Armstrong Flooring execs seek back benefits and severance

Former Armstrong Flooring executives say they are owed more than $4.5 million for unpaid earned vacation, severance and deferred retirement contributions.

President and CEO Michel Vermette, Chief Financial Officer Amy Trojanowski, General Counsel and Chief Compliance Officer Christopher Parisi, Human Resources Director John Bassett, Vice President Scott Hess and Senior Vice President and Controller Philip Gaudreau filed separate claims in Delaware bankruptcy court.

The claims come on top of the $4.8 million early payment of their annual incentives disclosed in court and Security and Exchange Commission filings in May. The incentive payments, a portion of which they would get for a full year, were made in the first quarter of the year, as LNP | LancasterOnline has previously reported. Such bonuses are typically handed out at year’s end and based on whether the company reached certain sales or revenue targets. The bonuses were predicated on the lower target levels.

After months of trying to find a buyer or other solution, Armstrong Flooring filed for Chapter 11 bankruptcy on May 8.

Payouts to executives prior to bankruptcy in other cases have caught the attention of federal authorities and even threatened to thwart Armstrong Flooring’s Chapter 11 plan. A report by the federal Governmental Accountability Office in September 2021 found 42 companies paid out $165 million five months to two days before filing bankruptcy in 2020.

The GAO study was conducted in response to potential abuses involving executive bonuses after Congress amended the bankruptcy code in 2005 to restrict debtors in Chapter 11 from paying executives retention bonuses for staying through bankruptcy and, to a lesser extent, incentive bonuses to achieve performance targets. There was a provision in a congressional report for GAO to review bankruptcy code on bonuses and a selected number and amount of court-requested and approved bonuses in fiscal year 2020.

The GAO concluded that Congress should consider amending the bankruptcy code to clearly subject bonuses debtors pay executives shortly before a bankruptcy filing to bankruptcy court oversight and to specify factors courts should consider to approve such bonuses.

Armstrong Flooring’s lender, Pathlight Capital, had opposed a new bankruptcy loan because it argued that the loan was essentially, in part, being used to restore funds that went to the executives. Ultimately, Pathlight dropped its argument and Judge Mary Walrath approved the financing.

More than 2,900 claims filed

The executives' claims are part of more than 2,900 claims seeking a piece 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 another $24 million to the same lenders for bankruptcy financing. The lenders are first in line for payment because those loans are secured by property that was sold.

Armstrong Flooring, as the debtor-in-possession, will have to give a full accounting of its finances in reports filed after the confirmation of a plan of reorganization and before the case is closed. In its last report, it had a cash balance of $788,678 at the end of June. The next report covering the month of July when the sale of the company was completed will likely be filed at the end of this month.

When a company files for bankruptcy, its creditors, including employees, can file claims for debts owed for up to 180 days prior to bankruptcy. Some creditors don’t file claims because they don’t expect there to be any money while others file just in case there is some.

In Armstrong Flooring’s case it’s not likely they will see all of that money, if any.

Employee wages have priority up to a certain amount if earned within 180 days of the bankruptcy filing, according to bankruptcy attorney Barry Solodky of Manheim Township-based Saxton & Stump. Solodky helped some Armstrong Flooring workers who are not executives file claims for pension benefits and severance pay.

An LNP | LancasterOnline review of claims showed that some employees were paid for part of their 2021 and 2022 incentives on July 6.

While the LNP review showed no employees seeking back pay, there are retirees seeking an untold amount of pension and life insurance benefits and more than two dozen former workers who live in Lancaster County seeking more than $1 million in severance earned prior to the bankruptcy. The employee claims range from more than $1 million to a few thousand dollars.

Some sought simply $15,150 for a priority claim, which is the highest any employee can receive under bankruptcy law.

“Each individual employee of a bankrupt employer is given a priority of $15,150 (as of April 2022, adjusted to inflation every 36 months) of all wages, salaries or commissions the employee earned up to 180 days prior to the organization filing for bankruptcy,” according to the Society of Human Resource Managers. ”In some cases, there will be sufficient assets to satisfy employee claims in full; 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 advisors have applied to be paid more than $15 million for their services.

Some of the executives are seeking severance, which is subject to contracts between the company and employee.

Solodky said executory contracts, whether employee or otherwise, can be assumed or rejected in the bankruptcy case. The buyer of most of Armstrong Flooring’s North American assets, AHF Products, assumed union contracts with some modifications. It did not assume the executives' contracts and company officers except for Vermette and Parisi were laid off on July 22, along with a few hundred of mostly headquarters staff.

A 2016 severance agreement for Armstrong Flooring executives filed with the Securities and Exchange Commission says the company may permanently suspend benefits under severance allowances in pay status in the event of the company’s insolvency, liquidation, or bankruptcy reorganization or in the event the cost of providing such benefits would lead to the company’s insolvency, liquidation, or bankruptcy reorganization.

Former Armstrong Flooring CEO Vermette was paid $2,157,530 in 2021, and the total compensation for the median employee in 2021 was $56,826, resulting in an estimated ratio of CEO’s pay to the pay of a median employee for 2021 of 37 to 1.

Vermette’s employment agreement 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 money via a preferential transfer. Preference allows money spent 90 days prior to bankruptcy to be brought back into the estate if the money was given preferentially to a creditor, Solodky said. The debtor-in-possession or the U.S. Trustee has two years from the bankruptcy filing for transfer actions, which usually happen towards the end of the process.

For money paid out to company insiders (officers, directors, shareholders or anyone with an extremely close relationship to the debtor) the preferential lookback is a year, Solodky said.

In 2020, Vermette saw the value of his pay plunge 73.7% to $1.19 million from $4.52 million the prior year, when he was hired and was given stock valued at the time at $3.8 million, spread over five years.

The stock grant was to replace compensation he would have received if he had stayed at his prior post at Mohawk Industries and was to reward him if Armstrong Flooring common stock’s stock price hit certain marks.

LNP | LancasterOnline reported in 2021 that Armstrong Flooring didn’t raise the salaries of Vermette and the other top executives because of the pandemic, which slashed the company’s financial results. Armstrong still gave the executives an annual incentive payout, albeit at the minimum level, because the company made progress on its strategic overhaul.

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Crédito: LISA SCHEID | Business Trends Reporter