NEW YORK (AP) -- A federal bankruptcy judge signaled his support for the $11 billion merger of American Airlines and US Airways.
But Judge Sean H. Lane deferred giving his official blessing until he could further consider the timing of a severance package for outgoing American CEO Tom Horton.
"The merger is an excellent result. I don't think anybody disputes that," Lane said Wednesday during a court hearing. American has been in bankruptcy protection since November 2011.
If Lane ultimately signs off on the deal, it would still need approval from Department of Justice antitrust regulators and from US Airways shareholders. It is expected to close by the fall.
The companies have proposed paying Horton $20 million in severance. Horton has agreed to step down as CEO and leave the company within a year of the merger's closing. The U.S. trustee objected to Horton's severance, saying it is in excess of limits set under the bankruptcy code.
American tried to get Lane to approve the severance as part of a larger motion to approve the merger. The U.S. trustee accused the airline of trying "to misuse their motion to approve the merger to make an end run around" limits included in the bankruptcy code. American denied that.
"This was not something decided upon to line the pockets" of American's executives, said Stephen Karotkin, a lawyer with Weil, Gotshal & Manges, which represents American.
Lane didn't object to the actual severance payment but agreed with the trustee that the timing of it seemed to violate prohibitions in the bankruptcy law.
"I am bound by the way Congress drafted the statute," Lane said, adding that he was worried about setting a bad precedent that lawyers in future cases will try to capitalize upon.
"There are many, many smart lawyers out there," Lane added. "It's not hard to imagine."
Lawyers for American and its creditors — who worked together to facilitate the merger — quickly argued that this case was a unique situation. In most bankruptcy cases, creditors lose part of the money they are owed. Thanks, in part, to the merger, creditors in this case will get what they are owed. Onetime shareholders of American's parent company AMR Corp. should also see some money back.
"In my 30 years in restructuring law, I've never quite seen a case like this," said Jack Butler, a lawyer with Skadden, Arps, Slate, Meagher & Flom which represents the creditors.
Butler, part of a team that helped negotiate Horton's severance, said it wasn't evaluated "in isolation."
Horton spent nearly his entire career at American, becoming CEO when the company filed for bankruptcy on Nov. 29, 2011. Once the deal closes, US Airways CEO Doug Parker will run the combined airline. Horton will step down as CEO and then leave the company's board within a year. The agreement calls for him to receive $19.9 million in cash and stock as well as a lifetime of free first-class tickets on American for himself and his wife.
The trustee didn't object to the merger or special compensation arrangements that have been proposed for rank and file employees.
Separately, Lane approved a motion to extend American's exclusive period for filing a reorganization plan until May 29, the last such extension allowed under law. There is then a 60-day waiting period for creditors to object to the plan before Lane can sign off on American's emergency from bankruptcy protection.
Scott Mayerowitz can be reached at https://twitter.com/GlobeTrotScott.