Superior Court Mostly Denies Motions to Dismiss By 38 Studios Defendants

| Sep 30, 2013 | Firm News

In a far-ranging and lengthy decision (almost 100 pages), the Superior Court has mostly denied defendants’ motions to dismiss the claims against them arising from the guarantees given by the State of Rhode Island for $75 million of bonds issued to finance the relocation to Rhode Island and further operations of former major league pitcher Curt Schillings’ video game company “38 Studios.” That company has gone bankrupt.  The Court’s opinion provides a comprehensive overview of much law related to the obligations of individuals and companies in such a situation, some of which is a matter of first impression in Rhode Island.

The plaintiff is the state agency that arranged for the issuance of the bonds. The defendants include banks that allegedly provided advice or other financial services to the agency, an insurance company that issued a liability policy to 38 Studios, Schilling and other employees of 38 Studios, lawyers and law firms that provided advice to the agency and several former members of the agency’s board. The various allegations against all or some of the defendants include unjust enrichment, disgorgement, breach of fiduciary duty, fraud and fraudulent misrepresentation, negligent misrepresentation, legal malpractice, negligence, breach of implied covenant of good faith and fair dealings, civil racketeering and civil conspiracy, as well as violation of other criminal statutes giving rise to civil liability.

The Court did dismiss certain claims against certain defendants in the amended complaint or otherwise agreed with defendants’ arguments respecting some damages claims.  However, no defendant had all claims against it dismissed.

Here is a short summary of the alleged facts. (They are set forth in great detail in the Court’s decision). Plaintiff acted as a “conduit” for the issuance of $75 million of bonds and provided the proceeds to 38 Studios to induce it to move its offices from Massachusetts to Rhode Island. Two year later, the company went bankrupt. Plaintiff alleges that various documents and information defendants provided to plaintiff were materially misleading. Moreover, some defendants allegedly failed to disclose that one of plaintiff’s analysts who did a preliminary assessment of the bond proposal recommended against it. Finally, some defendants allegedly personally profited from the transaction through undisclosed fees they received.

The Court’s opinion featured an extensive analysis of the legal doctrine of imputation, i.e., notice of a fact that an agent knows or has reason to know is imputed to the principal, as set forth in Sections 5.01, 5.03 and 5.04 of the Restatement (Third) of Agency. The discussion occurred because some defendants argued that the alleged knowledge of their conduct by those defendants employed by plaintiff should be imputed to plaintiff which knowledge would defeat many of the claims against them based on misrepresentations or fraud.

However, the Court recognized and applied exceptions to the imputation doctrine and held those exceptions defeated defendants’ arguments. One such exception is the adverse interest exception set forth in Section 5.04 of the Restatement. This section provides that notice of a fact known to the agent is not imputed to the principal if “the agent acts adversely to the principal in a transaction or matter, intending to act solely for the agent’s own purposes or those of another person.” The exception does not apply merely because the agent has a conflict of interest or because the agent is not acting primarily for the principal. The Court also recognized the “collusion” exception that applies when a person colludes with an agent to cheat the principal. After a detailed analysis of the allegations, the Court concluded that the adverse interest and collusion exceptions apply to many of the claims against most of the defendants.

With respect to the damages arguments on which defendants were successful, the Court said plaintiff could not recover $75 million from defendants because it had not lost $75 million; it could not recover for damage to its reduced ability to issue bonds because the program for which the bonds were issued no longer existed; and its possible future obligations for bond-service payments was not ripe for review.

On the other hand, the Court held that plaintiff could recover for its liability for the General Assembly’s appropriation of funds to pay the bondholders (of which $2.5 million had already been appropriated), for injury to its reputation and credit and for the fees and salaries paid to defendants.

Rhode Island Economic Development Corp. v. Wells Fargo Securities, LLC, P.B. 12-5616, 2013 WL 4711306 (R.I. Super. Aug. 28, 2013)

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