Judge approves Chapter 7 conversion for Direct Air

From the Carolina Forest Chronicle:

By Michael Smith


A federal judge has approved a request to convert Direct Air's bankruptcy to Chapter 7, paving the way for the embattled air service provider's assets to be liquidated.

Massachusetts bankruptcy judge Melvin Hoffman signed off on the order at 1:20 p.m. April 11.

[See the court document confirming the court ruling PDF.doc]

"For the reasons set forth on the record, the case is hereby converted to one under Chapter 7," the order states.

The Chapter 7 conversion order follows accusations listed in a motion filed earlier Wednesday by Direct Air's largest creditor, according to recently filed court documents.

In documents filed April 11, Chemoil Corporation, questioned previous Direct Air filings expressing hope the air carrier would fly again.

Chemoil also demanded an immediate conversion to Chapter 7 bankruptcy, which would result in liquidation of Direct Air's assets.

"This court should immediately convert this case to Chapter 7 and appoint a Chapter 7 trustee," the filing states.

The filing comes in response to Direct Air's request for more time to reorganize its assets under Chapter 11 and eventually resume operations.

Time, however, has run out, according to filings by Chemoil, a Florida fuel company that says it's owed more than $3.2 million.

Chemoil says in court records that questions surrounding millions of dollars in missing money and an ongoing investigation by the U.S. Department of Transportation warrant Chapter 7 conversion.

"It is highly unlikely that the debtor, after the serious allegations regarding violations of the USDOT regulations, will be capable of getting the USDOT's approval to 're-commence charter operations' any time in the foreseeable future – if ever," the April 11 filing states.

"Potential for 'rehabilitation' of this debtor, given the serious allegations of USDOT violations regarding charter air escrowed funds, is simply nothing short of pure fantasy," the filing continues.

At issue is an escrow account that as of April 10 had about $1 million deposited in it, according to court records

The problem is that the account has an estimated shortfall of between $10 million and $30 million, records state.

In previous filings, attorneys said money is supposed to be deposited into the escrow account when a passenger buys a ticket.

The money remains there until the flight is completed, at which point it's released to Direct Air.

Direct Air filed for Chapter 11 bankruptcy protection on March 15, two days after abruptly suspending all flights and stranding thousands of passengers on March 13.

At about the same time, three of Direct Air's founders – Judy Tull, Marshall Ellison and Kay Ellison – abruptly resigned, according to court documents.

Tull could not be reached directly for comment. Attempts to reach Tull were unsuccessful as of press time.

A telephone call to an address for Kay Ellison in Myrtle Beach could not be completed because an automated message said the number for that address has been disconnected.

On April 10, Direct Air's new majority owners – identified in court records as Avondale Aviation I, LLC – said in a filing that they appointed new management to get a handle on finances after Tull, Kay Ellison and Marshall Ellison resigned.

In response, Chemoil in its motion called that "preposterous," saying Direct Air's own financial statements show it "well aware of the depletion of the depository account" before the Chapter 11 request.

In its April 11 filing, Chemoil provided a profit and loss statement that reported Direct Air's net operating income at $2,761,760 between January and June 2011.

An income statement also included in court records, however, said Direct Air finished 2011 with a net loss of $9,908,789.

Chemoil said in its April 11 motion that similar problems with an escrow account arose in 2002 case that also involved that also involved the Ellisons.

"It is amazing how similar the two defalcations are to one another – both involve trust or escrow funds, both involve airline operations and both involve the Ellisons," the filing states.

"And the purported 'new management' would nonetheless like the court to believe that they knew nothing of all of this for over six (6) months," the filing continues.

Additional Information (From WMBF News):

Bankruptcy Lawyer James Robbins said the judge's decision to change Direct Air's Bankruptcy from a chapter 11 to a chapter 7 is not good news for anyone who purchased a ticket from direct air and still has not gotten their money back.

"Unfortunately, very often the only people who get paid as potential part of their debt is those who collateral, security for their debt," Robbins said.

Robbins said it means the average customer who bought an open ended ticket may be at the back of the line to get a refund.

"The Internal Revenue Service, the tax authorities would get paid, the next in line would maybe be employees who would have a priority period if they lost wages, and then last of all would be someone who has no security at all," Robbins said.  "They're the last ones who get paid and often get nothing"

Due to the apparent 10 to 30 million dollar discrepancy in Direct Air's escrow account meant to hold ticket sales, Robbins said many customers who did not pay with a credit card may only get only a fraction of what they are owed, if anything.

"[The escrow account] is not fully funded, so it may be that customers who paid cash for their asset their only recourse may be to get a percentage on that fund," Robbins said.  "If there were other assets they may have a claim on that, but that usually doesn't occur."