Arkansas jury awarded $47.4 million to bankruptcy trustee on a claim for a fraudulent transfer.
On June 24, 2008, Plaintiff Equity Media Holdings sold its rights to the Retro Television Network, Inc., a network that broadcasted television programs from the 1960s, 70s, 80s and 90s. The rights were sold to Luken Communications, LLC for $18.5 million, at approximately 16 percent of what it had been valued at in a November 2007 valuation, which reported that the Retro TV network was worth approximately $115.8 million.
Immediately prior to the transfer, Henry Luken III was the CEO and Chairman of the Board of Equity Media Holdings Corp., a public corporation based in Little Rock, Arkansas that held ownership interests in multiple television stations throughout the United States. Mr. Luken was Equity Media’s largest shareholder, owning 17 percent of the company’s common stock. Equity Media began having financial difficulty; its August 2007 10-Q showed that the company had a working capital deficit of $48.6 million. On May 15, 2008, Mr. Luken presented a plan to purchase Retro TV from Equity Media, which was allegedly insolvent at the time of this planned sale. On June 24, Luken Communications bought Equity Media’s interest in Retro Television Network, Inc. for $18.5 million.
On December 8, 2008, Equity Media commenced its voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code. The trustee of the chapter 7 estate of Equity Media, M. Randy Rice, sued Luken Communications, LLC, as well as its owner Henry G. Luken, III, alleging that the June 24, 2008 selling of the Retro TV network constituted a fraudulent transfer, sold for far less than it was worth.
According to Equity Media’s expert CPA, the two valuation appraisals performed before the sale of Retro TV were reliable. The valuation reports performed on Retro TV showed that, in the best case, the network was worth approximately $165 million. The most conservative estimate of the network’s value was approximately $69 million, which was much more than the $18.5 million Luken paid to acquire the company. Accordingly, the payment received by Equity Media Holdings was not a reasonable value for the asset purchased by Luken.
The jury rendered a verdict in favor of the Plaintiff, deciding that the transfer of Retro Television Network, Inc. to Luken Communications constituted a constructively fraudulent transfer, as according to 11 U.S.C §548. The jury decided that the actual damages to the Trustee equaled $47.4 million, which was determined by subtracting the amount Luken Communications paid for Retro TV from the most conservative valuation of Retro TV, approximately $69 million.