March 20, 2014

More money could be headed to Myrtle Beach-based Direct Air’s passengers under bankruptcy proposal

The trustee in Myrtle Beach-based Direct Air’s bankruptcy case is pitching a proposal that could recover more money for people who bought tickets for flights that never occurred when the charter air carrier abruptly stopped flying two years ago.

The trustee in Myrtle Beach-based Direct Air’s bankruptcy case is pitching a proposal that could recover more money for people who bought tickets for flights that never occurred when the charter air carrier abruptly stopped flying two years ago.

The proposal also would save the trustee’s office time and money by letting a third party try to recover funds from Valley National Bank, the New Jersey bank that let Direct Air’s founders improperly drain nearly $30.4 million from an escrow account that was supposed to protect customers’ ticket purchases.

Trustee Joseph Baldiga told The Sun News on Thursday that his proposal could pay up to 100 percent of the money owed to ticket purchasers depending on the third party’s success in prosecuting Valley National Bank.

“That’s the goal,” Baldiga said.

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.

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

Merrick Bank is the company that guaranteed most of those credit card payments. Merrick Bank estimates it lost $26.2 million by paying credit card chargebacks for Direct Air ticket purchases that should have been refunded from the carrier’s escrow account at Valley National Bank. In December, Merrick Bank filed a civil lawsuit against Valley National Bank in an attempt to recover the money it lost through those chargebacks.

Baldiga’s proposal would transfer all of the Direct Air estate’s interest in the missing Valley National Bank escrow funds to Merrick Bank, letting Merrick pursue its 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 customers who haven’t received full refunds for their tickets.

The 5 percent guaranteed by Merrick Bank is more than the 3.4 percent of missing escrow funds owed to passengers who have not yet received full refunds.

The proposal also would resolve several outstanding legal issues between the trustee’s office and Merrick Bank.

Merrick in January sued the trustee, saying it has the sole right to any claims against Valley National Bank. While Baldiga has not yet filed a lawsuit against Valley National Bank, he did say in court documents that the bank’s “gross negligence and willful misconduct” have damaged the estate and at least some of the missing escrow funds – if recovered – belong to his office. Merrick Bank’s lawsuit against the trustee is pending and there is a chance Baldiga could lose and the estate would wind up with nothing. Under the proposal, Merrick Bank would drop its lawsuit against the trustee and guarantee a share of whatever it collects.

Also, by shifting ownership of the claims to Merrick Bank, Baldiga would avoid any counterclaims Valley National Bank might make against Direct Air’s estate – particularly charges that the charter’s management was at least partly responsible for the missing escrow funds.

“Given Merrick’s damages that arose from the shortfall in the [escrow account], Merrick has strong incentive to seek the maximum possible recovery from Valley National Bank,” Baldiga said in court documents, adding that the agreement will relieve Direct Air’s estate of the financial burdens of Merrick Bank’s lawsuit against the estate and any potential lawsuit Baldiga would file against Valley National Bank.

“Absent the agreement, the estate would likely incur substantial administrative costs to pursue claims against Valley National Bank related to the [escrow account] that may well exceed the recovery from Valley National Bank.”

No date has been set for a judge to consider approval of the agreement between Baldiga and Merrick Bank.

Meanwhile, Baldiga continues to pursue Direct Air’s founders to recover funds they received from the failed charter.

Last week, Baldiga filed civil racketeering charges against Judy Tull and Kay Ellison, two of the carrier’s founders, claiming the women fraudulently withdrew money from the escrow account at Valley National Bank.

The charges are included in lawsuits filed against Direct Air’s founders, in which 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.

An investigation by Baldiga showed Direct Air’s founders drained millions of dollars from the carrier’s escrow account by falsifying records, inflating passenger totals, withdrawing funds for the same payments more than once and making withdrawals for payments that were never actually made. Baldiga has not said whether he intends to forward results of his investigation to law enforcement for possible further prosecution.

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.

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.

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