* CEO Horton's payout set in AMR-US Airways merger
* Judge says payment not authorized under bankruptcy law
* AMR plans to address severance in reorganization plan
By Jonathan Stempel and Tanya Agrawal
April 12 (Reuters) - A judge has rejected a proposed severance package of nearly $20 million for Thomas Horton, the chairman and chief executive officer of American Airlines parent AMR Corp, saying the payout was not allowed under federal bankruptcy law.
U.S. Bankruptcy Judge Sean Lane in Manhattan issued his decision on Thursday, after having approved at a March 27 hearing AMR's planned $11 billion merger with US Airways Group Inc.
Horton's $19.9 million severance had been part of the merger agreement and was to consist of equal amounts of cash and shares of the combined company.
Lane had suggested at the hearing that severance might be better addressed in AMR's reorganization plan, which the company has yet to submit and which requires creditor approval.
U.S. Trustee Tracy Hope Davis, a Department of Justice monitor for the bankruptcy, also opposed Horton's severance.
"It's American Airlines' current intention to address Mr. Horton's compensation arrangement in the plan of reorganization," said Mike Trevino, a spokesman for the carrier.
The combined company would be run by US Airways CEO Doug Parker, with Horton as nonexecutive chairman. Parker would become chairman after the first annual shareholder meeting, probably in the spring of 2014.
The plan of reorganization will address how creditors will get paid back. Shareholders of AMR may end up with a stake of at 3.5 percent in the combined company, which an attorney for AMR's creditor's committee has said could be valued at between $350 million and $400 million.
Horton first joined AMR in 1985, left in 2002 for a four-year stint at AT&T Corp and then returned. He became CEO of AMR when it filed for bankruptcy in November 2011.
AMR at first opposed merging while still in bankruptcy, but reversed itself under pressure from creditors. The merger would create the world's largest airline, and AMR and US Airways hope to save more than $1 billion of annual costs by 2015.
Davis had called Horton's proposed payout too large relative to severance for nonmanagement workers, and improper because it was not part of a program for full-time workers in general.
Lane rejected AMR's argument that these restrictions did not apply because the payout would be made - or could be voided - by the combined company after the merger closed.
"It is unclear what purpose would be served by the court's approval of the severance if (the combined company) could later veto the severance through a vote of its board," he wrote.
The judge also said deferring to AMR's "business judgment" in allowing the payout was "exactly what Congress sought to prevent" in capping severance awards by companies in bankruptcy.
AMR has said the payment to Horton recognized his efforts in leading the company through bankruptcy and into the merger.
Its lawyer, Stephen Karotkin, told Lane on March 27 that the desire of AMR directors to maximize value and see the merger through justified payments to Horton and others.
The combined carrier would take the American name and be based in AMR's hometown of Fort Worth, Texas. US Airways is based in Tempe, Arizona.
The case is In re: AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.