Adversary Proceedings | Armstrong Flooring, Inc.

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Armstrong Flooring, Inc. avoidance complaints alleging preference and fraudulent conveyance claims filed in adversary proceedings associated with Armstrong Flooring, Inc.'s Bankruptcy.

On January 30, 2023, Armstrong Flooring, Inc., one of the debtors-in-possession in the Armstrong Flooring, Inc. et al. bankruptcy, began filing adversary proceedings against certain creditors in the Bankruptcy Court for the District of Delaware.

According to our review of the Bankruptcy Case Docket, there were approximately 70 complaints filed on January 30, 2023.

These complaints seek to avoid and recover transfers made by the debtors as either alleged preferential transfers or alleged fraudulent transfers.

The claims against the defendants in this matter include a preference claim and a fraudulent conveyance claim.

The Bankruptcy Code requires the defendant (a person, corporation, or entity against whom the Plaintiff has lodged a complaint) to file an answer or response within 30 days of the Summons issue date. Failure to file a response may result in a default judgment against the defendant in the lawsuit amount.

A default judgment requires the defendant to refund the entire amount of the claim and any claims the defendant may have against Armstrong Flooring, Inc. and its affiliates may be disallowed by the court, thus, preventing them from being pursued.

If your rights are in jeopardy and you have not yet retained counsel, you should do so immediately. Click here to contact us today for support.

Preferential Transfer Claim

Under section 547 of the Bankruptcy Code, preferential payments, also known as preferences, are payments made to creditors (a person or company to whom money is owed) before filing a bankruptcy case that results in the creditor receiving more than they would in the bankruptcy case.

In this case, the payments received by businesses from Armstrong Flooring, Inc. and its affiliates for a period of up to 90 days before filing for bankruptcy may be considered preference payments. This bankruptcy provision allows the Plaintiff to "clawback" those payments in an attempt to redistribute the Debtors funds equally among all of the unsecured creditors.

Fraudulent Transfer Claim

A Fraudulent Transfer, otherwise known as a Fraudulent Conveyance, is when a business transfers money to another person or company to prevent a creditor from collecting on the debt.

A fraudulent conveyance can be either with the intent to defraud, otherwise known as an actual fraudulent conveyance, or without the intent to defraud though the circumstances of the transaction render it a constructive fraudulent conveyance. A Fraudulent Transfer claim is often lodged in the alternative to a Preferential Transfer claim to take another stab at the same transaction(s) under a different theory.

As some creditors were paid in full while other creditors received no payment, the Plaintiff seeks to claw back these payments from its paid creditors as either Preferential Transfers or Fraudulent Transfers to redistribute the money equally among all of its creditors.

There are some defenses that are typically applicable and could be used to protect the payments from being avoided and clawed back.

Defenses against a Preferential Transfer Claim.

Traditional Defense to a Preference Claim

The Plaintiff must prove all five elements of a preference under section 547. A traditional defense to the claim is to show that the Plaintiff cannot prove one of these elements. The five elements are:

  1. Payment made to or for the creditor's benefit.
  2. There was an antecedent debt (a legally enforceable duty to repay someone with money or property that existed before the moment in question) payable to the creditor.
  3. The payment was made while the debtor was insolvent.
  4. If the creditor was an outsider (unrelated to the debtor in any way), then the payment must have been made within 90 days of the debtors filing for bankruptcy protection. If the creditor was an insider (someone who has a position in a business, family members, business partners, etc.), then the payment must have been made within one year of the debtors filing for bankruptcy protection.
  5. The creditor must have received more than they would have received if the debtors' filed for bankruptcy under chapter 7 (liquidation) of the Bankruptcy Code.

Statutory Defenses to a Preference Claim

  • Ordinary Course of Business – A determination of "ordinary course" entails examining the debtor's and creditor's business activities to demonstrate a consistency of transactions between the 90-day preference period and the base period. The ordinariness of the transactions is determined by various factors, the most important of which is the timing of the payments.
  • Subsequent New Value – Generally, if the defendant provided goods or services to the debtor after the first alleged preference payment (based on the precise date of the alleged payment) but before the petition date, any such new value may be protected from avoidance.
  • Contemporaneous Exchange for New Value – This affirmative defense requires that the alleged payment and the value delivered to the debtor were not only intended to be contemporaneous (happening at the same time or very close together) but also were, in fact, contemporaneous. If the defendant had any security interests or claims on the debtor's property, this defense might also apply.
  • Ordinary Business Terms – This defense is applied when the alleged payments were within the industry standard of lateness/timing of payments.

Defense against a Fraudulent Conveyance claim.

While the intent to defraud is required for actual fraudulent conveyance, it is not required for constructive fraudulent conveyance.

Plaintiffs generally have difficulty avoiding such payments under this theory if invoices and payments are issued and paid according to the agreements between the parties. The following can be shown to defend against a fraudulent transfer claim:

  • Reasonably Equivalent Value – This affirmative defense element is generally evidenced by showing that the defendant's invoices and payments were made per the agreement/s.
  • Received in Good Faith (honesty in a person's conduct during the agreement) – This element may be satisfied with agreements entered into at arm's length and with payments that were made as per the agreement/s (parties negotiating a contract independent of each other, unrelated and operating with their self-interest).

Our Mission is to Avoid Messy Litigation

Maggie has been a licensed attorney since 2017. After gaining substantial experience managing avoidance actions for a bankruptcy law firm, she founded her independent practice in 2019 focused strictly on representing unsecured creditors in bankruptcy preference and fraudulent conveyance actions. Maggie's mission is to eliminate messy litigation by providing outstanding legal services to her clients with the highest levels of integrity, responsiveness, and efficiency.

As lead counsel, she has successfully defended avoidance and recovery actions for small businesses and multinational corporations representing both domestic and foreign clients. Maggie's legal services have resulted in the following:

  • a dismissal rate of over 50% of all cases,
  • an average settlement of 10% of the total claim amount for all cases, and
  • an average settlement amount of 3% of the total claim amount for cases with a claim over $100,000.

Please peruse our website for more information and click here to set up a free consultation.

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No Guarantee of Results

These results are intended only to provide information about the activities and experience of The Law Office of Magdalena Zalewski PLLC and should not be understood as a guarantee or assurance of future success in any matter. The results portrayed were dependent on a variety of facts and circumstances unique to the particular matters, including, but not limited to, the specific facts and circumstances of the matter, the applicable law, the competence of opposing counsel, or unanticipated events. Past results are not a guarantee or assurance of the same or similar results in future matters as the outcome of a particular case or matter will likewise depend on a variety of factors such as the specific facts and circumstances of the matter, the applicable law, the competence of opposing counsel, and unanticipated events. We do not make any guarantee, promise, or other assurance that the same or similar results can be obtained in any matter we undertake, and you should not assume that a similar result or outcome can be obtained by our law firm in your legal matter. The choice of an attorney is an important decision and should not be based solely on advertisements.

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