The Justice Department is objecting to a proposed $20 million severance payment for American Airlines CEO Tom Horton, saying it's bigger than allowed by bankruptcy law.
Horton became CEO when American filed for Chapter 11 protection in November 2011. The proposed merger of US Airways Group Inc. and American calls for Horton to lose that job and become chairman of the combined company. American has proposed giving him severance pay of almost $20 million and lifetime flight benefits.
The objection filed Friday by the U.S. trustee's office says bankruptcy law caps such payments, even if they are agreed to in bankruptcy court but not made until the company exits bankruptcy protection. Bankruptcy law limits severance payments to executives and aims to make sure companies can repay as much of their debt as possible.
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The objection also says previous company filings showed that Horton would get a maximum of $6.4 million if he had left at the end of last year, and raises the question of why he should get so much more money now. American has said in filings that the money for Horton is in recognition of his efforts during the airline's restructuring and his role in overseeing the merger with US Airways.
The trustee's objection also says American should be required to explain how its board determined that $20 million was the right amount for Horton, and to say whether independent directors approved of the payment.
The trustee's office is part of the Justice Department. Its job is to review bankruptcy cases to make sure bankruptcy laws are being enforced.
A written statement from American said it does not "expect any delay in the approval of the Disclosure Statement or voting on the Plan of Reorganization," which the company said is supported by the committee of unsecured creditors.
The case is in federal bankruptcy court in New York. Judge Sean Lane had previously rejected the same payment for Horton, but he left the door open for American to propose the payment in its reorganization plan, which it has done.
The trustee's objection is set to be heard in bankruptcy court on June 4.