Sweepstakes Operator Seeks Court Protection

American Family Enterprises, which uses the familiar images of Dick Clark and Ed McMahon to promote its sweepstakes and magazine subscription businesses, on Friday filed for Chapter 11 protection in federal bankruptcy court.

The Jersey City, N.J.-based company, which is owned by Time Warner Inc. and TAF Holdings Inc., described the voluntary filing as a key element in a proposed agreement in principle that would settle class-action suits lodged by disgruntled consumers. Spokesman Rich Tauberman said the filing would help the company to “restructure its finances and operations and to enable it to compete successfully over the long term.”

The filing marks the latest in a string of regulatory and court actions sparked by high-powered marketing campaigns conducted by sweepstakes operators, who use the promise of million-dollar checks to lure unsuspecting consumers. But in lawsuits, plaintiffs, many of them elderly, alleged that they were duped by slick mailings from American Family Enterprises and other sweepstakes companies. American Family Enterprises in the last year has reached voluntary settlements with 40 attorneys general’s offices that have instituted stricter regulations governing sweepstakes marketing.

The California attorney general’s office declined to comment on the bankruptcy filing. “We have been looking at the major companies that have been engaged in sweepstakes and are concerned about the activities that may be misleading,” said spokeswoman Sandra Michioku. “But because these are pending matters I can’t comment any further.”

Celebrity spokesman Ed McMahon, whose name has become synonymous with the company’s high-profile American Family Publishers sweepstakes, said he remains “committed to the company. I’m staying in the forefront while they go through this procedure. Bankruptcy scares everybody, but people don’t understand that it’s a protective device to allow the company to straighten out a few things and move ahead.”

Clark wasn’t available for comment, but Tauberman said he also continues his affiliation with American Family Enterprises.

Both Clark and McMahon were named in a lawsuit filed in April in Los Angeles Superior Court against American Family Enterprises.

According to court papers, Lila S. Hudson filled out a sweepstakes form and mailed it the same day she received it. According to the suit, the contest entry stated in bold, capital letters that: “Lila Hudson, it’s down to a 2-person race for $11,000,000. You and one other person in California were issued the winning number MT674097604. Whoever returns it FIRST wins it all!” Even if the other winner’s entry arrived before hers, the form allegedly said, she had automatically won a $50,000 prize. Hudson later learned she had won nothing.

Hudson’s suit is one of a string of legal actions initiated in the last two years around the country. The suits filed against American Family Enterprises and other companies involve plaintive tales of consumers who spent freely on merchandise in a costly bid to improve their chances of winning. Several elderly people traveled to sweepstakes companies’ headquarters, in the false belief they had won million-dollar prizes.

The company declined to comment on the class-action lawsuits or terms of the supposed agreement in principle. “The plan of reorganization would provide for the funding of the proposed [class-action] settlements, which account for a vast amount of the company’s debt,” said Tauberman, who added that “Time Inc. is supportive of the plan.”

American Family Enterprises hopes to eventually expand its business to include “e-commerce as well as marketing and partnership agreements outside of sweepstakes direct-mail initiatives,” Tauberman said.

American Family Enterprises President and Chief Executive Susan Caughman maintained in a prepared statement that the filing would have “no impact at all on our ongoing sweepstakes. All money for [the company’s] contests have been pre-funded and are held in trust by federally insured, independent financial institutions.” McMahon said he’s scheduled to “give away $1 million in December and another $10 million in February. The money is held in a separate trust to ensure that it’s available.”

Regulators continue to push sweepstakes operators to clean up their marketing campaigns. Late last month, Florida Atty. Gen. Bob Butterworth charged Publishers Clearing House, an American Family Enterprises competitor, with using deceptive tactics to sell magazines and merchandise through a national sweepstakes. Butterworth also urged Floridians involved in a class-action suit to reject a proposed settlement offer from Publishers Clearing House.

According to the Florida attorney general’s office, American Family Enterprises agreed to revise its sweepstakes marketing, pay $4 million to resolve charges and to make charitable donations in the names of McMahon and Clark.

*

Times Staff Writer Robin Fields in Orange County contributed to this report.