct Air filed for bankruptcy protection in 2012. Court documents show the account, which was at New Jersey-based Valley National Bank, only had $1 million when the charter abruptly stopped flying.
The complaint does not name the Direct Air executives who are alleged to have improperly withdrawn escrow funds. Alan Braunstein, who represents Direct Air in the bankruptcy case, referred questions to Joseph Baldiga, the bankruptcy trustee.
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Baldiga said his investigation into the missing escrow money is continuing, “so it’s premature to comment.”
“I do expect more to come,” he said.
Merrick Bank filed the complaint, alleging mismanagement of the escrow account by Valley National Bank. Merrick Bank guaranteed Direct Air passengers’ credit card payments and has had to pay $26.2 million in chargebacks for tickets on flights that never occurred.
Greg Haworth, a lawyer representing Valley National Bank, could not be reached for comment. The bank has not filed a response to the complaint and no court date is scheduled.
Merrick Bank alleges that Valley National Bank failed to segregate funds in the escrow account, allowing funds from different scheduled flights to flow into the same pot of money. Valley National Bank would then transfer to Direct Air whatever amount the charter service said it was owed, according to the complaint.
“Valley National Bank never attempted to match up the receipts claimed by Direct Air in its disbursement requests against the actual receipts into the depository account,” Merrick Bank’s complaint states. “At no time, therefore, was Valley National Bank capable of identifying which future flights or passengers it was holding money for, or in what amounts, thus completely eviscerating the purpose of the [escrow] account . . .”
Valley National Bank also failed to record the names of passengers whose money was received, released funds to Direct Air without certification from the air carrier that the flights had taken place and released funds to vendors without obtaining certified receipts or invoices. The bank also never questioned whether the balance in the account was appropriate given the amount of advanced bookings for flights.
“In short, Valley National Bank allowed Direct Air to operate the depository account as, effectively, a checking or demand account, disbursing funds at times, and in amounts, completely as directed by Direct Air,” the complaint states.
Merrick Bank is suing Valley National Bank for breach of contract, negligence, consumer fraud, aiding and abetting fraud and aiding and abetting conversion. Merrick Bank said Valley National Bank also violated federal Department of Transportation laws regulating charter air carriers. Merrick Bank is seeking at least $76.5 million in actual and punitive damages.
Merrick Bank also has filed a lawsuits against Direct Air’s founders – Judy Tull, Ed Warneck, Kay Ellison and Marshall Ellison – claiming they 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. That lawsuit is pending.
Direct Air – which was formed to help bring tourists to the Myrtle Beach area from places such as , 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 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. A bankruptcy judge this month also approved $250,000 in payments to passengers who bought tickets with cash or other means instead of a credit card. Baldiga said he expects those payments will be made before the end of this month.
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.