By Kate Bramson and Katie Mulvaney
38 Studios founder Curt Schilling, other executives from his failed video-game company and their insurer have agreed to pay a $2.5-million settlement to the state to resolve their part in the four-year legal battle against the architects of the state's failed $75-million loan deal.
If Rhode Island Superior Court Judge Michael A. Silverstein accepts the proposed settlement, the Rhode Island Commerce Corporation expects about $2.05 million would be available to help pay down the principal and interest owed on the bonds, spokesman Matthew Sheaff said. That's after the state's legal team is paid its 16.67-percent contingency fee of $416,667 and the state pays other legal costs associated with its lawsuit.
That $2.05-million would lower the taxpayers' cost for paying down the bonds from $53.9 million to $51.8 million, a Providence Journal analysis shows.
In 2010, the state's Economic Development Corporation sold $75 million in bonds to help pay for 38 Studios to move to Providence and create a multiplayer online video game. Although Schilling's company was expected to pay the vast majority of the $112.6 million owed on those bonds, the state guaranteed the payback to investors who bought the "moral obligation" bonds.
The state has been paying those bills since 38 Studios collapsed into bankruptcy in 2012, leaving Rhode Island taxpayers holding the bill.
This proposed settlement apparently ends Schilling's legal entanglements over the matter. However, settlement documents specify that he and the other company executives will make themselves available to testify at the state's upcoming trial with First Southwest Company, the solitary remaining defendant in the state's civil lawsuit. The other 38 Studios executives settling are Thomas Zaccagnino, Richard Wester and Jennifer MacLean.
In 2014, the same four executives agreed to pay $300,000 out of their Starr Indemnity and Liability Company insurance policy, to the lawyer handling 38 Studios' federal bankruptcy case in Delaware. Although that case and the receivership of the company in Rhode Island Superior Court are proceeding, Schilling and his executive team face no further liability in those matters, receivership lawyer Richard J. Land in Providence and lawyer Mark Felger in Delaware told The Providence Journal Monday.
Schilling and the other 38 Studios executives were not named in the ongoing complaint filed by the U.S. Securities & Exchange Commission, which charged the Commerce Corporation and bond underwriter Wells Fargo Securities with defrauding investors.
In the proposed settlement filed in court Monday, the 38 Studios executive team denied any wrongdoing. Eight other defendants who reached past settlements in the case also denied wrongdoing.
No court date for Silverstein to consider the settlement has been scheduled. He has approved three prior settlements.
Schilling declined a Providence Journal request for an interview.
"No, I will talk in my forum, directly to the tax paying citizens of Rhode Island," he wrote Monday in an e-mail. For now, Schilling noted he will be called to testify as the First Southwest matter proceeds.
This proposed settlement was the result of court-ordered mediation with retired Superior Court Judge Francis J. Darigan Jr.
The money to pay this settlement would come from the $10-million "directors and officers" insurance policy from Starr Indemnity that Schilling and the 38 Studios team have relied on to pay their legal bills. Those costs have whittled away at the $10-million top limit of what that policy could pay.
Lawyers refer to the kind of policy Schilling and his team have as a "wasting" policy or an "eroding" policy. They have one more term for it: a "cannibalizing" policy.
"A cannibalizing policy gives you a total limit of coverage, but out of those limits comes the cost of defense," said Max Wistow, the lawyer at the Providence firm of Wistow, Sheehan & Loveley who is leading the state's legal fight against the architects of the loan deal.
In considering this proposed settlement, the Commerce Corporation's outside legal counsel, Thomas Carlotto of Shechtman Halperin Savage, LLP, conducted a detailed and confidential analysis of the defendants' assets, Darigan told reporters at a news conference Monday morning. Darigan said Carlotto was satisfied the defendants had no other assets that could help pay any settlement or court judgment. Carlotto determined any recoverable assets were expected to be less than $2.5 million, the Commerce Corporation said.
Reacting to the proposed settlement, Governor Raimondo said in a statement: "My team and I remain focused on recovering as much taxpayer money as possible, and we are preparing for trial with the remaining defendant."
Darigan said he has not asked First Southwest back into mediation, but he hopes to. First Southwest lawyer Gerald J. Petros did not return a Journal phone call.
As the state's Oct. 18 trial date approaches, Roger Williams University School of Law professor Niki Kuckes said Monday the vast majority of civil cases reach settlements short of trial, since that reduces legal risk and cuts litigation costs.
"A very, very, very small percentage of [civil] cases get resolved at trial," Kuckes said.
Contrary to the way most civil cases play out, she said the 38 Studios proceedings have been unique in that Silverstein made many of the sworn statements and documents produced during the discovery process available for public review.
"I suspect that is much of what would come out at trial," she said.
In addition, she said, First Southwest will now be under "a lot" of pressure to settle as it could be on the hook for the remaining damages if it loses at trial.
(c)2016 The Providence Journal (Providence, R.I.)