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38 Studios points finger at R.I.

State broke its pact, official says

By Todd Wallack
Globe Staff / June 16, 2012
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Former Red Sox star Curt Schilling’s bankrupt video game company claimed it had a “fully negotiated deal and agreement” to receive additional funding from Rhode Island, but the state refused to honor the deal and damaged the company, according to documents obtained through public records requests.

In a strongly worded letter to the state film office, William Thomas, the president of 38 Studios LLC, chastised Rhode Island officials for withholding millions of dollars in film tax credits available to video game makers. He suggested in the letter May 25 that the state had promised to give the company as much as $8.7 million in tax credits after 38 Studios made a $1.1 million payment it owed the state May 17.

But the state refused to release the credits. Thomas also complained that state officials stopped talking after the company made the payment.

“We went from a position of working together in good faith to a position where all communication was shut off,” Thomas wrote in the letter. “The intentional delay in issuing the credits has caused severe damages to the company, its employees, and the state of Rhode Island.”

The letter is not the only time that 38 Studios has blamed Rhode Island for the company’s demise. Schilling told the Providence Journal two weeks ago that Governor Lincoln Chafee sabotaged the company by refusing the tax credits and disclosing the company’s financial troubles, spooking potential partners. Chafee has denied harming the company.

38 Studios filed for Chapter 7 bankruptcy last week, clearing the way to liquidate the company after it failed to attract new funding. Schilling declined to comment this week. A public relations firm representing the company did not respond to a request for comment.

Thomas asserted in the letter that the agreement to provide the tax credits was struck with Keith Stokes, then executive director of Rhode Island’s economic development agency, and David Gilden, a lawyer who represents the agency. He added that the existence of the agreement was supported by a May 16 e-mail from Gilden, telling the company the state would release the film tax credits upon receipt of the $1.1 million. Stokes resigned May 16.

The Rhode Island Economic Development Corp. declined to provide copies of the documents or confirm their existence, saying it needed more time to respond to a public records request filed more than three weeks ago.

Even if there were such an agreement, it is unclear whether it would be legally binding. Judy Chong, a spokeswoman for the economic development agency, said the agency “does not have the authority to enter such an agreement granting film tax credits.”

Schilling moved his company to Providence from Massachusetts last year after Rhode Island provided a $75 million loan guarantee. His company released one game in February, and had at least two more in development, but ran out of cash last month.

38 Studios applied for $8.7 million in tax credits for video game production in 2011 and filed preliminary applications for another $12 million in tax credits for this year, according to documents obtained under the Rhode Island public records law.

On May 1, the company missed a scheduled $1.1 million payment to the state related to the $75 million loan. The state declared the loan in default and barred the release of the tax credits.

Under state law, film and video game companies are entitled to receive $1 in tax credits for every $4 they spend on production in the state. They typically then sell those tax credits, at a discount, to other companies or individuals who owe taxes.

But Chafee said last month he was reluctant to award the tax credits unless he was confident the company could get back on firm financial footing. The state also raised concerns that the 38 Studios’ application met all the legal requirements for the tax credits.

It is unclear how much the tax credits would have helped 38 Studios. The company had already sold most, if not all the tax credits it requested, and owed millions of dollars to creditors. In its bankruptcy filing, 38 Studios reported it owed more than $150 million and had less than $22 million in assets.

The companies that bought 38 Studios’ tax credits — even though they had not been granted — could lose their money. The company struck a deal to sell the credits to Preservation Credit Fund LLC, a company run by Providence tax broker Michael Corso, and Row 1 Productions LLC, a Beverly Hills company that finances films.

Corso’s company used the anticipated tax credits as part of the collateral to obtain a loan from Bank Rhode Island, a Providence bank acquired by Brookline Bancorp. on Jan. 1. Karen Schwartzman, a spokeswoman for the bank, said the bank has financed tax credits “on occasion,” but said she couldn’t talk about specific transactions or customers.

Schilling may be personally liable for some of the losses. Corso’s companies used another key piece of collateral to gain its loan from Bank Rhode Island in January — a personal guarantee from Schilling.

Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack.

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