UArts has filed for Chapter 7 bankruptcy to liquidate its assets

The University of the Arts, which abruptly closed on June 7, leaving hundreds of students scrambling, filed for bankruptcy Friday, likely the beginning of the 150-year-old school’s last chapter.

The legal step kicks off a process under which the university will sell its Center City real estate and use the proceeds to pay off bond debt of around $46 million and other liabilities.

The school’s total debt secured by its real estate, including the bond debt, is $67 million, according to the Chapter 7 filing in U.S. Bankruptcy Court in Delaware. The secured debt includes a $6 million loan from TDBank in July. The filing lists $93 million in assets, mainly real estate.

Only after secured debts are repaid would others, such as vendors with unpaid bills, staff who are owed severance payments, and students who paid deposits, get consideration. Such unsecured debts total $5.2 million, the filing says.

“It all comes down to how much is left after they sell the real estate,” said Lawrence McMichael, a bankruptcy attorney at Dilworth Paxson LLP.

UArts owns eight properties along South Broad Street, as well as nearby blocks in Center City, according to a review of city property records by The Inquirer in June. That kind of property is notoriously difficult to value, and might not be as easy to sell as some might expect, McMichael said.

On North Broad Street, much of the Hahnemann University Hospital complex still hasn’t been sold, and sits empty more than five years after it went into bankruptcy.

The state Attorney General’s office received notification of the filing Friday after the school had been “unable to obtain alternative funding,” said Attorney General Michelle Henry.

“Regretfully, this is not beneficial to students and staff and leaves them with more questions than answers about next steps for their education and employment. We will continue to monitor the situation and ensure that all endowments are properly dispersed,” Henry said. “Additionally, we are in the process of a review to determine causes of failures that led to the abrupt closure which has inconvenienced and harmed so many people.”

The Friday move infuriated those who represented the closed school’s more than 600 faculty and staff, a union official said.

“This filing comes as former students, staff, and faculty continue to struggle with the damage done to their educations and careers, and while the UArts Board has neglected its legal, contractual, and moral obligation to negotiate severance payments for workers affected by UArts’ collapse,” said Bradley Philbert, vice president of United Academics of Philadelphia, the faculty and staff union.

“We will fight to make UAP members whole using every legal avenue available — the priority should not be bondholders or real estate developers, but the flesh-and-blood communities whose lives were upended by this disaster.”

Richard G. Placey, the attorney at Montgomery McCracken Walker & Rhoads LLP who filed the bankruptcy petition, has been paid $1.1 million for legal work so far.

The bankruptcy announcement follows Temple University’s announcement that its merger talks with the arts institution had ended without a resolution.

» READ MORE: UArts is unlikely to merge with Temple after negotiations soured with a major donor

The Hamilton Family Charitable Trust, which has contributed about half of UArts’ $63 million endowment, was not in favor of that money going to Temple as part of the deal, according to multiple sources who had knowledge of the negotiations but were not authorized to speak. The family wants the endowment fund transferred to the Hamilton Charitable Trust Education Fund, which was founded with the purpose of supporting educational activities in the Philadelphia region, according to a letter from a Hamilton trustee to the UArts board.

Temple did not want to have to engage in a protracted legal battle with a charitable trust.

» READ MORE: University of the Arts asks judge to distribute endowment with partner schools

“I think the board of the university should be congratulated for trying to work things out under very difficult circumstances,” said Bill Sasso, the attorney representing UArts. “But the Hamilton trustees were a significant factor in sinking that transaction with Temple.”

What happens with the endowment likely will be sorted out in Orphans’ Court, rather than in bankruptcy court, because most of the $63 million UArts endowment is restricted and can’t be used to pay off lenders.

This week, UArts filed a petition asking a judge to approve the distribution of its endowment to a dozen institutions that enrolled its students. The biggest chunk of the endowment, 44%, would go to Temple, which has taken 359 UArts students.

The money would be used for scholarships for transferred UArts students and then “to further the mission of advancing human creativity and art education in the areas of the visual and performing arts,” the filing said.

“Hopefully, for the benefit of the students that won’t be subject to protest,” Sasso said.

A Hamilton board member told The Inquirer this week that the family’s position had not changed.

» READ MORE: The University of the Arts is closing June 7, its president says

Stunning the local higher education community, UArts notified the Middle States Commission of Higher Education, its accreditor, of its unplanned, imminent closure in late May. The institution said it could not cover “significant, unanticipated expenses.” One UArts board member subsequently toldThe Inquirer it needed about $40 million.

The closure followed a precipitous decline in enrollment, from 1,914 in 2018-19 to 1,149 last fall, though numbers were trending up for this fall before the closure.

» READ MORE: Tracking where UArts students have landed

Class action lawsuits against the university have ensued, as well as allegations of unfair labor practices, and the Attorney General’s Office has confirmed it is investigating the circumstances of the closure and “any transfer or loss of assets” in violation of state laws.

Meanwhile, about 750 former UArts students have enrolled this fall at other colleges designated as teach-out partners, The Inquirer found in a survey earlier this month. Temple has the largest chunk, while Drexel, Moore College of Art and Design and Bennington College are among others.

Zoe Hollander was about to begin her senior year as a musical theater major at UArts when the school closed. Now enrolled at Temple, Hollander said bankruptcy felt like another blow.

“It’s not like I expect anything to be fixed at this point, but I’m really tired of things getting worse. It sort of just feels like no one cares, I guess. This 150-year-old institution closed within a week, disrupted so many lives, and we still don’t even know what happened,” she said. “...And now they are trying to sell off all of the assets and buildings and it feels like they are just trying to pretend the school never existed in the first place.

“I really just have no faith in the higher-education system as a whole, and don’t know who to trust when the systems in place that are meant to take care of us don’t follow through. I’m really just feeling exhausted — physically, mentally, and spiritually.”