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SpiralFrog owes $34 million. Investors get nothing?

A group that loaned funds to the now defunct ad-supported music service will get any money generated from asset liquidation.

Attorneys representing defunct music service SpiralFrog have notified investors not to expect any returns. Whatever money comes from liquidating assets will go to a group that loaned the company an "amount exceeding $34 million."

In a letter dated March 17, 2009, the law firm Rattet, Pasternak & Gordon-Oliver delivered that message to an undisclosed number of SpiralFrog investors. A copy of the letter, seen by CNET News, says the group that loaned the money was issued senior secured notes, which gives members of the group priority in any funds collected from the sale of assets.

"In that SpiralFrog's creditors will not be paid in full, there will be no distribution to shareholders," the law firm wrote.

The sum of money only includes the loans the company took to continue funding operations and doesn't include the amount that investors put in. Just where all this money went could shed light on some of the travails faced by ad-supported music services. A source close to the company told CNET on Friday that customers will see their music become inaccessible in two months.

New York-based SpiralFrog ceased operations in recent days and is one of the best-known digital music service to fail. The ad-supported service was wracked with problems even before launching in September 2007. You can find stories about some of them here and here.

A copy of the letter from SpiralFrog's attorneys to the company's investors.