Pan Am. World Airways, Inc. v. Continental Bank

• Decision Date: 05 July 1977
• Docket Number: Civ. A. No. 74-2969,74-2970.
• Citation: 435 F. Supp. 642
• Parties: PAN AMERICAN WORLD AIRWAYS, INC. v. CONTINENTAL BANK. PAN AMERICAN WORLD AIRWAYS, INC. v. PENN CENTER GROUP, INC. and William F. McGonigal and Frank W. Barnes.
• Court: U.S. District Court — Eastern District of Pennsylvania

435 F. Supp. 642

PAN AMERICAN WORLD AIRWAYS, INC. v. CONTINENTAL BANK.

PAN AMERICAN WORLD AIRWAYS, INC. v. PENN CENTER GROUP, INC. and William F. McGonigal and Frank W. Barnes.

Civ. A. Nos. 74-2969, 74-2970.

United States District Court, E. D. Pennsylvania.

July 5, 1977.

Stephen R. Bolden, Charles C. Coyne, Philadelphia, Pa., for Pan Am.

Lester J. Schaffer, John B. Brumbelow, Philadelphia, Pa., for Continental Bank.

Albert Ring, Philadelphia, Pa., for Penn Center Group, Inc., William F. McGonigal and Frank W. Barnes.

Howard F. Cerney, New York City, for Frank W. Barnes.

ADJUDICATION

DITTER, District Judge.

These diversity actions arising out of the allegedly fraudulent procurement and use of two air line credit cards were consolidated and tried to the court without a jury.¹ After consideration of the testimony and exhibits presented at trial, I make the following:

FINDINGS OF FACT

1. Plaintiff, Pan American World Airways, Inc., (hereinafter Pan Am) is a New York corporation engaged in the commercial airline industry with principal offices located in the Pan American Building, New York, New York.

2. Defendant, Continental Bank (hereinafter Continental) is a Pennsylvania corporation engaged in the banking business with principal offices located in Norristown, Pennsylvania.

3. Defendant Frank W. Barnes (hereinafter Barnes) is an individual residing in Montgomery County, Pennsylvania. At all times relevant hereto Barnes was the president or controlling party of Leisurac, Inc. (hereinafter Leisurac) and its subsidiaries, Leisurac World-Wide Travel Service Corp. (hereinafter World-Wide) and Embassy Tours, Inc. (hereinafter Embassy).

4. Defendant, Penn Center Group, Inc. (hereinafter Penn Center) is a Pennsylvania corporation having its principal office in Wayne, Pennsylvania. Although originally formed to engage in various aspects of the financial consulting business, at all times relevant hereto Penn Center was a "dormant" entity having no assets, employees, customers, or clients and engaged in no business activity other than acting as a conduit for Leisurac in the transactions which form the basis of this suit.

5. Defendant William F. McGonigal (hereinafter McGonigal) is an individual residing in Montgomery County, Pennsylvania. At all times relevant hereto McGonigal was the president and controlling party of Penn Center.

6. Barnes formed Leisurac in 1969 to deal in many aspects of the leisure-time industry, including travel agencies, the manufacture of fitness and recreation equipment, and recreation education and consulting services. Although there was some testimony about a division of Leisurac's engaging in the manufacture of recreational equipment at a plant located somewhere in the South, the evidence presented at trial did not establish that Leisurac or any of its subsidiaries were actively engaged in any business other than that of operating travel agencies.

7. In November, 1972, Leisurac acquired World-Wide, a Washington, D.C.-based travel agency. Raiford S. Pierce (hereinafter Pierce) who had been an executive and part-owner of World-Wide prior to its acquisition by Leisurac, remained with the company and thereafter managed World-Wide under the direction and control of Barnes.

8. In December, 1972, Leisurac, acquired Embassy, a New York City-based travel agency, and thereafter Embassy was operated under the direction and control of Barnes.

9. The travel agencies operated by Leisurac and its subsidiaries emphasized the provision of travel arrangements and services for business entities (i. e. commercial accounts) as opposed to individuals.

10. Leisurac and its subsidiaries extended thirty-day credit terms to their commercial accounts. The travel agencies themselves, however, were required to remit payment to the airlines through which they booked flights on a fifteen-day basis. As a result of this disparity between receipt and disbursement cycles, Leisurac and its subsidiaries encountered a severe shortage of cash.

11. In the early part of 1973 Barnes became dissatisfied with the services his companies were receiving from Pan Am and issued a directive to his travel-agency employees to book travel accommodations through carriers other than Pan Am whenever possible.

12. William R. Roy (hereinafter Roy) who at all times relevant hereto was Pan Am's vice president of passenger marketing, first became aware of the directive referred to in paragraph 11 in the spring of 1973 when its existence was reported to him by a Pan Am sales support team which had visited World-Wide to determine why the agency's bookings with Pan Am had fallen off significantly. Pierce told the sales support team (which in turn reported to Roy) that the reason for the drop off was the Barnes directive.

13. After learning of this directive, Roy contacted Pierce and arranged to meet with him and Barnes in an effort to iron out the differences between Leisurac and Pan Am. Thereafter, Roy, Pierce, and Barnes held a series of meetings. On these occasions Barnes presented Roy with a number of proposals he wanted Pan Am to accept in return for Leisurac's reversing its policy of shunning Pan Am. In order to alleviate the cash flow problems Barnes wanted Pan Am to extend Leisurac's billing cycle from 15 to 30 days. Barnes also proposed, inter alia, that Pan Am pay Leisurac "incentive commissions" or rebates of 17 to 20 percent (in addition to the normal travel agency commission) for all business Leisurac booked on Pan Am over and above a certain quota. Roy took Barnes' various proposals under advisement.

14. Subsequently, at a meeting between Roy and Pierce on June 7, 1973, Roy told Pierce that Pan Am would not pay Leisurac any commissions or rebates above the standard travel agency commission because to do so would violate regulations of the International Air Transport Association (IATA), an organization of which Pan Am was then a member. However, Roy stated that Pan Am would agree to a "brochure program" under which the carrier would pay to Leisurac 10 percent of its total bookings with Pan Am in the form of reimbursement for the cost of printing brochures for tours purportedly sponsored by Leisurac. Roy also told Pierce that Pan Am could not extend Leisurac's billing cycle to 30 days since that also would violate IATA regulations.

15. A meeting of critical importance to this suit was held between Pierce, Barnes, Roy and Michael Shamilzadeh, manager of Pan Am's Atlantic marketing programs, on June 12, 1973. At this meeting Pan Am and Leisurac reached an agreement on a brochure program that would operate for the second half of 1973. The major terms of this agreement were (1) that Leisurac would revise its policy of shunning Pan Am and instead would utilize Pan Am as its exclusive international carrier whenever possible and (2) Pan Am would return to Leisurac 10 percent of its Pan Am bookings that exceeded $1 million. These reimbursements would take the form of payments for the cost of brochures to advertise tours supposedly sponsored by Leisurac. However, it was understood by Roy, Shamilzadeh, Pierce, and Barnes that the brochure program in reality was designed to accomplish the same objective as the incentive commissions or rebates which had been proposed by Barnes. Specifically, Roy, Shamilzadeh, Pierce, and Barnes knew that Pan Am would pay invoices submitted by Leisurac for brochures without making any effort to verify the accuracy of the cost or quantity of brochures actually printed; that Pan Am would make no effort to verify whether Leisurac actually was sponsoring the tours advertised in the brochures; and that the level of reimbursements made to Leisurac would be based on its total volume of Pan Am bookings without regard to the amount of income, if any, generated by the tours purportedly advertised in the brochures.²

16. Pursuant to the brochure agreement Pan Am paid $84,500. to Lewis Advertising, Inc., a company controlled by Barnes, during the last six months of 1973.

17. At the June 12 meeting the possibility of Leisurac's utilizing Pan Am's Universal Air Travel Plan (UATP) credit card as a means of solving its cash flow problem by extending its billing cycle beyond 15 days was first discussed. When this matter was brought up, Roy who was unfamiliar with Pan Am's credit card policies, called John A. Makely (hereinafter Makely) Pan Am's director of Atlantic marketing into the meeting. Makely, who was one of Roy's subordinates in the marketing department, had had some prior experience with credit card matters. Makely advised Roy, Pierce, Shamilzadeh, and Barnes that IATA regulations prohibited an airline from issuing a UATP credit card to a travel agency for use by the agency in charging travel accommodations of third parties, i. e. the agency's customers. However, after Makely left the meeting it was agreed by the remaining parties in attendance (i. e. Roy, Shamilzadeh, Barnes and Pierce) that the IATA regulations could be circumvented by Leisurac's applying to Pan Am for a UATP card in the name of a straw (i. e., a company not associated with Leisurac and not engaged in the travel agency business) that would thereafter transfer the card to Leisurac and act as a conduit for purposes of receiving and paying bills for charges placed on the card.

18. As a result of the June 12 meeting with Roy and the other Pan Am officials, on or about June 19, 1973, Barnes called a meeting of Leisurac's executive staff at which time he reversed Leisurac's policy of shunning Pan Am and issued a new directive (Ex. P-20a) which required that accommodations for Leisurac's customers be booked on Pan Am whenever possible.

19. McGonigal and Frank R. Murdock, then the regional vice president of Continental's suburban-west region, were present at the June 19 meeting of Leisurac's executive staff; however Murdock left before the matters detailed in finding No. 20 were discussed.

20. During the course of the June 19 meeting,...