Trustee proposes pennies-on-the-dollar settlement with Myrtle Beach-based Direct Air founder

The trustee in Myrtle Beach-based Direct Air’s bankruptcy case has agreed to drop a racketeering lawsuit against the charter air carrier’s former chief executive officer in exchange for a $10,000 payment -- about 1.5 percent of the total amount she owes, according to court documents.

Trustee Joseph Baldiga said he doubts he will be able to collect the $657,252 he says Direct Air executive Judy Tull owes to the bankruptcy estate, so he has proposed the $10,000 settlement. The proposal still needs approval from a bankruptcy judge. No court date has been scheduled.

Baldiga still is suing the other Direct Air founders -- including Marshall and Kay Ellison, Robert Keilmann and Ed Warneck -- to recover nearly $2.6 million in payments they received from the carrier before it abruptly stopped flying and filed for bankruptcy protection in March 2012. He also has filed a racketeering complaint against Kay Ellison, claiming she and Tull fraudulently withdrew money from an escrow account that was supposed to protect passengers’ fares in the event their flights did not occur.

Nearly $30.4 million was missing from Direct Air’s escrow account when the carrier filed for bankruptcy protection. Tull and Ellison were the two executives who had access to the escrow account, according to court documents.

Baldiga said in court documents that the $10,000 payment from Tull is about the best the carrier’s estate can expect.

“Collectibility of any judgment against Mrs. Tull was a substantial consideration for the trustee in evaluating the appropriateness of the settlement agreement,” Baldiga stated in a court filing. “Ms. Tull has provided confidential, attested financial information to the trustee that shows she has no assets that the trustee would be available to recover any judgment from.”

Baldiga said in court documents that Tull is unemployed and her only income is Social Security payments. Tull sold her Myrtle Beach residence in a short sale and neither she nor her husband own any real estate. In addition, Tull does not have any securities, retirement accounts or ownership interest in any business entity.

“In light of Ms. Tull’s poor financial condition, she has been forced to obtain the settlement amount from friends and family,” Baldiga said in the court filing.

Tull already has paid $5,000 to the bankruptcy estate in advance of the proposed settlement agreement’s approval. She must paid another $5,000 by June 5. In the meantime, Tull must sign a $1 million civil judgment to be held in escrow pending that final payment. If she makes the final payment, Baldiga has agreed not to file the judgment and to drop his lawsuit against Tull. In exchange, Tull will drop any claims she might have against the bankruptcy estate.

Baldiga’s lawsuits against Direct Air’s founders allege fraud and breach of fiduciary duty, and he is seeking the return of payments made to those executives in the four years before the carrier filed for bankruptcy protection.

Baldiga is seeking to recover $841,758 in salary, consulting fees and other payments made to Keilmann, who was the carrier’s chief financial officer and the only founder to invest money in Direct Air. Baldiga also hopes to recover: $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.

All of Direct Air’s founders have filed responses to the lawsuits denying any wrongdoing. Warneck filed for bankruptcy protection in March, which means Baldiga would have to seek recovery of those funds through the personal bankruptcy filing.

In addition to the payments, Baldiga is seeking unspecified punitive damages against each of Direct Air’s founders.

In a report filed earlier this month, Baldiga identified three ways in which Tull and Kay Ellison 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.

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 -- 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 entered into an agreement with Merrick Bank in which the bankruptcy estate would get 5 percent of any money the bank recovers in its lawsuit against Valley National Bank. That money would go to pay passengers who haven’t yet received full refunds for their unused Direct Air tickets.

A bankruptcy judge previously approved $250,000 in payments to passengers who bought tickets with cash or other means instead of a credit card.