Citizens Bank sues Schilling for $2.4M

WPRI 12

Field reporting by Susan Campbell

Updated: Jun 15, 2012 12:03 AM

PROVIDENCE, R.I. (WPRI) – Citizens Bank is suing former Red Sox ace Curt Schilling personally for nearly $2.4 million, alleging he promised to repay money his now-bankrupt video game company 38 Studios borrowed from the bank.

RBS Citizens, the Providence-based bank's parent corporation, filed the lawsuit against Schilling in Superior Court in Boston last Thursday, the same day 38 Studios and its subsidiaries filed for bankruptcy in Delaware. The court complaint was first reported by The Boston Globe.

Court Doc: Schilling Complaint

Citizens says Schilling personally guaranteed a $2 million letter of credit and a $350,000 corporate credit card the bank gave 38 Studios, which the company and Schilling have both refused to pay off. Citizens is suing Morgan Stanley Smith Barney to get money out of Schilling's personal accounts.

More: Criminal probe launched into 38 Studios In-Depth: Complete coverage on 38 Studios Timeline: How the 38 Studios deal unfolded

Schilling's spokesman did not immediately respond to an email on Thursday, and Citizens declined to comment. Schilling told The Providence Journal he's invested $38 million in 38 Studios and guaranteed another $12 million in loans to the firm.

Separately, Bank Rhode Island and the R.I. Economic Development Corporation confirmed that they've gotten subpoenas from law enforcement agencies investigating the 38 Studios deal.

The court documents obtained by WPRI.com in the Citizens suit shed new light on how 38 Studios capitalized on its $75 million taxpayer-guaranteed loan from the EDC and what happened behind the scenes as the company fell apart last month.

In the days before and after the EDC sold the 38 Studios bonds on Nov. 1, 2010, Citizens provided 38 Studios with a $2 million letter of credit to benefit Empire LaSalle LLC, a subsidiary of Boston-based Berkeley Investments.

Berkeley owns the six-story One Empire Plaza building in Providence, the former headquarters of Blue Cross & Blue Shield of Rhode Island that 38 Studios relocated to in April 2011 in exchange for the Rhode Island loan. The company leased the building in September 2010 and amended the lease twice the following year.

The $2 million letter of credit was the security deposit on 38 Studios' Providence lease, according to EDC documents. Obtaining it was also one of the milestones set by the EDC for 38 Studios to receive payouts from the loan proceeds, and that allowed the company to get a $2.1 million cash transfer on Nov. 2.

Less than two weeks later, on Nov. 11, 38 Studios reached out to Citizens again, this time to open up a $350,000 corporate credit card account with the bank. As of last Thursday, the company had run up $373,596 in charges and fees on the card, according to the bank.

Almost a year later, in October 2011, "Schilling absolutely and unconditionally guaranteed to the bank the payment and performance of all indebtedness, obligations and liabilities of 38 Studios to the bank, then existing or thereafter arising." By that point 38 Studios had already received nearly all $49.5 million of the EDC loan proceeds it was entitled to.

As 38 Studios unraveled last month, Empire LaSalle tapped 38 Studios' letter of credit to withdraw $371,484 from Citizens on May 21, days after the company made an overdue $1.1 million payment to the EDC and missed payroll. Bankruptcy filings show 38 Studios owes its Providence landlord $10.8 million.

According to Citizens, "38 Studios failed to pay the bank" for Empire LaSalle's withdrawal even though the letter of credit's terms required it to do so immediately. That put the company in default, and on May 22 the bank demanded repayment of all its loans to 38 Studios plus fees, which the company didn't do.

Therefore, Citizens says, "Schilling is liable to the bank in the total amount of $2,394,240.40, plus thereafter accruing interest and late fees, costs and costs of collecting, including, without limitation, attorneys' fees and expenses."

"Schilling has failed and refused, and continues to fail and refuse, to satisfy the outstanding indebtedness," the complaint alleges. Citizens says it "is likely to suffer irreparable injury" if the court doesn't freeze Schilling's assets because it's unlikely to recover any money in bankruptcy court.

Schilling continues to work for ESPN as a television analyst on its "Baseball Tonight" program. He returned to the show earlier this month for the first time since 38 Studios collapsed.

Schilling also personally guaranteed a $4 million revolving line of credit from Middlesex Savings Bank in July 2010. 38 Studios later used a portion of its Rhode Island loan proceeds to pay down the amount outstanding on the line of credit, which was reduced to $1.5 million, bond disclosure documents show.

38 Studios was required to maintain that line of credit under the terms of both its agreement with the EDC and its lease on its old offices in Maynard, Mass. That lease doesn't expire until May 2014, and it's unclear whether the company found a new tenant to sublease or kept paying rent there even after it departed for Providence.

38 Studios' remaining liability for the Maynard lease is $1.5 million, according to its bankruptcy filing.

In addition, 38 Studios issued two unsecured promissory notes for a combined $767,000 to two company directors in the past in exchange for cash and the sale of an asset, according to the bond documents.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi's Notes blog. Follow him on Twitter: @tednesi

Nneka Nwosu contributed to this report.

Copyright 2013 WPRI 12. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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