“Technically, Brooke Franchise owes me $7 million, but who knows if I will ever see it,” said Roger Cunningham, former Brooke franchisee and agent/owner of RKC Financial in the Dallas/Fort Worth Texas, area.
Cunningham, like many Brooke franchise owners, is now involved in a lawsuit with the group. Kansas-based Brooke Corp., Brooke Capital and Aleritas Capital Corp. are part of a financial services lending and franchising enterprise that Robert Orr founded in 1986. 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.
Where once there were almost 800 franchise locations around the country, some sources say only 250 remain. In California there were more than 200 franchises at one time and numerous Brooke agencies in states across the country. But now many former franchisees have hired lawyers, because as Cunningham learned quickly, the contracts written between Brooke and the agent/owners had a specific clause that only allows binding arbitration in any lawsuit. Because Brooke officially filed Chapter 11 on Oct. 25, it could be many years before any arbitration settlements are forthcoming, Cunningham said.
All franchisees have received written notices saying that their contracts with Brooke are now null and void — but financial worries still abound.
Cunningham talks about picking up the “pieces of his life,” and getting his appointments back in place with carriers, and moving on with his agency, but it’s not an easy task.
Many agent/owners say they have lost their life savings. Most claim that Brooke took the premiums paid by clients and then cut commission checks that were not accurate or in some cases just denied that the commissions were owed at all. They say Brooke would put the commissions in question into what was called an “Orphan Fund” — then the monies owed would often never surface. Because most of the agent owners were small to mid-sized agencies, losing commissions, paying rent and other office related fees and struggling to pay back a $165,000 entrance fee to become part of Brooke put most into insurmountable, heavy debt.
Set Up to Fail
“We were set up to fail,” said Harvey Cohen of San Antonio-based Cohen Insurance Inc. Cohen was an experienced agent, spending many years with Allstate and then USAA before deciding to go out on his own. He was confident about Brooke when joined. He then brought his two daughters into the business as well.
But Cohen said that after the initial “wining and dining” to get him to join the franchise, reality set in.
“Within the first few months I noticed I was missing somewhere between $5,300 and $5,800 per month in commissions,” Cohen said. “When I questioned the discrepancy and suggested stealing was going on, Brooke’s regional vice president said that I must be wrong. He himself was such a believer that he had five agencies. Pretty soon I began to doubt myself and my own bookkeeping.”
Cohen added that his daughter, after learning about how he was faltering on the brink of bankruptcy under the Brooke umbrella, tried to commit suicide.
“This horrible situation of mine was just one of several that definitely contributed to her illness,” Cohen said. He added she is fine now, but that he knew of other agents whose marriages were destroyed and others considered filing bankruptcy.
Cohen also has a lawsuit pending. He said that with a Chapter 11 bankruptcy, funds that are still in place could eventually be used to pay former Brooke franchisees the settlements given out during arbitrations — but like Cunningham, he guessed that could be years down the road.
Potential Buyers Back Out
The picture seemed brighter for a while. The Overland Park, Kan.-based Brooke Corp. and Brooke Capital Corp. filed for Chapter 11 bankruptcy protection to prepare for a possible sale to two Kansas businessmen, who later withdrew their interest in purchasing the corporation. Lysle Davidson, an insurance agent from Johnson City, Kan., and Terry Nelson, vice chairman of First State Bank in Norton, withdrew the offer to acquire Brooke’s insurance network, saying there weren’t enough agencies left.
In addition to individual insurance agent franchise lawsuits, additional lawsuits had preceded the Brooke filing of bankruptcy. In September, the Bank of New York Mellon filed a lawsuit seeking more than $5 million from Brooke Corp. Citizens Bank and Trust Co. of Chillicothe, Mo., has also sued to recover a $9 million loan to Brooke Capital for which the bank says the company is in default.
Smoke Signals Trouble
Agents had been calling media outlets, including Insurance Journal, for several years with horror stories about their Brooke affiliations. For these agents, the signals had been loud and clear but they feel watchdogs dropped the ball. Insurance regulators in general said that the SEC had jurisdiction, not state insurance regulators, because it was a franchise business. However, Kansas Insurance Commissioner and NAIC President Sandy Praeger issued a statement in September saying that Brooke was being monitored, while again pointing out that the insurance department had limited jurisdiction.
“Those Brooke lawsuits deal with contractual issues that are not part of the insurance department’s regulatory authority,” Praeger said, “but we continue to monitor any potential problems that could concern Kansas consumers and policyholders.”
Later, the Kansas Department said consumers would be covered in all cases if they could prove or the agency could show premiums had been paid.
Still some agents say insurance regulators should have done more.
Former agency owner in Louisiana, Rhonda Lobell, said the Louisiana Department of Insurance hired an outside auditor in 2007 to look at the books after she and others complained that the Brooke firm was stealing. When the auditor was finished with the exam, the official report said he could not find evidence of any wrongdoing.
The Louisiana Department of Insurance only talked to one side, Lobell said. She and others contend that there were two sets of books and that the department failed to dig deeper.
Insurance Journal contacted the Louisiana Department of Insurance, which provided the market conduct study in full, 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,” Lobelle said. “What does that tell you?”
In recent days the Missouri Department of Insurance, Financial Institutions and Professional Regulation, as well as the Kansas Insurance Department, said they plan to send market conduct investigators to look at all Brooke’s paperwork. The insurance departments are working with Albert Reiderer, who is the special master appointed to represent Brooke.
But for the agency owners, the struggle to survive is still a reality.
Plano, Texas, former Brooke agent/owner Todd Herron said he is trying to put his life back together.
“I considered myself a pretty smart person when I bought into Brooke,” Herron said. “But with all the trouble going on with this franchise, I kept asking myself, ‘How they were pulling this off? How is it the feds and state regulators weren’t catching what was going on? What had I missed?’ Maybe I wasn’t so smart after all.”
Herron is working to re-establish relations with insurance carriers and plans to keep his agency, but said that many agents he has spoken with won’t have the resources to keep their shops open. Many are small agencies and the larger carriers are reluctant to have a relationship without a big name to go with it.
“Former franchisees are still in debt to local banks with loans they took out to join Brooke,” Herron said. “All are waiting to hear what will happen now that Brooke has filed bankruptcy.”
Other agents and some news outlets now say there is an FBI investigation ongoing with possible RICO charges pending.
Whatever happens to Brooke and its owners, many agents’ lives have forever been changed.
“I wasn’t a rich man coming into this situation, and I definitely am not one now,” said Harvey Cohen, who says he lost his life savings at 59 years of age because of his Brooke affiliation. “All of us are just trying to survive and and that is just what I intend to do.”
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