Justice Department opposes AMR's $20 million severance for CEO Horton

A plan by American Airlines' parent to exit bankruptcy and merge with US Airways Group is coming under fire from the U.S. Department of Justice over nearly $20 million in severance pay earmarked for outgoing boss Tom Horton.

In court papers filed on Friday in U.S. Bankruptcy Court in Manhattan, U.S. Trustee Tracy Hope Davis, the department's official charged with regulating bankruptcy cases in the New York region, said the severance deal for AMR Corp's chief executive violates bankruptcy law.

She asked the court not to approve the outline of the plan that must also be approved by AMR creditors.

The initial merger agreement called for $19.9 million in severance payments for Horton, but when Judge Sean Lane approved the merger at a hearing in March, he refused to green-light the severance package, saying it was a matter that should be left for AMR's Chapter 11 exit plan. Davis at the time had opposed the severance on grounds similar to those she cited on Friday.

AMR filed its exit plan last month, laying out how it would effect the merger, pay back its creditors and exit bankruptcy.

As expected, it also built Horton's severance deal into the plan. In Friday's filing, Davis argued that in bankruptcy severance is only acceptable when it is part of a program applicable to all employees and is not more than 10 times the average severance given to non-management employees. Horton's package meets neither criteria, Davis said.

The severance has been a controversial issue from the get-go, drawing criticism from some AMR pilots. Horton was not liked by AMR's unions, which were forced to accept reductions in benefits as part of the bankruptcy and merger deal.

An AMR spokesman said he did not expect the objection to delay the court approval process.

"Consistent with what American indicated previously, the company expects that Mr. Horton's compensation arrangement will be addressed at the plan confirmation hearing," spokesman Sean Collins told Reuters.

Davis also objected to a component of the plan that would provide top-priority payments of attorneys' fees and other expenses to many of AMR's creditors. She added that AMR gave insufficient information about many facets of its plan, including settlements between various classes of unsecured claimholders.

AMR filed for bankruptcy in 2011, the last major U.S. carrier to go through the process after its competitors underwent restructurings in the last decade. It initially opposed a merger, but agreed to explore one under pressure from its unsecured creditors' committee and unions.

US Airways CEO Doug Parker would run the combined airline, but Horton would serve as non-executive chairman until the first annual shareholder meeting, probably in the spring of 2014, after which Parker would become chairman.

AMR shareholders would receive a 3.5 percent equity stake in the new company, which would make it one of the few major bankruptcies in which equity holders earn some recovery. An attorney for AMR's creditors committee has said the stake could be valued at between $350 million and $400 million.

The case is In re: AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.

(Reporting by Nick Brown; Editing by Phil Berlowitz)