Tom Horton's Severance is Probably in the Golden Parachute Bag if the Court Applies the Business Judgment Rule Rather Than Section 503(c) of the Bankruptcy Code
The U.S. Trustee in American’s Chapter 11 bankruptcy proceedings is challenging American’s $19.8 million golden parachute for its CEO Tom Horton. The Trustee contends that the $19.8 million payment is too much under Section 503(c) of the Bankruptcy Code because $19.8 million is more than 10 times the mean severance payment to non-management employees. American responds that Section 503(c) and its limit on severance payments does not even apply because American – the debtor in the bankruptcy – won’t be paying Horton’s severance. Rather, the $19.8 million will be paid after the proposed merger between American and US Airways is completed by the new company that will be formed in the merger. According to American, because Section 503(c) doesn’t apply, the bankruptcy court should defer to the company’s business judgment regarding Horton’s severance.