When public charter operator Direct Air canceled its flights and filed for bankruptcy last month, it left its customers scrambling for refunds possibly worth upwards of $20 million, but now the company's credit card processor and escrow bank are reporting cash shortfalls.

Myrtle Beach, S.C.-based Direct Air provided public charter flights up and down the Eastern Seaboard and in the Midwest and offered vacation packages. The company, which used several airlines, canceled its charter program on March 13, and on March 15 it filed for bankruptcy protection in the U.S. Bankruptcy Court for the District of Massachusetts.

Direct Air is a direct-to-consumer company and fortunately for the retail community does not use the agent distribution channel. Agents are being spared the tangled web of refund requests that has followed in the weeks since the bankruptcy filing, but the story is a cautionary tale about the risks involved, and the potential money lost to all parties involved, when travel companies cease operations without a clear-cut refund protection plan.

In a press release issued on March 17, Direct Air explained that "despite the investment of additional working capital into Direct Air in the preceding months by the new majority owners, rising fuel costs and other operating expenses pushed the charter company into a severe operating loss position."

Following the bankruptcy filing, the Transportation Department (DOT) issued a statement for consumers affected by the Direct Air shutdown. The DOT said that under federal regulations, Direct Air has in place an escrow account into which all charter participant funds were to be deposited until payment was made to the airline that was to execute the charter flight.

The DOT also said that customers who paid for their Direct Air flight by credit card should contact their credit card company to get their money back.

However, the credit card processor, JetPay Merchant Services of Bingham Farms, Mich., claims the bank holding the escrow funds is not releasing them and is therefore putting almost the entire refund load on JetPay.

In an affidavit to the bankruptcy court, JetPay COO David Chester explained the credit card processing company's predicament. He said Valley National Bank, which maintains the escrow account affiliated with Direct Air purchases, has stopped honoring JetPay's requests for withdrawals from the escrow account for refunds resulting from canceled Direct Air flights.

According to Chester's statement, the bank's reasoning for not paying is that it was uncertain what it was required to do in light of Direct Air's bankruptcy filing.

"Without access to funds in the escrow account, JetPay is currently suffering a cash shortfall," Chester wrote. "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."

Regardless of why Valley National Bank isn't releasing funds from the escrow account, later court filings further question whether the bank even has the funds to cover the onslaught of refunds that need to be paid out and why those funds aren't available in the escrow account.

The bottom line is that for Direct Air customers seeking to get their money back, the process could be long and arduous, and there remains a great deal of uncertainty surrounding whether there will even be enough funding available to cover all the refunds, and if not, who is responsible and what course of action customers will have.

Follow Michelle Baran on Twitter @mbtravelweekly.

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