Judge Somers

10-06166 Redmond, Brooke Trustee v. GI Agency Inc. et al (Doc. # 109)

Redmond, Brooke Trustee v. GI Agency Inc. et al, 10-06166 (Banr. D. Kan. Oct. 27, 2011) Doc. # 109

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SIGNED this 26 day of October, 2011.

Dale L. Somers

For on-line use but not for print publication.

In Re:


Trustee of Brooke Corporation, Brooke
Capital Corporation, and Brooke
Investments, Inc.,


GI AGENCY, INC., et. al.,


CASE NO. 08-22786
(jointly administered)

ADV. NO. 10-06166


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In this adversary proceeding the Chapter 7 Trustee of Debtors Brooke Corporation,
Brooke Capital Corporation, and Brooke Investments, Inc. (hereafter collectively “Debtors”)
seeks to recover from defendants (insurance agencies and/or agents franchisees of Brooke) agent
statement balances and other similar obligations allegedly owed by the agents to the bankruptcy
estates. One of the defendants, Goodlander Funeral Services, LLC (hereafter “Defendant”),
moves to dismiss for failure to state a claim upon which relief may be granted (hereafter
“Motion”). The Trustee opposes the Motion.

Defendant moves to dismiss pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy
Procedure, which incorporates Rule 12(b)(6) of the Federal Rules of Civil Procedure and
provides for dismissal for “failure to state a claim upon which relief can be granted.” Such a
motion tests the sufficiency of the factual allegations of the complaint. The pleading standard
established by the Supreme Court in Twombly1 and Iqbal 2 is easily stated. “To withstand a
motion to dismiss, a complaint must contain enough allegations of fact ‘to state a claim to relief
that is plausible on its face.’”3 “Factual allegations must be enough to raise a right to relief
above the speculative level.”4 Plausibility has been construed by the Tenth Circuit as not

1 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).

2 Ashcroft v. Iqbal, 556 U.S. 662 (2009).

3 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008), (quoting Twombly, 550 U.S. at
570; see also Iqbal, 556 U.S. at ___, 129 S.Ct. 1949 (relying on Twombly to support statement: “To
survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.’”).

4 Twombly, 550 U.S. at 555.


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meaning “likely to be true” but as to referring to the scope of the allegations in a complaint.5
They “must be enough that, if assumed to be true, the plaintiff plausibly (not just speculatively)
has a claim for relief.”6 “This requirement of plausibility serves not only to weed out claims that
do not (in the absence of additional allegations) have a reasonable prospect of success, but also
to inform the defendants of the actual grounds of the claims against them.”7 “In determining
whether a complaint states a plausible claim for relief, the Court draws on its judicial experience
and common sense.”8


The claims for recovery against Defendant are based upon Brooke’s business practices
with its insurance franchisees. The Trustee alleges that Brooke controlled most of the cash flows
for its franchise agencies, and its business practice was to pay most of the operating expenses for
its agents, including rent and loan payments. Brooke then charged these payments (along with
the percentage of ongoing commission revenues and or recurring franchise fees) to the agent’s
monthly statements as offsets to the commission revenues earned. When, as in many cases, the
commission revenues where not sufficient to cover the costs, Brooke absorbed the costs or
advanced funds to the agent to cover them and recorded them in the agent statement balance
accounts. In this action, the Trustee seeks to recover the agent statement balances and other
similar obligations owed by Defendant to the bankruptcy estates.

5 Robbins,519 F.3d at 1247.

6 Id.

7 Id., at 1248.
8 Iqbal, 556 U.S. at ___,129 S.Ct. at 1950; Fifth Third Bank v. Brooke Holdings, Inc., 2011 WL
1337093 (D. Kan. case No. 10-2294, April 7, 2011).

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The Complaint alleges five counts to recover these advances: Count I - action on account;
Count II - action for money had and received; Count III - action for unjust enrichment; Count IV

- constructive fraudulent conveyance; and Count V - recovery of avoided transfers.9 Defendant’s
arguments regarding dismissal do not focus on particular counts but, under the general
contention that the Complaint is not plausible on its face, make five assertions. The Court will
address these assertions.

Defendant seeks dismissal on two bases. First, Defendant argues that the Affiliation
Agreement between it and Brooke has been terminated, such that the Trustee has no right to
recover. Second, Defendant argues that the Trustee’s claims are subject to arbitration and the
Trustee is time-barred from arbitrating those claims.

The Trustee’s Post-petition Rejection of the Franchise Agreement with Defendant

does not Preclude Trustee’s Recovery.

Defendant’s position is that the Affiliation Agreement10 between Defendant and Brooke
has been terminated, and because of such termination the Complaint does not state a claim for
recovery of the agent statement balances.11 The basis for the alleged termination is this Court’s

9 The Complaint also prays in Count VI that defendants’ proofs of claim be disallowed until such
time as the respective defendants satisfy their obligations to the estates and in Count VII, to the extent that
the defendants have valid claims, that such amounts be set off against the obligations the defendants have
under the Complaint. Defendant makes no arguments regarding dismissal of these counts.

10 A copy of the Affiliation Agreement is in the record as dkt. no. 68-1.

11 Even if for some reason the Trustee has no cause of action based upon the Affiliation
Agreement, this would provide a defense only to the claims based upon the agreement. Count I, action on
account, and Count II, money had and received, are the only two counts which could possibly be subject
to such a defense.


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order entered on November 17, 2008 (hereafter “Rejection Order”),12 granting the Trustee’s
Emergency Motion for Order Pursuant to 11 U.S.C. § 365(a) Authorizing Rejection of Franchise
Agreements as of Petition Date (hereafter “Rejection Motion”).13 In the Rejection Motion the
Trustee prayed for an order “authorizing as of October 28, 2008 rejection of all Franchise
Agreements to which Debtors were parties as of that date.” The Rejection Order granted the
relief sought. There is no dispute that the Affiliation Agreement between Defendant and Brooke
was included in the franchise agreements which the Trustee sought to reject and that the
agreement was rejected.

The parties agree that rejection of an executory contract pursuant to 11 U.S.C. § 365 does
not terminate a contract. Defendant’s argument that the Rejection Order, in addition to
approving rejection of the Affiliation Agreement, also terminated the agreement is based solely
upon the following statement in the Rejection Motion submitted as part of the presentation of the
basis for relief:

17. Given the fact that the Debtors are unable to perform their
obligations under the Franchise Agreements, there is thus no value
to the estate in maintaining them. Indeed, continuation of the
Franchise Agreements post-petition subjects the estate to
unnecessary administrative expenses as it would deal with
franchisee termination on a piece-meal basis. Moreover,
immediate termination of the (sic) all Franchise Agreements will
release all franchisees to pursue other business opportunities.
However, in the prayer for relief the Trustee sought only rejection of all franchise agreements.

The Rejection Order found cause for rejection and ordered the franchise agreements deemed

12 Case no. 08-22786, dkt. no. 155.
13 Case no. 08-22786, dkt. no. 105.

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rejected as of the petition date. Neither the word “terminate” or “termination” are in the
Rejection Order. There is absolutely no basis to conclude that the Affiliation Agreement
between Brooke and the Defendant was terminated (as opposed to rejected) by action of this

The Presence of an Arbitration Clause in the Affiliation Agreement does not

Provide a Basis to Dismiss the Complaint.

The Affiliation Agreement between Defendant and Brooke Franchise Corporation
includes a section requiring arbitration of “[a]ny issue, claim, dispute or controversy that may
arise out of, in connection with or relating the Affiliate Agreement (including addenda) and/or
the relationship of the parties.” Defendant argues, in the alternative, that if the Affiliation
Agreement has not been terminated, it requires dismissal of the Complaint because the Trustee’s
claims were required to be settled by arbitration within two years of the bankruptcy Court’s
order permitting rejection of the affiliate agreement. The Courts rejects this position.

First, there is question whether the contractual arbitration clause applies to all of the
claims asserted by the Trustee. Defendant assumes it does without providing any authorities in
support. Defendant does not move to compel arbitration. Since it is not necessary to resolve the
Motion, the Court declines to address the enforceability of the arbitration clause, a difficult,
unsettled question15 for which there is no direct guidance from the Tenth Circuit.

14 Further, as pointed out by the Trustee in response to the motion to dismiss, the Affiliation
Agreement in paragraph 15.7(h) provides that upon the termination of the Agreement, affiliate shall
remain responsible for payment to Brooke for net premiums, return commissions, unearned commissions
and return premiums. In addition paragraph 15.7(j) provides that “[o]n or prior to the termination
effective date, any commission credited to Affiliate’s agent account statement shall be subject to Affiliate

15 See 10 Collier on Bankruptcy ¶ 9019.05[2] (Alan N. Resnick & Henry J.Sommer eds.-in-chief,
16th ed. rev. 2010).


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Second, as the Trustee points out, assuming some or all of the claims are subject to the
contractual arbitration clause, the remedy is stay of the court proceeding regarding those claims
pending arbitration, not dismissal.16 Defendant seeks dismissal not stay.

Third, the Court rejects Defendant’s position that the claims are now time barred because
arbitration was not requested within two years of the November 17, 2008, when rejection of the
Affiliation Agreement was approved.

The Trustee makes the following arguments in opposition to Defendant’s position. First,
the Trustee argues that the issue of whether arbitration of a dispute is time-barred is for the
arbitrator to decide.17 Next, the Trustee points out that the arbitration clause does not contain a
two year limitation. Further, as again argued by the Trustee, assuming that Defendant is relying
upon a state law limitation period and the period did not expire before the petition was filed, the
action was timely filed pursuant to Bankruptcy Code § 108, which provides that the trustee may
commence an action before the later of the end of the non-bankruptcy limitation period
(including any suspension period occurring on or after the commencement of the case) or two
years after the order for relief. Defendant does not respond to these arguments by the Trustee.
The Court finds the Trustee’s positions well taken and denies the Defendant’s argument that the
Motion should be granted because arbitration was not commenced within two years of the date
the Court approved rejection of the Affiliation Agreement.

16 Quinn v. CGR, 828 F.2d 1463 (10th Cir. 1987); Cohen v. Ernst & Young, LLP (In re
Friedman’s, Inc)., 372 B.R. 530, 549 (Bankr. S.D.Ga. 2007).
17 Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).

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For the foregoing reasons, Defendant’s motion to dismiss for failure to state a claim upon
which relief may be granted is denied.



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