605 F.2d 998 (7th Cir. 1979), 78-1577, Civil Aeronautics Bd. v. Tour Travel Enterprises, Inc.

Docket Nº:78-1577, 78-1625.
Citation:605 F.2d 998
Party Name: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, I
Case Date:September 10, 1979
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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Page 998

605 F.2d 998 (7th Cir. 1979)

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

September 10, 1979

Argued Feb. 15, 1979.

As Amended Nov. 20, 1979.

Page 999

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

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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

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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.

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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...

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