(Photographer: Ty Wright/Bloomberg)
Armstrong Flooring Inc. paid its top executives $4.8 million just before filing bankruptcy, a move that was questioned by lenders.
Company Chief Executive Officer Michel S. Vermette and at least four other managers got part of their annual incentive payments early in order to try to keep them on the job, according to court papers and regulatory filings.
Such payments have come under fire from Congress, creditors and employees, who say the companies are evading bonus restrictions that judges can impose once in bankruptcy. A federal report found that in one recent year, 42 companies paid out $165 million just before filing bankruptcy.
Initially, the bonuses threatened to disrupt the company’s plan to borrow $30 million to fund its reorganization. Armstrong lender Pathlight Capital had opposed the new loan arguing it was inappropriate, in part because the money would be used to “essentially replenish” cash the company paid the executives.
On Monday, Pathlight dropped its objections to the proposed reorganization funding when Armstrong agreed to change the financing package, Armstrong attorney Ron E. Meisler said during a court hearing held by video. Under the new financing agreement, Armstrong will borrow $24 million, half of which will be a term loan that will include Pathlight as administrative agent, according to court documents.
Proposed Sale
Meisler told U.S. Bankruptcy Judge Mary Walrath that company executives were key to getting a deal for the funding and for a proposal to sell the company while under court protection.
Walrath, who has criticized such bonuses in the past, said at a video-court hearing Monday afternoon that she would approve the $24 million loan once the company makes final wording changes to the documents.
Armstrong filed Chapter 11 bankruptcy after it spent months trying to find a buyer and negotiate a deal with lenders, according to court papers filed in U.S. Bankruptcy Court in Wilmington, Delaware. Armstrong said it owed creditors $317.8 million and had assets worth $517 million.
Earlier this month, the maker of vinyl sheets, planks and tiles became the latest company to seek court protection from creditors to deal with spiraling costs and weak sales lingering from the Covid-19 pandemic.
Armstrong, based in Lancaster, Pennsylvania, plans to continue working with advisers at Houlihan Lokey Capital to find a buyer.
As it struggled with higher costs, Armstrong haggled with lenders who imposed harsh restrictions that hampered its turnaround efforts, Vermette said in court papers. The company had started to modernize operations in 2020 as the pandemic began to hit.
Armstrong Flooring was spun out of Armstrong World Industries, which exited bankruptcy in 2006 after winning court approval for a plan to deal with lawsuits related to asbestos. The substance can cause fatal lung diseases including cancer. Armstrong Flooring became a separate, publicly traded company in 2016.
The case is Armstrong Flooring Inc., 22-10426, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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