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Schilling's 38 Studios Files Chapter 7

JUN 7, 2012 4:09pm ET
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Shortly after embattled video game company 38 Studios LLC, filed for Chapter 7 bankruptcy protection on Thursday afternoon, Rhode Island officials were studying the effect on their financial picture and bond rating.

Meanwhile, the U.S. Attorney’s office in Rhode Island acknowledged that it has “been in contact” with the Federal Bureau of Investigation and the state police regarding 38 Studios.

“Our policy is neither to confirm nor deny any investigation,” said spokesman Jim Martin.

The state, through its economic development commission, is on the hook for a $75 million loan guarantee, backed by Rhode Island’s moral obligation, that it provided former Boston Red Sox pitcher Curt Schilling’s company.

In documents filed with the U.S. Bankruptcy Court for the District of Delaware in Wilmington, 38 Studios reported assets of $21.7 million, consisting of personal property, and $151 million in liabilities. Creditors holding secured claims are owed $116 million, those with non-secured, non-priority claims $33 million and those with non-priority claims $2 million.

Between 1,000 and 5,000 creditors are involved, according to the filing.

Gov. Lincoln Chafee looked somber at a late-afternoon press conference. “I wish we weren’t standing here right now,” he said.

Chafee, though, acknowledged that the bankruptcy court could work to Rhode Island’s benefit. “It’s not all bad. Now there’s some protection the courts will give to assets and the like,” he said.

The governor would not comment on any criminal investigation, referring such discussions to the State Police.

Delaware is a popular venue for bankruptcy filings, especially by large debtors. Chaffee said at the press conference that he was reluctant to encourage 38 Studios to file for bankruptcy in Rhode Island, lest it scare away potential investors.

38 Studios sent the following statement to the Providence Journal: “This action comes after several weeks when the company has reviewed, considered and received the recommendations and advice with respect to potential avenues for relief that are currently available.

“After ongoing negotiations with the state of Rhode Island and potential investors and other interested parties, the company has been unable to find a solution to the current stalemate.”

State revenue director Rosemary Booth Gallogly said her office was immediately in touch with bond rating agencies Moody’s Investors Service and Standard & Poor’s. “Should this [obligation] not be fulfilled, that would have implications on the state’s credit rating,” she said. “But the state has a track record of meeting its obligations.”

Moody’s, in a special report last month, cited the moral obligation in keeping its A2 rating of the bonds stable. A2 is three notches lower than Rhode Island’s Aa2 general obligation rating.

The Rhode Island Economic Development Corp. made a $75 million loan guarantee to 38 Studios in 2010 to entice the company to move to downtown Providence, R.I., from Maynard, Mass. It raised the money from a bond sale to private investors.

But the company struggled to make a $1.4 million fee payment last month, eventually paying after a check originally bounced. Schilling then laid off his entire staff, both in Providence and Timonium, Md.

Name partner Laura Davis Jones of Wilmington’s Pachulski Stang Ziehl & Jones LLP is debtor counsel. Jones has represented Continental Airlines, Filenes Basement and Evergreen Solar in Chapter 11 cases.

Judge Mary Walrath has the case.

According to court documents, the 38 Studios board considered a Chapter 11 reorganization before filing under Chapter 7, which generally involves liquidation. The board said it was “in the best interests of the company, its creditors, members and other interested parties.”

Amid the furor, six members resigned from the seven-member EDC staff, with Chafee naming the replacements last week.

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