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Rhode Island sues Curt Schilling, advisers over loan

by By Pat Holohan  |  Published November 2, 2012 at 2:48 PM
Rhode Island has sued 38 Studios LLC owner and former Boston Red Sox pitcher Curt Schilling, among other defendants, alleging it was misled in relation to a $75 million loan for the video game company.
 
The Rhode Island Economic Development Corp. on Thursday, Nov. 1, filed a 95-page complaint in the Rhode Island Superior Court against Schilling, certain 38 Studios board members and executives, bond placement agents Wells Fargo Securities LLC and Barclays Capital LLC and several employees of and advisers to the RIEDC.
 
The RIEDC provided 38 Studios with a $75 million loan on Nov. 1, 2010, financed with an equivalent amount of bonds, to fund the company's development of a video game, Copernicus, and enable the company to move from Maynard, Mass., to Rhode Island. The game was never released. The RIEDC said in its complaint that it was provided with information that funding 38 Studios had "a reasonable probability of bringing high-quality jobs and creating a new industry in Rhode Island."
 
The complaint asserted the defendants did not disclose various risks, including knowledge that even with the loan from the RIEDC, 38 Studios would be undercapitalized by millions of dollars and was likely to run out of money in 2012.
 
38 Studios defaulted on the loan on May 1 and owes the RIEDC $115.9 million, including principal, interest and guarantee fees. (The debtor cured the initial default on May 18 but was in default again when it filed for Chapter 7 on June 7.) The RIEDC seeks punitive damages from various groups of defendants on charges including breach of fiduciary duty, fraudulent misrepresentations and omissions, legal malpractice, negligence, civil conspiracy, unjust enrichment and alleged hidden commissions paid to Wells Fargo by 38 Studios.
 
Other defendants include First Southwest Co., financial adviser to the RIEDC; Starr Indemnity and Liability Co., which issued an insurance policy for 38 Studios; Thomas Zaccagnino, a member of 38 Studios' board of directors; Jennifer MacLean, president and CEO of 38 Studios; Richard Wester, CFO of 38 Studios; Robert I. Stolzman of Adler Pollock & Sheehan PC and Antonio Afonso Jr. of Moses Afonso Ryan Ltd., the RIEDC's attorneys; Keith Stokes, executive director of the RIEDC; and J. Michael Saul, deputy director of the RIEDC.
 
38 Studios and three subsidiaries filed for Chapter 7 on June 7 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington, listing $21.7 million in assets and $150.7 million in liabilities. Judge Mary F. Walrath is assigned to the case.
 
The RIEDC and Bank of New York Mellon Trust Co. NA, trustee on the $75 million loan, received permission on Aug. 8 to foreclose on 38 Studios' intellectual property. The creditors filed for relief from stay on July 25, saying they were concerned that the IP could have been damaged by the Chapter 7 trustee's liquidation efforts.
 
The Rhode Island Superior Court on Aug. 9 appointed Richard J. Land of Chace Ruttenberg & Freedman LLP as receiver to dispose of the assets released by the bankruptcy court.
 
Schilling founded 38 Studios, also known as Green Monster Games LLC, in 2006. The company aimed to develop online and console video games, toys, novels, comics, films and other media products. It released its only game, Kingdoms of Amalur: Reckoning, in February.
 
Documents show Schilling owns 82.9% of the company's equity. (Its name is derived from the uniform number he wore from 1992 until his retirement.)
 
Stephen P. Sheehan of Wistow & Barylick Inc., counsel to the RIEDC, declined comment on the case. Max Wistow and Benjamin Ledsham of Wistow & Barylick also represent the RIEDC. Chapter 7 trustee Jeoffrey L. Burtch of Cooch and Taylor PA did not return calls.
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