Brooke Corp. Troubles Continue as Stock is Sold

November 16, 2008

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. Crete also owns First United Bank of Crete, which made 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 part of a financial services lending and franchising enterprise. The Brooke companies bought independent 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 a U.S. District Judge appointed 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 from California, Colorado, Florida, Georgia, Illinois, Louisiana, Michigan, Minnesota, Missouri, New Mexico, North Carolina, Ohio, Oregon, South Carolina, Tennessee, Texas, Virginia and Washington 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 Brooke to go through bankruptcy litigation. Nelson is advising them 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 in which 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. He noted that many 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 said this compounded the problems.

“Like many of the subprime loans given out for homes, many did not qualify to become part of this franchise,” she said.

Lubelle herself is involved in a lawsuit. 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 alleged that the reason Brooke seemed clean was that two sets of financial books existed, and the “good set” was given to the DOI.

Insurance Journal contacted the DOI, which provided the study, but a spokesperson said the Department was 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 Oversight

The Kansas Department of Insurance said it is following up on consumer inquiries and monitoring the legal issues. Kansas Insurance Commissioner Sandy Praeger also said the department is interacting with the appointed special master and staff members about contractual concerns between the corporation and its franchisees. Yet the department does not have regulatory oversight in those contractual matters.

California Insurance Commissioner Steve Poizner encouraged consumers who purchased insurance policies through Brooke franchises to verify their coverage, in light of recent closures at Brooke. It is unlikely that an insurance policy held by a California resident will be impacted, but consumers should take simple steps to verify their policy status, the California Department of Insurance said.

The DOI said it is aware that several Brooke franchise offices in California have closed. The DOI is in the process of contacting the insurance companies that have done business with Brooke. While the department will request those insurers to notify California consumers of the status of their coverage, the process may take several weeks, the DOI said.

The Kansas City Star and Kansas Department of Insurance contributed to this story.

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