American Airlines' parent company AMR Corporation filed for Chapter 11 bankruptcy in late 2011 in the hopes of reorganizing its debts, ditching some obligations, and putting itself in a strong position for future profitability. Last year, US Airways Group, Inc., indicated it was interested in merging with American, which would have to be approved by the bankruptcy court.
The two companies recently got good news: a Manhattan-area bankruptcy judge approved the $11 billion-merger. What he did not approve of, however, was AMR's plan to serve up a nearly $19.9 million severance package to its former CEO. The judge made clear that the award would violate the provision in bankruptcy law that caps severance packages to keep excessive payouts from harming the company or depriving other creditors of their due. Furthermore, leaving the question up to AMR's "business judgment," the judge said, would be "exactly what Congress sought to prevent" when capping severance awards.
"You're telling retirees you can't pay their health care benefits, you're telling creditors you can't pay them, and then you want to pay $20 million to a CEO who hasn't done anything to earn it," an airline consultant explained to reporters. Nevertheless, he predicted, "AMR will end up giving him several million dollars, and can probably dig up other cases and precedents to justify it."
That won't happen in the merger agreement. Instead, the judge suggested that AMR could try getting it approved through their yet-to-be-submitted Chapter 11 reorganization plan, which is open to challenge by creditors.
The bankruptcy trustee also opposed the $19.9 million being paid out prior to the reorganization plan. Bankruptcy trustees monitor bankruptcy cases for legal compliance, among other duties. This trustee said that the CEO severance plan was far too large in comparison to the proposed severances for non-management employees.
AMR pointed out that, should the board of directors of the combined companies disapprove of the severance package after the merger, they could always void it.
The judge was not impressed by this argument. "It is unclear what purpose would be served by the court's approval of the severance" in such a case, he wrote.
The merger will result in the combined companies operating out of Fort Worth, Texas and operating under the name American Airlines.
Source: Thomson Reuters News & Insight, "Judge denies $20 million severance to outgoing AMR chief," Jonathan Stempel and Tanya Agrawal, April 12, 2013