The Department of Labor has asked the federal judge overseeing Western Global Airlines’ bankruptcy case to partially deny a motion dismissing all creditors claims as part of a restructuring plan because it is investigating ownership for potential violations of federal law related to management of the company’s retirement plan.
James Neff, his wife and the plan’s administrator are being sued by three current and former employees for alleged self-dealing while structuring a employee stock ownership plan (ESOP) in 2020.
The Wednesday filing reveals for the first time that Neff and his partners are under investigation for selling more than a third of the company at a “grossly inflated price,” resulting in “substantial” losses for the ESOP. The Department of Labor said the transaction was prohibited under the Employee Retirement Income Security Act (ERISA) of 1974 and that it doesn’t want to lose its right to recover losses from parties involved in the bankruptcy.
Western Global Airlines struck a deal with certain creditors and lenders for $77 million in debtor-in-possession financing as part of its Aug. 7 bankruptcy reorganization plan. Such deals are designed to give the company’s emergency financiers top priority over all other claims. Western Global’s debtors are seeking to dismiss all claims from unsecured creditors. The Department of Labor said it doesn’t object to the core terms of Western Global’s proposed bankruptcy financing, just the part that would release the government’s claims against Neff and related entities connected to the employee pension benefit plan.
Western Global, which began operating a year after Neff founded it in 2013, has 21 aging MD-11 and Boeing 747-400 freighters that are expensive to operate and maintain. The company is headquartered in Estero, Florida, and uses Southwest Florida International Airport in Fort Myers as its home base.
Flight-tracking sites show that more than two-thirds of Western Global’s fleet is out of service. It continues to fly missions for the U.S. military and other customers, but this year lost major contracts with Amazon and two other major customers and has struggled for business since the air cargo market began to collapse a year ago from its pandemic peak. Lower cash flows made it difficult to service the company’s high debt load.
Neff, through an affiliated company, in June acquired about $140 million in distressed debt from lenders putting him first in line any claims of the company’s assets.
The ESOP’s purchase of Neff family stock was not permitted under ERISA, according to the Department of Labor. The statute prohibits fiduciaries from allowing plans to engage in transactions involving the sale or exchange of a property between the plan and an interested party, including the acquisition of a security on behalf of the plan. An exemption allows an employer to acquire securities for “no more than adequate consideration.”
In 2020, Western Global took on $447.5 million in debt to facilitate a loan to the ESOP, which it used to buy 375,000 Neff shares for $510 million. Neff retained control of the company and continued to serve as CEO with an annual salary of $400,000, according to court documents.
The Department of Labor said it estimates Neff and his family “wrongfully received” about $182 million more from the ESOP deal than their stock was worth, while maintaining a majority stake and control of Western Global. The calculation was based on comparing the values of Western Global’s closest publicly traded competitors, Air Transport Services Group and Atlas Air (since privatized), which traded at an average of six times EBITDA (earnings before interest, taxes, depreciation and amortization), with 10% discount applied to Western Global for being less desirable.
“Although the trustee of the ESOP approved the ESOP transaction, the Department of Labor has reason to believe the trustee was operating under a conflict of interest and may have breached its fiduciary duties in approving the ESOP transaction,” the filing stated. Neff was aware of the conflict and possible breaches of fiduciary duty, it added.
The ESOP is obligated to repay Western Global 100% of the loan plus interest, which means the company owes Neff an additional $140 million, in addition to the $510 million already paid, based on his purchase of the secured loans.
Protecting secured bankruptcy creditors is appropriate, but Neff shouldn’t be able to use the process to immunize himself and family trusts against claims arising from his participation in an illegal scheme, the Labor Department told Judge Karen Owens of the U.S. Bankruptcy Court for the District of Delaware.
The lawsuit alleges the sale price for the ESOP was based on 20 times the company’s fair market value and that when Western Global offered high-interest bonds because there were no takers, Neff bought the bonds himself and stuck the employees with heavily devalued shares.
More FreightWaves/American Shipper stories by Eric Kulisch.
Write to Eric Kulisch at ekulisch@freightwaves.com
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