Chapter 11 Filing Saves Karl’s Home From IRS : Bankruptcy Papers Detail O.C. Entrepreneur’s $3.9-Million Trail of Debt and Delinquent Taxes

As federal officials prepared to auction his Newport Beach house last week, one-time videotape king Stuart Karl filed for bankruptcy court protection, declaring that he owes nearly $4 million in delinquent taxes and other debts.

Karl, convicted last year of making an illegal contribution to the Democratic presidential campaign of Gary Hart, filed under Chapter 11 of the federal Bankruptcy Code on July 19.

The move forced the Internal Revenue Service that same day to abandon a sealed-bid auction of Karl’s Hillcrest Lane home in Newport Beach’s Big Canyon area, where he and his family still reside. The IRS had seized Karl’s house June 8 because the videotape marketing consultant owed more than $717,000 in delinquent federal income taxes.

Trail of Debt

While Karl’s recent financial problems have been widely reported, last week’s bankruptcy filing provides the most complete accounting of the trail of debt and court judgments Karl owes to law firms, car rental agencies, banks, private airline services, friends, and Lorimar Telepictures--for which the Orange County native sold the immensely successful Jane Fonda workout videotapes.

It also comes at a time when Karl is reportedly battling a skin cancer that was removed from his hip by surgeons about three weeks ago, but a family member said he is back at work with a Los Angeles company involved in videos.

Neither Karl nor his bankruptcy attorney, Richard L. Barnett of Santa Ana, returned telephone calls from The Times on Monday and Tuesday.

At his sentencing last December, Karl said, “Your honor, I regret doing these things that brought me here today. . . . No amount of time or energy will get rid of the anguish and embarrassment that I have caused my family.”

Karl, 37, became the blond-haired symbol of megasuccess after persuading Jane Fonda to record exercises on videocassettes for sale to the public.

Millions of Americans bought up the Fonda tapes, making Karl a millionaire and converting his one-man operation in 1979 to a 200-employee partnership with Lorimar, which bought out his company in 1984.

At about the same time, Karl began earning the reputation as a major Democratic Party activist and fund-raiser, especially on behalf of presidential hopeful Hart.

But both worlds--financial and political--eventually came crashing in on the youthful Newport Beach entrepreneur.

Karl was forced to resign from a Lorimar subsidiary in early 1987 amid conflict-of-interest charges that his company had dealings with a firm in which he and two associates reportedly had a financial interest. Lorimar then sued Karl in November, 1987, for allegedly violating the terms of his resignation.

Karl was indicted on charges that he used employees of his video company as a front for illegal campaign contributions to Hart and congressional candidates in six states in 1984 and 1988. In December, Karl was fined $60,000 and placed on three years’ probation after pleading guilty to two counts in the indictment.

Meanwhile, the IRS filed liens against his Newport Beach house for unpaid income taxes and seized the property on June 8, intending to sell it at an auction scheduled last Wednesday, according to IRS spokeswoman Sally Ruhnau. But Ruhnau said the IRS had to abandon its plans at the last minute because Karl filed for bankruptcy protection before the bids were unsealed on Wednesday.

Chapter 11 allows a debtor to be temporarily sheltered from creditors while he works out a plan to eventually pay them. If the plan is unacceptable to a bankruptcy judge, however, the debtor’s assets can be ordered sold.

$3.9 Million in Debt

The bankruptcy filing shows that Karl, who reported no income for 1988, is $3.9 million in debt, while his assets are listed at $2.54 million, nearly all of which is the value he reported for his home.

Of the $3.9 million that Karl owes, $950,817 is back taxes, the bulk of which is $717,701 due to the IRS for 1986 and 1987 income taxes. An additional $214,110 is owed in state income tax, and $19,000 is owed Orange County in property taxes for Karl’s home and boat.

As testimony to Karl’s legal woes, bankruptcy records show that the businessman owes tens of thousands of dollars to a number of law firms in Orange County, Beverly Hills and Washington.

The records also list 10 successful or pending court cases against him, including two by leasing companies that repossessed his Jeep Wagoneer and Chevrolet Cavalier for lack of payment.

Home Valued at $2.5 Million

In addition, about $1.85 million has been secured with trust deeds against the Big Canyon home, which the bankruptcy filing values at $2.5 million.

The largest of the secured debts is a $1.3-million loan he took out in January, 1984, from Mercury Savings & Loan of Newport Beach, the filing shows.

Other creditors given trust deeds on the home include Blake, Barnett, Milman, the Santa Ana bankruptcy law firm representing Karl; New Media Communications, a Burbank firm that loaned Karl $200,000; George S. Karl Sr. of Newport Beach, who loaned his son $200,000; Genovese & Gute Inc., a Newport Beach law firm that Karl owes $95,000; and Brian McMahon, a Winnetka, Ill., man who loaned Karl $52,000 a year ago.

Karl also listed more than $1 million in debts that are unsecured, meaning they are not backed by any of Karl’s property.

The largest unsecured debt is $705,381 that Karl owes to former business partner Lorimar Telepictures, which filed three lawsuits in Orange County Superior Court against the businessman. Two are pending and one resulted in a judgment against Karl, the bankruptcy filing shows.

Karl also owes a $40,607 unsecured debt to Aircraft-At-Your-Call, a Hillsboro, Ore., aviation firm, as well as $14,000 to Martin Aviation of Santa Ana. Both firms have obtained court judgments against the Orange County businessman.

Other unsecured debts compiled by Karl include $221,447 owed to the Bank of America branch in Newport Beach; $19,131 to the Bank of Newport in Newport Beach; $9,941 to a Santa Ana security service; $47,454 to the Washington law firm of Williams and Connolly; and $101 owed to the Book of the Month Club.

In the bankruptcy filing, Karl claimed that he made $213,000 in 1987 but reported his income as either “unknown” or “$0” for last year. Aside from his house, he lists few assets other than a $6,000 membership in the Pacific Club and an Etruscan vase valued at $2,500.

Karl also claimed $16,000-a-month living and housing expenses.

CHRONOLOGY OF STUART KARL’S WOES 1984: George Stuart Karl Jr., a Chapman College dropout who already is running his own company, makes his entrepreneurial mark by persuading Jane Fonda to tape her exercise routine on videocassette for sale to the public. Record numbers of the tapes are sold, and Lorimar Telepictures buys Karl’s firm in 1984, putting him in charge of a subsidiary called Karl-Lorimar Home Videos. November, 1987: The business partnership begins to crumble when Lorimar files suit against Karl for “conflict of interest” because the subsidiary is doing business with a firm in which Karl reportedly has a financial interest. Jan. 20, 1988--Former Democratic presidential candidate Gary Hart denies any knowledge of financial improprieties after published reports that Karl may have violated federal campaign laws by advancing more than $96,000 to Hart’s 1984 campaign and putting a Hart aide on his own payroll in 1986. After the 1984 campaign, Karl becomes known as a Democratic party activist and fund-raiser, especially for Hart. Jan. 22, 1988--A former Karl employee says her boss asked her and other employees to donate to Hart and several congressional candidates on Karl’s behalf, in an effort to get around federal limits on individual contributions to federal campaigns. The employee also says she wrote checks and made wire transfers, at Karl’s request, for $96,000 that went into Hart’s campaign, but which Karl listed on campaign forms as a loan for video services. Jan. 26, 1988--The Justice Department announces that the FBI will investigate allegations that Karl improperly funneled campaign contributions to Hart. June 9, 1988--Karl is indicted by a federal grand jury in Los Angeles on charges of violating federal campaign laws by funneling nearly $200,000 in illegal contributions to Hart and congressional candidates in six states in 1984 and 1986. June 20, 1988--Karl pleads not guilty to the 12-count federal indictment. Aug. 2, 1988--Karl pleads guilty to one felony and one misdemeanor, and pledges his cooperation in the investigation of Hart’s campaign finances with the understanding that he will not serve a prison term. Dec. 5, 1988--Karl is fined $60,000 and placed on three years’ probation. June 8, 1989--The Internal Revenue Service, tired of waiting for Karl to sell his home to pay back taxes, seizes his house for a closed-bid auction of the property. July 19, 1989--On the day set by the IRS to open the sealed bids for Karl’s house, his only remaining substantial asset, the sale is called off after Karl files for bankruptcy protection in federal court in Santa Ana.