The US Department of Labor (DOL) has objected to the Delaware Bankruptcy Court issuing a final order granting Western Global Airlines (KD, Fort Myers Southwest Florida) (WGA) USD75 million in priority post-petition debtor-in-possession (DIP) financing whilst charges are still being pursued against founder and CEO James (Jim) Neff and family members about prohibited financial transactions relating to the company's employee stock ownership plan (ESOP).

In the objection, to be heard on September 7, 2023, the DOL argues the court should deny the requested relief for post-petition senior secure super-priority financing - granted in an interim order on August 8. The reason being that it would prevent the DOL from "pursuing any claims against Neff or any other knowing participant in any prohibited transaction relating to the ESOP's purchase of WGA's stock".

This relates to a class action suit in the US District Court of Delaware filed on February 28, 2022, combining two cases alleging the ESOP's fiduciaries and company's owners violated the Employee Retirement Income Security Act (ERISA) by selling 370,00 shares or 37.5% of the airline's stock from Neff and his family at a "grossly inflated" price of about USD510 million to the ESOP on October 22, 2020, to the detriment of employees whose retirements are held in the plan. Neff and his family received USD510 million from the ESOP through WGA. Neff also remained in control of WGA and continued to serve as its chief executive with an annual salary of USD400,000. Two months later, the airline reported that the shares were worth only USD328 million. The DOL has an ongoing investigation into the ESOP transaction and Neff's role in it. It alleges that Neff and his family wrongfully received USD182 million more from the ESOP transaction than their stock was worth while still maintaining a majority equity interest and control of WGA.

"The ESOP's purchase of Neff's stock (and his family's stock) was a prohibited transaction under ERISA. The statute prohibits fiduciaries from allowing plans to engage in transactions involving the "sale or exchange [...] of any property between the plan and a party in interest," including the "acquisition, on behalf of the plan, of any employer security," the DOL said.

"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. Neff was aware of the conflict and the facts underlying the possible breaches of fiduciary duty."

It claims: "Under the proposed final order, Neff seeks to immunise himself and his family, including their family trusts, against claims arising from his participation in the ESOP's purchase of his stock, which was a prohibited transaction in violation of ERISA. The debtors seek to bind all creditors and parties in interest to the releases stated in the debtors' stipulations. Those releases would include the Department of Labor's claims against Neff as a knowing participant in a prohibited transaction. The [DOL] Acting Secretary does not consent to those releases," its counsel stated.