E-Mails Reveal 38 Studios’ Desperate Attempts to Secure Tax Credits
Tuesday, July 31, 2012
Hours before the financial troubles of Curt Schilling’s 38 Studios became public, company executives were scrambling to convince the state to sign off on millions of dollars in film tax credits, according to e-mails released by the Economic Development Corporation (EDC).
Shortly after midnight on May 14, 38 Studios’ lead director Tom Zaccagnino fired off an e-mail to David Gilden and Brian Gallogly (EDC legal counsel), then-EDC executive director Keith Stokes, Schilling and Bill Thomas (38 Studios’ chief operating officer) threatening that if the state didn’t guarantee the company the ability to access tax credits, the company would collapse.
By 8:30 that morning, Zaccagnino informed the group that “we now have a tax credit investor” as long as the state was willing to guarantee it would approve the company’s application. Gilden then sent a “revised term sheet” to Zaccagnino and made it clear that nothing was final on any discussions that were underway.
Schilling Claims Governor Scared Away Investors
The noon deadline would pass without an agreement in place and later in the day, Governor Chafee told Channel 10 that “we're always working to keep Rhode Island companies solvent, and that's what we're doing with 38 Studios.”
Those comments, Schilling has since claimed, scared away potential investors and set the company on a path toward bankruptcy. The former Red Sox ace has ripped the Governor’s handling of his video game company on several occasions, including in an interview on WEEI where he said, “I think he had an agenda and executed it.”
Schilling’s company received a $75 million loan guarantee from the EDC in 2010 to move its headquarters from Massachusetts to the Ocean State, a plan Chafee opposed during his run for Governor.
Although Schilling claimed he wasn’t interested in receiving tax credits, his original meeting with state officials took place in the Providence law office of Michael Corso, the state’s top tax credit broker. The meeting included House Speaker Gordon Fox, Stokes and Zaccagnino. Corso and Zaccagnino had previously worked together on a deal for historic tax credits for the Stone House Hotel project in Little Compton.
38 Studios Wouldn’t Reveal Investor
Less than two years later, 38 Studios executives had changed their tune and were desperately seeking film tax credits to remain afloat.
In January, Corso pledged over $14 million in tax credits that had received only an initial certification from the state as collateral to borrow $9.6 million from BankRI for 38 Studios. That transaction is now under state and federal investigation.
After Chafee’s comments about the company’s financial problems, Zaccagnino turned up the pressure to secure the credits. In an e-mail sent to Gilden that evening, he tore into the EDC and Chafee’s office for not working harder to help save the company. He also refused to reveal the identity of the potential investor.
“Dave - the fact that the company and RIEDC/Governor's office will not be working on this collaborately all night is alarming given the current situation," he wrote. “With regards to a written brief on the current discussions with potential funding sources, as previously stated, we are being advised by counsel that we simply can not provide that information given the overall situation.”
Back & Forth
The following day, Gallogly (EDC counsel) sent a draft of a “guaranty agreement” to Zaccagnino and Corso, but noted that “this is for discussion purposes only, as the statute and related regulations regarding the authority of the tax administrator to sign any guaranty is still under review.”
That afternoon, Zaccagnino sent another e-mail requesting an update from the state.
“Can you please provide an update on where we stand relative to a clear path to completion, one way or the other," he asked. "Management is doing its best to hold down the fort and avoid having 300 employees walk out the door."
Eleven minutes later, Schilling himself threatened that the company's demise was imminent.
"This ceases to become a viable company at 5pm when the employees are notified that they will be receiving their paychecks," he said.
A day later, the tax credits still appeared to be on the table for the company. Corso sent an e-mail making it clear exactly what the company needed for its investor.
"As discussed, this guaranty needs to guaranty issuance as well as honoring it," Corso wrote. “In addition, it should be explicit that it within the reference to event of default includes without limitation, bankruptcy."
Gilden’s reply: “We're getting close. Working on the documents now and getting approvals.”
By then, 38 Studios was offering a seat on its board to a state official in exchange for the tax credits. At the same time, Zaccagnino continued to push the state to move forward so he could keep the company’s investor.
But on May 17, the same day Stokes officially resigned as director of the EDC, Zaccagnino explained that his investor was hearing that the state was not going to issue tax credits. Later in the day, a 38 Studios executive attempted to pass a bad check to cover a $1.125 million payment that was due to the EDC on May 1.
At that point, the talks between the two sides took a turn for the worse.
"After this afternoon's bad faith attempt to deliver a check with insufficient funds in the account, we will no longer accept your calls or other attempts to communication," Gilden wrote to Zaccagnino.
Company Goes Bust
A day later, Chafee held a press conference to explain that he was opposed to offering any more taxpayer money to the struggling company.
"It's time for them to go out and get private capital funding," he said.
Asked if the state would ever agree to a similar deal in the future, Chafee said, “never, not on my watch.”
Less than a week later, 38 Studios laid off every single employee. In June, the company filed for bankruptcy owing more than $150 million to over 1,000 creditors and claiming less than $22 million in assets.
Editor's Note: The e-mails quoted in this piece were not corrected for grammar or spelling.
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