The trustee in Myrtle Beach-based Direct Air’s bankruptcy case has filed a lawsuit against Avondale Aviation 1 LLC, the group that acquired the charter air carrier months before it went out of business, seeking the return of more than $107,000 in payments to the charter’s founders, consultants and others.
The lawsuit is one of a half-dozen filed by Trustee Robert Baldiga in the wake of his investigation into how $30.4 million was missing from Direct Air’s escrow account at the time it filed for bankruptcy protection in March 2012. That investigation blames Direct Air’s founders for draining the account, which was supposed to hold passengers’ fares until their flights were completed, through a series of improper transactions and accounting methods.
Baldiga has entered into settlement agreements with three of the founders — Judy Tull and Marshall and Kay Ellison — that would require them to pay back a fraction of the nearly $1.9 million in improper payments they took from the charter service. Lawsuits are pending against the other two founders — Robert Keilman and Ed Warneck. They received a combined $1.4 million in improper payments from Direct Air, according to court documents. Warneck has since filed for bankruptcy protection.
Baldiga is suing Avondale to recover another $77,083.50 in payments the private equity firm made to Direct Air’s founders after Avondale acquired a majority interest in the charter service on Sept. 29, 2011. Those payments were part of a $750,000 promissory note Avondale gave to Direct Air’s founders as part of the acquisition and for consulting fees paid to the founders.
Baldiga also wants to recover more than $30,000 in fees and expenses Avondale paid to a trio of consultants it hired to evaluate the Direct Air acquisition.
Avondale — which is owned by Hank Torbert, Washington, D.C.-based investor and principal of RLMcCall Capital Partners — has denied any wrongdoing in its answer to Baldiga’s lawsuit. The company said its payments were made during the ordinary course of business and that it received fair-market value in services for those payments. Avondale has asked a bankruptcy judge to dismiss the lawsuit. Torbert could not be reached for comment.
Baldiga said the lawsuit is in the early stages and both sides are still conducting discovery. No court date has been set.
Court documents state that Direct Air’s escrow account already was missing tens of millions of dollars by the time Avondale acquired the charter service. Baldiga said another $3 million was drained from the account under Avondale’s leadership, although Avondale said in court documents that it was never in control of day-to-day management of Direct Air.
In a report filed last month, Baldiga identified three ways in which Tull and Kay Ellison — the only founders with access to the charter’s bank accounts — 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.
The escrow account, required by federal law, was supposed to keep passengers’ payments safe in case a flight was canceled and money had to be returned. There were about 93,000 people who bought tickets for Direct Air flights that did not occur. Since their payments were not held in escrow, 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 recently settled a lawsuit against Tull, the charter service’s former chief executive officer. Under that settlement, Tull paid $10,000 of the $657,252 she allegedly owed for improper payments. A second settlement with Marshall and Kay Ellison — the carrier’s former chairman and managing partner, respectively, calls for the couple to pay $92,000 of the nearly $1.2 million they allegedly owed for improper payments they received. That settlement still needs the approval of a bankruptcy judge.
Baldiga said in court documents that the settlement agreements are the best Direct Air’s estate can expect to get because Tull and the Ellisons now have limited financial resources.
Contact DAVID WREN at 626-0281 or via twitter at @David_Wren_