The filing of personal bankruptcy by franchise founder Robert Orr was another nail in the coffin for more than 800 insurance agencies left out in the cold after the demise of Brooke Capital Corp.

The company's failure has raised many questions about its business practices, bringing on a visit to its Overland Park, Kan.-offices by the FBI, as well as the notice of a number of insurance departments throughout the country.

The demise of Brooke on Dec. 16 appears complete, with a statement released by its founder saying he filed for personal bankruptcy after pledging his fortune to the company to keep it from going under. Mr. Orr said he and his family lost $12 million and is on the hook for another $25 million he said he personally guaranteed in trying to save Brooke Capital Corp. and Aleritas Capital Corp. (the financing arm for the franchise business).

He added that he came out of retirement to help save the company, but regretted the move because it cost the family so much.

“I have endured financial ruin and unwarranted personal attack,” adding that he has “become the target of attack for anyone with a complaint.”

Mr. Orr blamed the company's failure on increased loan losses, a failed refinancing transaction and rapid expansion in a difficult economy.

A personal bankruptcy filing in the U.S. Bankruptcy Court, District of Kansas, Kansas City, indicates Mr. Orr is on the hook for more than $50 million to creditors, primarily to banks. He lists owing more than $2.58 million to Brooke Holdings alone.

Brooke Corp. was a public company listed on the American Stock Exchange. The company was delisted in early October because it was no longer considered viable. Later that month Brooke filed for Chapter 11 bankruptcy protection.

Founded in 1986, the company primarily helped agents set-up their own businesses through franchising agencies under the Brooke name. The corporation included a consulting service arm, financing for the franchises (most were property-casualty personal lines agencies) and life insurance. It also owned a funeral home business to sell life insurance products.

According to government filings, a major source of income was the creation of new franchisees that paid a fee of more than $165,000. Under the agreement, agents paid all of their commissions and fees to Brooke. In return, agents received payments from Brooke intended to smooth out their earnings over the course of the year and avoid the soft market cycles.

The franchise scheme fell apart by 2008, however, when the company reported in its second quarter 10Q that for the first six months of that year that it signed up two new franchises, compared to 130 for the same period in 2007. It said the reason for this was its emphasis on quality over quantity.

Bob Tomlinson, assistant insurance commissioner for the Kansas Insurance Department, which he said is assisting the FBI in its investigation of Brooke, said there are questions about whether Brooke ever had a sustainable business model, but added such conclusion was a matter of speculation.

One thing there seems to be little dispute over is that there were member agents who say they felt they were not receiving their fair share of the business.

Several attempts to contact Brooke franchises were unsuccessful.

One former Brooke agent, who agreed to discuss his experience if he and his firm were not identified, said his relationship with Brooke was comparable to what others have described in other reports and blogs; that the company did not pay a fair share of the agency's earnings back to agents.

He blamed himself for his predicament, admitting he should have adequately performed due diligence. But the franchise offered funding for the business he wanted to start, something that was tough to find, and he grabbed the opportunity.

When his franchise agreement expired over a year-and-a-half ago, he left Brooke, and has thrived since. However, he understood that others who remained with Brooke are just managing to hang on or have walked away from the business. The franchisees were released from their agreements in late October by the court.

According to one government filing, as of December 2007, Brooke had a total of 882 franchises in the United States, 876 of which were p-c operations. Of the 26 states the franchise operated in, the bulk were in Texas (152 agencies), California (123), Florida (90), and Kansas (79).

At least three of those states issued warnings to consumers to check their policies. If the policies were purchased through a Brooke Agency they should report any problems.

Mr. Tomlinson said the Kansas insurance department was primarily concerned with the solvency of a life company Brooke operated and sold off to First Trinity Financial Corp. He said the company remains solvent and the sale was approved.

As for the FBI investigation, he said the department could not discuss it, but that generally the FBI would be interested in the same types of issues as the department: the collection and payment of premiums to insurers, noting that “There are funds that are unaccounted for.”

The department ordered all insurers dealing through Brooke to continue coverage on policies, even if they have not received premium payments.

As for Brooke franchise agents, however, their only remedy for money owed would be through the courts, Mr. Tomlinson said.

While the department has “sympathy” for agents affiliated with Brooke, he said, it does not have jurisdiction over franchise agreements. The department protects the relationship between consumers and the insurance industry but does not have authority over internal industry business matters, he said.

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Brooke Franchise Demise Impacts 800+ Agencies

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