By Nick Brown
NEW YORK Aug 23 (Reuters) - American Airlines and its creditors' committee on Friday urged a bankruptcy judge to approve the airline's restructuring plan despite an antitrust challenge from the Department of Justice.
In court papers filed in U.S. Bankruptcy Court in Manhattan, American's bankrupt parent, AMR Corp, said failing to approve the restructuring would add "a destabilizing factor" to its proposal to merge with US Airways Group and pay back creditors.
AMR's creditors' committee, in a separate filing, said refusal by Judge Sean Lane to give the plan his blessing could threaten creditor support for the plan, which includes AMR's unions and most of its creditors.
"While the DOJ enforcement action has unsettled creditor and stockholder expectations, deferring entry of the confirmation order ... would only exacerbate this uncertainty," the committee said.
The U.S. government also filed a brief on Friday, but did not, as might have been expected, urge Lane to not approve the restructuring plan. Instead the government, through U.S. Attorney Preet Bharara, said it took "no position as to whether" Lane should confirm the plan, but cited the "attendant risk that a confirmed plan may not be able to become effective for a considerable time, if at all."
AMR and US Airways agreed to merge in February in an $11 billion deal that would end AMR's bankruptcy and create the world's largest airline. Experts had expected the deal to enjoy a smooth ride through the regulatory process.
But on Aug. 13, two days before the restructuring plan was to gain final court approval, the DOJ sought to block it, filing a lawsuit in Washington, D.C., alleging a stifling of competition that would harm consumers though higher fares.
Judge Lane, overseeing AMR's bankruptcy in New York, held off confirming the plan in the face of the DOJ's lawsuit, giving the parties until Friday to brief him on the best course of action.
AMR, in its court papers, stressed that the merger agreement, which Lane already approved, contains "a mechanism" to account for this very scenario. If the parties cannot obtain regulatory approval, the deal would eventually be terminated, AMR said.
Lane voiced hesitation to rubber-stamp a deal that might later change due to a settlement with the DOJ. But AMR said future changes to the plan, namely divestitures, are expressly required to go back before Lane for approval.
The creditors' committee said Lane's job is to make sure the plan meets standards under the bankruptcy law. Worrying about antitrust concerns is the DOJ's job.
"They are separate processes, before different courts, and on different schedules," the committee said.
If the Justice Department ultimately succeeds in blocking the merger, it would put AMR's restructuring back at square one, requiring it to forge new strategies for paying back creditors.
AMR shareholders, who stand to receive a 3.5 percent stake in the new entity under the merger, would likely be wiped out under any plan that excludes a merger, restructuring experts have said.
AMR's unions also support a merger. The Transport Workers Union, representing ground crew members, on Thursday filed court papers urging Lane to approve the deal.
But not everyone is in favor of Lane signing off. A group of plaintiffs in a separate antitrust lawsuit against US Airways filed a brief on Thursday in AMR's bankruptcy, saying the judge cannot under bankruptcy law confirm a plan that may prove not to be feasible. AMR appears "unable to articulate a 'Plan B' which would resolve" antitrust risks, the group said in its filing.
Regardless of Lane's decision, the issue will come down to the sides' ability to resolve matters with the DOJ. Chapter 11 merger plans require both bankruptcy court approval and regulatory approval, and one does not impact the other.
At a hearing last week, Lane did not seem opposed to the restructuring plan on its face, his hesitation instead rooted in concerns that the deal he was being asked to approve might look different a few months down the road.
The DOJ antitrust suit will take months to resolve, and possibly longer if it goes to trial.