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Updated: Friday, 08 Jun 2012, 12:27 PM EDT
Published : Thursday, 07 Jun 2012, 1:12 PM EDT
PROVIDENCE, R.I. (WPRI) – 38 Studios declared bankruptcy on Thursday, one day after federal and state officials began a formal investigation into Curt Schilling's video game company, WPRI.com has learned.
38 Studios LLC and its three subsidiaries filed for Chapter 7 bankruptcy protection, which means they have ceased operations and will be liquidated, in Delaware shortly after noon. A meeting of the company's creditors is scheduled for July 10 in a Wilmington, Del., courthouse.
The liquidation caps a stunning turn of events over the past month that saw 38 Studios lay off its nearly 400 employees after defaulting on a payment to the R.I. Economic Development Corporation, which lured the firm here with a $75 million taxpayer-backed loan. The agency's top official and board members have resigned.
"After ongoing negotiations with the state of Rhode Island and potential investors and other interested parties, the company has been unable to find a solution to the current stalemate," Schilling spokesman Larry Solters said in a statement. Schilling has not commented on the bankruptcy filing.
Governor Chafee said the bankruptcy filing was not a surprise and is "not all bad" because the state will now be able to try and find investors to buy some of 38 Studios' assets to help pay off its debts. "We're going to do everything we can to maximize the return on our investment," the governor told reporters.
All of 38 Studios' corporate entities are registered as limited liability corporations in Delaware. 38 Studios LLC, the parent company, said it owes $150.7 million to 1,079 creditors, many of them in Rhode Island. By far the largest is a secured debt of $115.9 million owed to the EDC. The parent company reported earning no income.
Rhode Island taxpayers could owe nearly $90 million through 2020 to pay off the EDC's 38 Studios bonds. Chafee said state officials were not informed about the bankruptcy filing ahead of time. Jonathan Savage, a lawyer advising Chafee, said there are investors who've expressed interest in buying 38 Studios' assets.
The rest of 38 Studios LLC's debts are unsecured, including unpaid wages owed to former employees. The parent company estimated its assets at $21.7 million, including $12.8 million on deposit with the EDC, and told the court it does not expect it will have any funds available to pay off unsecured creditors.
In addition, 38 Studios Baltimore LLC said it owes $5.5 million to 28 creditors on top of the EDC loan, court documents show. The Maryland studio, which estimated its assets at $335,208, is the former Big Huge Games studio that produced 38 Studios' debut, "Kingdoms of Amalur: Reckoning," which was released in February.
38 Studios Baltimore reported receiving $22 million between 2010 and 2011 from Electronic Arts, the company that distributed "Reckoning," as part of a "work-for-hire agreement."
A third subsidiary, Mercury Project LLC, disclosed no assets and a $1.9 million debt to Electronic Arts as part of a three-party agreement that also included City National Bank of Beverly Hills, Calif., and International Film Guarantors in Santa Monica, Calif. The fourth subsidiary, Precision Jobs LLC, reported no assets or liabilities.
Curt Schilling owns 82.9% of 38 Studios LLC's equity, according to court documents. The former Red Sox ace founded the company in 2006 as Green Monster Games and moved it to Rhode Island last year in exchange for the $75 million loan guarantee. The next-largest equity stake is board member Douglas Macrae's 6.4% share.
Separately, federal and state law enforcement officials confirmed the launch Wednesday of a formal investigation into 38 Studios and its efforts to secure Rhode Island tax credits to remain afloat. Chafee said he would not comment on an active investigation.
House Speaker Gordon Fox, who backed a new $125 million loan guarantee program in 2010 with more than half its resources set to go to 38 Studios, said he would "absolutely" do the same thing again now. However, the state's most powerful Democrat expressed astonishment at what happened.
"All of a sudden, suddenly without warning, there's, like, financial damnation and they're out of business," Fox said. "I don't know what happened down there. ... I don't know what caused 38 Studios to fail."
The deal was never popular with voters.
A WPRI 12 poll in September 2010 showed 54% of Rhode Island voters opposed the $75 million loan guarantee to 38 Studios, with just 28% in favor of the deal, which was strongly supported by former Gov. Don Carcieri and EDC Executive Director Keith Stokes, who resigned last month. Carcieri has refused to discuss the situation.
Also on Thursday, Alison Vareika withdrew from consideration as one of Governor Chafee's new nominees to serve on the EDC board after critics noted her son works in the governor's office. Chafee replaced Vareika with Peter Crowley, owner of the Newport restaurant La Forge and brother of the late state Rep. Paul Crowley.
38 Studios has paid $35,000 to the law firm Pachulski Stang Ziehl & Jones LLP to serve as its general bankruptcy counsel, according to court documents. The lawyers representing 38 Studios are Laura Davis Jones, David M. Bertenthal and Curtis A. Hehn in Wilmington.
Court documents show that 38 Studios CEO Jennifer MacLean and Sundar Subramanian, both members of its board of directors, left the firm on May 24. MacLean was earning $276,320 a year, documents show. Schilling wasn't drawing a salary but was taking medical and dental benefits worth $17,192 annually.
Chafee's office has hired an outside team from Deloitte to conduct a forensic audit of 38 Studios' finances stretching back to the company's founding in 2006. They began work last week.
Tim White and Sean Daly contributed to this report.
Copyright WPRI 12
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