Judge: This Mega-Million Dollar American Airlines CEO Severance is Not Happening

Though the merger of American Airlines and US Airways (NYSE:LCC) will likely go on as scheduled, the proposed $20 million in severance proposed for AMR CEO Thomas Horton will not. A bankruptcy judge made the ruling on Thursday in a Manhattan court, citing the restrictions Congress placed on executive compensation for companies filing for bankruptcy.

Judge Sean Lane, who approved terms of the merger in March, dismissed the argument made by AMR Corp (parent company of AA) that the severance was in reality being paid by the newly formed company. Lane described that argument “something of a legal fiction,” according to the AP. AMR argued that, since it wasn’t AMR but the soon-to-be-minted American Airlines (with US Airways included) that would be paying for the package.

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Lane’s summary rejection of the argument leaned on a popular mandate limiting chief executive compensation to 10 times that of employees below the managerial level. Though AMR was set on awarding the package to Horton for his performance throughout the bankruptcy proceedings, the judge was able to deny the request on clear legal grounds. Aviation consultants are pleased that a potential PR disaster was avoided…

The combined AA and US Airways would be the largest airline in the world. Other airline mergers, including Continental’s pairing with United (NYSE:UAL), allowed for larger chief executive compensation packages because they were not subject to bankruptcy regulations, something noted by Judge Lane in his ruling. Horton will become chairman of American following the shift, while US Airways CEO Doug Parker will become chief executive.

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The newly formed American Airlines will have its headquarters in Fort Worth, the place AMR now calls home. US Airways stock has stock has stabilized above $16 per share, marking a major period of improvement since it fell below $8 in April 2012.

Despite the ruling against the $20 million in severance for Horton, the bankruptcy proceedings should go as scheduled and put the new company in position to attend to business later in the year. The AA board could then award Horton several million in a separate decision, according to sources.

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