McNally Smith bankruptcy case may be close to an end, leaving creditors with less

A new plan to liquidate the assets of the now-closed McNally Smith College of Music may have less in it for creditors such as students and faculty than previously hoped.

On Wednesday in federal bankruptcy court in St. Paul, trustee Patti Sullivan outlined a deal with the mortgage holder that could sell or shift ownership of the former music school building by mid-summer, instead of in December.

Sullivan said the deal would give her until June 18 to sell the downtown St. Paul building at 19 Exchange St. East, and if no sale is made by then, the ownership of the building would be transferred to Exchange Street Partners, the mortgage holder.

Under the deal yet to be approved, Exchange Street Partners would release its lien on the personal property inside the building — audio equipment, instruments, and other items. Those items would be sold at auction and the proceeds could go toward other creditors. The estimated value of those items at auction is between $300,000 and $500,000, Sullivan said. That's far less than the total amount of claims, which so far exceed $6 million.

"The estate believes this is in the best interest of the unsecured creditors," she said. In part, this is because the sale would happen before funds could be spent on "costly" maintenance.

Last month, Sullivan and Exchange Street Partners had all but agreed on a deal that would've given the estate through December to sell the building. In court in April, Sullivan said estimates from brokers valued the building at between $5 million and $8 million.

But estimates have fallen since then.

After further talks with real estate brokers, Sullivan downgraded the estimated value to between $3 million and $6 million.

All of this weakens the value prospects for unsecured creditors, which include former McNally Smith faculty and staff who weren't paid for their last weeks of work, students and parents who'd pre-paid tuition for the spring semester and others.

Federal law puts secured creditors at the front of the line, and so far there are $4.95 million in secured claims including from Exchange Street Partners.

As of Wednesday afternoon, there were more than 200 unsecured claims totaling around $6.5 million.

Sullivan said the estate has no money, and waiting for a sale through December could be expensive.

"The main issue is the bankruptcy estate doesn't have the money for the overhead costs each month," Sullivan said, adding that it costs $40,000 a month for both upkeep on the building and the interest on the mortgage. "If we sell it for a longer amount of time, the debt will increase."

In the meantime, some money has been made through the bankruptcy's first auction.

Sullivan told the court that the sale of office equipment and furniture from spaces rented out by the school brought in a total of $18,032 at auction. The sale of three Dodge minivans brought in an additional $5,215.

The personal property in the school — the audio equipment, musical instruments and other items — will be put up for auction on June 20 and 21.