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Bankruptcy court clears AMR-US Air deal

by Lou Whiteman | Published March 28, 2013 at 9:49 AM

A federal bankruptcy court judge on Wednesday signed off on a proposed merger between AMR Corp. and US Airways Group Inc. but failed to approve a lucrative severance package that was set to be paid to AMR's outgoing CEO.

Judge Sean H. Lane of the U.S. Bankruptcy Court for the Southern District of New York at a hearing Wednesday called the planned $11 billion merger between American Airlines Inc. parent AMR Corp. and US Airways "a tremendous result." US Airways has been pursuing Fort Worth-based AMR since soon after that company's November 2011 bankruptcy filing, and in February agreed to terms on a transaction that would create the world's largest carrier.

The approval clears one potential deal hurdle, but the parties must still win regulatory approval for the transaction. Judge Lane also extended AMR's request to extend its exclusivity period for filing a reorganization plan until May 29.

The hearing was not without drama, including debate on a $19.875 million cash-and-stock package that AMR chief executive Tom Horton would receive upon AMR's emergence from Chapter 11 protection. Terms of the deal call for Horton to relinquish that role post-merger but to stay on as nonexecutive chairman for one year.

The U.S. trustee overseeing the reorganization earlier this month said that the package is in violation of the Bankruptcy Code. Trustee Tracy Hope Davis in an objection filed with the court said AMR has failed "to explain why the sweeping changes to their various employee compensation programs are permissible" under Section 503(c) of the Bankruptcy Code, which is designed "to curtail payments of retention incentives or severance to insiders ... without factual and circumstantial justification."

Under Section 503(c), according to Davis, American must show that the payment to Horton and other AMR managers "is part of a program that is generally applicable to all full-time employees" and that "the amount of the payment is not greater than 10 times the amount of the mean severance pay given to nonmanagement employees" during the calendar year when it is made.

AMR has argued that the severance is an obligation of the merged company, and not the debtor.

But Lane, according to people at the courthouse, said he was concerned that if he approves the severance it would set bad precedent for future cases.

Lane neither approved nor rejected the proposed severance, saying from the bench he will issue a written ruling explaining his thoughts on the package.

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