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PAN AM v. CONTINENTAL BANK

July 5, 1977

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



The opinion of the court was delivered by: DITTER

 DITTER, J.

 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. *fn1" 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. *fn2"

 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, McGonigal learned that Barnes needed a corporation to act as a conduit in carrying out the plan referred to in finding No. 17 and he volunteered Penn Center for this purpose. Barnes, Pierce, and McGonigal then agreed that they would submit an application for UATP (type A) credit cards in the name of Penn Center as the subscriber and that upon issuance, the cards would be transferred to Leisurac and used by its subsidiaries, Embassy in New York and World-Wide in Washington, D.C., to charge travel accommodations for Leisurac's customers.

 21. No employee of Pan Am was present at the meeting referred to in the preceding paragraph. However, on the basis of the meeting held on June 12, 1973 (see finding No. 17), Pan Am employees Roy and Shamilzadeh were aware of the fact that Leisurac would submit an application for UATP cards using a straw corporation.

 22. Shortly after the June 19 meeting Pierce obtained from Shamilzadeh an application for the UATP credit cards. Subsequently Barnes or someone acting under his express direction, filled out the application, listing Penn Center as the applicant and giving materially false and misleading information as to the business activities and financial status of Penn Center. McGonigal knew that the information contained in this application was materially false.

 23. Sometime between June 19, 1973, and August 9, 1973, the falsely completed credit card application (Ex. P-1) was submitted to Shamilzadeh at Pan Am. On or about August 9, 1973, Shamilzadeh returned the application to Pierce because it had not been signed. Thereafter Pierce, acting under the express direction of Barnes, signed the application in the name of McGonigal as president of Penn Center and returned it to Shamilzadeh.

 24. On or about August 20, 1973, Shamilzadeh forwarded the credit card application of Penn Center to Phillip Baressi, the manager of Pan Am's credit department, along with a covering memorandum which stated as a reason for recommending approval of the application, "we [Pan Am] have recently concluded an agreement with this Company [Penn Center] to be their sole world wide carrier." Ex. P-18. Pan Am never had any such agreement with Penn Center, -- the agreement referred to in this memorandum was that between Pan Am and Leisurac discussed in finding No. 15.

 25. The credit card application listed Continental and its employees Murdock and Roland Grey as "bank references."

 26. No employee of Pan Am's marketing department (i.e., Roy, Makely, Shamilzadeh) had authority to override a decision of Pan Am's credit department as to whether or not a UATP card should be issued to a particular applicant or to order the issuance of a UATP card without first obtaining the approval of the credit department.

 27. Sometime between August 20, 1973, and September 7, 1973, the credit department of Pan Am rejected the application of Penn Center.

 28. Thereafter Barnes was notified that Pan Am's credit department had rejected the application because of a lack of information about Penn Center. Barnes called Roy and told him that Pan Am's credit department did not have accurate information on Penn Center and requested Roy have the credit department contact Murdock at Continental to verify Penn Center's credit-worthiness. Roy relayed this information to Baressi through Shamilzadeh, suggesting that Baressi investigate Penn Center further before rejecting its application.

 29. After learning that the credit application had been refused, Barnes and McGonigal set about to create an "identity" for Penn Center. Sometime in August, 1973, Barnes, McGonigal, and Nate Gordon (Leisurac's chief financial officer) had a meeting at which they prepared a false business and financial picture of Penn Center which was then submitted to Dun & Bradstreet.

 30. Dun & Bradstreet prepared a report based on the information supplied by McGonigal and Barnes. On or about September 7, 1973, McGonigal sent a copy of this report to Shamilzadeh who forwarded it to Baressi. This report stated falsely that Penn Center was engaged in ...


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