In a filing made in bankruptcy court on Friday, American Airlines said the severance package of $19.8 million for its chief executive Tom Horton is legal, refuting the objection of the U.S. bankruptcy trustee.
The trustee had filed an objection last week to Horton's employment agreement that is part of the proposed merger with US Airways. Horton is slated to become chairman of the newly combined company and receive a severance of cash and stock when the merger closes.
"The Employee Arrangements are on market terms, are carefully designed to incentivize employees to remain focused on consummating the Merger, and will allow the Debtors to maximize the value of the Merger for the benefit of their stakeholders. Accordingly, the relief requested in the Motion, including the Employee Arrangements, should be approved and authorized," American's parent company, AMR Corp. said in the filing.
AMR also mentioned that of the 300,000 parties that were notified about the company's merger agreement, only 25 responses were filed. Of those, there was only one objection, made by the U.S. Bankruptcy Trustee as it pertained to the employment compensation agreements that are part of the merger agreement.
"Importantly, no party that has filed a response has challenged (nor could it) the Debtors’ business
judgment in entering into the Merger Agreement or that the Merger clearly is in the best interest
of the Debtors’ estates," the filing said.
The trustee has argued that the Horton's severance payment "defeats Congress' intent" when it placed restrictions on executive compensation. Those restrictions in the U.S. Bankruptcy Code limit payments to current employees to not more than 10 times the average of similar payments to nonmanagement employees, except in special circumstances.
AMR says the bankruptcy code does not apply in this situation because AMR is not making the payment to Horton, the newly formed company, will be making the payment after the merger closes and AMR has emerged from bankruptcy.
A hearing is scheduled on March 27 where U.S. bankruptcy judge Sean Lane will hear arguments related to AMR's motion to merge with US Airways.