A federal bankruptcy judge sided Tuesday with American Airlines, overruling a U.S. trustee’s objection to the company’s plan to pay its chairman and CEO a nearly $20 million severance package.
The ruling clears the way for American to formally seek the approval of its creditors to exit Chapter 11 bankruptcy and merge with US Airways. American entered bankruptcy 18 months ago and has sought concessions from employee unions to bring costs down. The two carriers announced their intention to merge late last year, and the proposal has generated little significant opposition.
However, the $19.9 million compensation for Thomas Horton has been a sticking point for months. In a merger that would create the world’s largest airline, Horton would stay on until next spring, when he’d leave the combined company in the hands of US Airways Chairman Doug Parker. The company would keep the American name and headquarters in Fort Worth, Texas.
U.S. Trustee Tracy Hope Davis, who oversees bankruptcy cases in the Southern District of New York for the Justice Department, said last month in a court filing that the proposed payment to Horton violated the U.S. bankruptcy code, which requires that an executive severance package be no more than 10 times the severance given to most rank-and-file employees.
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The Justice Department’s antitrust division must sign off on the $11 billion deal, but that decision will be based on the merger’s impact on competition and consumers.
American built Horton’s compensation into its reorganization plan, hoping to get approval from Judge Sean Lane, who earlier had approved the merger with US Airways but not the severance package.
Susan Golden, an attorney for the U.S. trustee, argued that the reorganization plan shouldn’t be submitted to creditors because the payment to Horton would be larger than bankruptcy law allows.
“The court should not allow distribution of a plan that violates the code,” Golden said at a hearing Tuesday in the U.S. Bankruptcy Court in Manhattan, housed in the Alexander Hamilton U.S. Custom House.
Jack Butler, an attorney for a group of American’s debt holders, said concerns about the size of the payment weren’t a reason to delay taking the plan to the creditors, which include large banks and other companies.
“Just because the U.S. trustee says something violates bankruptcy code doesn’t mean it does,” he said.
Lane agreed, saying the U.S. trustee hadn’t cleared the “high hurdle” required to prevent creditors from receiving the disclosure statement, a detailed description of American’s bankruptcy exit. He cited other cases in which objections to executive compensation packages weren’t enough to block reorganization plans from proceeding.
“I find it would be inappropriate to hold up the disclosure statement based on these issues,” Lane said.
The financial crisis of 2008 and its aftermath raised scrutiny of executive pay and sparked cries for reform, but with corporate profits again soaring along with the stock market, the issue has faded in the public’s consciousness.
John Coffee Jr., a law professor at Columbia University and a corporate governance expert, said it was an uphill battle in court for those who wanted to rein in executive pay. He added, however, that the objection of the U.S. trustee is notable.
“The bankruptcy court usually goes with the flow and does not attempt to reform a broken system,” he said. “Still, U.S. trustees do not typically object either, so this is an unusual case.”