In re Amr Corp.

• Decision Date: 11 April 2013
• Docket Number: No. 11–15463 (SHL).,11–15463 (SHL).
• Citation: 490 B.R. 158
• Parties: In re AMR CORPORATION, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

490 B.R. 158

In re AMR CORPORATION, et al., Debtors.

No. 11–15463 (SHL).

United States Bankruptcy Court,

S.D. New York.

April 11, 2013.

Weil, Gotshal & Manges LLP, By: Harvey R. Miller, Esq., Stephen Karotkin, Esq., Alfredo R. Pérez, Esq., Tracy Hope Davis, United States Trustee, By: Susan Golden, Esq., Brian S. Masumoto, Esq., Michael T. Driscoll, Esq., New York, NY, for the Debtors.

Skadden Arps Slate Meagher & Flom LLP, By: Jay M. Goffman, Esq., New York, NY, and By: John Wm. Butler, Jr., Esq., Albert L. Hogan III, Esq., John K. Lyons, Esq., Felicia Gerber Perlman, Esq., Chicago, IL, for the Official Committee of Unsecured Creditors.

Milbank, Tweed, Hadley & McCloy LLP, New York, NY, By: Gerard Uzzi, Esq., Eric K. Stodola, Esq., for the Ad Hoc Committee of AMR Corporation Creditors.

Latham & Watkins LLP, New York, NY, By: D.J. (Jan) Baker, Esq., for U.S. Airways.

Steptoe & Johnson LLP, Washington, DC, By: Filiberto Agusti, Esq., Joshua R. Taylor, Esq., for the Allied Pilots Association.

James & Hoffman, P.C., Washington, DC, By: Edgar N. James, Esq., Kathy Krieger, Esq., David P. Dean, Esq., Darin M. Dalmat, Esq., Daniel M. Rosenthal, Esq., Counsel for the Allied Pilots Association.

Caplin & Drysdale, Chartered, Washington, DC, By: James P. Wehner, Esq., Kevin C. Maclay, Esq., Todd E. Phillips, Esq., for the U.S. Airline Pilots Association.

Davis Polk & Wardwell LLP, New York, NY, By: Marshall S. Huebner, Esq., Timothy E. Graulich, Esq., Natasha Tsiouris, Esq., for Citibank, N.A.

Mintz Levin Cohn Ferris Glovsky & Popeo, P.C., Boston, MA, By: William W. Kannel, Esq., Ian A. Hammel, Esq., for U.S. Bank National Association.

Chapman and Cutler LLP, Chicago, IL, By: James E. Spiotto, Esq., Franklin H. Top III, Esq., and Craig M. Price, Esq., Laura E. Appleby, Esq., New York, NY, for U.S. Bank National Association and U.S. Bank Trust National Association.

Shipman and Goodwin LLP, Hartford, CT, By: Ira H. Goldman, Esq., Kathleen M. LaManna, Esq., Corrine L. Burnick, Esq., for U.S. Bank National Association and U.S. Bank Trust National Association.

Foley & Lardner LLP, New York, NY, By: Mark L. Prager, Esq., Douglas E. Spelfogel, Esq., for U.S. Bank National Association and U.S. Bank Trust National Association.

Sidley Austin LLP, New York, NY, By: Michael G. Burke, Esq., Andrew P. Propps, Esq., for U.S. Bank Trust National Association.

MEMORANDUM OF DECISION

SEAN H. LANE, Bankruptcy Judge.

Before the Court is the Debtors' motion under Sections 363, 503(b), and 105(a) of the Bankruptcy Code for approval of an agreement to merge the Debtors and U.S. Airways Group, Inc. (“US Airways”), and related relief. (ECF Doc. No. 6800) (the “Motion”). The merger would create the world's largest airline and has the wide support of stakeholders in this case, as demonstrated by the statements filed in support by the Official Committee of Unsecured Creditors (the “UCC”), an Ad Hoc Committee of AMR Corporation Creditors, and the unions for the pilots at both American Airlines and U.S. Airways. In addition to combining the operations of the two airlines, the merger proposes certain employee arrangements, including a proposed severance payment of $20 million to Thomas Horton, the Chief Executive Officer of Debtor AMR Corporation (“AMR”).

The U.S. Trustee (“UST”) objects to the Motion. While raising no objection to the merger transaction itself, the UST argues that the proposed employee arrangements do not meet the requirements of Section 503(c) of the Bankruptcy Code, which places restrictions upon compensation paid to insiders during a bankruptcy case. The Debtors contend that Section 503(c) does not apply because these employee arrangements are conditioned on the closing of the merger and will be paid by the new enterprise created by the merger (“Newco”), not the Debtors. For the reasons stated below, however, the Court finds that Section 503(c) prohibits the authorization of the $20 million severance payment to Mr. Horton.

BACKGROUND

The merger is an agreement among AMR, AMR Merger Sub, Inc., and U.S. Airways. Under the terms of the Agreement and Plan of Merger, dated February 13, 2013 (the “Merger Agreement”), AMR Merger Sub, Inc., a wholly owned subsidiary of AMR that was formed to effectuate the merger, will be merged into U.S. Airways. US Airways will continue to survive as a direct, wholly owned subsidiary of AMR. Upon the effective date of the merger, AMR will be named “American Airlines Group Inc.” and the combined company will operate under the “American Airlines” name.

As consideration for the merger, the shareholders of U.S. Airways will receive 28% of the diluted equity of the merged enterprise. The remaining 72% will be distributed to the Debtors' stakeholders pursuant to a plan of reorganization. The value of the aggregate diluted equity of the parent of the merged airlines to be distributed to the stakeholders of the Debtors as a result of the merger is approximately $8 billion, based upon the implied equity value of U.S. Airways' stock as of February 13, 2013.

The merger is subject to and effective upon the confirmation and consummation of the Debtors' chapter 11 plan of reorganization.¹ Specifically, the merger will be implemented by the plan and the value achieved by the merger will be distributed through the plan. The closing of the merger and the effective date of the plan will occur at the same time. Neither a disclosure statement nor a plan of reorganization has yet been filed, and the Motion explicitly states that all parties in interest reserve all of their rights with respect to such plan. While the consummation of the merger remains subject to the Debtors' plan being confirmed and consummated and satisfaction of the conditions in the Merger Agreement, approval of the Merger Agreement by the Court will bind the Debtors to its terms retroactive to its execution date of February 13, 2013.

The merger is the culmination of many months of negotiations between the Debtors, the UCC, U.S. Airways and numerous other constituencies. It has the overwhelming support of the UCC, the Consenting Creditors, the Ad Hoc Committee and the Debtors' labor unions.

Employee Arrangements

In connection with the merger, the Motion seeks approval of certain employee compensation and benefit arrangements—referred to as the “Employee Arrangements”—contained in Section 4.10 of the Merger Agreement and Section 4.1( o ) of the American Disclosure Letter.² These fall into three categories: (i) Ordinary Course Changes; (ii) Employee Protection Arrangements; and (iii) the CEO severance payment.

The first category of Ordinary Course Changes provides for base wage increases for non-union employees as set forth in Section 4.1( o ) of the American Disclosure Letter.³ Eligible employees include: (i) AA agents, reservation and planners, AA support staff, and Eagle support staff; (ii) Eagle agents; (iii) management levels 9 through 11 (Vice Presidents, Senior/Executive Vice Presidents, and President); and (iv) front line management at AA and AMR Eagle. The Debtors state that all of these changes are being made in the ordinary course of business. They will become effective immediately and will be paid by the Debtors prior to the closing of the merger.

The second category of Employee Protection Arrangements is also set forth in Section 4.1( o ) of the American Disclosure Letter.⁴ These include Short–Term Incentive Plans, 2013 Long–Term Incentive Plans, Alignment Awards, Severance Arrangements, a Key Employee Retention Program, and a Level 5/6 Long–Term Incentive Program. While the Motion states that these Employee Protection Arrangements will be instituted prior to the consummation of the merger (Motion ¶ 76), the Debtors have clarified that they are subject to and will only become effective upon consummation of the merger, and thus they will be paid by Newco and not the Debtors. See Hr'g Tr. 13:5–11. These Employee Protection Arrangements are designed to achieve pay and benefit parity between the Debtors' employees and those of U.S. Airways.

The details for the individual programs within this second category vary. The Short–Term Incentive Plans, for example, include a profit sharing arrangement in 2013 for those employees that are level 5 and below, which covers analysts, supervisors, and managers. In lieu of profit sharing, these employees may receive an increase in base wages or similar compensation. Also included is a short-term incentive plan effective for 2013 for managers at level 6 and above (the “STI”), which covers senior managers or directors, managing directors, vice presidents, senior/executive vice president, and president. Eighty percent of the STI is based on a sliding scale of performance objectives linked to 2013 pre-tax profit margins. The remaining twenty percent of the STI is not specifically outlined, but is instead based on operational performance metrics that are to be determined by AMR.

Another Employee Protection Arrangement, the 2013 Equity LTIP Award, is a long-term incentive program award (“LTIP”) that will be made to approximately 60% of level 6 managers (senior managers or directors) and 100% of level 7 managers and above in amounts that are equal to the dollar amounts to be awarded to similarly situated U.S. Airways managers. The 2013 Equity LTIP will be in the form of stock-settled restricted stock units, but may be in the form of cash awards under certain circumstances. The vesting schedule is in accordance with that of similarly situated U.S. Airways managers, with the first vesting date in April 2014. Similar to the LTIP, the Alignment Award is a long-term incentive program award that will be available to approximately 60% of level 6 managers and 100% of level 7 managers and above. The amount of the award will be calculated based on a multiple of the prepetition target award value applicable to the recipient's position. One third of the award will vest upon each of the closing of the merger, 12 months...