In the latest legal squirmish over ownership, COLT has asked a federal bankruptcy judge for a protective order relating to an examination of operations at COLT’s leased properties in Sonoma, Calif., and Boyes Hot Springs, Calif.
U.S. Bankruptcy Judge Alan Jarosolvsky last week gave the green light for Jim French Studios to search both properties in relation to business activities, including the inspection and copying of business records of COLT, which has filed for Chapter 11.
Jim French Studios says it hasn't been paid the bulk of a $2.2 million promissory note related to the sale of the company, which was consummated more than seven years ago.
Jim French told XBIZ last month that he's ready to take over the beleagured company that he once owned.
COLT Studio is one of gay adult's oldest operating companies. French, a photographer and adult industry pioneer, founded the company in 1967.
In addition to its COLT Studio flagship titles, subsidiary labels include Buckshot Productions, Minute Men and Olympus. The extensive COLT branded line of products includes apparel, leather gear and numerous novelties as well as cards, calendars and books.
With the current issue at hand, David Chandler, COLT’s attorney, said that the order to search is overbroad and “overreaches and exceeds” the scope of Rule 2004 of the U.S. Bankruptcy Code, which allows in many cases for creditors with "good cause" to probe business records.
Proposed inspection times at COLT's operations at Sonoma and Boyes Hot Springs were to begin today at 9 a.m. and 1 p.m., respectively. But the scheduled times had to be mutually agreeable.
The parties, as a result of the protective order motion made late Friday, have put the inspections on hold and will meet again in bankruptcy court on the latest issue Oct. 1.
COLT contends there are numerous areas that haven't been resolved in the bankruptcy proceedings.
“There is a dispute as to the breadth of the security interest held by Jim French Studios,” COLT attorney David Chandler said in a brief, noting that there is a pending case in San Francisco Superior Court where Jim French is attempting to foreclose its security interest.
“[COLT] has pending in the Superior Court case a cross complaint based upon the failure of Jim French Studios to deliver a substantial portion of the images which it was contractually obligated to deliver upon close of the sale,” the brief said.
Chandler, who wasn’t available for comment to XBIZ on Monday, wrote that in the alternative “a walk-through inspection under specific restrictions” would be appropriate for the general appraisement of the premises.
In the motion Friday and other recent court papers, several other revelations have come to surface.
COLT said that after closing escrow in 2003, new COLT owners John Rutherford and Thomas Settle “discovered that the existing business and brand was dead, and that the only means to capitalize on the assets purchased was to produce new, contemporary content, while leveraging what little equity remained in the COLT brand."
“[COLT] began to run into difficulty when it was discovered that it was not provided all of the images which it had purchased,” court papers said. “Without the images, it was difficult to produce new packaging, magazines and calendars.”
By 2008 business for COLT was “seriously declining.”
“Distributors left the business as did a number of retailers,” COLT said in court papers, noting that it closed its offices in San Francisco and moved business operations to Sonoma that reduced overhead by $20,000 per month.
COLT also said shipping and logistics were moved to Nevada, which resulted in additional savings.
Later, Jim French Studios brought suit in San Francisco because COLT was unable to pay the payments on the original purchase agreement. And to add to the mix, both Settle and Rutherford filed their own personal Chapter 7 cases.
COLT has asked the court to stick with its Chapter 11 plan, where Rutherford and Settle would retain their positions of officers and directors of the company.
They also would retain their interests and commence payments to French on monthly installments.
After liquidation of assets, unsecured creditors, according to COLT, would receive $265,000 in 72 monthy installments.
Last month, French said that he was working with his attorneys to take control of COLT's assets. His comments were made after an initial ruling by Jarosolvsky.
In the statement to XBIZ, French said, “I am very pleased with a decision turning over the COLT brand and assets back into my control. I’ve spent the past several years fighting to get what I was rightfully owed, and in the end I have prevailed."
French, through his spokesman, Jeffrey Turner, told XBIZ on Monday he couldn't comment on the latest developments.
In the Chapter 11 bankruptcy filing, COLT’s parent, Prowest Media Corp., included assets of $105,000 and liabilities of $2.9 million.
Its largest creditor is Jim French Studios at $1.49 million, although the " validity of security interest is disputed," according to the filing.
Other creditors include Paladin Video Inc. at $282,000, Internap LLC at $30,000, Stan Loeb at $130,000 and the Internal Revenue Service at $632,000.
COLT noted that it had revenue from operations of $2.2 million in 2008, $1.6 million in 2009 and $433,000 in 2010 through June.
One potential asset COLT claimed is a pending matter against French for copyright and trademark infringement worth $2.5 million.