The trustee in Myrtle Beach-based Direct Air’s bankruptcy case has filed civil racketeering charges against Judy Tull and Kay Ellison, two of the charter air carrier’s founders, claiming the women fraudulently withdrew money from an escrow account that was supposed to protect passengers’ fares in the event their flights did not occur.
The charges are included in lawsuits filed Thursday against Direct Air’s founders, in which Trustee Joseph Baldiga seeks to recover more than $3.2 million in salary, consulting fees and other payments the founders took from the failed charter service during a four-year period leading up to its bankruptcy filing in March 2012.
Baldiga also has asked a judge to issue a restraining order against those founders – Tull, Ellison, Marshall Ellison, Ed Warneck and Bob Keilman – to stop them from transferring any assets or spending any more money than what is necessary for living expenses until the lawsuits are resolved. Baldiga cited Keilman’s transfer in 2009 of his home and other assets into his wife’s name as evidence that Direct Air’s founders might try to hide assets that could be used to repay money they took from the air carrier.
Tom Rafferty, a Maryland lawyer who represents Keilman, declined to comment when contacted Friday. Warneck could not be reached for comment.
Reese Boyd III, a Myrtle Beach lawyer who represents Tull and the Ellisons, told The Sun News this week that Baldiga’s investigation “contains quiet a few inaccuracies that my clients do not agree with.” Boyd said Tull and the Ellisons plan to respond to the allegations, but declined further comment because of the ongoing proceedings.
The most serious charge is the racketeering allegation against Tull and Kay Ellison, who controlled withdrawals from a trust account set up at Valley National Bank in New Jersey. Baldiga, in his complaint, said the women violated federal wire fraud laws by regularly sending withdrawal requests to the bank by fax and email. Wire fraud is a criminal offense that carries a maximum 20-year prison sentence for each instance. Baldiga declined to say whether he is referring information to law enforcement for possible prosecution.
Tull and Ellison “improperly dissipated [Direct Air’s] depository accounts by preparing and submitting fraudulent release requests … for the common purpose of funneling money to [Direct Air] that it was not entitled to,” according to the complaint.
The civil racketeering charge, if proven, would allow Baldiga to recover three times the actual damages suffered by Direct Air. Those actual damages are at least $30 million, Baldiga said in the court filing.
Baldiga is seeking to recover salary and other payments made to Direct Air’s founders because they allowed the charter service to operate for years even though they knew it was insolvent, according to court documents. The founders kept Direct Air flying by improperly taking money from the escrow account to cover expenses.
Their conduct “fraudulently prolonged the life of [Direct Air] years beyond insolvency and deepened the ... insolvency until it reached over $30 million,” Baldiga said in court documents, adding that the founders should have pulled the plug on the air carrier the minute they realized it was insolvent.
“The [escrow] shortfall would not exist at its current magnitude if the ... management team ceased operations when it became apparent that the depository accounts at Valley National Bank contained insufficient funds to cover all current operating expenses and all customer funds for advance flights pursuant to [U.S.] Department of Transportation regulations,” the complaint states.
Although Direct Air never made a profit and continually operated at a loss, there is disagreement over when the carrier’s founders realized the carrier was insolvent. At the latest, court documents show the founders knew about the insolvency by the end of 2009 but continued to operate the charter for more than two more years.
The lawsuits allege fraud and breach of fiduciary duty against all of Direct Air’s founders.
Baldiga is seeking to recover $841,758 in salary, consulting fees and other payments made to Keilman, who was the carrier’s chief financial officer and the only founder to invest money in Direct Air. Baldiga also hopes to recover: $657,253 in payments made to Tull, the carrier’s chief executive officer; $602,392 in payments made to Kay Ellison, the carrier’s managing partner; $571,815 in payments made to Marshall Ellison, the carrier’s chairman; and $552,791 in payments made to Warneck, the carrier’s president.
Those amounts represent payments made in the four years leading up to Direct Air’s bankruptcy filing. The statute of limitations for recovering fraudulent transfers in a bankruptcy case is four years in Massachusetts, the state where Direct Air’s bankruptcy was filed.
In addition to recovering the payments, Baldiga is seeking unspecified punitive damages against each of Direct Air’s founders.
By the time Direct Air filed for bankruptcy protection, the shortfall in the carrier’s escrow account totaled nearly $30.4 million. Federal law required Direct Air to establish the escrow account so passengers’ fares would be protected if a flight did not occur. Once a flight took place, the escrowed money could be withdrawn by Direct Air to pay bills.
In a report filed earlier this month, Baldiga indentified three ways in which Direct Air’s founders improperly drained the escrow account.
Among those was the founders’ 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 founders 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.
The report also blames Valley National Bank for failing to question any of the withdrawal requests made by Direct Air’s founders.
“Valley National Bank never failed to process any release report submitted by Direct Air,” Baldiga said in the report.
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 is suing Direct Air’s founders to get back about $25 million it lost due to the refunds. A bankruptcy judge also approved $250,000 in payments to passengers who bought tickets with cash or other means instead of a credit card .