Brooke Corp. Troubles Continue as Stock is Sold

Kansas Franchise Group Faces Lawsuits in Multiple States

Amid the flurry of lawsuits leveled by franchisees, now an Illinois company connected to a bank involved in the lawsuit of the parent company of Brooke Corp. has taken control of 44.3 percent of Brooke’s stock.

Trim Creek LLC of Crete, Ill., now owns 6.43 million shares of Brooke’s common shares. According to an account in the Kansas City Star, Trim Creek is 70 percent owned by Crete Bancorporation Inc. of Crete, Ill. Crete also owns First United Bank of Crete, which made separate loans of $5 million and $7.87 million to Brooke Holdings, Brooke’s parent, in May 2008.

The Kansas City Star reported that in September, First United sued Brooke Holdings for allegedly defaulting on the loans. The stock was pledged as collateral.

Brooke Corp., Brooke Capital and Aleritas Capital Corp. are all part of a financial services lending and franchising enterprise. The Brooke companies bought independent insurance agencies and other businesses from their owners with Aleritas funds and repackaged them as Brooke agency franchises sold to entrepreneurs using money borrowed from Aleritas. The Brooke companies also repackaged and resold the loans as securities to Wall Street investors and to groups of mostly small Midwestern banks, the Kansas City Star story said.

In the lawsuit filing, Trim Creek said that it acquired the stock from First United in exchange for a $1.61 million promissory note. First United filed its suit shortly after U.S. District Judge John Lungstrum appointed Albert Riederer, a former Jackson County prosecuting attorney and Missouri Court of Appeals judge, as a “special master” to take charge of Brooke and its affiliated businesses.

Special Master vs. Receiver

“Appointing a special master, Albert Riederer, rather than a receiver allows agent/owners to continue writing business as the litigation proceeds,” said Reid Nelson, a San Antonio, Texas, attorney representing more than 200 agent/owners in a suit against Brooke Corp. Nelson told Insurance Journal that other banks, such as Fifth Third, DZ and HVB that are holding loans agents took out to pay the fee to become part of Brooke Corp. as franchisees, are pressuring agent/owners to sign a letter saying they are responsible for their loans rather than wait for the Brooke to go through bankruptcy litigation. Nelson is advising the agent owners to wait for the Brooke bankruptcy litigation to go through.

According the attorney, the banks are also asking agency owners to turn over all commissions to the bank through a “lock box” arrangement where the bank will take the rent first and then give the rest of the earned commissions back to the agents.

“I am advising against this arrangement as well,” Nelson said.

Nelson is representing agent/owners in a lawsuit against Brooke Corp. from the following states: Texas, Louisiana, California, Florida, New Mexico, Colorado, Oregon, Washington, Michigan, Missouri, North Carolina, South Carolina, Tennessee Georgia, Ilinois, Ohio, Minnesota and Virginia.

Nelson said that many Brooke franchisees involved in the lawsuit face bankruptcy themselves, many losing lifetime savings.

‘I Told You So’

Rhonda Lubelle, a former franchise owner in Louisiana, said many of the franchise owners should never have been approved for the loans to become part of Brooke. In addition to Brooke’s mismanagement, Lubelle says this situation compounded the problems.

“I told you so,” Lubelle said. “Like many of the subprime loans given out for homes, many did not qualify to become part of this franchise.”

Lubelle herself is involved in a lawsuit with Brooke. She has been outspoken about the troubles she faced with Brooke management. She said a market conduct study was done by the Louisiana Department of Insurance in 2007 that debunked many of the accusations of problems she and others had told the department and other officials about early on. She alleges that the reason Brooke seemed clean was that two sets of financial books existed and the “good set” was given to the Louisiana Department for review.

Insurance Journal contacted the Louisiana Department of Insurance, which provided the market conduct study, but a spokesperson said they were unaware of any accusation that two sets of books existed.

“Seven out of the eight Brooke franchises in Louisiana have gone under,” Lubelle said. “What does that tell you?”

Little Regulatory Oversight

Insurance regulation oversight of Brooke is limited. Yet, Brooke remains under the watchful eye of the Kansas Department of Insurance. The department said it is following up on consumer inquiries and closely monitoring the legal issues surrounding Brooke Corp. Kansas Insurance Commissioner Sandy Praeger also said the department is interacting with the appointed special master and staff members regarding contractual concerns between the corporation and its franchisees. The insurance department does not have regulatory oversight in those contractual matters.

Sources: The Kansas City Star, Kansas Department of Insurance contributed to this story.

Topics Lawsuits Legislation Agencies Louisiana Kansas