WOODLAND HILLS, Calif. posted on www.xbiz.com: Outbidding Playboy, New Frontier Media and XGen LLC, Penthouse agreed to pay $1.765 million at a bankruptcy court auction for the major assets of Jill Kelly Productions.

With the acquisition, Penthouse may become a major player in the adult DVD arena. The company also announced earlier this year that it is building a 50,000-square-foot production studio in Glendale, Calif.

JKP’s assets included more than 200,000 burned and packaged DVDs as well as 65 unreleased masters, but there was some doubt about the value of the cache due to lingering 2257 concerns.

Philip Starr, who took over as CEO after the beleaguered company filed Chapter 11 bankruptcy, stood up in court and admitted that even he had no idea what the assets are worth.

Lawyers for Penthouse and Playboy asked for a continuance in an attempt to clarify the 2257 issues, but Judge Kathleen Thompson denied their motion, stating, “You’re going to buy what the debtor has.”

However, Aram Ordubegian, counsel for a group of unsecured creditors, told XBIZ, “It’s our [the unsecured creditors] understanding that all 2257 documents are all properly maintained.”

Penthouse also may have to strike a separate deal with Kelly because, although she forfeited any claim on the copyrights to the material sold at auction, she personally retains the trademark on her name.

Kelly told XBIZ that she already has had conversations with Penthouse.

JKP’s only secured creditor, XGen LLC, was offered the first opening bid at $725,000.

Aram Ordubegian, counsel for a group of unsecured creditors, had earlier told XBiz that he believed JKP’s assets far exceeded $725,000 and that he was hopeful other companies would outbid XGen, which is owned by Frank and Michael Koretsky, who also own International Video Distributors, Pleasure Productions and Whipsmart Toys.

While there is no guarantee that all of JKP’s unsecured creditors will be paid the money they are owed – XGen has roughly $500,000 in secured claims that must be paid before any of the other creditors get a dime – Ordubegian told XBIZ that the $1.765 million winning bid is “a spectacular outcome for the creditors.”