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An unprecedented demand by an Arkansas jury for Henry G. Luken III to pay $47.4 million more for a money-losing business that he bought for $18.5 million has forced Luken Communications into bankruptcy.
The U.S. Bankruptcy Court in Chattanooga on Wednesday ruled that Luken Communications may pay the salaries of its 38 employees, and that the company -- owned jointly by the Chattanooga entrepreneur and Life Care Centers of America founder Forrest Preston -- can continue business as usual pending the appeal of the Arkansas jury's verdict. There also is a chance that U.S. District Judge Kristine G. Baker could reduce or set aside the verdict, which would negate the need for an appeal, or the judge could push for additional sanctions.
"I do not believe that the verdict is fair," Luken said. "I did not steal anything from anybody."
The $47.4 million jury award came at the end of a lawsuit by the bankruptcy trustee for Equity Media Holdings Corp., a Little Rock, Ark.,-based television network that sued to undo Luken's 2008 purchase of Retro Television Network because the deal was allegedly a "constructively fraudulent transfer," according to trustee M. Randy Rice.
Rice claimed that the $18.5 million Equity Media received for Retro Television was "less than a reasonably equivalent value in exchange," according to court documents. A business plan put together by the company valued Retro TV at $115.8 million just seven months before Luken bought the television network.
The Equity board agreed to the sale and had hoped to buy back Retro Television later when its finances improved, but that didn't work out. The trustee charged that as a result of the transaction, Equity Media immediately went belly-up and lost the ability to pay its many creditors.
But those claims are preposterous, said Luken, who owns several other companies and has vast real estate holdings.
Before it went bankrupt, Equity Media lost "millions of dollars" attempting to operate Retro Television, and had "no operational history of producing a profit," Luken said.
The deal was approved by Wells Fargo and other secured creditors of Equity Media, and the parties obtained an independent fairness opinion from Ladenburg Thalmann & Company, Luken wrote in a response to Rice's complaint.
"If anything, it appears that the price paid for the subsidiary corporation stock, Retro Programming Services Inc. was excessive and, since the acquisition, the company has continued to lose money," Luken wrote.
Luken, who was also the largest shareholder of Equity Media, said in the filing that he agreed to buy Retro Television at executives' behest after Equity Media failed to find another buyer for the money-losing business. He was, in essence, attempting to help prop up a company that he partly owned, he said. Regardless, the jury's opinion that giving a Equity Media $18.5 million in exchange for a money-losing enterprise would harm the company in some way shows a lack of basic business sense, he said.
"I didn't do what they're claiming I did, and the documents they're using to assert that I did, if you presented them to any Wall Street banker, he would laugh at you," Luken said on Wednesday. "I think the people of Chattanooga know me well enough to know that I don't need to be a thief."
The jury wasn't allowed by the judge to hear the evidence that showed the company was continuing to lose money, which Luken said would have caused it to reach a different verdict.
But Gregory H. Bevel, the Dallas lawyer who represented M. Randy Rice, the trustee for the bankrupt Equity Holdings, said the jury still took on the lowest valuations possible.
"This isn't a case of some crazy, jury-gone-wild situation," he said. "The jury in Arkansas picked the most conservative, lowest business valuation number they were given."
At this point, the bankruptcy trustee for Equity could either take RTV back or try to get a portion of the settlement from the bankruptcy estate, he said.
"That decision is in the district court's hands in Arkansas," Bevel said.
Equity Media still has $64 million of unpaid claims in its bankruptcy and Bevel said he is working on behalf of the trustee for Equity to recover what he can for those creditors, and Equity is the largest of the unsecured creditors of Luken Communications.
"In our mind, we've established the amount of the claim and now it's a matter of working through the bankruptcy process in Chattanooga to determine how much of that claim will be paid," Bevel said.
Luken Communications broadcasts five active networks through about 320 affiliate stations as over-the-air programming that is available to TV owners who have an antenna. Luken Holdings, Luken himself and Luken's other companies are not involved in the bankruptcy.
Contact staff writer Ellis Smith at esmith@timesfree press.com or 423-757-6315.