State Legal Fees for 38 Studios Near $1M
Thursday, May 29, 2014
The fallout from the 38 Studios bankruptcy has already cost the state $840,000 in legal fees and related costs and the resulting lawsuit could end up costing taxpayers millions more, according to documents provided in response to a public records request.
Only a fraction of the total amount—$156,000—has gone to Wistow & Barylick, Inc., the firm handling the litigation and that money has covered out-of-pocket expenses, such as filing fees, depositions, computer-assisted legal research, and expert consultants.
Firm gets a sixth of any state winnings in lawsuit
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTBut the firm stands to make many times that if the lawsuit is successful. A copy of its contract with the Rhode Island Commerce Corporation—the former Economic Development Corporation that was at the center of the state’s $75 million loan guarantee to the failed video gaming company—shows that the local firm is operating on sixteen and two thirds percent contingency fee. That means that Wistow & Barylick will get a sixth of however many millions the state recovers from the lawsuit, if, in fact, the litigation is successful.
The remainder of the $840,000 that has been split between two firms. Shechtman Halperin Savage, the new general counsel for Commerce RI, has been paid $584,046 between June 2012 and April 2014.
A third firm, the New York-based Cohen & Gresser LLP, last year earned $102,615 representing the state before the Securities and Exchange Commission, which is also investigating the 38 Studios deal. Of the three firms, Cohen & Gresser has the highest billing rates, between $650 to $750 an hour for partners and $300 to $595 for associates.
“It’s like a divorce. Both parties get screwed and the only ones who win are the lawyers,” said state Rep. Mike Chippendale, R-Foster, the secretary for the House Oversight Committee, which has launched its own investigation into the 38 Studios affair.
Rep. Karen MacBeth, the chair of the committee, expressed concern about how much Wistow & Barylick could earn from its contingency fee. “This is eating up the amount that we’re going to get as a state to pay back the bonds,” said MacBeth, D-Cumberland. “I see this as a lot of lawyers making a lot of money on an issue.”
Governor’s office defends fee
In a statement, a spokeswoman for Governor Lincoln Chafee, who chairs the board for Commerce RI, defended the state’s compensation agreement with Wistow & Barylick. “RICC has paid no legal fees to Wistow and Barylick to date nor will it pay them any legal fees unless there has been a recovery,” said the spokeswoman, Faye Zuckerman, in an e-mail.
She said the fee—sixteen and two thirds of any money recovered—is “less than a normal contingency fee,” which she said usually could be anywhere from 33 to 40 percent.
Retired State Superior Court Judge Stephen Fortunato and state Rep. Bob Craven, a Narragansett Democrat and former state prosecutor, confirmed that Wistow & Barylick is being paid less than the normal contingency fee. “On the face of it, it doesn’t seem improper,” said Fortunato, who now teaches law at Roger Williams University. “It shouldn’t raise eyebrows.”
Ed Mazze, a business professor at the University of Rhode Island and a longtime critic of the 38 Studios deal, also said that the contingency fee is “customary practice” in these types of cases.
But, at a sixteen and two thirds rate, Wistow & Barylick stands to earns millions off the lawsuit.
“The maximum estimated recovery is potentially more than $75 million but there are too many variables to be more specific,” Zuckerman said. Craven estimates that the amount sought could be as high as $89 million when interest on the bonds and other expenses are included.
A spokeswoman for Commerce RI, meanwhile, declined to respond to a series of questions about the cost of the lawsuit and the potential damages that are being sought. Instead, she released this statement: “The lawsuit is ongoing and Commerce RI doesn’t speculate or comment on the legal costs at this time.”
State reps urge alternatives to lawsuit
MacBeth and Chippendale say the state may have more cost effective alternatives to plugging away at litigation.
The costs of the failed 38 Studios deal is weighing heavily on the minds of lawmakers this session as they wrestle over whether to make the first full $12.5 million payment on the principal and interest that is due on the bonds. (A payment of $2.5 million approved in the last session went just towards the debt service.)
If lawmakers do not pay, the insurance policy the state took out with Assured Guaranty would cover the payments, MacBeth said. The insurer would also try to recover its costs by investigating the 38 Studios. MacBeth said the state would also benefit from having Assured Guaranty shoulder the costs of an investigation. “They certainly have the deeper pockets than we do,” she said.
Chippendale suggested that a more prudent alternative than the state’s current approach would be not paying back the bonds and doing a full investigation into how the 38 Studios loan guarantee was put together and who is really responsible for it. An investigation, he said, should come before the lawsuit. Once an investigation has identified the responsible parties, the state could decide whom to sue, he said.
“There are several viable avenues we could be going down. To me, it appears to be going backwards,” Chippendale said. “This has a certain feeling of Watergate in that we are dealing with a situation that is bad, but what’s worse is the cover-up.”
Chippendale said the state should also explore the possibility of directly negotiating with bondholders, who have signaled they are open to such talks—but only when the state has “defaulted” on making the bond payments.
Lawsuit damages tied to bond payments
But rating agencies would view a negotiated settlement with bondholders as a “distressed transaction,” warranting a downgrade of the state’s bond rating, Craven said. (Craven said that information comes from House Speaker Nicholas Mattiello’s recent meetings with rating agency officials in New York City. Craven was not at those meetings, but he said Mattiello briefed Democratic House members on the conversations at a caucus meeting.)
Craven said he has not made up his mind on whether the state should go through with its $12.5 million payment on the bonds this year. He remains concerned—but not yet convinced—that the money saved from not paying may be outweighed by the higher cost of borrowing from having the state’s bond rating downgraded.
The lawsuit factors into that decision after a state judge ruled last August that the state’s lawsuit could only move forward if it could claim damages, such as any liability the then-Economic Development Corporation incurred from the General Assembly’s appropriation of funds for the bond payments. (However, the judge also ruled that the state could seek damages for “injury to its reputation and credit” and its “payment of salaries and fees to the defendants” in the lawsuit.)
Craven said he does agree with calls for a full investigation. He said investigators should probe how the 38 Studios deal happened, why it happened, and who is responsible for it. If the General Assembly does approve the $12.5 million debt payment this year, he said that should be tied to the launching of the investigation.
“You can’t just pay it and say, ‘We won’t do this anymore,’” Craven said. “There’s got to be some investigation and at least a final determination that is legitimate.”
The House Oversight Committee is already conducting its own probe, but Craven said it is limited in what it can do. He said lawmakers do have the authority to establish a special commission to fully investigate the affair.
Lawsuit defended
Amid revelations of the cost, some are questioning whether the state is being as aggressive as it could be with the lawsuit.
Chippendale said attorneys for the state have yet to depose state lawmakers or staff members at Commerce RI who are “treasure troves” of information. “From the outside looking in, it does not seem as aggressive as it could be,” Chippendale said.
Nearly a year after a judge rejected a motion to dismiss, the lawsuit remains in the discovery phase, likely making next year the earliest point at which the actual trial could begin. “We’re not sure that they’ve discovered everything that they need,” Mazze said.
But Craven expressed confidence in the lawsuit and the attorney leading it. “Max Wistow is as talented a lawyer as I’ve met in this jurisdiction. He doesn’t take a case unless he knows he can win,” Craven said. “I’ve been a practicing attorney for 31 years and I’ve seen 31 years of his work. He’s as good as it gets.”
“I’m of the opinion—as it relates to some of the defendants—they have a rock solid case,” Craven added.
Stephen Beale can be reached at [email protected]. Follow him on Twitter @bealenews
Related Slideshow: 38 Studios Legal Fees
New state records show that state legal fees associated with the 38 Studios bankruptcy are nearing $1 million. Below is a breakdown of how much each firm has made - and stands to make in the future. Figures are taken from documents provided by the Rhode Island Commerce Corporation.
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