In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
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The Trustee has filed a Declaration of even date setting out the facts underlying the analysis that led him to recommend the settlement to the court. The court and the parties should review that settlement before reading this supplemental memorandum.
In the Trustee's opinion, the lowest defensible number of tickets sold is in the range of 6,900 - 7,000 tickets over the six year period 1990 - 1996 for which Delta seeks to recover damages. The number may be as great as 9,300.
In light of that sales volume, the remaining issues are the damages recoverable in light of those sales and the merits of the various defenses asserted by the BRA Defendants to be available to the Trustee.
1. Legal Standards to Be Applied.
As the court implied at the hearing on April 15, 1997, if a full trial was required to obtain approval of a settlement, there would be no purpose in settling. Collier on Bankruptcy, 15th Ed. (Rev.), provides at Par. 9019.02, page 9014-4:
The TMT Rule does not require the bankruptcy judge to hold a full evidentiary hearing or a "mini-trial" before a compromise can be approved. Otherwise, there would be no point in compromising; the parties might as well go ahead and try the case. Instead, the obligation of the court is to "canvass the issues and see whether the settlement 'falls below the lowest point in the range of reasonableness.'"
Citing In re Drexel Burnham Lambert Group, Inc., 134 BR 493 (Bankr SDNY 1991) and Port O'call Inv. Co. v. Blair (In re Blair), 538 F.2d 849 (9th Cir. 1976). This memorandum and the Trustee's Declaration of even date are intended to assist the court in "canvassing the issues" and to demonstrate to the court that the settlement indeed falls well within the "range of reasonableness."
The BRA Defendants are mistaken as to the pre-petition events in Delta Air Lines, Inc. v. Robert Y. Seward et al., Case No. 1:93-cv-1036-HTW ("the Seward case"). A temporary restraining order was entered in 1993, but at that date Seward and Dauman were the only defendants. Bonham and World Plus, Inc. ("WPI") were added as defendants in 1994 and, on January 27, 1995, partial summary judgment was entered in favor of Delta Air Lines ("Delta") and against Bonham and WPI. That same order denied two efforts by Bonham and WPI to change the forum in the case from Atlanta to Fairbanks.
On September 29, 1995, Delta obtained a permanent injunction against Bonham and WPI, barring them from trafficking in Delta frequent flier program certificates and tickets.
Bonham and WPI were represented throughout these events by counsel.
The trustee concludes that the liability of Bonham and WPI for damages has been determined; the only issue open to litigation at this point is the amount of damages. Bonham's and WPI's liability flows from the partial summary judgment as to liability entered January 27, 1995, not, as the BRA Defendants suggest, from the temporary restraining order. Summary judgment has been entered determining that Bonham and WPI committed tortious interference with the contractual and business relations of Delta. Seward Case, Order of Court January 27, 1995, p. 24.
A few additional points:
(a) The court found actual malice by Bonham and WPI towards Delta.
(b) No final judgment has been entered, under Fed. R. Civ. Proc. 54(b) or otherwise.
3. Measure of Damages.
The Trustee has been unable to find any cases which contradict the "stowaway rule," the case law holding that the measure of damages for a person obtaining a ticket for travel by fraud is the highest fare imposed by the carrier for the travel route involved. A passenger traveling on a ticket obtained by fraud appears to be a stowaway; American Airlines v. Christensen, 967 F.2d 410, 416 (10th Cir. 1992) ("Thus, those whom the Defendants encouraged to buy and travel on the void awards were essentially stowaways, passengers without valid tickets.") This line of authority goes back as far as railway ticket cases in the late nineteenth and early twentieth centuries; see, e.g., Kirby v. Union Pacific Ry, 51 Colo. 509, 119 P.1042, 1046 (1911); citing Bitterman v. Louisville & Nashville R.R., 207 U.S. 205, 221, 28 S.Ct. 91, 96, 52 L.Ed. 171 (1907).
The measure of damages for services tortuously obtained is set out at Restatement of Torts 2d, §932:
If one is entitled to a judgment against another because the other has tortuously caused him to render services, the damages include compensation for
(a) either the value of the services or the loss of earnings by the plaintiff, and
(b) other elements of harm of which the conduct was the legal cause.
The Comment to this section makes clear that it applies to cases where the services were obtained by "force, fraud or duress." Comment, §932. The value of the services obtained through fraud by Bonham, WP and WPI was the fare in effect at the time of the services. Delta's insistence that it be the highest fare in effect at the time of the services appears to be a gloss arising under the case authority set out above.
A few other points. It doesn't matter that the passengers involved might not have flown at all if they had been required to pay a full fare, or that Delta incurred no greater cost than if the seats occupied by the Bonham, WP and WPI passengers were empty.
The fact that a stowaway would not have bought a ticket if he could not travel for free or that he occupies a seat that might have remained empty does not make him less of a stowaway. Whether or not he would have paid for a ticket, and whether or not the seat that he occupies would have been filled, the stowaway misappropriates the services of the carrier. Because the misappropriation resulted from the actions of the Defendants, it is clear that the Defendants damaged American.
American, 416. This appears to be consistent with the law of Alaska. In the related area of detention of chattels, the Alaska Supreme Court affirmed an award of damages for loss of use of a generator purchased at auction, where the generator had been taken by another. The court held that proof of loss of use damages did not require a showing that the purchaser would have used the generator during the time it was wrongfully held by the defendant. Ben Lomond, Inc. v. Campbell, 691 P.2d 1042, 1045 (Alaska 1984), quoting Restatement §931.
In attempting to apply Restatement §932 to the facts of this case, the Trustee reasoned that, by definition, the average price of $550 was lower than the lowest fare available on Delta for the flight in question. If Delta had had a lower fare available at the time, customers of Bonham, WP and WPI would have purchased Delta tickets directly, instead of taking the chances associated with a ticket obtained by fraud. Presumably, Bonham, in setting the price point for the tickets she and her businesses sold, set that price point as high as possible consistent with Delta's then-current ticket prices. Thus, on an average basis, the $550 fare should be slightly below the lowest possible fare available on Delta.
Selecting $550 as the measure of damages has another attraction: it has the practical effect of operating as restitution or partial restitution by disgorgement of ill-gotten gain by the debtor. While, strictly speaking, restitution is an equitable remedy, selecting a measure of damages which also happens to be the measure for disgorgement suggests the measure of damages has some merit.
4. Other Issues Raised by BRA Defendants.
The BRA Defendants suggest that the settlement is motivated by Delta's having obtained relief from stay, and that the pressure of trial in Atlanta is driving the Trustee to a hasty, ill-conceived settlement. The BRA Defendants urge the Trustee and the court to proceed to hearing on the Rule 60(b) motion to reimpose the stay.
Reimposing the stay simply defers the issue. The bankruptcy estate would still have to litigate Delta's claim, likely in Atlanta, at very considerable expense. Re-imposition of the stay would be appropriate if there were no settlement. But there is a settlement and, as shown above, it is very favorable to the estate.
The BRA Defendants are suspicious of the terms of the release, and believe that by failing to release WPI and Atlantic Pacific Funding Corporation ("APFC"), Delta intends to proceed against those entities. The Trustee understands Delta intends to confirm to the court in its briefing on this point that Delta simply wants to preserve its rights against WPI and APFC in the event the BRA Defendants succeed in their efforts to persuade the court that this court does not have jurisdiction of and the trustee does not represent WPI and APFC. This issue can be resolved by drafting an appropriate condition into the Order Approving Settlement.
The BRA Defendants argue that Delta should be equitably estopped from asserting all or part of its claim, since it failed to timely act against Bonham and WPI when Delta knew or should have known Bonham and WPI were violating the temporary restraining order. First, as noted in Part 1 of this memorandum, the argument rests on a misapprehension as to the temporary restraining order: it did not extend to Bonham and WPI, but addressed only Seward and Dauman. The court did not then have jurisdiction of Bonham and WPI. As far as the Trustee can determine, Delta learned of the existence and activities of Bonham and WPI from the records of Seward and Dauman. Delta asked Bonham and WPI to desist from violations of Delta's rules governing its Frequent Flier Program. When Bonham and WPI continued to traffic in Delta Frequent Flier Program tickets in violation of Delta's rules, Delta joined Bonham and WPI as defendants in the Seward case, and by January of 1995 had obtained summary judgment against them.
Second, it is difficult for the Trustee to see how an equitable estoppel could be set up on these facts. The undisputed facts show that Bonham and WPI set out to and did defraud Delta. WPI customers were provided by Bonham and WPI with instructions as to how to defraud Delta. It is difficult to see how the Trustee can set up an estoppel on those facts. Are the BRA Defendants suggesting that Delta should have discovered the fraud sooner? Assuming that is true, how does it create an equitable estoppel? Equitable estoppel requires that the person asserting it reasonably rely on the conduct of the other; Merdes v. Underwood, 742 P.2d 245, 248 (Alaska 1987) ("The elements of equitable estoppel are assertion of a position by conduct or words, reasonable reliance thereon by another party, and resulting prejudice.") How could Bonham or WPI reasonably rely on Delta's failure to discover the fraud? Since Bonham and WPI were working diligently to conceal their fraud on Delta, doesn't their conduct necessarily mean any reliance on Delta's failure to discover the fraud was unreasonable by definition.
Finally, to the extent equitable estoppel is an equitable remedy, it requires those who seek the remedy to have acted fairly and without fraud or deceit in the controversy in issue. Sea Lion Corp. v. Air Logistics of Alaska, Inc., 787 P.2d 109 (Alaska 1990). That would appear to be impossible in the circumstances of this case.
Lastly, the BRA Defendants argue that Delta's claim should be equitably subordinated to the claims of other creditors under 11 U.S.C. §510(c). The Trustee agrees that, if Delta's claim were based upon a calculation of damages not supported by case law, application of §510(c) might be applicable. But as described in the Trustee's Declaration and this memorandum, Delta's claim has a minimum value of more than $3.8 million.
Equitable subordination is available where (1) the claimant has engaged in some type of inequitable conduct; (2) the misconduct has resulted in injury to creditors or conferred an unfair advantage; and (3) equitable subordination is not inconsistent with the other provisions of the Code. In the Matter of Fabricators, Inc., 926 F.2d 1458 (5th Cir. 1991). The only inequitable conduct by Delta would have occurred if its claim was so excessive as to be beyond the limits of reasonable damages. Under the terms of this settlement, it is not.
But the risk of equitable subordination applies to all creditors. Any creditor who knew that he or she was supposed to be making money from defrauding Delta runs the risk of a motion by Delta to subordinate that creditor's claim to Delta's claim. Persons at risk would include anyone who traveled using tickets purchased through WP and WPI, since they were required to sign an acknowledgment that, in effect, they knew they were defrauding Delta. Any investor who asked Bonham how the monies to pay them the astonishing rates of return Bonham promised would have been made would have been told about millions of frequent flier miles and tickets sold in violation of Delta's rules.
At the level of claim described in this memorandum, and at the level proposed in the settlement, the Trustee does not believe he would have been successful in arguing that equitable subordination applied to Delta's claim. However, it appears likely that Delta, if it wished, could have made out a claim of equitable subordination for some and perhaps all of the investors.
5. Concerns Raised by the Court.
At the hearing on April 15, 1997, the court suggested there was a risk that Delta would received a ten percent dividend, while other creditors might receive only a 2% dividend.
Presently, Delta has filed a proof of claim for "not less than $10 million," against other claims of about $50 million. Those proofs of claim are presumptively valid. Delta's presumptive dividend, then, is 16.67%. The settlement will reduce that dividend to about 12%. At a distribution to general unsecured creditors of exactly $2 million, Delta's dividend peaks at 15%, still lower than the presumptively valid claim. The claims of other creditors are already reduced by voluntary withdrawals of claim, and will be reduced still further by the conditional withdrawals of claims made by the BRA Defendants. The Trustee has pending dozens of objections to claims and portions of claims. Many of those objections have not been opposed.
Clearly, the claims by creditors other than Delta are gong to decrease, further reducing the risk that Delta will obtain a preference.
In the context of other motions that same day, the court expressed concern that the Estate be administered as cost-effectively as possible. Litigation with Delta, wherever occurring, will be very expensive. Delta has made clear to the Trustee that it intends to litigate in Atlanta, and that it will pursue all procedural remedies available to it to assure that it litigates in Atlanta. Proof of the actual fares involved in Delta's claim, as opposed to a simplification of those fares, would be very expensive. Those administrative dollars seriously impact the dividend to the creditors. This settlement avoids those administrative expenses. The Trustee points out to the court that if the Trustee spent $200,000 reducing Delta's claim by $2 million, and there was a ten percent dividend to the creditors, the litigation would be a net loss to the creditors.
The Trustee requests the court approve the settlement with Delta Air Lines.
DATED at Fairbanks, Alaska this 22nd day of April, 1997.
GUESS & RUDD
Attorneys for the Trustee
James D. DeWitt
ABA No. 760523
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