A law firm that advised Rhode Island on the ill-fated 38 Studios financing deal has agreed to pay $4.37 million to settle a lawsuit with a state agency.

"The proposed settlement is a step in the right direction, and I hope this is the beginning of a positive resolution to the 38 Studios saga," Gov. Lincoln Chafee said in a statement Friday evening.

According to Chafee, the payment to Rhode Island Commerce Corp. by Antonio Afonso Jr. and his firm, Moses Afonso Ryan Ltd., represents the full amount remaining of their insurance coverage, minus legal fees, according to Chafee.

Rhode Island Superior Court, which is hearing the state's complaint against banks, advisors and other parties over a lost month in the financing, must approve the settlement.

Commerce Corp.'s predecessor, the Rhode Island Economic Development Corp., provided a $75 million loan guarantee in 2010, backed by the state's moral obligation, to 38 Studios, a video-game company owned by former Boston Red Sox pitcher Curt Schilling.

Schilling moved his company to downtown Providence, but the company folded in 2012 and filed for Chapter 7 bankruptcy.

Afonso was bond counsel to the EDC.

Rhode Island two weeks ago approved a $12.3 million payment for 38 Studios bonds as part of its $8.7 billion fiscal 2015 budget after heated debate among lawmakers. A report by SJ Advisors of Eden Prairie, Minn., for which the state paid $75,000, said the debt stands at $86.4 million, including interest.

Debate focused on the degree of harm Rhode Island's reputation could face in the capital markets. Fitch Ratings said last week that default would not drag Rhode Island's general obligation and appropriation-backed ratings to junk.

SJ Advisors said Moody's Investors Service and Standard & Poor's could drop the GO bonds to junk, but added that determining what action Fitch would take would be difficult. "We were unable to find any cases where Fitch had rated deals where a governmental entity failed to honor an obligation to pay debt service where such obligation was subject to appropriation," SJ Advisors said in its report.

Schilling, who pitched the Red Sox to two World Series championships and the Arizona Diamondbacks to another, said last week that his cancer, which he announced on Feb. 5, was in remission.

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