Legal jousting began in Rhode Island Superior Court on Wednesday between lawyers for the state and Curt Schilling’s failed video-game company, 38 Studios LLC.
State Superior Court Judge Michael Silverstein began hearing arguments in Providence over a lawsuit by the state’s Economic Development Commission to recoup roughly $110 million from a loan guarantee the quasi-public agency issued in 2010. Schilling’s lawyers are looking to dismiss the suit.
The commission was conduit issuer for $75 million of bonds sold to private investors in 2010 that were backed by moral obligation, part of a package to entice former Boston Red Sox pitcher Curt Schilling to move his company to downtown Providence from Maynard, Mass. The funding was also intended to enable the company to finish production of its Copernicus online video game and bankroll its expansion in Rhode Island.
Bond interest has pushed the balance higher, according to court documents.
38 Studios filed for Chapter 7 liquidation last year. The commission sued Schilling and 13 other defendants, including advisors and former EDC chairman Keith Stokes, for the money in November, citing “crushing evidence” that the company concealed information about its struggling finances.
Those advisors included placement agents Wells Fargo and Barclays, financial advisor First Southwest Co. and bond insurer Star Indemnity & Liability Co.
“38 Studios failed in May of 2012. If that failure had resulted from the risks that these advisors had disclosed to the EDC board, there would be little or no cause for this complaint,” the lawsuit said, “In fact, 38 Studios failed because of risks that had not been disclosed to the EDC board, but were or should have been known by all of these advisors, and by 38 Studios.”
But company attorneys say Schilling and other top executives told EDC officials that they needed more than the bond money to complete Copernicus.
Rhode Island officials are looking to sell the company’s assets.
Lawmakers, meanwhile, have debated whether Rhode Island should pay the debt. Unlike general obligation, moral obligation bonds are secured by a nonbinding covenant for a legislative body, such as a state agency or legislature, to include the money in a budget recommendation. The obligation, however, is not legally binding.
Two bills are pending the legislature to ban Rhode Island from paying the 38 Studios debt, but Gov. Lincoln Chafee and top state financial officials favor paying the debt to avoid a backlash in the capital markets.
“Let’s pursue a lawsuit. I hope we’re successful there. But let’s not send a message that Rhode Island’s a place where they’re going to back down on moral obligations,” said Chafee, who opposed the deal in 2010 while campaigning for governor.
Stokes and other EDC board members resigned last year when the controversy escalated. The state Senate on Tuesday unanimously confirmed Marcel Valois as chairman. Valois held the same title under Gov. Lincoln Almond in the later 1990s.