If a recent Barron's article is correct, Marvel Entertainment (NYSE:MVL) could owe millions to a bankrupt company originally co-founded by Spider-Man creator Stan Lee.

Trouble is, the Barron's article, written by Bill Alpert -- one of my favorites for his normally spot-on detective work -- assumes too much and misses pertinent facts about a key player in the case.

Meanwhile, back at the Hall of Justice ...
The lawsuit hinges on whether an October 1998 intellectual property rights assignment between Lee and his former company, Stan Lee Media (SLM), included a financial interest in characters Lee co-created while working for Marvel.

Alpert puts it plainly, early in his story: "In 1998, [Marvel] ... used bankruptcy procedures to reject Marvel's $1 million-a-year lifetime-employment contract with Lee. That voided Lee's exclusive assignment to Marvel of his rights in characters like Spider-Man." [Emphasis added.]

Sounds ominous, doesn't it? A bankrupt entity siphoning tens (hundreds?) of millions from Marvel for its productions with News Corp. (NYSE:NWS) for Fantastic Four and X-Men, Sony (NYSE:SNE) for Spider-Man, and General Electric's (NYSE:GE) Universal for Hulk, among others.

That's what James Nesfield, who's leading the lawsuit against Marvel on behalf of himself and other SLM shareholders, including convicted felon Peter Paul, asserts in this SEC filing. Quoting:

July, 1998 -- [Marvel CEO Isaac] Perlmutter and [Avi] Arad use Chapter 11 Reorg Plan to void Stan Lee's 1994 ... exclusive Employment Agreement with Marvel. (Unknown to Perlmutter and the public, and never disclosed to the SEC or through public filings, the 1994 Marvel-Lee Employment Agreement ... included ... 10% of movie and TV profits a Rights Assignment and Forbearance Agreement that effectively paid Lee a royalty for his co-creator's rights and thereby secretly quieted title to Stan Lee's Marvel character co-creations, including Spider Man, X-Men, etc.) [Emphasis added.]

There's just one problem: Documentary evidence seems to back Marvel. Excerpts from Lee's 1976 and 1980 employment agreements, provided by the company via its investor relations representative, show that Lee transferred rights to his creations to Marvel decades ago.

To be fair, Alpert didn't have access to Lee's old contracts. And he maintains that his story is also based on documentary evidence, including a 1999 BrandWeek interview with Lee and Paul.

"I've always had a lifetime contract at Marvel Comics and about a year and a half ago, in their bankruptcy, they rejected everybody's contract. So for the first time, I had a chance to do whatever I wanted," Lee told BrandWeek.

It's the phrasing "do whatever I wanted" that's troubling. It could mean, "do whatever I wanted with the characters I created" or "do whatever I wanted because I was locked into working for Marvel and only Marvel."

The context of the interview, to me, suggests the latter. "We are establishing a studio dedicated to the development of compelling original content," Lee and Paul told BrandWeek when asked about the purpose of SLM. [Emphasis added.]

Excelsior no more?
Interestingly, that would jibe with the contents of a November 1998 contract Lee signed with Marvel. In it, the comic book king asserts Lee's right to work for other entities and only claims rights to work produced by Lee for Marvel.

But the agreement also makes assertions as to who owns Spider-Man, Hulk, the X-Men, etc. as brands. "You may, for publicity, advertising, public relations, historical and any related purposes ...  refer to or hold yourself out as founder and/or creator of whatever characters and images you created or founded on behalf of Marvel,  provided such uses do not confuse ownership or source of origin," the document reads. [Emphasis added.]

Clear, right? Yes, but in a 2002 lawsuit, Lee claimed he assigned Marvel "conditional rights" to characters he co-created -- even if the substance of the case was a provision of the November '98 contract that provided Lee a 10% cut of the TV and movie income derived from his characters.

The judge's ruling in the case doesn't speak to creator's rights. The closest you'll find is a reference to pre-1994 profit participation:

The parties entered into an agreement granting Lee a share of Marvel's profits. In 1995, pursuant to this agreement, Marvel paid Lee a 10% participation, which was based on revenue received by Marvel under an arrangement with Danchuk Productions. Under this arrangement, Lee received a percentage of gross receipts. The payments to Marvel were characterized as "profit participation."

That and other evidence compelled the judge to grant most of Lee's claims in January of 2005. By April, the case had been settled.

Today, Lee says, in a suit filed against Nesfield, that he didn't own rights to Marvel characters and, thereby, couldn't have assigned them to SLM.

Meet Mr. Mayhem
Ultimately, legal experts will decide this case, which is proceeding in two phases. First, a trial to determine liability. Then, if necessary, a trial to determine damages. Discovery is to be completed by October.

So, we won't know the outcome for months. Perhaps years. Still, as investors, I think it's important to study cases like this -- if only to understand what the plaintiff has to gain. By "plaintiff," I don't mean Paul, who at one time controlled 27% of Stan Lee Media. I mean Nesfield.

Known best as a whistleblower in the mutual fund market-timing scandal, Nesfield has been a player in bankruptcy investing as well. Here's his bio from a 2002 filing in which his former company, Nesfield Capital, proposed to acquire the assets of Freerealtime.com:

Mr. Nesfield is a specialist in the art of investing in distressed companies, primarily companies in bankruptcy. Mr. Nesfield has worked in the financial service field since 1978 in various capacities such as trader of government bonds, corporate bonds, market maker, and analyst. [Emphasis added.]

That's in stark contrast to how he bills himself in his later filing for the Marvel case. "Mr. Nesfield is in the investment business with a special interest in corporate governance," the document reads.

Perhaps so. Trouble is, Nesfield and his partners attempted a 2006 reverse spilt and recapitalization that would have given them more than 95% of the outstanding shares of SLM.

Nesfield defended the proposal -- which was never enacted and remains void -- in an interview with me last week, claiming that the reverse spilt was arranged to establish a quorum capable of acting to keep the company out of bankruptcy, a move that he said Lee blocked repeatedly. "We took extreme measures to protect the assets of the company," Nesfield said. "Everything we did was for a purpose."

The strategy worked: a Colorado state court judge awarded control of SLM to Nesfield in May.

And today? Nesfield has plenty to lose. According to a copy of an SLM shareholder list, Nesfield owned 500,000 shares as of February 2007. He confirmed by phone that his holdings remain at or near that total today. I'd love to believe that Nesfield's operation is a rescue, but to me, it looks too much like reclamation.

Yet I, too, have a bias: I am a Marvel shareholder.

My research doesn't necessarily disprove Nesfield and Paul's claims. Marvel could be perpetrating a fraud, as the lawsuit asserts. If so, it would likely forfeit hundreds of millions of dollars' worth of intellectual property.

To me, the context and facts of the case -- too much of which the Barron's article skipped over -- suggest a very different outcome. That's why I say Marvel is the hero here.