Superior Court Judge Michael Silverstein's decision allows the Economic Development Corp. to proceed with its lawsuit against Schilling, former 38 Studios executives, former EDC officials and others. The suit alleges fraud, negligence, breach of fiduciary duty, racketeering and conspiracy and says the board was misled into approving a $75 million loan guarantee for the company in 2010.
38 Studios — named for Schilling's old jersey number — filed for bankruptcy last year, leaving the state on the hook for $112 million. About $90 million is outstanding.
With the decision, the EDC has cleared the first major hurdle in pursuing potential claims against Schilling and others. Among other things, the lawsuit claims the defendants knew the company would run out of money by 2012, but concealed that from the EDC board, which made the final decision to back the deal.
The agency had used the loan guarantee to lure 38 Studios from Maynard, Mass., to Rhode Island, which has struggled for years with a bad economy and high unemployment.
Gov. Lincoln Chafee, who opposed the deal before he took office and who serves as EDC board chairman, said he was "gratified" by the ruling.
"It allows the important claims to proceed and is a significant first step to recovering the taxpayers' losses," he said in a statement.
Jeffrey Schreck, who represents Schilling and others at 38 Studios, declined to comment. Schilling has previously called the lawsuit political and denied wrongdoing. He said at the time the suit was filed that the EDC's approval of the loan guarantee was made "with its eyes wide open and with full understanding of any risks." Schilling has accused Chafee of not doing enough to help 38 Studios stay afloat and publicly called him a "dunce of epic proportions."
The EDC sued in November, naming 14 defendants. Nine of those worked for the agency, including former Executive Director Keith Stokes and former Deputy Director Michael Saul, as well as its attorneys and financial advisers. Four of the defendants were executives or on the board at 38 Studios, including Schilling. The final defendant issued an insurance policy to 38 Studios.
The defendants moved to dismiss all or parts of the lawsuit, and the judge rejected most of their arguments.
The suit doesn't seek a specific dollar amount but wants repayment of the $75 million in bonds that supported the deal. It seeks triple damages from some of the defendants, including Schilling.
In his ruling, Silverstein said the state can't immediately sue to recover the entire $75 million because it hasn't lost that much. The bonds are being repaid over time. But the judge said the EDC might have a claim for future losses if and when the General Assembly approves the payments. He also said the agency could sue for fees and salaries paid to the defendants and damage to its reputation and credit.
The legislature this year appropriated an initial $2.5 million for payments on the bonds.
Max Wistow, an EDC lawyer, said he was "quite pleased" by the decision and looks forward to moving ahead with the case. In court, Wistow has described a "fraudulent scheme" in which the defendants both withheld information and provided false information.
Attorneys for Stokes and Saul argued they should be immune from liability under the "public duty" doctrine because they were public officials who were doing their jobs and following orders, but the judge ruled the doctrine doesn't apply in a case where an employer is suing an employee. Saul's attorney, Bruce Gladstone, said his client is disappointed by the ruling but called the judge's finding that the EDC cannot now recover a $75 million loss "well-reasoned."
Silverstein dismissed some counts against Barclay's and Wells Fargo, which acted as bond placement agents for the EDC, and Starr Indemnity and Liability Company, which issued an insurance policy for 38 Studios.
The next hearing in the case is scheduled for Sept. 13.
Associated Press writer Michelle R. Smith contributed to this report.