When the Harrisburg Midtown Arts Center filed for bankruptcy last year, the city of Harrisburg faced the possibility of losing more than $100,000 in unpaid taxes and trash-collection fees.
The debt grew as the case made its way through bankruptcy court and bills continued to go unpaid.
Now, nearly one year after the popular live-music venue filed for Chapter 11, it looks as if the city won’t be left holding the bag for all of that debt, which recently totaled more than $136,000.
But the cash-strapped city— and its taxpayers— could lose out on nearly half of that amount, depending on how the bankruptcy case plays out and how successful the business is, under new ownership.
The former owner, John Traynor, sold the property, including most of its furnishings, in May to a group of new buyers who promised to continue operations and expand the business to be able to host larger events.
As part of the sale, HMAC paid off its mortgages and other secured debts that could have attached liens to the property so the new owners could get a clear title. Among the debts paid off was more than $60,000 that HMAC owed the city for years of unpaid trash bills and more than $9,000 in city property taxes.
But the $6-million sale ended with just $53,000 cash on hand and a line of remaining creditors with claims against HMAC, including the city of Harrisburg,
Among the claims, the city says HMAC owes more than $66,000 in amusement taxes that were never paid, dating back to when the business opened in 2011.
Traynor disputes the amount of amusement taxes owed. The tax is assessed at 10 percent of ticket sales. He said the exact amount owed would be settled through the bankruptcy process.
In the meantime, it’s unclear if the city, or other creditors, will get any or all of their money back.
Creditors in bankruptcy cases are prioritized in different categories with secured creditors like banks at the top of the food chain and unsecured creditors at the bottom. Among unsecured creditors, some are considered “priority,” such as Harrisburg’s amusement taxes and IRS taxes, and those would be paid before other unsecured creditors.
The bankruptcy process is valuable, Traynor said, because it provides business owners with necessary time to reorganize debts and generate income, but it also brings additional costs in the form of attorney bills and court fees.
During the closing of the sale of the property, for example, $185,000 was paid to attorneys and the court trustee. Those payments eat into the amount available for unsecured creditors. In this case, since the business remains open and operational, additional revenue is being created all the time, Traynor said.
Attorneys who represent unsecured, non-priority creditors, such as repair workers or local residents who invested in HMAC, are hoping for the best but prepared to potentially get pennies on the dollar.
Earlier this year, and again this week, Traynor told PennLive that all creditors would be paid back. But that statement may be premature, attorneys told PennLive.
Robert Chernicoff, who represents HMAC in the case, said it’s still too soon to know who will get repaid and how much.
“It could be nothing or it could be everything” that gets paid back,” Chernicoff said. “I can’t say. I don’t have a crystal ball.”
Chernicoff said he is currently drafting a plan of reorganization that will be dependent on future revenue. Part of the solution for maximum repayment for creditors will be the new owners getting grants and tax credits and doing sufficient business going forward, Chernicoff said.
The plan eventually must be approved by a trustee and later, a judge. But in the meantime, the former ownership group of Bartlett, Traynor and London must submit to the court monthly operational reports detailing expenditures and revenues.
Revenue that comes in is restricted and considered part of the bankruptcy case, with the trustee signing off on any expenditures.
York businessman Christopher Werner and others took over the bar from a partnership headed by Traynor, who is staying on as a construction consultant during the transition. Traynor said the sale to Werner’s group will permit HMAC to move forward in its new iteration with a clean slate.
For Traynor, the deal marks the final chapter of a roller-coaster commercial revitalization project that he and others believe helped spark the rebirth of a vital business scene in Harrisburg’s Midtown.
He said his business was one of the few to repay a city loan in 2009 from a controversial business-loan program hatched by former Mayor Stephen Reed. Traynor said he repaid that $100,000 debt in full and intends to make good on his debts from his time as owner of HMAC.
“I feel really strongly about this, that everyone is going to get paid back,” he said.
Traynor said a $2.8 million loan taken by his company to help finance the sale of the property is expected to be paid off by the new owners within 18 months, which will provide the cash to repay creditors.
These days, the Third Street corridor is Harrisburg’s cultural boulevard, and HMAC - along with the likes of Midtown Scholar, the Millworks, the Broad Street Market and the Susquehanna Art Museum - are regional attractions.
“I’m thrilled,” Traynor said earlier this year. “We took a blighted building in the middle of a struggling city, and we turned it into a $6 million project in 10 years."
That rehabilitation isn’t quite finished yet but a new restaurant is set to launch this week, Traynor said, with a new menu and chefs from Philadelphia.
Traynor said the new ownership expects to launch a new set of renovations this year that will include the opening of a third performance venue in the 35,000-square-foot building’s basement, as well as a rooftop beer garden.
Those projects will be financed in part with a $1 million state grant earmarked for HMAC in 2017.
Traynor has no ownership stake going forward, according to the bankruptcy filing.
The filing was triggered in part, Traynor told The PennLive last year, by fallout from a social media firestorm after a alleged rape last summer of a woman who’d been at the bar. Harrisburg police would eventually say claims of a direct link between the bar and the assault were not credible.
Editor’s Note: This article was updated to clarify that Traynor is no longer acting as general manager. A new general manager has been hired. The 2017-18 city taxes originally listed in this article as a claim also have been paid.
READ MORE: Should the state have acted sooner to take over the Harrisburg School District?
Claims filed against HMAC by PennLive on Scribd