American Airlines says CEO's severance deal is legal

Posted Friday, Mar. 22, 2013  comments  Print Reprints

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American Airlines said Friday that a $19.8 million severance package negotiated for CEO Tom Horton is legal despite objections from the trustee that it doesn't conform to U.S. bankruptcy law.

The trustee filed an objection a week ago to Horton's employment agreement, which is part of the proposed merger with US Airways.

Horton is slated to become chairman of the combined company and receive a severance of cash and stock when the merger closes.

"The Employee Arrangements are on market terms, are carefully designed to incentivize employees to remain focused on consummating the Merger, and will allow the Debtors to maximize the value of the Merger for the benefit of their stakeholders," American's parent company, AMR Corp., said in the filing.

The issue is up for discussion at a hearing scheduled for Wednesday in New York, where U.S. Bankruptcy Judge Sean Lane will hear arguments related to AMR's motion to merge with US Airways.

The judge will also consider AMR's request to extend its exclusivity period for filing a reorganization plan until May 29.

It now has until April 15 to file it.

Analysts say AMR is likely to prevail in its legal argument on the severance.

Since Congress amended the bankruptcy code in 2005 to restrict excessive executive compensation and bonuses, debtors and their lawyers have found creative ways around the rules.

"As long as there is some other business reason and it has some other component to it, besides purely staying with the company through the bankruptcy case, the courts have been willing to approve these negotiated agreements," said Wayne Barnes, a bankruptcy law professor at Texas Wesleyan School of Law.

American also noted that of the 300,000 parties notified about the merger agreement, only 25 responses were filed. Of those, there was only one objection, made by the bankruptcy trustee.

"Importantly, no party that has filed a response has challenged (nor could it) the Debtors' business judgment in entering into the Merger Agreement or that the Merger clearly is in the best interest of the Debtors' estates," the filing said.

The unsecured creditors committee and an ad hoc bondholder group filed responses Friday in support of American's arguments against the trustee's objection.

Airline consultant Mike Boyd said that even if the judge re-evaluates the compensation, the deal between US Airways and American is likely to be approved and a new compensation contract negotiated for Horton.

"Instead of walking away with $20 million, he'll walk away with $15 million," Boyd said.

AMR says the bankruptcy code does not apply in this situation because the newly formed company, not AMR, will make the payment to Horton after the merger closes.

The trustee argued that Horton's severance payment "defeats Congress' intent" in placing restrictions on executive compensation.

Those rules limit payments to current employees to 10 times the average of similar payments to nonmanagement workers, except in special circumstances, the trustee said in the filing.

"In filing the objection, the U.S. trustee is performing a policing function and ensuring the merger and bonus payments are not just rubber-stamped," Barnes said.

"This is an ongoing issue with the bankruptcy courts and the recent legislation and will likely be precedent for future bankruptcy cases."

Andrea Ahles, 817-390-7631

Twitter: @Sky_Talk

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