Court to Reassess Severance Payment as Part of Reorganization Plan

When American Airlines revealed its plans to merge with U.S. Airways to become the world's largest airline, the details of the transaction were widely reported. One aspect of the deal—a nearly $20 million severance payment to Tom Horton, the CEO of American Airlines—grabbed headlines. To be sure, $20 million is no small sum, even in this age of rich golden parachutes for executives of large public corporations. But the severance payment came under scrutiny not just for its eye-popping figure. Because the payment was contemplated in connection with American Airlines' Chapter 11 bankruptcy case, the Office of the U.S. Trustee, tasked with overseeing the administration of the airline's reorganization case, objected to the severance payment that, in its view, was prohibited by federal bankruptcy law.

The bankruptcy court agreed with the U.S. Trustee.¹ Approving the merger transaction, but striking down the severance payment, the court made clear that, notwithstanding American's decision to structure the payment as an obligation of a newly-formed entity following American Airlines' anticipated emergence from Chapter 11, the court could not approve the allowance of a payment that, on its face, ran afoul of the statutory limitations on the amount of severance that may be paid to insiders.² The payment, whether made by American Airlines or a post-merger entity, was still a severance payment and the amendment to the Bankruptcy Code governing allowance and payment of severance to insiders (§503(c)) that was enacted in 2005 as part of the Bankruptcy Abuse and Consumer Protections Act (BACPA) would apply.³ The BACPA amendment reflected the intent of Congress to address concerns about excessive payments to corporate executives of bankrupt companies. Though it refused to authorize the payment, the court noted that such a payment could be proposed under a plan of reorganization and reconsidered at such time.⁴ Shortly after the court issued its decision, American Airlines submitted its Chapter 11 plan of reorganization. Indeed, Horton's severance payment is back on the table as part of the airline's Chapter 11 plan, but the legal issue at plan confirmation may shift to whether the Bankruptcy Code requires a Chapter 11 plan to comply with §503(c), the same provision that the bankruptcy court has already determined the proposed severance payment violates.

Background