Thursday, March 28, 2013

Judge Questions $20 Million Payout to AMR's CEO: WSJ

Updated March 27, 2013, 7:53 p.m. ET


The Wall Street Journal

A bankruptcy judge said it would be "inappropriate" to approve a $20 million exit package for the outgoing chief executive of American Airlines parent AMR Corp.,  calling it his only "hang-up" as he cleared the way for a merger with US Airways Group Inc.

U.S. Bankruptcy Judge Sean Lane on Wednesday granted American's request to send the merger plan to the airline's creditors for a vote, one of the final steps before the Forth Worth, Texas airline can emerge from bankruptcy proceedings and combine with US Airways.

AMR CEO Tom Horton, though, will have to wait for approval of the $19.9 million severance negotiated as part of the merger agreement. The American chief was poised to get about $10 million in both cash and stock when relinquishing his post to US Airways Chief Executive Doug Parker, who is set to run the combined airline.

Once the merger is approved by creditors and antitrust regulators, Mr. Horton will become nonexecutive board chairman of the new company, called American Airlines Group Inc., until spring 2014.

A Justice Department representative monitoring American's bankruptcy proceedings objected to Mr. Horton's severance package, calling it in court papers an "end run around" a federal law that limits retention bonuses and other payments to executives running firms under Chapter 11 protection.

The law, added as part of a Bankruptcy Code overhaul in 2005, forbids severance payments to so-called "insiders" of companies under Chapter 11 protection unless the compensation is applicable to all full-time employees or is less than 10 times the average severance paid to non-management employees during the same calendar year. Insiders are generally defined under bankruptcy law as executives, directors or others controlling a company.

American's lawyers at Weil, Gotshal & Manges LLP argued the severance would be paid by the new merged airline and therefore wasn't subject to the Bankruptcy Code's restrictions.

Tracy Hope Davis, the U.S. Trustee monitoring American's case on behalf of the Justice Department, said in court papers that the new merged airline was "nothing other than the reorganized" American and characterized the airline's arguments as "artifice and manipulation" that attempted to "game the system."

Judge Lane said during Wednesday's hearing that Mr. Horton's severance was his "only hang-up" with the merger, which would be the largest airline marriage ever. "It's inappropriate to approve it," he said. The judge suggested he might reconsider it later.

"We do not believe a company can evade congressional requirements in the Bankruptcy Code simply by delaying payment of a $20 million severance until the day after confirmation" of a reorganization plan, said Clifford J. White III, director of the Justice Department's U.S. Trustee Program, which monitors bankruptcy proceedings.

The ultimate fate of Mr. Horton's severance remains unclear. He could still receive the severance if creditors later approve the merger agreement, or could face additional legal challenges.

In an interview before the hearing, Mr. Horton said the details of his severance package were out of his hands.

"It's up to the board of directors and the company," Mr. Horton said of the package. "I'm probably the one guy who doesn't have anything to say about it."

"All year long I've been focused on creating a successful American Airlines and that's what I'll be focused on to the last day," he added.

The merger, long desired by US Airways and endorsed more willingly by American starting last spring, would create the world's largest airline, with an expected market value of around $11 billion. It would pay the airline's bondholders back in full and give the company's existing shareholders 3.5% of the combined airline, and possibly more.

Earlier in the hearing, Stephen Karotkin, a lawyer for AMR, called the day a "watershed event" and called the payments to creditors and previous shareholders of American "unprecedented involving a chapter 11 case of legacy airlines."

Now that Judge Lane has signed off on the plan, AMR is on the clock to file an official plan to reorganize on which creditors must vote. The judge on Wednesday approved AMR's request to maintain control of its bankruptcy case through May 29, which gives it more time to file that plan.

The deal also needs regulatory approval, and the companies hope to close the merger by the third quarter. AMR filed for bankruptcy protection in November 2011 with the goal of cutting billions of dollars in labor and operational costs. It negotiated deep cuts with its labor unions, but the US Airways merger gives the workers better terms than if American had emerged from bankruptcy on its own.


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