Luken Communications Vice President Matt Winn walks among the company's 10 satellite dishes atop the TV empire located on East Eighth Street.The Chattanooga-based TV conglomerate that syndicates and broadcasts shows across the U.S. moved one step closer to the auction block on Thursday, as attorneys for Luken Communications argued successfully in the U.S. Bankruptcy Court of Chattanooga that they be allowed to sell the company built by businessman Henry Luken.
Luken Communications, which operates a handful of broadcast TV networks as well as a chain of low-power TV stations across the country, is locked in legal combat with Randy Rice, a bankruptcy trustee from Arkansas who won an unprecedented $65.9 million verdict against the company for what a jury found was a "constructively fraudulent transfer."
Rice said that when Luken bought the company from Equity Media, he didn't pay a fair price for the business.
Luken paid $18.5 million for the struggling business, which had never made money. But Rice convinced a jury that it was worth much more than that -- as much as $115.8 million according to one estimate -- and that Luken had used his influence as a former Equity Media board member to negotiate a lower price.
Tom Ray, an attorney representing Luken Communications during its Chapter 11 bankruptcy, called the company's current predicament the result of a "runaway jury," and that the verdict had taken everyone by surprise.
"This is not the fault of the debtor," Ray said. "They haven't run up these huge debts."
The passage of time has not supported the rosy estimates put forth in Equity Media's Arkansas bankruptcy, according to court filings made public in Chattanooga. Though Luken has since expanded the size and scope of the TV business, it still loses money every month, and has assets of $20 million versus liabilities of $22 million, not including Rice's judgment against it.
Henry Luken and partner Forrest Preston, who are partners on the venture, agreed to put up $2 million as a stalking horse bid to get the auction moving, if creditors approve a plan to sell the company and distribute those proceeds for pennies on the dollar.
"If there is no sale, then we're looking at a Chapter 7 [liquidation]," Ray said. "Obviously, Luken communications does not have the ability to pay, nor will it pay a $65 million judgment."
Rice, the biggest creditor in Luken Communications' bankruptcy and the reason the company sought bankruptcy protection, has expressed interest in buying the company with the goal of running it profitably.
"We feel like we may get it to be able to get it running well enough to where we can sell it for a substantial amount of money as a going concern," Rice has said. "As it is right now, the debtor has not been successful."
The next hearing is scheduled at 9 a.m. Sept. 8 to determine whether creditors will accept the plan to sell the company.
Still up for debate is how the various creditors, including Rice, will be classified, and whether they will be paid in whole or in part when the sale concludes. In the meantime, Luken and Preston have put up an additional $400,000 in debtor-in-possession financing to carry the company through the sale.
Contact staff writer Ellis Smith at 423-757-6315 or esmith@timesfreepress.com.