Former Armstrong Flooring executives say they owe more than $4.5 million for unpaid leave, severance pay and deferred pension contributions.
President and CEO Michel Vermette, Chief Financial Officer Amy Trojanowski, General Counsel and Chief Compliance Officer Christopher Parisi, Chief Human Resources Officer John Bassett, Vice President Scott Hess and Senior Vice President and Controller Philip Gaudreau filed separate claims in Delaware bankruptcy court.
The claims are in addition to $4.8 million early payment of their annual incentives disclosed in documents filed by the courts and the Security and Exchange Commission in May. The incentive payments, part of which they would receive for a full year, were paid out in the first quarter of the year, as NL | LancasterOnline has already reported. These bonuses are usually distributed at the end of the year and depending on whether the company has reached certain sales or revenue targets. Bonuses were based on lower target levels.
After months of trying to find a buyer or other solution, Armstrong Flooring filed for Chapter 11 bankruptcy on May 8.
Payments to executives prior to bankruptcy in other cases have drawn the attention of federal authorities and even threatened to thwart Armstrong Flooring’s Chapter 11 plan. A report by the Federal Office of Government Accountability in September 2021 found that 42 companies had paid $165 million five months to two days before filing for bankruptcy in 2020.
The GAO study was conducted in response to potential abuse of executive bonuses after Congress amended the bankruptcy code in 2005 to prevent Chapter 11 debtors from paying executive retention bonuses to remain bankrupt. and, to a lesser extent, incentive bonuses for meeting performance targets. There was a provision in a congressional report for the GAO to revise the bankruptcy code on bonuses and a select number and amount of bonuses sought and approved by the court in fiscal year 2020.
The GAO concluded that Congress should consider amending the bankruptcy code to clearly subject the bonuses that debtors pay to executives shortly before a bankruptcy filing to the oversight of the bankruptcy court and to specify the factors that the courts should take into account in approving these bonuses.
Armstrong Flooring’s lender, Pathlight Capital, had opposed a new bankruptcy loan because it argued the loan was essentially, in part, used to restore funds that went to executives. Ultimately, Pathlight dropped its case, and Judge Mary Walrath approved the funding.
More than 2,900 complaints filed
The executives’ claims are among more than 2,900 claims seeking some of the remnants of a $200 million sale of the company’s assets in July. Armstrong Flooring owed creditors $317.8 million in debt, including $160 million to pre-bankruptcy lenders Pathlight Capital and Bank of America, and an additional $24 million to the same lenders for bankruptcy financing. Lenders are first in line for payment because these loans are secured by assets that have been sold.
Armstrong Flooring, as debtor in possession, will be required to account for its finances in reports filed after a plan of reorganization is confirmed and before the case is closed. In her last report, she had a cash balance of $788,678 at the end of June. The next report covering the month of July in which the sale of the company was completed will likely be filed at the end of this month.
When a business files for bankruptcy, its creditors, including employees, can file claims for debts due up to 180 days before bankruptcy. Some creditors don’t file claims because they don’t expect there to be money while others file just in case there is.
In the case of Armstrong Flooring, they are unlikely to see all that money, if any.
Employee salaries are prioritized up to a certain amount if earned within 180 days of filing for bankruptcy, according to bankruptcy attorney Barry Solodky of Manheim Township-based Saxton & Stump. Solodky has helped some non-executive Armstrong Flooring workers file for retirement benefits and severance pay.
An NLP | LancasterOnline’s review of the claims showed some employees were paid for part of their 2021 and 2022 incentives on July 6.
While the LNP’s review showed no employees asking for back pay, there are retirees seeking an untold amount of pension and life insurance benefits and more than two dozen former workers living in Lancaster County and seeking more than $1 million in severance pay earned before bankruptcy. Employee claims range from over a million dollars to a few thousand dollars.
Some asked for just $15,150 for a priority claim, which is the highest amount an employee can receive under bankruptcy law.
“Each employee of a bankrupt employer receives priority of $15,150 (as of April 2022, adjusted for inflation every 36 months) on all wages, salaries or commissions the employee has earned up to 180 days before the organization filed for bankruptcy”, according to the Society of Human Resource Managers. “In some cases, there will be enough assets to fully satisfy employee claims; in others, employees may be compensated for only a portion of their claims or receive nothing at all.
Law firms representing the company, unsecured creditors and retirees, and financial advisers demanded to be paid more than $15 million for their services.
Some of the executives are asking for severance pay, which is subject to contracts between the company and the employee.
Solodky said enforceable contracts, whether employed or not, can be presumed or dismissed in bankruptcy. The buyer of most of Armstrong Flooring’s North American assets, AHF Products, assumed the union contracts with some modifications. He did not assume that executive contracts and company executives, with the exception of Vermette and Parisi, were laid off on July 22, along with a few hundred staff, mostly from headquarters.
A breakup agreement 2016 for Armstrong Flooring executives filed with the Securities and Exchange Commission states that the company may permanently suspend severance benefits in the event of corporate insolvency, liquidation, or bankruptcy reorganization or in the event that the cost of providing such benefits would lead to the insolvency, liquidation or bankruptcy reorganization of the business.
Former Armstrong Flooring CEO Vermette received $2,157,530 in 2021, and the median employee’s total compensation in 2021 was $56,826, giving an estimated ratio of CEO salary to median employee salary for 2021 of 37 to 1.
At Vermette hiring contract says it is enforceable “except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally”. The contract was for three years from August 2019.
Also, the bankruptcy estate may be able to recover some of the money via a preferential transfer. The preference allows money spent 90 days before bankruptcy to be returned to the estate if the money was given preference to a creditor, Solodky said. The U.S. debtor-in-possession or trustee has two years from the bankruptcy filing for transfer actions, which usually occur near the end of the process.
For money paid to company insiders (officers, directors, shareholders or anyone with an extremely close relationship to the debtor), the preferential lookback period is one year, Solodky said.
In 2020, Vermette saw the value of his salary plunge 73.7% to $1.19 million, from $4.52 million the year before, when he was hired and given shares valued at at the time to $3.8 million, spread over five years.
The stock award was to replace the compensation he would have received had he remained in his previous position at Mohawk Industries and was to reward him if Armstrong Flooring’s common stock price reached certain marks.
NL | LancasterOnline reported in 2021 that Armstrong Flooring had not raised salaries for Vermette and other top executives due to the pandemic, which had reduced the company’s financial results. Armstrong still gave executives an annual incentive payout, albeit at the minimum level, as the company made progress in its strategic overhaul.