In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
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LARRY D. COMPTON, under penalty of perjury, states that:
1. I am the duly authorized and acting Chapter 7 trustee in the above-entitled proceeding.
2. I make this Declaration in support of the proposed settlement between the Estate and Delta Air Lines ("Delta").
3. Delta bases its claim against the Estate on the sale by Raejean Bonham ("Bonham"), her proprietorship, World Plus ("WP") and her corporation, World Plus, Inc. ("WPI") of frequent flier tickets obtained and sold in violation of the rules and policies governing Delta's frequent flier mileage program.
A. Delta's Program and Rules
4. On January 27, 1995, the United States District Court for the Northern District of Georgia, Atlanta Division, in Delta Air Lines, Inc. v. Robert Y. Seward et al., Case No. 1:93-cv-1036-HTW ("the Seward case"), a case in which Bonham and WPI are parties defendant, issued an extensive Order of Court ("the Summary Judgment Order") and on September 29, 1995 another Order of Court ("the Permanent Injunction"). Bonham and WPI were represented by counsel in the proceeding leading up to both orders.
5. As a part of the Summary Judgment Order and the Permanent Injunction, the court made specific findings and determinations regarding Delta's frequent flier program. Those finding include:
(a) When a frequent flier program ("FFP") member wants to obtain free tickets based upon accumulated frequent flier miles, the FFP member must request a frequent flier award in writing from Delta. The FFP member is then issued a frequent flier program certificate.
(b) When the FFP member wants a ticket, the FFP Member presents the certificate and identification to Delta. The FFP member may have FFP tickets issued in his or her name, or to a family member or traveling companion by designating in writing to Delta, specifying the person's relation to the FFP member, and then signing the certificate.
(c) A ticket is then issued to the person specified by the FFP member.
(d) All FFP members are sent copies of the current version of Delta's frequent flier program rules ("the Official Rules") shortly after joining Delta's FFP program.
(e) The Official Rules, from Spring of 1987 through May 1, 1995, limited transfer of FFP awards to family members, dependents or traveling companions ("the Relative Rule").
(f) The Official Rules, from Spring of 1987 through at least the date of the Summary Judgment Order, forbade the sale, barter or assignment of FFP awards ("the No Sale Rule").
6. In addition to setting out these determinations, and as
a part of its determination that summary judgment was appropriate,
under the Summary Judgment Order:
(a) Delta was granted summary judgment on Delta's claim for tortious interference with business relations as to Bonham and WPI for the sales by Bonham and Delta of FFP tickets in violation of Delta's No Sale Rule and Relative Rule.
(b) Bonham and WPI, among other defendants, were permanently enjoined from trafficking in Delta FFP tickets in violation of the No Sale Rule and the Relative Rule.
(c) The court denied Bonham's and WPI's motion to dismiss for lack of jurisdiction.
(d) The court denied Bonham's and WPI's motion for transfer of the case under 28 U.S.C. §1401 and the doctrine of forum non conveniens.
7. The determinations regarding the Official Rules, based upon my investigation of Delta's published Official Rules, seem to be consistent with the actual Official Rules.
8. On my understanding of bankruptcy and civil procedure law, those determinations, while not final since no judgment has been entered, are binding upon me as successor in interest to the rights of Bonham and WPI.
9. Bonham has stated under oath as recently as April 16, 1997
that the Official Rules did not impose the Relative Rule or the
No Sale Rule until 1991. But as described in Paragraphs 5(e) and
5(f), those rules appear to have been in effect since April 1987.
And from the records in her files dating from at least as early
as 1988, Bonham not only knew of the Relative Rule and the No
Sale Rule; she was requiring persons purchasing frequent flier
tickets from her to sign a disclaimer acknowledging that the sale
was in violation of Delta's Official Rules.
B. Number of Tickets Sold
10. There are at least four means that can be used to calculate the number of tickets sold by Bonham, WP and WPI. Each has problems. The methods are
(a) derivation from known gross ticket sale receipts and cost of goods sold in the reconstructed accounting records of the debtor;
(b) estimates made by employees;
(c) calculations based on the gross profit notebooks, and
(d) counting reservation cards or a statistical sampling of reservations cards.
(1) Derivation from Gross Receipts.
11. The debtor did not maintain any accounting records; the estate has been forced to reconstruct them. The debtor had two sorts of revenue: ticket sales and investment contracts. Where the transactions were by check, money order, cashier's check or wire transfer, it is possible to determine with some confidence whether the revenues are from ticket sales or investment contracts. In the case of cash deposits, however, unless the cash is for a single ticket, it is very difficult to determine with confidence whether the revenues were from ticket sales. For purposes of this analysis, I have treated cash deposits as tickets sales, which in the case of the gross receipt approach, may overstate sales to an unknown extent.
12. The following table sets out gross revenues from ticket
sales and gross cash deposits not attributed to investor income
by year:
|
|||||||
Category | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | Overall Total |
Total Cash and Ticket Sales | 991,085 |
59,191 |
966,758 |
702,969 |
519,362 |
83,760 |
3,323,125 |
At the date this table was generated, income for calendar year 1991 remained out of balance, and some of the deposit detail for 1995 was incomplete. For purposes of estimated calculation of gross receipts from ticket sales, I have assumed that total inflows in 1991 were $978,922, the mean of 1990 and 1992. That increases total inflows for the period 1990 - 1995 from $3,323,125 to $4,242,856.
13. The prices charged by Bonham and WPI varied over time, and also depended on the class of the ticket, the amount of advance notice given by the customer, and to some extent on destination.
14. I have examined the debtor's price lists, both current versions and older versions. At the time her business was shut down and for the last several years, the basic price for a round trip ticket was $550, if the reservation was made two or more weeks in advance, travel was by Coach class, and for a domestic destination. The price for ticket on shorter notice was $675. International tickets were more. First class tickets were more.
15. Investors who were also customers of Bonham, WP and WPI were charged $50 to $75 less for equivalent tickets for at least some periods, and some investors were given FFP tickets as an inducement or reward for entering into investment contracts with Bonham and WPI.
16. Under those circumstances, the average price of a ticket is necessarily only an estimate. In my opinion, based upon my review of the records available, the average price of a ticket was probably in the range of $550 - $650. That estimate is closely confirmed by dividing the gross ticket sale proceeds of $1,931,580 as described in Paragraph 32 below by total tickets sold of 3,513 resulting in an average ticket sale price of $549.84.
17. Applying that estimate to the gross receipts described
in paragraph 12, results in the following range of estimated tickets
sold between 1990 and 1995:
18. Using the Gross Receipts methodology, I estimate total ticket sales in the range of 6,527 - 7,714 for the period 1990 through 1995.
19. There are a number of difficulties with this approach, including (a) it assumes that Bonham deposited all of the proceeds from ticket sales into her bank accounts, (b) the estimated average price of a ticket is necessarily a rough estimate, (c) the cash proceeds component likely includes some investment contract monies deposited as cash, and (d) there are errors inherent in reconstructing accounting information.
20. Turning to the cost of tickets sold, the following table summarizes the ticket expense incurred by Bonham and WPI by year, based upon the Quicken accounting:
21. I have examined the debtor's records, for both current and earlier years. At the time her business was shut down and for the last several years, the typical cost for a round trip ticket was $475, if the reservation was made two or more weeks in advance, travel was by Coach class, and for a domestic destination. The cost for ticket on shorter notice was higher. International tickets were more. First class tickets were more.
22. Under those circumstances, the average cost of a ticket is necessarily only an estimate. In my opinion, based upon my review of the records available, the average price of a ticket was probably in the range of $450 - $475. That estimate is closely confirmed by dividing the gross ticket sale proceeds of $1,638,685 as described in Paragraph 32 below by total tickets sold of 3,513 resulting in an average ticket sale cost of $466.46.
23. On those assumptions, that implies ticket sales as follows:
24. Using this methodology, then, Bonham and WPI sold 6,527 - 7,714 tickets per year.
25. There are difficulties with this approach, including (a)
not all tickets purchased resulted in revenue to the business,
since some Bonham, WP and WPI customers were caught by Delta;
and (b) some of the monies treated as travel expenses may be disguised
distributions to investors, as I believe was the case with the
Apple Corporation/T.L. Franklin distribution and the Patriot Management
Corporation/Joseph Taylor distribution.
(2) Derivation from Employee Estimates.
26. Melanie Cook ("Cook"), in her deposition to the Securities & Exchange Commission, and in her Rule 2004 examination, testified that she was employed by Bonham and WPI beginning approximately October 1993 and ending February 1995.
27. Cook estimated at, on average, WPI probably sold 4 - 5 tickets per day during the time she was employed there. She acknowledged that at peak seasons, during spring break in March of each year and during the Thanksgiving/Christmas holidays, the volume would be much higher, perhaps 50 to 60 tickets per week. On the other hand, the summer was described as much slower, and WPI would sometimes go two to four days without selling a ticket.
28. Cook testified that it was the informal policy of Bonham and WPI not to place more than five customers on any single flight; otherwise, there was a danger that there would be several WPI passengers, all claiming to be relatives of the same frequent flier.
29. Assuming tickets sales were at that level for all of the period 1989 - 1995, and assuming all tickets were on Delta, and assuming 270 working days per year, that would imply total ticket sales in the range of 8,640 - 10,800 tickets.
30. There are difficulties with this approach, including (a)
it assumes that the activity level estimated by Cook is accurate,
and (b) it assumes that the period of Cook's employment is representative.
(3) Derivation from Gross Profit Calculation Notebooks.
31. Bonham and WPI kept what I describe as gross profit calculation records, showing ticket sales, including gross proceeds, cost of tickets and gross profit. The notebooks are not available for all years. The notebooks include sufficient backup materials to allow one to determine how many ticket sales occurred in each month.
32. The following table summarizes the available information:
Month | Gross Sales | Cost of Tickets | Gross Profit | Number of Tickets |
Jan-94 | 26,320 | 21,290 | 5,030 | 48 |
Feb-94 | 24,168 | 18,810 | 5,358 | 41 |
Mar-94 | 34,870 | 28,307 | 6,563 | 50 |
Apr-94 | 32,140 | 25,790 | 6,350 | 23 |
May-94 | 25,295 | 21,030 | 4,265 | 45 |
Jun-94 | 65,615 | 53,595 | 12,020 | 129 |
Jul-94 | 53,094 | 44,280 | 8,814 | 94 |
Aug-94 | 46,615 | 40,755 | 5,860 | 82 |
Sep-94 | 32,640 | 26,720 | 5,920 | 57 |
Oct-94 | 31,100 | 25,820 | 5,280 | 52 |
Nov-94 | 28,847 | 24,484 | 4,363 | 51 |
Dec-94 | 53,240 | 46,678 | 6,562 | 95 |
Jan-95 | 9,590 | 8,388 | 1,202 | 17 |
Totals | 463,534 | 385,947 | 77,587 | 784 |
Average | 35,656 | 29,688 | 5,968 | 60 |
Grand Totals | 1,931,580 | 1,638,685 | 292,895 | 3,513 |
Annual Average | 643,860 | 546,228 | 97,632 | 1,171 |
*Separate Gross Sales and COGS were carried for the | ||||
Fairbanks and Wasilla offices, and are consolidated here | ||||
**Beginning 9/92 Wasilla was no longer carried separately |
33. Based upon that information, with average annual ticket sales of about 1,200 tickets, across eight years of business activity, that implies total ticket sales in the range of 7,200 tickets.
34. There are some difficulties with this approach, including
(a) although I attach no credibility to the claim, Bonham has
repeatedly asserted that these sales represented only her "quick
sales" and not the total volume of tickets, and (b) it assumes
that the periods shown are sufficiently representative to constitute
a basis for generalization across the entire 6 year sales history
described here.
(4) Counting reservation cards.
35. I found approximately 8 small boxes of reservation cards on the WPI premises when I assumed control of the business. The boxes measure approximately 9 inches wide by six inches high by 12 inches deep. Each box contained airline reservation cards, usually accompanied by a receipt and a disclaimer signed by the customer.
36. Each box appears to contain approximately 200 - 210 reservation cards accompanied by the receipt and disclaimer. Some of the documents are photocopies and not originals.
37. I also found two small bankers boxes containing photocopies of reservation cards, receipts and disclaimers. I can identify some duplicates between the these records and the records described in the following paragraph.
38. When the United States returned records taken by search warrant and grand jury subpoena, I found among those records four small bankers boxes containing a mix of reservation cards and photocopies of reservation cards, most but not all accompanied by the receipt and disclaimer.
39. There appear to be some duplicates between the original reservation cards and the photocopies of reservations cards.
40. Not all of the reservations cards document sales of tickets. In reviewing a selection of the cards, I observed some that were marked as "no follow up" or "didn't pay."
41. The number of passengers on a given reservation card is highly variable. I found cards describing one passenger and cards describing six passengers.
42. I have made no effort to inspect each of the reservation cards, or even a majority of the reservation cards. However, I have examined selected groups of reservation cards chosen at random from the cards described in Paragraphs 35, 37 and 38.
43. Among reservation cards I found cards stating that the passenger's or passengers' tickets had been confiscated by Delta upon discovery that the tickets were obtained in violation of Delta's FFP Official Rules. In many or most cases, Bonham and WPI purchased or obtained a replacement ticket for those passengers, resulting in a net loss to Bonham and WPI.
44. Among those reservation cards I found cards stating that the passenger had canceled his or her reservation, so that while there was a reservation card there was no revenue.
45. Based upon documents found in the debtor's records and produced in discovery by BRA Defendants, I am certain that among the reservation cards are reservations for investors who obtained FFP tickets for free as an inducement to enter into or roll-over their investment contracts. While there may be reservation cards for those flights, the reservations cards would not represent revenue to Bonham or WPI.
46. Many of the reservation cards I examined lacked a date that included a year; that is, they showed a month and a day but not the year of travel or year of issue. The absence of a year makes it difficult to confirm the validity of the reservation card by comparing it to the other information resources set out above.
47. For these reasons, I believe that counting reservation cards is the least accurate method of determining total ticket sales, and I have not made any effort to undertake such an effort.
C. Reconciliation of Number of Tickets,
48. The following table recaps the number of tickets sold by
methodology used:
1990 through 1995 |
|||||||
Methodology | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | Total |
Ticket Income | |||||||
Low End | 1,525 | 1,506 | 1,487 | 1,081 | 799 | 129 | 6,527 |
High End | 1,802 | 1,780 | 1,758 | 1,278 | 944 | 152 | 7,714 |
Ticket Expense | |||||||
Low End | 1,877 | 1,905 | 1,841 | 1,502 | 1,212 | 472 | 8,810 |
High End | 1,981 | 2,011 | 1,944 | 1,586 | 1,279 | 498 | 9,299 |
Employee Estimates | |||||||
Low End | 1,080 | 1,080 | 1,080 | 1,080 | 1,080 | 1,080 | 6,480 |
High End | 1,350 | 1,350 | 1,350 | 1,350 | 1,350 | 1,350 | 8,100 |
Gross Profit Sheets | 1,171 | 1,171 | 1,171 | 1,171 | 1,171 | 1,171 | 7,026 |
AVERAGES | |||||||
Low End | 1,413 | 1,416 | 1,395 | 1,209 | 1,066 | 713 | 7,211 |
High End | 1,576 | 1,578 | 1,556 | 1,346 | 1,186 | 793 | 8,035 |
As shown, the lowest estimate for the number of tickets is 6,500 and the highest estimate is 9,300. I will rely on the low end average of 7,200 tickets for the purposes of this analysis.
D. Percentage of Flights on Delta.
49. The overwhelming majority of airline flights booked through
Bonham and WPI were on Delta. Again, I reach an approximation
of the percentage of total ticket sales based on several sources
of information: (a) Bonham's testimony to Delta when Delta deposed
her in 1994; (b) employee testimony when those employees were
deposed by Delta in 1994; and (c) the Gross Profit notebooks for
1991, 1992 and 1994.
(1) Bonham's Testimony to Delta.
50. I do not attach a lot of credibility to Bonham's testimony, but in a deposition taken by Delta she would presumably have every reason to understate and minimize the total percentage of her ticket sales that were made with Delta FFP tickets.
51. In her deposition taken by Delta in the Seward case on September 22, 1994, she testified that since 1991 ninety percent of her total business was through Delta. Bonham Deposition, page 72.
52. Bonham testified that in 1994 ninety-seven percent of her
business was through Elco Investments. Bonham Deposition, page
42. So far as I am aware, Elco only sold Bonham and WPI Delta
FFP tickets.
(2) WPI Employee Testimony to Delta.
53. Delta also obtained the depositions of WPI employees Carol Walrath and Melanie Cook in the Seward case.
54. In her deposition on September 21, 1994, Carol Walrath testified she had worked at WP and WPI since May of 1989. Walrath Deposition, page 11.
55. Walrath testified that for a couple of years preceding her deposition, Elco Investments had furnished "99 and nine-tenths" of the FFP tickets sold by Bonham and WPI. Walrath Deposition, page 21.
56. Walrath testified that Bonham and WPI, after receiving the Temporary Restraining Order in 1993, stopped doing business with Robert Seward, but continued to deal almost exclusively in Delta FFP tickets. Walrath Deposition, 27.
57. Walrath agreed that "Delta is pretty much the whole business, isn't it?" Walrath Deposition, 52.
58. In her deposition on September 21, 1994, Melanie Cook testified she had worked at WPI since June of 1992. Cook Deposition, page 6.
59. Cook testified that while occasionally WPI would issue a ticket on United Airlines, the vast majority of WPI's business was on Delta. Cook Deposition, page 22.
60. Cook testified that Delta FFP tickets made up "probably
more than 95%" of WPI's business. Cook Deposition, page 59.
(3) Gross Profit Notebooks.
61. I reviewed portions of the three notebooks described in Paragraph 32. I examined the records in particular for the period January 1991 to October 1992.
62. The following table summarizes the tickets I found described in those periods:
63. Based upon my review, Delta's FFP tickets amounted to 97%
- 98% of Bonham and WPI's total tickets described in the portions
of the notebooks I reviewed.
(4) Recap of Percentage of Flights on Delta.
64. Summarizing the estimated percentage of flights on Delta:
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Method | Low | High |
Bonham | 90.00% | 97.00% |
Cook | 95.00% | 95.00% |
Walrath | 99.00% | 99.00% |
Reserv. Cards | 98.00% | 98.00% |
Notebook | 97.00% | 98.00% |
65. Based upon this information, I believe that not less than
96% of the Bonham and WPI-generated FFP tickets were on Delta.
E. Estimated Damages.
66. If 96% of the FFP tickets were on Delta, and if there are an estimated 7,211 tickets sold by Bonham and WPI for the six years under review, then Delta has a claim based on an estimated total of 6,923 tickets.
67. As described in the memorandum of my attorneys filed this date, I believe that the fairest likely measure of damages is $550 per ticket, the average price realized by Bonham and WPI on the sale of tickets.
68. Therefore, it is my opinion that the minimum probable value of Delta's claim is $3,807,000.
69. Under an analysis that uses the higher end of 8,035 tickets then total damages are $4,240,000.
70. For these reasons, I believe the proposed settlement with
Delta is exceptionally favorable to the Estate and I urge the
court to approve the settlement.
DATED at Anchorage, Alaska this 22nd day of April, 1997.
/s/Larry D. Compton
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