April 11, 2012 | last updated April 19, 2012 2:10 pm

Judge Puts Brakes On Direct Air

Troubled charter air service provider Direct Air lost its fight to fly again today when a judge ordered it into Chapter 7 bankruptcy, forcing the company to scrap plans for restructuring and liquidate its assets.

At U.S. Bankruptcy Court in Worcester, Judge Melvin S. Hoffman sided with U.S. Trustee Richard King's stance that the company was too troubled to fix itself.

"(Direct Air) hasn't given me anything I can grab onto in terms of (a) strategy," Hoffman said.

Attorneys for Direct Air had asked for either an extension before the ruling to find more capital or to deny the trustee's request to convert the carrier's case from Chapter 11 bankruptcy protection, which would have allowed the company to reorganize.

At the heart of the judge's ruling were the customers, whom Hoffman said were "in a state of purgatory," not knowing whether their flights will take off, not being able to make other plans and unable to get refunds.

After filing for Chapter 11 on March 15, Direct Air said it was hoping to resume flights May 15. Locally, its routes out of Worcester Regional Airport went to vacation destinations in Florida and Myrtle Beach, S.C. In today's hearing, Steven Fox, an attorney for Direct Air, admitted that it was "not likely to meet that date, but not for lack of trying."

Hoffman said the target date was unrealistic, and Andrea Handel of the U.S. Department of Justice agreed. Handel said it was unlikely for Direct Air to be back in the air by May because it would need to file a new application to regain its charter license with the U.S. Department of Transportation (DOT) , which would be complicated because of the company's financial troubles.

Addressing Hoffman's concerns about customers, Fox said that May 15 was chosen, in part, because most customers of Direct Air hadn't booked flights beyond that date and that people who planned to fly before had already been able to make other plans. However, he told the judge that Direct Air has a shortfall of $25 million to $30 million regarding money paid by customers who haven't yet flown.

Central to the Myrtle Beach, S.C.-based company's issues is the mishandling of funds. In court, finger-pointing with regard to who was responsible for a loss of money in the company's escrow account continued. Fox said the fund contains about $1.1 million, but that millions more were lost and the company is investigating. King cited additional factors in his request for the conversion to Chapter 7.

Limited Cash

Direct Air had ceased operations, had a limited cash supply, ($45,000 as of March 23, when King filed his motion to convert the case to Chapter 7), which is separate from the escrow account required as protection for customers, and has administrative expenses that continue to grow, King said. Also at issue is that the company is dealing with an investigation by the Transportation Department regarding Direct Air's abrupt cancellation of services March 14, as well as the handling of its escrow account. Handel also charged that Direct Air hadn't responded to a letter from the DOT asking for financial information, among other things.

Fox argued that his client was working to fix its situation.

"We will do no further harm," he promised.

When Hoffman asked for insight into the likelihood that Direct Air would be able to restart operations, Fox said the company had had discussions with members of Congress whose constituents would benefit from the company's routes. He said they also had been in talks with various airport authorities about restarting operations and were working on securing third-party funding. He said the company had acknowledged the DOT investigation.

He said Direct Air has also communicated with credit card processor JetPay Merchant Services and American Express to determine how the remaining money in its escrow account should be dispersed between them as reimbursement for chargeback transactions. Balance statements said the account should have had at least $12 million.

"We believe there's far less money in the escrow account than there should be," he said.

Hoffman agreed to hold off on ruling on a motion filed by JetPay to recover funds. He scheduled a hearing for for May 22.

According to a list of Direct Air's 20 largest creditors, it owes more than $9 million. Among the creditors to whom Direct Air owes money are the airports along its former routes. According to the documents, the company owes the Massachusetts Port Authority, which operates Worcester Regional Airport, $84,716.

As other airports seek replacement carriers, the dismantling of Direct Air leaves Worcester's airport without any. But Richard Walsh, assistant director of communications and marketing for Massport, said the agency remains optimistic about it's the airport's future.

"What Massport needs to show airlines is that there is a market at Worcester airport, and Direct Air showed us that. Their numbers increased every year and Worcester was one of their strongest routes," Walsh said. "We'll share the market data and we'll see where that takes us."

Walsh said that, in addition to seeking commercial carriers, the airport has a future in general aviation.

He said the addition of Rectrix Aviation as a fixed-base operator will "be a catalyst to really attract general aviation."

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