Bankrupt Owes Labels $28 Million

It’s wrestled with legal issues, on-off label licenses and low income. Now in Chapter 11 bankruptcy, the music service formerly run by Owen Van Natta owes $27.7 million to the major and indie labels for use of their songs.

The figures are in a list of creditors obtained by and show a further $1.2 million owed to the service’s content delivery network and in royalties…

The former Project Playlist, conceived to embed music on sites like MySpace (NSDQ: NWS), has a potted history, attracting RIAA legal heat in 2008 because its music content was actually hosted elsewhere, including on unlicensed sites around the web, without owners’ permission.

The service protested “we do not host music files, nor do we make them available”, but it later obtained licenses from EMI and Sony (NYSE: SNE) Music Entertainment, and shut down to international users.

It hired former Facebook exec Owen Van Natta as CEO to restore credibility, even though Facebook and MySpace, which Van Natta would join as CEO after just five months, had blocked the player widget.

Despite a loyal core following, has been edged out of the online music space because it focused too narrowly on a central model, embedding of playlists, that itself was messy and on questionable legal ground in labels’ eyes. What’s more, it depended on the ad-supported model, against which U.S. models have turned reluctant.

The site had attracted $3 million investment in 2007 but hit money difficulties last year and was reportedly seeking new funds. Last year, said it had licenses from all four majors, but that left it needing to pay for the music it was using – a defeat to its original claim of non-involvement in distribution.

CNET: “In filing for Chapter 11 on August 6, the music service reported that it has $2.2 million in total assets (only $203,000 in cash).”

Protected in bankruptcy by Chapter 11, the service apparently is seeking a new round of equity financing, CNET reports: “Playlist said it has lined up an undisclosed private equity firm that appears willing to invest. The company said it would use the money to pay off the labels.” Former MTV exec John Sykes, who replaced Van Natta, has himself been succeeded by founder Jeremy Riney.