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The McNally Smith College of Music bankruptcy case took what appears to be a step forward Wednesday in federal court.

The trustee and the mortgage holder in the case are working on an agreement that may pave the way for the bankruptcy to be completed. The deal, though could also leave students, and maybe staff, at the whims of the real estate market.

Outlines of the agreement, which is not yet in writing, call for Exchange Street Partners, the holder of a $4.5 million mortgage on McNally Smith's downtown St. Paul building, to pay for maintenance on the building until a sale is made. While they do that, the trustee would be given a window to sell the property.

"They are agreeing that we can try to liquidate or sell the property until the end of December of 2018," said Patti Sullivan, the trustee in the case. "We're very optimistic that we will find a buyer and we will increase the amount of money that will be paid to the unsecured creditors."

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If that sale does not happen, Exchange Street Partners would purchase the property. Sullivan says real estate brokers have estimated a price of between $5 million and $8 million. When sold, that money would go first to pay off about $5.2 million owed to secured creditors. Exchange Street Partners is the largest secured creditor.

What's left of any money from that sale would go to priority creditors, such as staff owed back pay and possibly students who paid tuition in advance, and then other unsecured creditors.

The agreement would also give that group money made from liquidating personal property inside the building, such as sound mixing boards, speakers, and other equipment and furniture. Based on estimates from companies that do liquidation work, Sullivan says that could bring in at between $300,000 and $400,000.

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Staff and students, along with other creditors, have made claims that add up to more than $5 million.

Sullivan said it's very early in the process and that she must still sort through all the claims to see which might need to be challenged.

"I'm here to get as much money as we can, but we'll just have to wait and see," she said. "A few months down the line I'll have a better idea."

Michael Rosow, an attorney for Exchange Street Partners, declined to comment.

There are other parties also trying to fight for students. Some students have filed suit in Ramsey County saying the school misrepresented the transferability of course credits, among other things.

Jeffrey Klobucar, an attorney representing about a dozen former students, said he's waiting to see the agreement before making any comment on it, although he added that he's worried about the outcome for students.

"The real tragedy of this case is that the victims are going to be the students and their parents," Klobucar said. "So, we're going to do our best to stay vigilant and try to protect their interests as well as we can."

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The trustee and mortgage-holder are working on an agreement that could lead to the sale of the music school's building. It may also leave students and staff who are owed money at the mercy of the real estate market.

Deal may be near to guide McNally Smith bankruptcy

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