Myrtle Beach-based Direct Air founder files for bankruptcy protection as creditors swarm

Ed Warneck – one of the founders of Myrtle Beach-based Direct Air – has filed for personal bankruptcy protection in an effort to avoid having to pay back money he received from the failed charter air carrier and a $25 million debt guarantee he made to Merrick Bank, which was forced to refund customers’ ticket purchases after the bankrupt carrier abruptly stopped flying in March 2012.

Warneck, of Myrtle Beach, has filed for Chapter 7 bankruptcy liquidation, claiming $201,452 in assets and more than $26 million in debts, almost all of it related to Direct Air.

A meeting of Warneck’s creditors is scheduled for Thursday in federal bankruptcy court in Charleston.

The personal bankruptcy filing has halted a lawsuit Joseph Baldiga, the trustee in Direct Air’s corporate bankruptcy case, filed against Warneck seeking to recover $552,791 that Direct Air paid to Warneck in the four years leading up to its failure.

That money was paid to Warneck for salary, consulting fees and other compensation, according to court documents.

Direct Air, which was formed to help bring tourists to the Myrtle Beach area, filed for bankruptcy protection in 2012 in Massachusetts.

Baldiga said he now must determine whether he will ask a bankruptcy judge in South Carolina to disallow any discharge related to the money Warneck received from Direct Air.

Baldiga has not yet filed any paperwork in the South Carolina case. He said he has not received any indication from the carrier’s other founders – Judy Tull, Marshall and Kay Ellison and Robert Keilmann – that they intend to file for personal bankruptcy protection.

In addition to the money Direct Air paid to Warneck, Baldiga is seeking to recover nearly $2.7 million the charter paid to the other founders as well as unspecified punitive damages. The lawsuit will continue against those founders not under bankruptcy court protection.

It’s not clear what impact Warneck’s bankruptcy filing will have on a separate lawsuit Utah-based Merrick Bank has filed against him and the charter’s other founders.

Merrick Bank is suing the founders to enforce personal guarantees they signed in 2006 to cover debt related to Direct Air ticket refunds.

A lawyer for Merrick Bank could not be reached for comment.

Warneck was Direct Air’s president and was in charge of marketing the charter service. He now handles marketing for a chain restaurant with locations in the Myrtle Beach area.

Meanwhile, in other Direct Air court proceedings:

• A civil lawsuit Merrick Bank filed against Valley National Bank – the bank that allowed Direct Air’s founders to drain millions of dollars from an escrow account that was supposed to safeguard ticket purchasers’ money – probably will not be dismissed despite court papers filed this week seeking to remove the case from the federal court docket.

A clerk for federal court in New Jersey, where Valley National Bank is located, filed a notice of dismissal in the lawsuit because Merrick Bank has failed to serve its complaint within a mandated 120-day period. A hearing on the dismissal is scheduled for April 28, but Baldiga said he expects Merrick Bank to serve Valley National Bank with the lawsuit before that date.

Baldiga and Merrick Bank agreed last month to a settlement in Direct Air’s bankruptcy case. Baldiga filed the proposed settlement agreement on March 19, but a bankruptcy court judge has not yet approved it.

“Merrick Bank has been waiting for our deal to get approval from the bankruptcy court but I think now they’re just going to serve the complaint,” Baldiga said. “I don’t expect that dismissal to happen.”

Under the settlement agreement, Baldiga would transfer all of the bankruptcy estate’s interests in the missing escrow funds to Merrick Bank. That would allow Merrick Bank to pursue its civil lawsuit against Valley National Bank without any interference from the trustee’s office. In exchange, Merrick Bank has agreed to give the trustee 5 percent of its net recovery from Valley National Bank. Those funds would be used to pay back Direct Air customers who haven’t received full refunds for their tickets.

About 1,900 Direct Air customers bought flight tickets with cash, checks or some form of payment other than a credit card, according to court records. To date, those customers have received refunds from the trustee’s office totaling $250,000 – or 26.5 percent of the $943,014 those customers are owed. Baldiga said he hopes the proposed settlement with Merrick Bank will raise enough money to pay the rest of what is owed to Direct Air’s customers.

Customers who paid with credit cards have received full refunds through chargebacks initiated by their card companies and paid by Merrick Bank.

In the civil lawsuit, Merrick Bank alleges Valley National Bank let Direct Air’s founders improperly drain money from an escrow account that was supposed to hold ticket purchasers’ funds until after their flights took place. There was only about $1 million left in the escrow account when Direct Air stopped flying, forcing Merrick Bank to cover approximately $25 million in ticket refunds.

Merrick Bank, which guaranteed payments for tickets bought with credit cards, is trying to recover the money it had to spend on refunds from Valley National Bank.

Its lawsuit is in addition to Merrick Bank’s attempts to collect on the founders’ personal guarantees for that same debt.

• Horry County’s Department of Airports has agreed to pay $5,000 to Direct Air’s bankruptcy estate as part of a settlement agreement it reached this month with the trustee’s office.

Baldiga originally sought $45,000 from the county – the amount of money it received from Direct Air in the 90 days leading up to its March 2012 bankruptcy filing.

That money was for passenger fees and ground services the charter owed to the airport. Under bankruptcy law, trustees often can recover any payments a debtor makes to a creditor in the three months before a bankruptcy filing.

Horry County initially objected to the trustee’s demand and the two sides eventually negotiated the $5,000 settlement, which still needs a judge’s approval.

Direct Air 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.

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.