Saturday, June 3, 2017

Big talk, but no big money in People Express deal

Ken Spirito was feeling frustrated. It was two weeks after the Peninsula Airport Commission kicked in $565,000 toward the multimillion-dollar cost of what would become People Express Airlines' third failed effort to start flying, this time out of Newport News/Williamsburg International Airport.

"Continued lack of support from NN behind the scenes. Why can't anyone be positive?" Spirito, now the airport's former director, complained in an email to airport commissioners.

And six weeks later, even after People Express had repaid a $565,000 short-term loan from W.M. Jordan — it's not clear if that's where the commission money went — company chief executive John Lawson was feeling frustrated, too. His firm had just lost out on a project to build a new security checkpoint at the airport.

"I will be creating hundreds of new passengers for your airport with the Tech Center expansion. I have helped bring two new hangars to the Airport, and ALL our contracts were open bid where we were the LOW BIDDER and SAVED YOU MONEY. We invested $1,000,000 in Peoples Express that you introduced me to," he fired off in an email to Spirito. "What were you thinking?"

The failed effort to launch a start-up airline would involve a tight-knit, secretive circle of some of the Peninsula's most important power brokers, according to documents uncovered by a state audit, sparked by Daily Press reports that the commission used public funds to pay off a $4.5 million People Express debt owed to the politically connected financial powerhouse, TowneBank.

It was when all else had failed that Spirito, former Newport News City Manager Jim Bourey and TowneBank Peninsula board member Herbert V. Kelly Jr., a prominent local business lawyer, came up with the idea of a loan to People Express from TowneBank that would be guaranteed by taxpayer funds deposited with the airport commission, the audit found.

That guarantee, made to a company that told the commission its debts were already $240,000 more than its assets, would eventually require the airport to pay $4.5 million to TowneBank, in what state officials last week said was an unauthorized and illegal use of public money.

Desperate to find service to replace AirTran, which left the airport in 2012 cutting traffic by more than half, a group of Peninsula leaders listened hopefully to a pitch from from People Express founder Michael Morisi that he could make the airport a busy hub for a brand-new discount airline, employing 1,000 people.

Morisi bragged to local officials about $50 million in Wall Street financing that he said was just around the corner, according to the audit.

In March 2013, at Spirito's request, Lawson invested his first $300,000.

But in April, as Morisi continued to push for public support, he complained in an email to Spirito:

"We had meetings with several of the largest private investors in the area who were part of a group put together by former Mayor Joe Frank, the head of air service development, appointed by Mayor McKinley Price. Each of these men indicated a very strong desire to see us establish our headquarters here and begin service and expressed they would make personal investments ... With only one exception, these did not materialize."

Morisi's email mentions a March 28 phone call from Frank "indicating that he 'had $5 Million I could get.'"

"Unfortunately, today," the email continues, "Joe said he did not believe the community, through public funds, or the private business leaders would make any investment until after we acquire XTRA Airways."

XTRA Airways was an Idaho-based charter firm Morisi had agreed to buy, a purchase that he was trying to find money for to get planes for People Express, which was then little more than marketing company recently fined for illegally hawking discount air fares.

The purchase never went through, and Morisi and People Express were sued by a Chicago leasing firm for some $171,000 it had advanced to make the deal work.

Bourey's involvement stepped up in October 2013 with his appointment to the airport commission board. Just three months into his new job as Newport News city manager, Bourey emailed a number of Hampton Roads leaders to convene a meeting to discuss plans to increase air service at the airport.

Also that October, Lawson's firm lent an additional $985,000 to People Express, a loan that has never been repaid. Two months earlier, Lawson had won approval from the Newport News City Council for what he described at the time as a $200 million project to build Tech Center, a mixed-use development that would start with a Whole Foods-anchored shopping center.

In November 2013, Bourey drafted a letter to People Express' newly appointed chief executive officer, Jeff Erickson, saying that as city manager he was ready to recommend grants of local funds totaling $500,000 a year for five years, once it started operations.

That wouldn't be enough.

A new plan

At the start 2014, Erickson came up with a new plan to get People Express flying. He would hire three planes from Nevada-based Vision Airlines, which like XTRA had the federal certifications that allowed it to fly. But he needed $5 million to close the deal.

"I am not very confident in the NEW direction Pex has laid out in its plan," Spirito emailed to Bourey, using the shorthand for People Express.

Bourey apparently was.

"Our new City Manager Jim Bourey is taking a lead role now ... Capital fundraising efforts and operations planning are ongoing," Sam Workman, assistant director of the Newport News Economic Development Authority, emailed to Jackie Hudson, business manager at the Virginia Economic Development Partnership.

"Our City Manager has been instrumental and very involved at a high level," Workman said in a later email to Hudson.

Bourey worked in the area Morisi had claimed as his expertise, trying to line up investors.

"I'm seeing Lawson at 4PM Thursday and (Riverside Health Systems President William B.) Downey at 10AM Friday," Erickson emailed to Bourey in early February 2014. "Thx for opening the door!!"

"Excellent, hope things go well!! I am working on some other folks as well," Bourey replied.

Three days later, in an email to former state Del. Alan Diamonstein, whose law firm soon would be advising TowneBank about the commission, Bourey wrote, "We are at a critical juncture with People Express ... Just that old money bugaboo. I plan to talk to a few folks in the community this week."

Financing a Vision Airlines deal was not the only worry. People Express wasn't paying the airport for rent, utilities, trash pickup and security badges, a sum that reached nearly $41,000 by the end of March 2014.

In May, one supplier filed to garnish People Express' bank accounts for nearly $65,000 it said it was owed. By then, the IRS had filed liens for $232,000 in unpaid taxes. A $50,546 balance due on the company's credit cards was still unpaid, more than a year after American Express sued for payment in Newport News Circuit Court. The sum is still unpaid.

And the Washington, D.C., law firm Hogan Lovells had won a promise from People Express and Morisi to pay $153,836 it was owed.

Bateman's dilemma

Hogan Lovells agreed to let People Express send $20,000 by wire on May 15, 2014, then make several payments over the next couple months to satisfy what it owed them.

TowneBank employee Terrie Spruill emailed bank executive Bert Bateman, a Newport News city councilman who was also serving as an airport commissioner, to tell him: "I just talked to Mr. Ogg, the attorney for Hogan Lovells, and he is supposed to email me a release ... I will let you know when I receive that email from the attorney or if you want me to speak directly with the member, I would be glad to do that as well."

Bateman asked her to reach out so that the matter could be resolved quickly. Asked about that exchange on Saturday, Bateman said that it is routine for bank staff to check with senior management about such liens.

Bateman had told auditors and the Daily Press that his only involvement with People Express was setting up a meeting between Bourey and Brian Skinner, TowneBank's Peninsula president, which eventually led to the airport commission's loan guarantee. Bateman sat in on the meeting, took notes and then decided he should recuse himself from the matter, he said. He shared his notes with another loan officer.

Records obtained by the auditors show that Bourey, Spirito and Jason Moulton, People Express' chief financial officer, were including Bateman on May 23 emails with financial information that later would be used to work out the loan and the guarantee, including a schedule of expected payments from the state of airport capital funds.

On the night of May 23 — five days before the meeting that Bateman scheduled — Bourey emailed Bateman to thank him for meeting "with us" that afternoon, not specifying where or with whom. Bourey says that he "really would like to push this as much as we can because the upside is so huge."

"I was pretty surprised as you that they are not in better position with revenues to get in the air. ... If it looks like they will not have a clear path to flying, we will cancel the Friday event. It is better to have that problem than the incredible black eye of failing," Bourey wrote.

Bateman told the Daily Press that Bourey was asking him general questions about financing options for People Express.

"I told him they were not bankable," he said.

In an email response that evening, he wrote to Bourey, "Jim, we are not venture capitalists."

He added that any funds serving as a surety on TowneBank credit is "convoluted and unprecedented at best. Red flags on PEX accounts have flown bc of garnishments (this is in the public domain already). Timeliness is another issue entirely. Brian and I will huddle on Tuesday. He has been briefed on this already."

Over the next few days, Bourey and Spirito tried to understand where People Express stood financially, eventually receiving a balance sheet on May 26 that showed the airline's debts exceed its assets by about $241,000. Meanwhile, invites were being emailed for an event announcing People Express' launch — the governor was coming.

Bateman said Bourey asked him to set up a meeting with TowneBank Peninsula president Skinner, Spirito, Kingston and People Express CEO Erickson. They met on May 28, 2014. Batemen said Skinner asked him to sit in because Skinner didn't know everyone.

"Before we walked in, I told Jim I couldn't be involved," Bateman said on Saturday. He says he was asked to take notes of the discussion and didn't participate.

"When it was done, Brian and I walked over to Sue Ivy's office, so he could hand off to her," Bateman says. "I walked out of there feeling like I had done my job and was no longer involved."

The auditors found an email from Bateman the next day to Sue Ivy, the loan officer assigned to handle the deal, and to lawyers representing the bank, People Express and the airport commission, as well as People Express executives Erickson and Moulton, laying out how a loan guarantee with the airport commission would work. Moulton emailed Bateman to talk about the loan terms.

Bateman says now he was simply circulating the notes he was asked to take at the meeting.

When Moulton emailed back to talk about loan terms, Bateman replied that Ivy was handling the matter.

A week later, on June 3, in response to a question from one of the bank's lawyers, Bateman detailed the Peninsula Airport Commission accounts that were to be used to secure the People Express loan. He copied colleagues at the bank, Spirito, Kelly and Kingston.

"That was just a question about the notes I took," he said Saturday.

The next day, Terrie Spruill — who had emailed Bateman about the law firm People Express owed money to — emailed Bateman at 11:42 a.m.: the bank had just received a garnishment summons for the airline, an IRS levy for $252,030.15. Bateman forwarded her email to People Express officials saying, "Help."

It wasn't until June 18 that the bank, People Express and the airport commission finally reached an agreement on a $5 million line-of-credit loan. One sticking point was Lawson's concern about when his company's loan would be repaid. At one point, W.M. Jordan's controller suggested boosting the guarantee to $6 million. Bourey kept pushing Lawson on the need to complete the deal and the businessman eventually agreed to let his company's loan be subordinated to the commission-guaranteed credit line. Bateman wasn't involved in any of this.

But on June 23, Moulton called to sound him out about surety bonds and letters of credit. Bateman emailed a summary to Skinner, Ivy and an executive at TowneBank's insurance affiliate.

"He just called me because he had my number and he had a general banking question," Bateman said Saturday. "I didn't think it had anything to do with the loan."

Grounded

Despite the hoopla over People Express' eventual launch — Bourey boasted that passenger traffic at the airport was up 25 percent — it was a rocky start.

With Vision's planes operating half full, the service was operating well below the level predicted in Morisi's glowing pitches to airports, economic development officials and investors suggested. An email from the airport's auditor noted that People Express' costs exceeded revenue by nearly $865,000 in July and more than $647,000 in August.

In mid-July, Spirito emailed Morisi that passengers were complaining about delays and sloppy operations, and that airline was charging them for services it never provided, such as sitting together.

In mid-September, an accident with a supplier's truck damaged one Vision plane, taking it out of service. Since Vision never delivered the third plane it promised, People Express was grounded. It never flew again.

In a long email to Erickson two weeks later, Bourey encouraged him to stay on, saying he should continue seeking investors.

In October, as Spirito was pressing Erickson to turn over more than $100,000 of passenger fees the airline had collected on behalf of the airport and was required by federal law to turn over, Bourey complained to the People Express CEO that "I am pretty frustrated to learn from Brian at TowneBank that you plan to furlough employees tomorrow. Here I am pumping up People Express on WAVY yesterday. We have got to be in the loop."

Ivy, the TowneBank loan officer, emailed Spirito to say that People Express reported that it was bringing in a financial adviser from the investment bank Raymond James and Associates.

Spirito replied, "The person (People Express) is referring to is in no way close to doing anything with them."

Bourey, meanwhile, was emailing suggestions to Erickson about how to persuade people who had put money into People Express to invest even more. He could tell them, Bourey suggested, that without investing more, they risked losing the money they'd already bet on the airline.

Relations between the airline executives and Spirito were growing strained.

In November, Spirito ordered People Express to leave the airport because of the unpaid bills and passenger fees it had not turned over. Morisi sent an email complaint to Bourey, and added: "Jim, we will fly again. I am working two paths and have high confidence."

"Mike ... I am about to go into the PAC meeting," Bourey replied, asking if the company planned to pay the passenger fees it was supposed to hold for the airport with money meant to cover bills at Newark Liberty International Airport in New Jersey.

"I need something positive to work with," he added.

Time to pay

In late November, when People Express missed payment of interest due on its TowneBank loan, Bourey ordered Spirito to pay, with a copy to airport lawyer and TowneBank director Kelly.

Kelly said he approved, but Spirito said, "I cannot feel comfortable." He added in a follow-up email, "I was never given authority by the board to make P&I (principal and interest) payments."

Kelly replied, "I share your frustrations but we need to do this ... no approval by the Commission is necessary."

Two months later, TowneBank told People Express it was in default and had 15 days to start flying and pay interest owned on its debt. That same day Bourey emailed Spirito about his upcoming annual performance evaluation, noting, "What I would like to do is a memo documenting ... the many successes you and the airport have had this past year."

On Feb. 18, 2015, the commission turned over to the bank $4.2 million drawn from three bank accounts — $3.2 million from state airport funds, just under $300,000 from the account holding a federal grant meant for marketing and revenue subsidy for People Express, and $693,000 from an account holding money Peninsula cities and counties had contributed to a regional air service committee that was supposed to be used to match the federal grant.

In March, Morisi, upset by a comment from Spirito in the Daily Press criticizing People Express, emailed Bourey to complain — and to note:

"Jim what I have not seen yet is any media coverage about the $5M provided to PEX, so congratulations on keeping that quiet."

Original article can be found here:   http://www.dailypress.com

1 comment:

Anonymous said...

Gives new meaning to cluster fk. Heads need to roll if not jail time.