Judge Somers

10-06163 Redmond, Brooke Trustee v. Nick Hammer Agency Inc et al (Doc. # 82) - Document Text

SIGNED this 03 day of November, 2011.

Dale L. Somers

For on-line use but not print publication.

In Re:


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




CASE NO. 08-22786
(jointly administered)

ADV. NO. 10-06163


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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. The matter under advisement is the motion to dismiss for failure to state a claim upon
which relief may be granted (hereafter “Motion”) filed by Defendant Turney & Son, Inc.
(hereafter “Defendant”), a Brooke franchisee. The Trustee opposes the Motion and, in the
alternative, seeks leave to amend the Complaint, if the Motion is granted.

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. at 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’s First Argument - “Brooke” is not Coextensive with the “Debtors”.

Defendant correctly notes that throughout the first portion of the Complaint, the factual
allegations frequently relate to “Brooke,” defined as Brooke Corporation and its various
subsidiaries, while the claims seek relief on behalf of the Debtors. It is true that “Brooke” is a
far broader group of entities than the three entities who are Debtors.

This circumstance arises from the Trustee’s pleading style. The Complaint first sets forth
background facts common to all counts and all defendants, including allegations about Brooke’s
unsustainable business model and Brooke’s improper revenue recognition, which allegedly
resulted in Brooke appearing solvent when in fact it was continuously insolvent from 2003
through the dates the bankruptcy petitions were filed. The Complaint then makes general
allegations regarding the Brooke’s relationship with the Brooke insurance agencies, including
the practice of creating statement balances.

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.


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The individual claims or counts, however, are based upon specific allegations concerning
actions of the Debtors (as opposed to Brooke). For example, Count I alleges that Debtors made
the loan payments and/or paid operating expenses on behalf of Defendant, that Debtors furnished
accounts statements to the Defendant, that Defendant acknowledged the amounts paid and
promised to pay the amounts shown on the statements, and despite demand Defendant has failed
and refused to pay. Counts II and III, which state alternative counts for recovery of the
statement balance, also refer to the Debtors, not Brooke. Likewise, with respect to Counts IV
and V, it is alleged that Debtors were continuously insolvent during the four-year period
preceding their bankruptcy filing, during that period one or more of the Debtors transferred
various monies to or for the benefit of the Defendant, that Brooke did not receive reasonably
equivalent value, and that Debtors were engaged in a business for which their remaining
property was unreasonably small and/or they were incurring debts that were beyond their ability
to pay. It is the individual claims for relief, which make allegations concerning Debtors, not
Brooke, which must be evaluated under the Twombly and Iqbal standard.

The question is whether under the circumstances of this case, the failure to distinguish
between the Debtors is a sufficient basis to find claims for relief have not been stated under
Twombly and Iqbal. In this bankruptcy case, as reflected in the Order Granting Trustee’s
Omnibus Procedures Motion with Respect to Category B, C-1, and C-2 Complaints (hereafter
“Omnibus Procedure Order”)10 applicable to 32 adversary proceedings, including this
proceeding, the Court has sanctioned the Trustee’s providing critical transfer information with
respect to alleged transfers sought to be recovered under Chapter 5 of the Bankruptcy Code by

10 Case no. 08-22786, dkt. no. 1952. The Complaint in this case is Category B.

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documentation, rather than by the allegations in the complaints. With respect to claims to
recover allegedly fraudulent transfers, the Trustee, on or before the deadlines stated in the order,
must provide the following critical information:

Disclosures with respect to the specific individual elements of the
fraudulent transfer allegations in his Complaints for each
defendant, including the tracing of the transfers through Brooke
entities to demonstrate that a debtor entity had an interest in the
funds transferred, but not including information with respect to the
issue of insolvency.11

 Arguably, under Twombly and Iqbal, Chapter 5 Complaints lacking such critical information
would be subject to dismissal for failure to state a claim. However, the Omnibus Procedures
Order, which is essentially an agreement on the procedures applicable to the adversary
proceedings negotiated by the Trustee and the many defendants, implicitly modifies the pleading
standards in these cases.

In this proceeding, Counts IV and V of the Complaint (the fraudulent transfer claims) are
Chapter 5 claims. The Trustee has a duty pursuant to the Omnibus Procedure Order to provide
the critical information about these claims. Counts I, II, and III of the Complaint seek to recover
the same funds as are the subject of Counts IV and V. Therefore, to the extent there could be
deficiencies in the factual allegations of Counts I, II, and III, such as the identity of the Debtor
entitled to recover the statement balances, the Omnibus Procedure Order provides for curing the

11 Id. at p. 5.
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lack of information.12 The Twombly/Iqbal purpose of providing notice would not be served by
granting the Motion to dismiss.13

Defendant’s Second Argument - that the Complaint does not allege that Turney &

Son’s Sales Commissions were Insufficient.

Defendant argues that a claim on which relief may be granted has not been pleaded with
respect to recovery of the account balances because there is no allegation Defendant’s account
balances were insufficient to pay the loan and operating expenses advanced by Debtors. The
Court finds the allegations are sufficient. The only plausible inference to be drawn from the
allegations of paragraphs 45, 46, and 47 of the Complaint is that the statement balances and other
similar obligations of agents did not arise unless the commissions were insufficient to cover the

Defendant’s Third Argument - Each Cause of Action is a Threadbare Recitation of


Defendant argues that causes of action are pleaded by a recitation of the elements of each
claim and that none of the causes of action is supported by factual allegations. In what is in
effect a restatement of Defendant’s first argument, Defendant urges that the factual contentions
are pleaded with respect to Brooke and then the Complaint “pivots” to seek recovery on behalf
of the Debtors.

12 The Court recognizes that the Omnibus Procedures Order provides the “Trustee’s disclosures
shall not prejudice any defendant from filing a motion to dismiss for failure to plead with specificity.
However, no defendant may file such a motion until after the Trustee’s disclosures have been made.”
Case no. 08-22786, dkt. no.1952, p. 6. The Court construes this statement to permit the filing of a
motion. It does not state that the Court cannot consider the disclosures required by the Omnibus
Procedures Order when ruling on such a motion.

13 The parties’ memoranda do not make reference to the Omnibus Procedure Order. The Court
has not been informed of the critical information provided, but assumes it includes the factual data
defined as critical information in the Omnibus Procedure Order.


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As stated above, the Court finds the allegations concerning the actions of the Debtors
sufficient. The Complaint, when supplemented by the Trustee’s preliminary disclosure of
critical transfer information, gives adequate both notice of the claims against Defendant and
states a plausible right to relief.

Defendant’s Fourth Allegation - Turney & Son is Entitled to Know Which Debtor is

Making the Claims Against It.

Defendant’s final argument, that it is entitled to know which Debtor is making claims
against it, is also just another restatement of Defendant’s first argument. The critical information
which the Trustee must provide includes identity of the entities involved in the allegedly
fraudulent transfers.

For the foregoing reasons, the Court denies Defendant’s Motion to Dismiss. Defendant’s
position that the Complaint is subject to dismissal because the general factual allegations refer to
Brooke, which includes entities in addition to the Debtors, is rejected. The individual counts
each refer to the Debtors, not Brooke.

Given the general allegations with respect to Brooke, the specific allegations with respect
to Debtors, and the critical information required to be provided by the Trustee to the Defendant
pursuant to the Omnibus Procedure Order, the Court finds the Complaint states claims upon
which relief may be granted under the standard of Twombly and Iqbal. The notice aspect of
Twombly/Iqbal as applied solely to the allegation of the Complaint is of reduced importance in
this case given the Trustee’s obligation, pursuant to the Omnibus Procedures Order, to provide
critical information about the transfers in issue in the Chapter 5 claims, which transfers also are
the basis for the accounts sought to be collected in Counts I, II, and III. Therefore, although the


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Complaint lacks detail concerning the account statements, including which of the three Debtors
made the advancements in issue, the Court finds the Complaint should not be dismissed for lack
of specificity, including failure to identify which of the three Debtors made the transfers in

Further, when the factual allegations of the Complaint are considered in light of the
Court’s familiarity with the Brooke case and common sense, the Court has no hesitation in
concluding that the Complaint states claims which are plausible on their face. The Trustee
clearly has pleaded claims to collect the account balances, assuming the factual allegations to be
true. The Complaint alleges that agent statement balances were created by the Debtors and that
Defendant acknowledged the balances and promised payment, which has not been made. As to
the constructive fraudulent transfer claim, the allegation of insolvency of Debtors and lack of
equivalent value have passed over the line from speculative to plausible given the detailed
allegations concerning the insolvency and business practices of Brooke.

Defendant Turney & Son, Inc.’s Motion to Dismiss is denied.


14 The Court is mindful that the Trustee has moved for leave to file an amended Complaint if the
Motion to Dismiss were granted. Assuming dismissal, the Court would grant the motion, resulting in a
the filing of an amended complaint which undoubtedly would rectify any identified pleading deficiencies
in the Complaint.


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