Processor JetPay Takes Some Flak But Keeps Flying After Direct Air Bankruptcy

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A merchant processor with a bankrupt airline client breathed a little easier Friday afternoon after getting a court ruling that protects a disputed reserve fund for cardholder chargebacks.

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“The bankruptcy court in question agreed with our motion that the escrow account is for the consumer,” Trent Voigt, chief executive of JetPay LLC of Carrollton, Texas, told Digital Transactions News moments after a hearing ended in the case of Southern Sky Air & Tours LLC, doing business as Direct Air.

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Myrtle Beach, S.C.-based Direct Air is a charter airline serving 17 cities whose main business, according to Voigt, is “to take cold people to Myrtle Beach,” a popular tourist destination on the Atlantic coast. Direct Air on March 15 filed for Chapter 11 protection in U.S. Bankruptcy Court in Worchester, Mass., a couple of days after suspending service just as the spring-break travel rush was getting into high gear. Direct Air’s bankruptcy petition lists estimated assets of only $500,000 to $1 million but debts somewhere in the range of $10 million to $50 million.

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The flight cancellations triggered a wave of chargebacks that threatened to overwhelm JetPay, an independent sales organization for South Jordan, Utah-based Merrick Bank. According to the Associated Press, the company stopped flying because it couldn’t pay its fuel bills but said it would resume flights in mid-May. In the meantime, Direct Air told customers to contact their credit card issuers for refunds.

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The chargebacks poured in. According to an affidavit JetPay filed with an emergency request to recover payments from the reserve fund, there were only six chargebacks between March 10 and March 13. On March 14, they jumped to 195, followed by 1,388 on March 15, the day of the filing. More than 6,800 others came in over the next three days. In all, customers filed 8,434 chargeback requests worth $3.4 million between March 10 and March 18.

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Unlike scheduled airlines, U.S. Department of Transportation regulations require charter carriers to set up escrow accounts covering 100% of purchases, according to Voigt. That seemingly would enable cardholders to recover the full value of unused flights. JetPay said it supplied 99% of the funds in Direct Air’s escrow account. But the bank that holds the account, Valley National Bank of Wayne, N.J., froze it with the bankruptcy filing. “The bank cited as the sole reason that it was uncertain what it was required to do or not do in light of Direct Air’s bankruptcy filing,” JetPay’s affidavit says. A Valley National spokesperson did not respond to Digital Transactions News requests for comment Friday afternoon.

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With the account frozen, JetPay began paying chargebacks with its own operating funds, according to Voigt, leading to the emergency request for relief. “Without access to funds in the escrow account, JetPay is currently suffering a cash shortfall,” the affidavit says. “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.”

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Press reports said creditors such as fuel suppliers, airports and others had their eyes on the fund as a possible source of cash. But JetPay, joined by American Express Co., sought to have the court declare the account was outside of the bankruptcy proceedings and could be used for its contractual purpose. “What we wanted to make sure more than anything else was that some airplane-leasing company or fueling company didn’t get their hands on money that was for consumers,” says Voigt. Judge Melvin S. Hoffman agreed with that argument, according to Voigt. Related issues, however, may be taken up at another hearing in April.

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Voigt says that with the reserve fund covering chargebacks again, JetPay will take only a minor financial hit from the bankruptcy through legal expenses and some other costs. “We’re going to be absolutely fine,” he says.

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JetPay processes payments for several other airlines that Voigt wouldn’t identify. The business produces good returns, but requires strong operational controls and diligent monitoring of reserves, according to Voigt. “It is a decent profit maker, but it does have a lot of labor behind it,” he says.

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At the very least, financially troubled airlines can produce public-relations headaches for their merchant acquirers. Frontier Airlines blamed its processor, First Data Corp., for forcing it into bankruptcy in April 2008 when First Data tried to increase its reserve, a move the airline said crippled its cash flow. First Data denied that charge, and the two sides came to an accord about a month later.

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