Two years after loaning his school money in a failed attempt at saving it, McNally Smith College of Music co-founder Doug Smith has filed for personal bankruptcy protection.

Smith and his wife live in their Forest Lake home on $3,913 in combined monthly Social Security income. The government is threatening to garnish that income over an unpaid Small Business Administration loan, according to his lawyer.

“He held out as long as he could,” John Lamey said.

The college abruptly closed in December 2017 and entered bankruptcy two months later. Smith’s business partner, Jack McNally, soon followed with his own bankruptcy filing.

Court records show the two men loaned the school a combined $1.33 million between March 2017 and November 2017, when the school stopped paying its bills.

Smith filed a $665,000 claim in the corporate case in hopes of recovering some of his loan. But most, if not all, of the money available in that case is going to employees who didn’t get their last paychecks.

“My understanding is the unpaid professors and wage claims in the corporate case are going to be the only ones seeing any distribution. We’re not anticipating any recovery,” Lamey said.

WHO GETS PAID?

Under a deal between bankruptcy trustee Patti Sullivan and Exchange Street Partners, the investor group that bought the mortgage on the downtown St. Paul school building, the estate will have around $900,000 to distribute, mostly from the sale of music and recording equipment.

Under bankruptcy rules, Sullivan and the other professionals who are handling the bankruptcy will be paid first.

Wage claims are treated as the next highest priority. Records show 133 employees are seeking payouts in the case; those payments are capped at $12,850 per person.

If there’s anything left, it will go to students who pre-paid tuition for the spring 2018 semester. The school collected $564,000 in tuition before suddenly closing the school, according to Jack McNally’s filing.

Unpaid taxes and other unsecured claims come after the students.

Sullivan wouldn’t confirm that there will be nothing left for students and lower-priority claimants. She said it’ll be about six months before the distributions are finalized.

Smith’s Chapter 7 filing lists well over 100 business-related debts worth $2.2 million that he wants wiped away. They include $1 million to Exchange Street Partners; $300,000 to the Small Business Administration; and smaller amounts to Metro Transit and the City of St. Paul.

Smith also owes $39,000 on student loans and an unknown amount in taxes and government penalties.

INSURANCE PAYS 10 STUDENTS

Ten former McNally Smith students are getting money from the school, but it’s coming through the insurance company, not the bankruptcy estate.

Attorney Jeff Klobucar represents the 10 students, who filed tort claims against the college, alleging school officials misled them about the school’s weak accreditation.

Klobucar said each of his clients reached a confidential settlement with Hanover Insurance earlier this year.

Those students settled for “substantial discounts” from their initial claims, Sullivan told the court.

Sullivan told the judge in March that she gave Hanover a list of 242 people and agencies that submitted $4.47 million in claims in the corporate bankruptcy case. But Hanover isn’t paying anyone other than the 10 students with tort claims.

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Many students learned after McNally Smith closed that they were unable to transfer credits to another college because it had national, not regional, accreditation.

Students who took out federal loans to attend the school were eligible to have those loans forgiven, as long as they didn’t transfer their credits to another college.

M.A. Mortenson Co. bought the school building in January for $6.5 million. It houses a charter school, a church and its longtime tenant, the History Theatre.