The bankruptcy of a charter air service and the possible mismanagement of the charter's transaction escrow account are apparently threatening the solvency of Bingham Farms, Mich.-based ISO JetPay Merchant Services LLC. According to court filings, JetPay said it could be bankrupt "in a matter of weeks" unless money in the transaction escrow account of Southern Sky Air & Tours LLC (dba Direct Air) is released to the processor.
JetPay's March 21, 2012, filing in the United States Bankruptcy Court District of Massachusetts Central Division in Worcester, Mass., followed Direct Air filing for Chapter 11 bankruptcy protection on March 15. After reassessing its situation, Direct Air re-filed for Chapter 7 bankruptcy on March 23. Chapter 7 requires the company to cease operations, sell its assets and distribute its proceeds to creditors.
According to the Direct Air bankruptcy petition, Avondale Aviation LLC bought a majority interest in Direct Air in September 2011, but "rising fuel costs and other operating expenses [soon] pushed the carrier into a severe operating loss position."
Direct Air told the court that the original partners in the charter air service - Kay Ellison, Marshall Ellison and Judy Tull - "without warning, and without notice, resigned" on March 12. Direct Air said it immediately appointed a new management team but the next day found it did not have enough money to continue operating; Direct Air then cancelled all of its flights and filed for bankruptcy.
Direct Air noted that the flight cancellations came at the peak of the spring break travel season - traditionally a busy time of year for the charter company.
JetPay, Direct Air's payment processor, said in a court filing it is obligated to repay customers for cancelled flights. The ISO said those reimbursements may rise to $20 million - an amount JetPay believes could put it out of business if funds in the transaction escrow account are not released to reimburse customers who paid for flights with credit cards.
Direct Air objected to a JetPay motion to release the escrow funds and reported a shortfall in the escrow account. Only about $1 million remains in the account, according to Direct Air - far less than the amount JetPay said it has already reimbursed Direct Air customers since the bankruptcy was filed and the escrow account closed.
On March 21, JetPay filed an emergency motion for relief with the bankruptcy court, asking the court to release escrow money held by Valley National Bank of Wayne, N.J. The petition for separation of the escrow account from the bankruptcy funds was joined by the United States Department of Transportation, American Express Co. and JetPay's acquiring bank, Merrick Bank of Draper, Utah. JetPay also filed an affidavit from its Chief Operating Officer, David Chester, in support of the motion.
In the motion, Chester said when a customer purchased a flight, JetPay funded the Valley National escrow account for the purchase amount and assumed responsibility for collecting that payment. Only when Direct Air certified that a charter flight was completed did Merrick Bank release the money to Direct Air. JetPay would then send a draft to Valley National for reimbursement.
Chester said it normally was reimbursed from the escrow account. However, after the bankruptcy filing, Valley National refused JetPay's reimbursement requests while JetPay's own bank account with Merrick "is being drained daily by chargeback and refund claims without reimbursement," the ISO said.
Adding even more pressure to JetPay's finances, the Transportation Department sent out notices telling consumers to seek reimbursement for cancelled flights from their credit card companies. JetPay said between March 10 and March 18, 2012, it paid close to $3 million in chargebacks.
"JetPay projects that in a matter of weeks, the cash shortfall will likely exceed several million dollars and may reach as high as $20 million, which will jeopardize the ability of JetPay to continue business," Chester said.
Direct Air noted in its March 23 objection to the JetPay motion for relief that "the exact amounts and/or reasons for the shortfall [in the escrow account] are not clear." Direct Air said it would do a forensics investigation to determine exactly what happened to the money that was supposed to be in the escrow account.
In a statement, JetPay President Trent Voigt said, "All consumer funds are deposited into a Department of Transportation escrow account to protect consumers in this exact situation. JetPay also carries catastrophic chargeback insurance to be able to easily deal with these kinds of rare occurrences and will cover any shortfalls if any exists within the escrow account."
Voigt added, "It is unfortunate that Direct Air's customers were abandoned as they were. JetPay stands behind its customers and is wholly solvent with the right insurances in place to make sure all valid credit card chargebacks are covered."
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