PLATTSBURGH — A judge has approved a request to convert the Direct Air bankruptcy from a Chapter 11 reorganization to a Chapter 7 liquidation.
U.S. Bankruptcy Judge Melvin Hoffman issued the order in U.S. Bankruptcy Court for the District of Massachusetts on Wednesday afternoon, following a hearing on the expedited motion by the U.S. trustee appointed to oversee the original bankruptcy proceeding to Chapter 7.
Many of the reasons set forth for the conversion are contained in a motion filed with the court by Chemoil Corp., Direct Air's largest creditor, in support of the trustee's request.
Chemoil filed its motion in response to a response by Southern Sky Air and Tours LLC d/b/a Direct Air's response to the trustee's motion.
UNDERFUNDED ESCROW
Chemoil noted Direct Air didn't dispute facts included in the trustee's motion — that the airline had no current operations and its prior management team resigned on or about March 13, among other specific points.
In addition, the debtor acknowledged that several significant obstacles would have to have been overcome before flight operations could be restored. That includes securing access to sufficient funding, airports, aircraft, fuel and payment processing.
Documents filed by Chemoil show Direct Air had a net operating income of $2,751,760 in the first half of 2011. Additional documents revealed the company had a $9,908,789 net income loss for 2011.
Chemoil also refers to the ongoing U.S. Department of Transportation investigation into Direct Air's abrupt shutdown and an underfunded escrow account that was supposed to cover ticket refunds and other costs.
Direct Air had requested additional time to reorganize, saying it was premature to switch to Chapter 7 status on the basis it would not be able to do so. Chemoil alleges there are millions of dollars missing from the escrow account, even though those funds were supposed to remain there until after flights were completed.
Chemoil notes that since Direct Air is no longer certified by DOT to operate charter flights and, given that agency's investigation, it is highly unlikely the company would be able to resume service in the foreseeable future, if ever.
CHARGE OF COMPLICITY
Direct Air suspended operations on March 13, stranding thousands of passengers. It filed for Chapter 11 protection two days later.
The airline had been acquired by Avondale Aviation 1 LLC in late September. Prior management, including Marshall and Kay Ellison and Judy Tull, continued on until about March 12, when they either resigned or were locked out, according to conflicting statements from either side.
Chemoil alleges Avondale Aviation officials had knowledge of the missing escrow funds and were complicit in the continuing depletion of those funds by prior management.
"Avondale 1 and the Debtor," the motion says, "would like this court to believe it had no knowledge of what was going on with the Depository (escrow) account and the finances of the Debtor from the date of its purchasing a majority interest in the debtor in late September 2011 to the date of assumption of management responsibilities on March 12, 2012 — which in and of itself is preposterous."
'PURE FANTASY'
Chemoil wants a Chapter 7 trustee appointed and charged with uncovering the truth about and liability for the alleged improprieties.
"The unrealistic belief of the part of the Debtor, Avondale and Debtor's counsel that there is some basis to keep this case in Chapter 11 and that there is a potential of a confirmable plan (to resume operations) ... given the serious allegations of USDOT violations regarding charter air escrowed funds, is simply nothing short of pure fantasy."
A meeting of Direct Air's creditors has been set for May 12 in Worcester, Mass.
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