The analogy hit Anthony Figliola right away when 38 Studios, Curt Schilling’s beleaguered video-game company in Providence, filed for bankruptcy.
“This can become Rhode Island’s Solyndra,” said Figliola, vice president of Uniondale, N.Y., lobbying group Empire Government Strategies. The federal government in 2009 provided a $535 million loan guarantee to Solyndra Corp., only for the solar company to file for Chapter 11 bankruptcy two years later. Solyndra has become a talking point in the presidential campaign.
On Thursday, 38 Studios LLC, the video-game company founded by former Boston Red Sox pitcher Schilling, filed under Chapter 7 in the U.S. Bankruptcy Court for the District of Delaware of Wilmington. Rhode Island, through its economic development corporation, issued $75 million of bonds sold to private investors in 2010 that were backed by the state’s moral obligation. The company got $50 million of that with the balance held in a reserve fund.
Court documents reveal 38 Studios owing Rhode Island $116 million among its $151 million in liabilities.
Given the liquidation emphasis of Chapter 7, the nebulous nature of the video-game industry and intellectual property a huge variable, Rhode Island could well be on the hook for most of the amount.
A meeting of creditors is scheduled for 2 p.m. July 10. Debtor counsel is Laura Davis Jones of Pachulski Stang Ziehl & Jones LLP, who served that role in the Continental Airlines Chapter 11 case.
“Recovery could be paltry,” said Bill Brandt, president and chief executive of Development Specialists Inc. and chairman of the Illinois Finance Authority. “Descending into full faith and credit increases the risk profile demonstrably.”
Rhode Island could recover more if an investigation reveals “nefarious” action by the company, Brandt added, referring to pending criminal investigations.
Several government agencies are investigating. Rhode Island State Police superintendent Steven O’Donnell said Friday that the state police, state attorney, the U.S. attorney in Rhode Island, and the Federal Bureau of Investigation are examining 38 Studios. He declined further comment.
According to Brandt, filing in Delaware, a popular venue for large debtors, also gives Schilling some distance from Rhode Island. “If he files in Rhode Island, he could get a trustee a little more bent to the state’s will. Delaware gives him an opportunity for more neutral turf,” Brandt said.
Brian Fraser, a partner with Richards Kibbe & Orbe LLP in New York, called Delaware “one of the most experienced bankruptcy courts in the country — that and the Southern District of New York.”
Wilmington, otherwise a blip on the Northeast Corridor radar, has become a bankruptcy court epicenter over the past 20 years. “It’s no surprise that 38 filed there,” said Anthony Sabino, citing Delaware’s reputation as pro-debtor. “It gives Schilling & Co. an edge.”
Sabino is a trial lawyer and St. John’s University professor who has worked dozens of cases in Delaware, and has appeared before Mary Walrath, the veteran judge who has the 38 Studios case.
“Judge Walrath is a pro at these kinds of cases. She’s well-known for her scholarship. A well-regarded, thoughtful judge,” he said of Walrath, a former Princeton University basketball player who has worked the Delaware bench since 1993 and served as chief bankruptcy judge there from 2003 to 2008.
The big surprise for Sabino was Schilling filing for Chapter 7 liquidation rather than taking a shot at Chapter 11 reorganization, even if it later devolves into a liquidation.
“By filing Chapter 7, a trustee will automatically be appointed, and Schilling and incumbent management will be ousted. Hard to figure why they threw in the towel — or, in this case, the sock. Not like the combative Schilling at all,” Sabino said.
Schilling in 2004 pitched in a playoff game with a badly injured right ankle, his bloody sock visible to television cameras, en route to Boston’s first World Series championship in 86 years.
Moody’s Investors Service, which rated the bonds A2, three notches below Rhode Island’s general obligation rating, said the state has previously honored obligations on economic development bonds. Revenue director Rosemary Booth Gallogly asserted as much at Thursday’s press conference in Providence. In 1993, the Rhode Island Economic Development Corp. covered a default by Alpha Beta Technology after having issued $30 million in bonds backed by a letter of credit secured by the EDC reserve fund.
Debt service for 38 Studios consists of interest payments of about $5.3 million this calendar year. The first principal payment in 2013 is $7.44 million. Once principal payments begin, annual debt service is about $12.75 million. 38 Studios received the $75 million as part of a $125 million job creation bond package.
Chafee, while campaigning for governor, spoke out against the deal.
“How in the world could they have given away the store and made the majority of those bonds available to a company that was never in the black and was never properly vetted?” Figliola asked.