Bankruptcy Judge Says The Package, Worth Nearly $20 Million, Is Not Allowed By Law

A severance package totalling $19.9 million for American Airlines CEO Tom Horton is not allowed under federal bankruptcy laws. That is the determination of Judge Sean Lane, who said that his decision was based on a section of the law enacted in 2005 to prevent excessive payments to executives after a company was forced to reorganize.

It does not appear that the decision will be a major stumbling block in completing the merger between American Airlines and US Airways, but it does mean that the companies and American's unsecured creditors will have to go back and address the issue of how it can compensate Horton. He will step down as American CEO when the merger is complete, and become the non-executive chairman of the merged airline.

The Dallas Morning News reports that AMR Corp and its creditors said that, since the payment was not to have happened until after the company emerged from bankruptcy, the bankruptcy laws did not apply in this case. But Judge Lane disagreed, saying that it was clear that the money was in payment for service to AMR, not Newco, a company that will not come into existence until after the bankruptcy is settled. The judge said that because the ownership of Newco will be largely made up of AMR's debtors, it is simply a assigned name for the merged airlines.

Lane said in handing down his decision that the package offered to Horton is similar to ones accepted in both the Delta/Northwest merger in 2008 and the United/Continental merger in 2010, but said that the situations weren't the same. He said both of those agreements were made outside the Chapter 11 framework. Judge Lane did say that after the bankruptcy process was finished, Newco would not be bound by the bankruptcy laws.

FMI: www.nysb.uscourts.gov/