Two down, but millions to go

While the collapse of 38 Studios LLC was a singular and precipitous event, the effort to recoup some of the state-guaranteed bond money lost in the deal keeps moving along in drips and drabs. Case in point, the second settlement stemming from the state’s lawsuit against parties involved in the guaranteeing of $75 million in bonds that the company defaulted on when it filed for bankruptcy in 2012.

The latest agreement, announced last week, settles claims against Adler Pollock & Sheehan P.C., attorney Robert I. Stolzman, former R.I. Economic Development Corporation Executive Director Keith W. Stokes and former EDC Deputy Director J. Michael Saul, and was arrived at following two sessions of court-ordered mediation. The final approval of the deal will be considered before Superior Court Associate Justice Michael S. Silverstein on Friday, Aug. 21.

If the $12.5 million agreement is accepted by the court, it will direct about $9.9 million from the insurance companies representing the defendants to holders of the 38 Studios bonds, which were backed in late 2010 by the EDC.

In doing so, it chips away at the amount owed by Rhode Island taxpayers, who are currently responsible for $74.3 million in outstanding debt on the 38 Studios bonds. When the company failed, taxpayers were on the hook for some $89 million. The state expects to keep paying down the debt over the next six years, in the neighborhood of $12 million annually, according to a state summary.

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The failed video game company, led by former Boston Red Sox pitcher Curt Schilling, defaulted on its loans after paying a little more than $1.1 million in guaranty fees, according to a House Fiscal Advisory Staff summary. The state filed lawsuits against multiple parties in the case, arguing that it had been misled about finances.

The first settlement in the case, approved by the Providence court in June 2014, resulted in a $3.2 million payment to bondholders, according to a spokeswoman for EDC successor R.I. Commerce Corp. In that settlement, the state ended its lawsuit against its bond counsel and his firm.

The two settlements do not affect an ongoing lawsuit against Schilling, who was the company’s chairman and founder, as well as several officers in the failed venture and companies that helped to secure the loans.

In May, Silverstein, who is presiding over the 38 Studios cases, appointed retired Supreme Court Chief Justice Frank J. Williams as mediator. The intention is to encourage negotiated agreements between parties, and avoid a state trial.

The expenses of Commerce R.I., including its attorney fees, are deducted from the settlements, which will total $3.8 million between the two agreements. The state’s attorneys, Wistow Barylick Sheehan & Loveley, receive a one-sixth contingency fee, according to a spokeswoman.

The General Assembly, beginning last year, started appropriating money to cover the bond debt. The state has scheduled payments of roughly $12.2 to $12.5 million a year through 2021, although the total amount due will be reduced by settlement amounts reached in the litigation.

To date, the state’s appropriations have covered about $11.1 million in payments to bondholders, according to Howard. •

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