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Judge disallows $20 million severance to American Airlines chief Tom Horton | Dallasnews.com - News for Dallas, Texas - The Dallas Morning News

By TERRY MAXON TERRY MAXON The Dallas Morning News
Staff Writer [email protected]
Published: 11 April 2013 09:16 PM


U.S. Bankruptcy Judge Sean Lane ruled Thursday that the severance payment of nearly $20 million for AMR Corp. and American Airlines Inc. chairman and chief executive Tom Horton isn’t allowed under the federal bankruptcy code.

In an order formally approved AMR’s merger with US Airways Group Inc., the judge said the payment ran afoul of a section of the federal bankruptcy code passed in 2005 to rein in excessive payments to executives of bankrupt firms.

The decision isn’t expected to sidetrack the merger, but it will force the companies and the unsecured creditors committee to revisit what compensation it can give Horton, who will step down as CEO and become nonexecutive chairman of the merged companies.

"The Court's written approval of the merger agreement allows us to continue progressing forward with our planned merger with US Airways,” American spokesman Mike Trevino said Thursday evening. “It’s American Airlines' current intention to address Mr. Horton's compensation arrangement in the plan of reorganization."

The judge had verbally approved the merger at a March 27 hearing in his New York City courtroom, but held off on a ruling on Horton’s compensation.

The U.S. Trustee’s office had objected to the payment, saying it was too large in relation to the average severance that AMR employees were getting.

AMR, its unsecured creditors committee and others have defended the proposed payment. They said it would not be paid until the merger became effective, and the merger wouldn’t be effective until the airline was out of bankruptcy – therefore, the bankruptcy code wouldn’t apply.

The judge disagreed. “Of course, the Debtors are correct in noting that the payment technically will not come from the Debtors’ estate. But that is somewhat of a legal fiction,” he wrote.

“It is clear that the severance payment relates to Mr. Horton’s employment at AMR, where he currently serves as CEO, and not from Newco, which does not yet exist and where Mr. Horton will take on a new position only after the merger is finalized and the proposed severance is paid,” the judge said, with Newco being the assigned name for the merged American-US Airways.

“As a practical matter, moreover, the proposed severance would be paid without any action from Newco, an entity that will consist of 72 percent of the property of the reorganized Debtors,” he added.

He was referring the Feb. 13 agreement between the boards of AMR and US Airways to merge the two companies, with shareholders of US Airways to receive 28 percent of the new company, to be called American Airlines Group Inc. AMR stakeholders, including creditors, labor unions and holders of the existing AMR stock, will split the other 72 percent.

AMR, American and various subsidiaries filed for bankruptcy protection on Nov. 29, 2011. While airline officials were reorganizing AMR’s finances including deep cost-cutting in labor and other areas, US Airways chairman and CEO Doug Parker led an effort to have the two carriers merge.

While Horton had spoken out against the idea of considering a merger until the bankruptcy case was finished, the pressure from US Airways caused its rival to open up discussions that led to the February merger agreement.

Under the deal, Parker will take over as CEO when the merger becomes effective, projected to come in September pending completion of the bankruptcy case and U.S. Justice Department’s antitrust review.

Horton will step down as CEO and take over the job of non-executive chairman, meaning he will not be an employee of the merged companies. He will hold that job until the first shareholders’ meeting or after one year, whichever comes first.

The Feb. 13 merger agreement included a provision that Horton is to receive $19,875,000, with half to be paid in cash and half to be paid in stock in the merged company.

The U.S. Trustee’s office objected that that amount was more than 10 times the average severance paid by the bankrupt company, the limit set by the 2005 amendment to the bankruptcy code.

In Thursday’s decision, Lane acknowledged AMR’s argument that Horton’s payment is like the severance payments paid to executives in two other mergers: Delta Air Lines and Northwest Airlines in 2008 and United Airlines and Continental Airlines in 2010, but he said the situations aren’t the same.

“This argument misses the point. Both of those mergers occurred outside of the Chapter 11 context where parties are not subject to the requirements of the Bankruptcy Code,” the judge wrote.

“Although these two examples may inform the Court as to market salaries for a severance payment in major airline mergers, they do nothing in the way of satisfying” the limits set by the bankruptcy code, he said.

While Lane disallowed the proposed severance, he took note that the company post-merger would be beyond the bankruptcy code. Lawyers for AMR and American had suggested an amendment to the merger agreement to say that the board of American Airlines Group would vote on the Horton severance post-bankruptcy.

“It is unclear what purpose would be served by the Court’s approval of the severance if Newco could later veto the severance through a vote of its board,” Lane wrote. “Indeed, under this proposed amendment, there is little reason for the Court to be involved at all.”

Bucking Bar

Good. His severance pay can only be ten times the average given to non management employees.

Judge denies $20M severance deal for AMR CEO

IQuitEagle

That should apply to normal CEO pay as well. Heck, even make it 20x.

Timbo

It's about time someone in power, noticed what's been going on in this industry since Deregulation.

Now, can we revisit Leo's and Michelle's severance package? Oh, wait, they got out before the "New Rules" in 2005. From the ariticle:

AMR argued that the limit didn't apply because the payment would be made by the new company formed after AMR emerges from bankruptcy protection.

But Lane called that argument "somewhat of a legal fiction" because the money was Horton's reward for his work at AMR, not at the new company, which will be called American Airlines Group Inc.

AMR also argued that Horton's payoff was similar to payments made to CEOs in other airline mergers. But Lane said the earlier deals — Delta's purchase of Northwest and United's merger with Continental — didn't occur under bankruptcy and its limits on insider severance payments.

...

RhinoPherret

I sure have a feeling that Horton “Hears a Who” will still somehow end up with his severance package duckets from AMR (legally or not) that will be over the severance formula provided by the DoJ Trustee’s office.

I am trying to guess how he will get around the judge’s ruling and end up with the big payday he is trying to get and that AMR wants to give hime so badly.

HIREME

I see a $20mil consulting fee in his future...

Sink r8

The AMR creditors will be the largest group of shareholders, I believe, but there are other shareholders, and the Board has duties besides. Seems to me that it would be hard to justify a $20 million severance payment to Horton for "facilitating" something that's already happened.

If I was a LCC shareholder, for example, and the merger and exit from CH 11 had occurred, I would balk at throwing away that money. I don't see a moral, ethical, or business reason to pay the former CEO after the fact. The reason he was paid in the first place was essentially for not hijacking the merger in Bankruptcy. If the exit/merger is allowed to take place without the severance, what rationale could possibly be given after the fact for his over-compensated role?

Maybe I'm being naive, but I think the new board will have a problem, and Horton's overpayment might be in jeopardy.

Good.

eaglefly

The board and Horton have been chums throughout this "process" (a process primarily designed to transfer corporate wealth be it financial assets or debt from employees to executives) and don't usually stiff each other. That's what they do to employees. Horton will get his payoff one way or the other. He brought back billions by gutting labor and they'll justify most of that $20 million in some way.

Sink r8

You're probably right. There just has to be a semblance of accountability. Board members (theoretically) can't directly pay their buddies outrageous fees for dubious services.

If the merger is approved in CH 11 and Horton, and the law decides market rates for separation, it's a little weird to pay a guy an outrageous above-market rate retroactively.

I'm just thinking some smaller stockholders might have valid grounds to sue or otherwise impact such a transaction. I don't know the pertinent laws and regulations, so this is just a guess.

GQpilot

The $20 million was a way to bribe him to go along with the merger. He knew the merger was the right thing to do for American, but if he dragged American out of bankruptcy prior he could walk away with a large chunk of American equity. I hate to say it, but just give him the $20 million and get him out of there before he does any more damage. He's still the CEO at American until the POR approval. Let him sit as a non-executive board member for a year and then shove him out with the golden parachute. Is it total BS? Yes, but the most important thing here is the future of American Airlines.

G