American Airlines bankruptcy trustee challenges outgoing CEO’s severance

The U.S. trustee in AMR Corp.’s Chapter 11 bankruptcy case has objected to American Airlines CEO Tom Horton’s $19.8 million severance payment, arguing that the company hasn’t explained why such a large sum is permissible under federal bankruptcy rules.

Horton’s compensation is addressed as part of the company’s merger agreement with US Airways, which calls for Horton to become chairman of the combined company until its first shareholders meeting, expected in mid-2014. US Airways CEO Doug Parker will be chief executive of the combined carrier.

The U.S. trustee in such cases supervises the debtor’s administration. That includes monitoring financial reporting and also compensation and reimbursements, according to a description by the administrative office of U.S. Courts.

However, it is the bankruptcy judge who decides on motions before the court.

Bankruptcy Judge Sean Lane is scheduled to rule on the merger and Horton’s severance package at a March 27 hearing. Friday was the deadline for objections in those matters.

In a prepared statement, American Airlines spokesman Andrew Backover said: “American does not believe the objection filed by the office of United States trustee has merit.” Backover said that AMR’s initial request for Horton’s severance and other employment compensation terms are “appropriate and should be granted by the bankruptcy court.”

According to the trustee’s filing, made Friday in Lane’s court in New York City, the company has stated that it doesn’t have to address the payment because the newly reorganized company will issue it, not the current AMR. But U.S. Trustee Tracy Hope Davis said it’s not who makes the payment that is important, but whether the payment conforms to restrictions placed on compensation arrangements by the U.S. Bankruptcy Code.

In the filing, Davis said, “a severance payment of close to $20 million defeats Congress’ intent” when it put restrictions on such compensation. Those rules, Davis argues, limit payments to current employees to not more than 10 times the average of similar payments to nonmanagement employees, except in special circumstances.

Backover’s statement says: “The employee arrangements included in the merger agreement are structured to reasonably and appropriately compensate our employees as well as to align them with their counterparts at US Airways with the goal of moving toward market levels over the next few years. The employee arrangements were deemed reasonable and appropriate by compensation consultants retained by the unsecured creditors’ committee and are in line with industry precedents.”

Horton’s severance has not been challenged by AMR’s creditors, including unions representing its employees.

On Friday, the Allied Pilots Association, which represents American Airlines pilots, filed a motion supporting the merger. The union said the best way for the airline to recover “is to merge with US Airways,” which will make it competitive with United and Delta.

The union representing US Airways pilots also filed a motion in support of the merger Friday.

(c)2013 the Fort Worth Star-Telegram. Distributed by MCT Information Services.