Mattel Inc. last year vanquished its rival, MGA Entertainment Inc., by winning a $100 million judgment and the rights to MGA’s Bratz doll.
But now the toy company is increasingly concerned that its claim to the money and the doll may be slipping back.
That’s because MGA’s new and largest creditor appears to be first in line to claim those assets. What’s more, Mattel is claiming that the creditor Omni 808 Investors LLC, which is headed by Beverly Hills investor Neil Kadisha has ties to MGA’s chief.
“Based on the statements made to the court, it appears that Omni 808 hopes to jump the queue and take belated priority over Mattel’s successful claims against MGA and obstruct Mattel’s rights in Bratz,” said Michael Zeller, a partner in the downtown L.A. office of Quinn Emanuel Urquhart Oliver & Hedges LLP who is representing Mattel with partner John Quinn.
“Mattel does not believe that there is any merit to that position,” Zeller continued.
However, Mattel is vigorously fighting the matter in court and is alleging essentially that Kadisha’s move is part of a plan concocted by MGA’s chief executive, Isaac Larian, to keep the company’s assets out of Mattel’s hands and avoid paying the big judgment.
The situation arose because Kadisha’s Omni 808 bought a loan collateralized by the assets of MGA, apparently including the rights to the Bratz doll. Since that loan is in default, Omni 808 could foreclose and claim its collateral. Omni 808’s secured rights to the assets could challenge Mattel’s court judgment. Theoretically, Mattel could get nothing.
Court documents suggest that Kadisha could be a friendly debt holder because Omni 808 is connected to Larian’s brother-in-law. That raises the possibility that Larian could remain in control of the company.
An MGA spokeswoman said neither Larian nor any of the company’s attorneys would comment for this article. Court documents detailing MGA’s position on its finances have been filed under seal, making it difficult to present the company’s counterargument.
Kadisha’s lawyer, Todd Gordinier, declined to comment for this article. However, in court documents that aren’t sealed, Kadisha argues that Mattel’s allegations are “replete with false and misleading representations.”
Starting out
MGA of Van Nuys, which was started by Larian in 1979 as a consumer electronics importer, introduced Bratz dolls in 2001, and they became popular among tween girls. At their peak in 2005, the dolls generated an estimated $2 billion in annual sales making them MGA’s monster product. The company’s other lines include Little Tikes and Baby Born, a baby doll line.
But in a 2004 lawsuit, Mattel of El Segundo claimed that toy designer Carter Bryant drew the dolls while he was still a Mattel employee. The toy maker argued that Bratz was Mattel’s property, even though Bryant sold the drawings to MGA.
A federal jury in August agreed with Mattel and found that Bryant was still under contract with Mattel when he created the Bratz doll line. As a result, the company was awarded ownership of Bratz’s intellectual property and $100 million in damages.
The net result: Mattel was set up to be the new owner of Bratz after the 2009 Christmas season to give retailers assurance that they could purchase Bratz products. MGA could appeal the decision and delay matters.
In the meantime, MGA is trying to prevent the court from appointing a receiver who would oversee the Bratz finances through 2009.
It was during this legal tussle about the receiver when Mattel was startled to discover that it may not be first in line to get Bratz and the money.
That’s because of some financial maneuvers that occurred while the trial was occurring. In summer 2008, Kadisha’s company bought most of a loan from Wachovia Bank for $110 million. The loan, originally for $313 million, was made to MGA and it was collateralized by the company’s assets, including MGA’s inventory, accounts receivable, and apparently the intellectual property rights of the doll itself. (Wachovia retained $22 million of the debt and exchanged it for unsecured promissory notes.)
“Wachovia must have been awfully worried that it wasn’t going to be able to collect $313 million from MGA because they sold that note for $110 million,” said Michael Swartz, a litigator in the downtown L.A. office of Hennigan Bennett & Dorman LLP. Swartz is not involved in the case. “Wachovia must have thought that at the end of the day there might have been a bankruptcy.”
In the event of an MGA bankruptcy, legal experts said that Omni 808 would be first in line to be repaid because it’s the largest secured creditor. As a result, Kadisha could claim ownership of Bratz or even MGA itself. That’s because such a secured position would come ahead of Mattel’s monetary judgment and could even come ahead of Mattel’s ownership of the Bratz line.
Offshore entities
Mattel is also concerned about apparent ties between Kadisha and Larian.
In court documents, Kadisha admits that MGA approached him about negotiating a deal with the bank to buy the loan. He then gathered a group of private investors and formed Omni 808 to buy the debt from Wachovia.
Mattel alleges in court documents that Omni 808 was actually funded through a series of offshore entities with ties to Larian’s brother-in-law, Leon Neman.
Mattel claims that it obtained public filings that show Omni 808 received funding from a company called Vision Capital LLC. According to the filings, Vision Capital’s address is the same as Neman’s downtown L.A. textile and garment wholesale company, Neman Bros. & Associates Inc.
Mattel further alleges that a paper trail shows that Vision Capital is funded by a company called Lexington Financial Ltd. Lexington has a London mail drop but is registered in the Caribbean island of Nevis, a haven for offshore accounts. In court documents, Mattel alleges that Lexington’s agent is listed as L.A. attorney Fred Mashian, a longtime business associate of Larian’s brother-in-law, Neman.
Mashian did not return a call for comment. However, in a declaration filed with the court last week, Mashian said that he has provided legal services for Lexington Financial in the past, but does not have an affiliation with the entity.
Mattel claims the situation suggests “that related parties to MGA and Larian created these vehicles for the improper purpose of attempting to leapfrog over Mattel’s claims and shield their assets from creditors and other rights holders such as Mattel.”
Kadisha, a former chairman of Qualcomm Inc., denies Mattel’s allegations. In court documents, he claims that “substantial financial institutions” funded the purchase of MGA’s debt from Wachovia, and that Lexington Financial has no relationship with MGA or Larian.
Kadisha is managing partner of L.A. private investment firm Omninet Capital, which invests in private equity and real estate. In 2006, a Los Angeles Superior Court judge ruled that Kadisha misappropriated millions of dollars from a pair of trusts for a widow and children of a friend. The money was allegedly used for Kadisha’s investment in Qualcomm. He is appealing the judge’s ruling. Kadisha was No. 43 on the Business Journal’s list of Wealthiest Angelenos in May with an estimated $925 million in wealth.
Regardless, Mattel’s fear is that Larian could end up shielding his assets, and Mattel may end up without being able to collect some or all of its judgments.
Loyola law professor Dan Schechter, who is not involved in the case but who reviewed court documents for the Business Journal, said: “If what Mattel claims is true, this is a classic shell game in which the assets of a distressed debtor are siphoned off to affiliated entities in order to defeat an onrushing creditor.”
Nonetheless, any effort to keep Mattel from getting its award likely would trigger another fight.
In fact, Mattel already has argued in court documents that since the court ruled MGA never rightfully owned Bratz, it therefore wasn’t legally able to collateralize the Bratz line.
Schechter said Kadisha’s company can argue that the Wachovia loan was made in good faith before the court awarded the Bratz line to Mattel, thus giving Kadisha’s company the right to assert its claim over the popular dolls.
“What you have is a complicated factual issue that is not going to be resolved quickly, easily or cheaply,” said Schechter.
