Lawsuit questions Island Air bankruptcy

Island Air, once the state’s second-largest airline with new routes, new aircraft and an expanded workforce, was touting itself as having a bright future.

But it all came crashing down Nov. 10, 2017, when it abruptly ceased operations after giving employees, vendors and customers one day’s notice.

Now, the estate’s trustee and two of the airline’s unions are claiming in a lawsuit that the company’s bankruptcy and subsequent liquidation might have been avoided if the owners, including billionaire Larry Ellison, had invested more money and put the interest of the 400 employees ahead of their own, according to a joint lawsuit filed this month in federal District Court in Honolulu against Ellison, controlling shareholder Jeffrey Au and others.

“The Island Air bankruptcy was caused by the self-interested acts of its owners,” says the lawsuit filed by trustee Elizabeth Kane, who represents the estate for the benefit of the creditors, and the unions representing most employees. “Had Island Air’s owners and their representatives acted in the interests of Island Air rather than their own, then the bankruptcy of the company would not have occurred when it did (if it occurred at all), the outstanding debts would not have been as substantial as they are, and there would be additional assets to satisfy those debts.”

Among the lawsuit’s claims are that Au knowingly undercapitalized Island Air with just $7 million in loans when the two entities he controlled purchased a two-thirds interest in Island Air from Ellison’s Ohana Airline Holdings LLC in February 2016. Ellison, co-founder of Oracle Corp., is the seventh- richest man in the world with a net worth of $62.5 billion, according to Forbes.

Ellison purchased the airline in February 2013 and retained a one-third stake when he sold it to Au three years later.

The lawsuit, which seeks damages and a jury trial, alleges that Ellison kept the airline barely alive until he could sell the five ATR aircraft he owned prior to filing for bankruptcy.

Also alleged in the suit is that Au protected his own interests by buying the airline primarily with debt and little of his own money. He later made unreasonable demands in unsuccessfully seeking new investors so that he could retain control in the hope of a big payoff, the lawsuit says.

In addition, the lawsuit seeks employee compensation due to the airline not giving its workers adequate notice of termination. In February 2018, the Air Line Pilots Association and the Teamsters, along with the Transport Workers Union, which is not part of the lawsuit, filed claims of nearly $10 million in damages for not giving employees the legally mandated 60 days’ notice of company termination.

Shutting down

In November 2017, Island Air filed for Chapter 7 bankruptcy, which is liquidation, or shutting down and selling all assets to pay off debts. One month earlier it had filed for Chapter 11 bankruptcy, which is reorganization, when a company has a plan to pay some of its debts and eventually emerge from bankruptcy.

“When the company filed for Chapter 11 bankruptcy on Oct. 16, 2017, the employees were told that there was nothing to worry about and the future was bright,” the lawsuit said. “As a result, when the company shut down less than a month later, the employees were shocked. Responsible parties did not give Island Air employees or their unions the required 60 days’ notice of closure under the state Dislocated Workers Act or the federal Workers Adjustment and Retraining Notification Act. They were not paid their wages from the last pay period. Their medical premiums were not paid. Rather than use the available funds of Island Air to pay the employees, Mr. Au tried to secure those funds for himself.”

The lawsuit says that in May 2017, 15 months after Au acquired the airline, Island Air hit “a substantial financial crisis” and that by June of that year it became apparent to Au and Paul Marinelli, who manages most of the personal financial investments for Ellison, that a substantial new investment was necessary to keep Island Air aloft.

“From May 2017 until the shutdown on November 10, 2017, Island Air was kept on life support through various small cash infusions that all parties knew were insufficient in the long run,” the lawsuit says. “As a foreseeable consequence, Island Air’s debt ballooned and its assets dwindled. Simply put, any person controlling the company and acting in the best interest of it would have shut it down many months earlier and not continue to dispose of assets and rack up liabilities that could not be repaid.”

During its final six months of existence, the lawsuit says that Island Air acted with “an astounding disregard for the interests of the company.”

Marinelli, acting for Ellison, had an interest in keeping Island Air “unnaturally on life support” because Island Air was in possession of five ATR aircraft that Ellison owned.

“Mr. Marinelli knew that if Island Air went into bankruptcy, it would be extremely difficult to sell Mr. Ellison’s five airplanes without the assistance of Island Air’s maintenance personnel, and that the price that could be obtained would plummet,” the lawsuit says. “So Mr. Marinelli made just enough funds available to Island Air to keep it alive long enough for him to sell those aircraft” and then three days before the airline filed for Chapter 11 extracted $400,000 from Island Air to give to Ellison’s Island Leasing LLC, according to the lawsuit.

Money allegations

The lawsuit alleges that Au purchased the airline primarily through loans rather than cash so that Au and Ellison legally could put themselves ahead of unsecured creditors and employees in case the company were to eventually file for bankruptcy.

Each of Au’s two entities — PaCap Aviation Finance LLC and Malama Investments LLC — each bought one-third of the shares of the airline for $4,000 in cash, or a total of just $8,000, to represent two-thirds controlling interest in the company. Ellison’s Ohana Airline Holdings entity bought one-third of the shares for $4,000 in cash.

The transaction also was funded by a $2 million loan to PaCap Aviation from Panda Travel founder and CEO Jack Tsui; a $2 million loan from another Ellison company, Carbonview Limited LLC; and a $3 million loan from Carbonview. The two $2 million loans were secured by Island Air’s assets as collateral. In addition, Carbonview provided a $3.5 million line of credit intended for aircraft lease rent and/or maintenance reserve payments.

Ellison, who also owns 98% of Lanai, maintained substantial control of the airline up until the bankruptcy despite only retaining one-third ownership of the airline, the lawsuit says.

Starting in May 2017, the airline began scrambling to cover payroll, misled employees about the company’s future and inflated its finances to potential investors, the lawsuit says. Its financial crisis snowballed when it received default notices from the lessors of its newly acquired Bombardier Q400 aircraft, received nonpayment notices on various insurance policies required to fly its aircraft, and had vendors freeze accounts, the lawsuit says.

The lawsuit alleges that Au, who had no prior airline experience, micromanaged Island Air and fired or forced out executives or board members who disagreed with him. Among those he fired were CEO Les Mura­shige and Chief Operating Officer Rob Mauracher, a former CEO at Island Air. The lawsuit claims that Au promoted David Uchiyama from chief commercial officer to acting CEO, and then ultimately to permanent CEO in June 2016, because Au knew that Uchiyama wouldn’t challenge Au’s decisions out of fear of losing his job.

Besides Au, Ellison, Marinelli and Tsui, other defendants include Island Air Vice President of Finance and director Christopher Gossert; and Communications Pacific CEO Catherine Yannone, also known as Kitty Lagareta, who was a board member of Island Air during the last two months before the company’s shutdown.

Lagareta and Gossert were sued because they should have known as directors that Island Air was required to pay its employees their benefits or other compensation owed to them upon Island Air’s closure, the lawsuit says.

The lawsuit’s defendants either had little to say or could not be reached.

“At this time we have no comment,” Marinelli said. “You can imagine it’s a developing situation, which we don’t have a comment on at this point. We might have some comments relatively soon.”

Au, who was traveling on the mainland, said, “I can’t comment right now.”

Tsui and Uchiyama, who is now chief operating officer of the city rail project, did not return phone messages, and Gossert could not be reached for comment.

Lagareta, who said she was only a director for “weeks,” said Island Air was a client of her public relations company, owed her company money, and that she joined the board at Au’s request to help with communication after he said the airline was going to file for Chapter 11 bankruptcy. Lagareta said she later resigned after Au told her the company was going to liquidate.

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CLOSED FOR BUSINESS

Island Air through the years:

>> Sept. 9, 1980: Island Air begins scheduled service between Honolulu and Princeville, Kauai, as Princeville Airways.

>> May 1987: Princeville Airways is sold by Consolidated Oil and Gas to Aloha Airgroup Inc., the parent of Aloha Airlines, and is renamed Aloha IslandAir. It later is renamed Island Air in 1995.

>> May 11, 2004: Gavernie Holding LLC, owned by Charlie Willis, purchases Island Air from Aloha Airgroup.

>> Feb. 26, 2013: Larry Ellison’s Ohana Airline Holdings LLC acquires Island Air from Gavernie Holding.

>> February 2016: Two entities controlled by Honolulu venture capitalist Jeffrey Au acquire a two-thirds share of Island Air from Ohana Airline Holdings, which retains one-third interest.

>> Oct. 16, 2017: Island Air files for Chapter 11 reorganization.

>> Nov. 10, 2017: Island Air ceases operations one day after its employees are notified it is shutting down and liquidating.

>> Aug. 12, 2019: Trustee Elizabeth Kane and two of Island Air’s unions sue Ellison, Au and others for undercapitalizing the airline, putting the owners’ interests ahead of the employees and creditors and failing to give the workers the required 60 days’ termination notice.

Source: Honolulu Star-Advertiser research