By Nick Brown
NEW YORK (Reuters) - A bankruptcy judge on Thursday held off approval of a restructuring plan for American Airlines, citing a U.S. government challenge this week to the airline's proposed merger with US Airways Group Inc
American's parent company, AMR Corp
Judge Sean Lane had been expected to approve the plan at a hearing on Thursday. But, two days before the hearing, the U.S. Justice Department sued to block the merger, saying it would lead to higher fares and hurt consumers.
Instead of approving the plan, Lane gave AMR and its creditors until August 23 to submit briefs on how he should proceed.
Lane said he needed more information about the appropriateness of approving the restructuring plan in light of the antitrust challenge.
AMR and US Airways, which have said they will fight the antitrust lawsuit, and their lawyers argued on Thursday that Lane should still approve the bankruptcy plan.
A lawyer for US Airways, Daniel Wall, said the Justice Department's timing, just two days before the final hearing, was "audacious."
"Don't allow the bankruptcy issues, which are complicated enough on their own, to be held hostage to very late-filed antitrust issues," Wall told the judge.
But Lane cited "lingering doubts" about the benefits of approving a bankruptcy plan before the antitrust issue is resolved. "What would be the point of entering a confirmation order ... if, in fact, there's a lot more work to be done?" he said.
Under the restructuring plan, a reorganization cannot go ahead without antitrust approval for the merger, which could take months.
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.
Lane said he had strongly considered canceling Thursday's hearing but decided to give parties an open forum to discuss the antitrust challenge.
The bankruptcy plan has the support of nearly all of AMR's key creditors, and Lane had already signed off on the merger and an initial outline of the restructuring plan that incorporates it.
Absent the antitrust challenge, Thursday's hearing would have been the final step in AMR's exiting bankruptcy and implementing its merger.
(Reporting by Nick Brown; Editing by Steve Orlofsky)