Civil Aeronautics Bd. v. Tour Travel Enterprises, Inc.

• Decision Date: 20 November 1979
• Docket Number: Nos. 78-1577,78-1625,s. 78-1577
• Citation: 605 F.2d 998
• Parties: CIVIL AERONAUTICS BOARD, Plaintiff, and Earl Bratton, et al., Intervening Plaintiffs-Appellants, v. TOUR TRAVEL ENTERPRISES, INC., et al., Defendants-Appellees. CIVIL AERONAUTICS BOARD, Plaintiff-Appellee, and Earl Bratton, et al., Intervening Plaintiffs-Appellees, v. Nathan YORKE, Trustee of Tour Travel Enterprises, Inc., Sunshine Travel Agency, Inc., and Sunshine Travel of Nevada, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 998

605 F.2d 998

CIVIL AERONAUTICS BOARD, Plaintiff, and Earl Bratton, et al., Intervening Plaintiffs-Appellants, v. TOUR TRAVEL ENTERPRISES, INC., et al., Defendants-Appellees.

CIVIL AERONAUTICS BOARD, Plaintiff-Appellee, and Earl Bratton, et al., Intervening Plaintiffs-Appellees, v. Nathan YORKE, Trustee of Tour Travel Enterprises, Inc.,

Sunshine Travel Agency, Inc., and Sunshine Travel

of Nevada, Defendant-Appellant.

Nos. 78-1577, 78-1625.

United States Court of Appeals Seventh Circuit.

Argued Feb. 15, 1979.

Decided Sept. 10, 1979.

As Amended Nov. 20, 1979.

Kenneth F. Levin, Beatty, Levin, Holland, Basofin & Sarcany, Jed R. Mandel, Jenner & Block, Thomas R. Meites, Chicago, Ill., for intervening plaintiffs-appellants.

James F. Bishop, Crystal Lake, Ill., Christopher A. Bloom, Chicago, Ill., for defendants-appellees.

Before FAIRCHILD, Chief Judge, CASTLE, Senior Circuit Judge, and WOOD, Circuit Judge.

HARLINGTON WOOD, Jr., Circuit Judge.

This interlocutory appeal challenges the district court's order establishing priorities to be followed in disbursing funds from an escrow account. The account was established to protect travel tour participants, whose deposits reserved places on tours which, because of the bankruptcy of the tour operator, never occurred. For reasons as yet undetermined, the account holds less than the required amount. The district court ordered that those deposits directly traceable into the account be refunded to their depositors. The court's action is challenged on several grounds, but we reach only one. We hold that absent claimants should have been notified and given an opportunity to be heard before priorities were established, and therefore we vacate the district court's order and remand for further proceedings.

I.

The appeal stems from one of the several suits arising from the financial collapse of Richard Tauber's and Gerald Mann's travel tour conglomerate. ¹ The Civil Aeronautics Board initiated the action, charging violations of the Federal Aviation Act, 49 U.S.C. § 1485(e), and its charter regulations, 14 C.F.R. §§ 378 and 378a (1978). ² It sought the appointment of a trustee to represent all tour participants, an accounting of the funds in the escrow account, and an injunction prohibiting future violations of its regulations. Named as defendants were several corporations and individuals: Tour Travel Enterprises (TTE), Sunshine Travel Agency, Inc., Sunshine Travel of Nevada, Inc., ³ Mann and Tauber, the First National Bank of Highland Park, and Joel Shiffrin, a vice president at the bank. The three corporations sold travel tours; Mann and Tauber in addition to being officers also owned all the stock in the three corporations. The First National Bank of Highland Park was escrowee and Shiffrin managed the escrow account. Although the CAB originally filed the action, four groups of disappointed tour participants or their travel agents intervened to participate in the proceedings before the district court: the Bratton Intervenors, ⁴ the Chapman Intervenors, ⁵ the Travel First of Crystal Lake Intervenors, ⁶ and Hemisphere Travel, Inc. and Victoria Travel, Ltd. ⁷

TTE organized and marketed inclusive tours and one-stop-inclusive tours to a variety of domestic and foreign locations. Apparently, it sold tours to travelers both directly and through travel agencies. The commonly controlled corporations, Sunshine Travel Agency, Inc. and Sunshine Travel of Nevada, Inc., as well as other travel agencies unaffiliated with the Tauber-Mann conglomerate, were among the travel agencies dealing with TTE. ⁸

Charter tours are planned many months in advance and tour operators like TTE typically require prepayment of the entire tour price. Needless to say, this leaves would-be tour participants open to the considerable risks of the tour operator's bankruptcy, fraud, or careless planning. See generally Dickerson, Travel Consumer Fraud: Rip-Offs and Remedies, 28 Syracuse L.Rev. 847 (1977). The CAB regulations sought to be enforced in this action, 14 C.F.R. §§ 378 and 378a (1978), were intended to reduce these risks.

The CAB regulations have already been described in this court's earlier decision in Bratton v. Shiffrin, 585 F.2d 223 (7th Cir. 1978), Vacated, --- U.S. ----, 99 S.Ct. 3094, 61 L.Ed.2d 871 (1979), and have subsequently been revoked and replaced with new ones. See 43 Fed.Reg. 36,603-04 (Aug. 18, 1979, effective Jan. 1, 1979) (revoking 14 C.F.R. §§ 378 and 378a); Final Rule, Public Charters, Id. at 36,604 (codified in 14 C.F.R. § 380 (1979) ); Final Rule, Consumer Protections for Charter Participants, 44 Fed.Reg. 12,971 (Mar. 9, 1979). It is fair to say that the regulations will undergo additional modifications in the near future. See 43 Fed.Reg. 36,604, 36,606 & n. 20 (Aug. 18, 1978)(tour operators' responsibility to provide surety bonds and escrow agreements is subject to a CAB proceeding in docket 31735); Final Rule, Public Charters, Extending Consumer Protection Requirements to Other Charter Types, 44 Fed.Reg. 43,464 (July 25, 1979); Notice of Proposed Rulemaking, Public Charters, Escrow Depository Requirements, 44 Fed.Reg. 32,399 (June 6, 1979). Consequently, there is little point in our describing the past regulatory scheme in great detail. Greatly simplified, the regulations required a tour operator to submit to the CAB a prospectus encompassing a myraid of details ranging from the type and capacity of the aircraft to advertising samples. If the prospectus passed the CAB's inspection, the tour operator could market the tour. Each tour included a standardized contract between the tour participant and the operator. The contract stressed the tour operator's responsibility for his own negligence or mismanagement and specified refund procedures: if the tour operator canceled the tour, the escrowee refunded the entire amount directly to tour participants.

Most importantly for the purposes of this appeal, the regulations required tour operators to make arrangements to secure their financial viability and to protect travelers against the loss of their advance payments. For a series of tours the tour operator furnished either a large surety bond or a smaller surety bond along with an escrow account for tour participants' deposits. ⁹ TTE, as do most tour operators, elected the second arrangement. It selected the defendant, First National Bank of Highland Park, which already maintained business accounts for TTE, Sunshine Travel Agency, and Sunshine Travel of Nevada, as the depository bank for the escrow account. The bank not only acted as escrowee, but also as trustee on a surety bond in the amount of $200,000.

The regulations also governed the bank's behavior. Only accounts at federally insured banks were allowed and a separate record for each tour was required to be maintained. The bank's authority to permit withdrawals was limited and the tour operator had none. Aside from refunds to tour participants, the only disbursements permitted were those to direct air carriers, hotels, and other supplying surface accommodations. These withdrawals, however, could not deplete the reserve below twenty percent of the total deposits received. The entry of funds was regulated less closely. The bank was required to maintain a separate accounting for each tour. The regulations also authorized two means by which deposits could enter the escrow account. If a tour participant dealt directly with a wholesaler like TTE, the regulations required that his check be made payable directly to the depository account. If, however, a tour participant dealt instead with a retail travel agency like some of the intervenors, the participant would pay the agent, who, presumably after deducting his commission, remitted the balance to the escrow account.

The problem here is that the day before TTE and the two controlled travel agencies were declared involuntary bankrupts the escrow account held $391,579.58 instead of the estimated $750,000 which tour participants had prepaid for TTE tours. Since this appeal was certified under 28 U.S.C. § 1292(b) before any meaningful discovery took place, one can only speculate about the disappearance of the funds. One explanation is that the missing money never reached the account. Travel agencies especially those in dire financial straits might have forwarded less than the required amount. Or alternatively, the bank might have mistakenly or otherwise placed deposits by TTE, Sunshine Travel Agency, or Sunshine Travel of Nevada into their business accounts instead of the escrow account. It is also possible that the money may have entered the account only to be withdrawn later. The bank, for example, might have guarded withdrawals less carefully than the regulations mandated. According to yet another theory, some of the money might not be the deposits of disappointed tour participants at all. Instead it might belong to TTE as profit from past completed tours. ¹⁰ In any event, there are only clues as to the money's disappearance and at this early stage of the litigation the district court was unconcerned with these questions.

On its own motion, the court suggested that the existing funds should be distributed and ruled that those able to trace their money into the account deserved first priority in the funds. After considering the pleadings, memoranda of law from both the original parties and the intervenors, the stipulation of facts, oral arguments by counsel, and the escrow agreement itself, the district court concluded that the funds were held for each individual depositor and that those who proved the fund actually held their money were entitled to the money's return. Anticipating that the money which could be traced into the account might amount to less than the entire fund, the court deferred ruling on who might claim any of the deposits which might remain. The court then stayed the implementation of its order until we acted upon this appeal.

II.

The district court's...