The broadcast TV networks owned by Chattanooga multimillionaires Henry Luken and Forrest Preston could go to the highest bidder following a legal setback in in Arkansas, as the entrepreneur prepares to appeal his case before a federal appellate court.
A reorganization plan submitted to U.S. Bankruptcy Court in Chattanooga calls for the sale of Luken Communications for at least $2 million, as attorneys appeal an out-sized $65.9 million judgment handed down by an Arkansas court.
Luken Communications was forced to file for bankruptcy last year after a jury agreed that the purchase price of $18.5 million Luken paid for the company's assets in 2008 was too low, and effectively robbed its then-parent company, Equity Media, of its only substantial asset. Equity, meanwhile, was left owing more than $100 million to various creditors.
Equity's bankruptcy trustee argued that the sale to Luken, who resigned as a board member of Equity Media in order to purchase its TV business, forced Equity into bankruptcy since it no longer had any way to repay creditors.
U.S. District Judge Kristine G. Baker upheld that verdict in 2014 and upped the jury's judgment against Luken from $47.4 million -- already the largest in Arkansas history and among the largest ever in the U.S. -- to an unprecedented $65.9 million after Luken filed a motion to retry the case.
Luken has argued that the judge withheld important information from the jury, including the fact that his company has lost money every year it has operated, and the fact that Luken and partner Forrest Preston have each invested about $18 million just to build up the Chattanooga TV business into one that is still expected to continue to lose money through much of 2015.
Luken's plan originally called the investment of millions of dollars more into the company to create a group of 10 networks, each projected to attract about 240,000 viewers across the U.S., which would eventually bring in about $24 million per year in revenue. But the Arkansas ruling put a stop to that expansion.
The passage of time has not supported the 2008 valuations cited in Arkansas, one of which predicted that the company should be worth as much as $115.8 million at the time of sale in 2008. According to the Chapter 11 reorganization plan, the company assets today are worth $20 million, with liabilities of about $22 million, not including Rice's $65.9 million settlement.
"Think of it as if you're baking a cake, and you've got all your ingredients here, and you started the process and then all of a sudden somebody turns off the stove," said Tom Ray, one of Luken's bankruptcy attorneys. "Well, you're going to have mush if you stop now. Obviously, Luken communications does not have the ability to pay, nor will it pay a $65 million judgment."
Luken and Preston have put up $400,000 in debtor financing to continue to run Luken Communications during its bankruptcy, and have agreed to put up a stalking horse bid of $2 million to ensure a minimum bid for the company. The proceeds of the sale would be used to pay off the company's creditors, including Equity Media's trustee, for pennies on the dollar while wiping out debts.
W. Randy Rice, the trustee for Equity Media, said that perhaps the company will thrive under different ownership and management after six years under Luken.
"We've been looking at getting the people who came up with company's concept in the first place to brainstorm with that asset and let them step in and run it," Rice said. "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. As it is right now, the debtor has not been successful."
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