American Airlines CEO $20 Million Severance Denied by Bankruptcy Court

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Judge Sean Lane of the United States Bankruptcy Court for the Southern District of New York approved the $11 billion merger of US Airways Group and AMR Corporation on March 27, 2013.  The merger will be effective upon confirmation of the AMR debtor’s Chapter 11 plan.  Once the merger is complete, the new entity will be known as Newco.  In the ruling, Judge Lane denied the $20 million severance payment to Thomas Horton, the current Chief Executive Officer of AMR Corporation, which was requested by Newco.  Judge Lane issued a written opinion where he explained his reasons for denying the proposed severance payment. 

AMR debtors wanted the bankruptcy court to approve employee compensation and benefit arrangements that fell into three categories: Ordinary Course Changes, Employee Protection Arrangements, and CEO Severance Payment.  Initially, the US Trustee objected to all three employee arrangements.  Eventually, she withdrew her objections to all except for the CEO severance payment.

The CEO severance payment was requested as compensation for termination of Horton’s employment as CEO of AMR Corporation once the merger was complete.  The severance compensation was to be paid 50% cash and 50% in common stock for a total of $19,875,000. 

The US Trustee cited that approving the post-merger CEO severance payment would violate Section 503 (c) of the Bankruptcy Code. This section of the bankruptcy code prohibits retention incentives and severance awards to a debtor’s insiders (who are directors, officers and general partners) unless the payment is part of a program applicable to all full-time employees and is not to exceed 10 times the amount of average severance payments given to non-management employees during the calendar year of the payment.  The US trustee pointed out that as CEO, Mr. Horton was considered an insider in this section of the Bankruptcy Code and did not allow permission to pay the severance.

AMR debtors argued that the proposed severance payment was not subject to section 503 (c) of the Bankruptcy Code, because Newco and not the AMR debtor’s estates, would be making the payment after bankruptcy and after the merger.  They base their argument on section 363 of the Bankruptcy Code and its “business judgment” standard.  However, the bankruptcy court found that section 503(c) was added to the Bankruptcy Code in 2005 to enforce a higher standard than the business judgment standard on severance arrangements.

Judge Lane determined that the payment to the CEO was for work performed during the bankruptcy.  AMR debtors also argued that a severance payment to a CEO was common in mergers citing the merger of United and Continental and Delta and Northwest. The Bankruptcy Court confirmed that these mergers took place outside of Chapter 11 Bankruptcy and therefore the requirements under the Bankruptcy Code.

AMR debtors also offered an amendment to the CEO severance agreement to include that the Board of Directors of Newco needed to vote in favor of the severance payment before it could be made.  Judge Lane did not agree to pre-approve the payment and advised AMR debtors they could look to section 1129 (a) (4) as the basis for post-emergence payment to the CEO.

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