Brooke Franchise Corp. Sued for Fraud, Violation of RICO Act

September 26, 2007

Overland Park, Kan.-based Brooke Corp. was recently named in a lawsuit that alleges the company participated in fraud, negligence and violated the federal RICO Act (Racketeer Influenced and Corrupt Organizations Act).

Arthur C. Mann, president of IGWT Insurance Services in Tampa, Fla., filed the lawsuit in U.S. District Court saying that Brooke misrepresented facts and manipulated funds. Specifically the lawsuit alleges five counts: fraudulent misrepresentation (Brooke Franchise and Heritage), negligent misrepresentation (Brooke Franchise and Heritage), breach of contract (one each against Brooke Franchising and Heritage) and violation of the RICO Act (Brooke Franchise and Brooke Credit).

Mann purchased two Brooke Franchise agencies in Brandon and Tampa, Fla., in 2005. Mann agreed to operate as a Brooke Franchisee for five years in exchange for services to be provided by Brooke. The lawsuit alleges that Brooke intentionally misrepresented the yearly agency commissions and failed to fulfill its contractual obligations, among other problems.

Brooke Franchise Corp., Brooke Credit Corp and American Heritage help their franchisees with access to credit to make acquisitions and expand operations as well as providing access to a slate of national carriers.

Brooke spokesperson Cynthia Weber Scherb, general counsel, provided the following comment on the lawsuit: “We were disappointed to see that the old news about the Mann lawsuit, which was filed last January, is circulating now, but we appreciate this opportunity to respond. We at Brooke work hard to make sure our processes and procedures are correct and our employees act ethically. We believe that the allegations in the lawsuit are untrue, and we intend to defend vigorously. The lawsuit has been stayed by the court, and sent to mediation, which will occur in November in Kansas City. If the parties are unable to resolve their differences in mediation, the court has ordered that the parties proceed to arbitration, and the case will remain stayed pending that arbitration.”

Attorney Brett C. Coonrod of the The Law Offices of Smith/Coonrod represents Arthur Mann and defended the agreement to go mediation.

“Mr. Mann agreed to the Court’s stay of the litigation and the referral of the claims to the mediation/arbitration process. This, however, does not mean his claims are any less valid and a decision in his favor will be just as binding on Brooke as would a decision of the US District Court,”Coonrod said. “My client’s claims are typical of other Brooke franchisees that I have represented and I believe that there are fundamental problems with Brooke’s accounting processes and its business model insofar as that model relates to the treatment of its agents.”

Brooke’s Scherb said that “given that Brooke has over 800 franchises currently, and is growing rapidly, we believe that the number of lawsuits we’ve had with franchisees has been very low, and that we’ve been successful in resolving them at little or no cost to the company.”

Brooke Corp. has 12 lawsuits filed against the company.

Kyle Garst, Brooke Corp. chairman and CEO said “that 12 franchise related lawsuits or arbitrations (both closed and active)…go back to 2000 and include six old closed lawsuits/arbitrations that we won or settled long ago. Of the six current cases disclosed, two have agreed to arbitration and one has agreed to mediation. In some of the cases, we initiated legal proceedings against a franchisee. I hope this better demonstrates why we believe our franchise litigation exposure is minimal.”

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