Redmond. v. NCMIC Fin. Corp. (In re Brooke Corp.)

• Decision Date: 15 January 2013
• Docket Number: Bankruptcy No. 08–22786.,Adversary No. 12–6043.
• Parties: In re BROOKE CORPORATION, Debtor. Christopher J. Redmond, Chapter 7 Trustee of Brooke Corporation, Brooke Capital Corporation (f/k/a Brooke Franchise Corporation), and Brooke Investments, Inc., Plaintiff, v. NCMIC Finance Corporation, Defendant.
• Court: U.S. Bankruptcy Court — District of Kansas

485 B.R. 650

In re BROOKE CORPORATION, Debtor.

Christopher J. Redmond, Chapter 7 Trustee of Brooke Corporation, Brooke Capital Corporation (f/k/a Brooke Franchise Corporation), and Brooke Investments, Inc., Plaintiff,

v.NCMIC Finance Corporation, Defendant.

Bankruptcy No. 08–22786.

Adversary No. 12–6043.

United States Bankruptcy Court,

D. Kansas.

Jan. 15, 2013.

John J. Cruciani, Michael D. Fielding, Husch Blackwell LLP, Kansas City, MO, for Plaintiff.

Brendan L. McPherson, Paul D. Sinclair, Polsinelli Shughart, P.C., Kansas City, MO, Jason L. Bush, Polsinelli Shughart PC, Overland Park, KS, for Defendant.

MEMORANDUM OPINION AND ORDER GRANTING IN PART THE PLAINTIFF'S MOTION TO DISMISS COUNTERCLAIM COMPLAINT

DALE L. SOMERS, Bankruptcy Judge.

Plaintiff Christopher J. Redmond, Chapter 7 Trustee (Trustee) of Debtors Brooke Corporation, Brooke Capital Corporation, and Brooke Investments, Inc., moves under Federal Rule of Civil Procedure 12(b)(6) and (c), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b), to dismiss the counterclaims asserted by Defendant NCMIC Finance Corporation (NCMIC or Defendant). The motion presents the question whether a creditor's claims for damages allegedly caused by the tortious acts of a custodian, who was superseded by the filing of a petition under Chapter 11 and the appointment of a Chapter 11 Trustee, are entitled to administrative priority under 11 U.S.C. § 503(b)(1)(A) or (b)(3)(E).¹ After carefully considering the pleadings and the oral arguments of counsel, ² the Court finds that only the claims arising from postpetition conduct are eligible for administrative expense status, but that, except for the one claim that was asserted in NCMIC's proof of claim, administrative expense status for those claims is barred by a prior order of the Court. As to NCMIC's prayer that the counterclaims defeat the Trustee's fraudulent conveyance claims against it, the Court finds that only the counterclaims arising from postpetition conduct are eligible for offset under § 553 and that recoupment is not available for any of the counterclaims. Based on these rulings, the Trustee's motion is granted in part.

BACKGROUND FACTS.

The Brooke group of companies was involved in many aspects of insurance and insurance-related businesses, including a network of insurance franchisees and agents. The parent company was Debtor Brooke Corporation (Brooke Corp.). Debtor Brooke Capital Corporation (Brooke Capital), a majority-owned subsidiary of Brooke Corp., owned 100% of Brooke Capital Advisors, Inc. (BCA), which has not filed bankruptcy but was involved in events relevant to this proceeding. Brooke Capital also owned 100% of Debtor Brooke Investments, Inc. The three Brooke Debtors will be referred to collectively as Debtors.³ Another relevant majority-owned subsidiary of Brooke Corp. was Brooke Credit Corporation, d/b/a Aleritas Capital Corporation (Aleritas), which has not filed bankruptcy. Aleritas was engaged in lending money to Brooke franchisees and other insurance agents.

Defendant NCMIC, which began its relationship with Brooke in 1998, initially fulfilled a “warehouse” financing role for Brooke agency franchise loans, holding the loans until they were securitized or sold to community banks. Later, NCMIC provided insurance premium financing and merchant credit card processing services to Brooke agents/franchisees. In addition, NCMIC purchased various participation interests in loans which Aleritas made to Brooke agents.

Brooke's business did not flourish. The Trustee alleges that the Brooke business model was unsustainable. On September 11, 2008, the Bank of New York Mellon, as trustee, filed an Emergency Motion for the Appointment of a Receiver with the United States District Court for the District of Kansas.⁴ The Brooke defendants opposed the motion and sought the appointment of a Special Master instead. A hearing was held, and the parties agreed the District Court should enter a Consent Order Appointing a Special Master. Pursuant to that order, Albert A. Riederer (Riederer) was appointed Special Master of the “Special Master Entities,” defined to be Brooke Capital, Brooke Corp., and BCA. The Special Master had authority to administer and manage the Special Master Estate, including the following power and authority:

to take custody, control and possession of all records, assets, funds, bank accounts, brokerage accounts, premises and other materials of any kind in the possession of or under the direct or indirect control of the Special Master Entities related to the Special Master Estate, and to direct the application thereof as set forth in the agreements of the Special Master Entities and their subsidiaries governing the same.⁵

Brooke Corp. and Brooke Capital filed voluntary Chapter 11 petitions on October 28, 2008, and Brooke Investments, Inc., filed a voluntary petition under Chapter 11 on November 3, 2008. Riederer was appointed as Chapter 11 Trustee of the three Debtors. On June 29, 2009, the Chapter 11 proceedings were converted to Chapter 7. Riederer initially served as Chapter 7 Trustee. On November 3, 2011, Plaintiff Christopher J. Redmond was appointed as successor Chapter 7 Trustee.

The Trustee filed this adversary proceeding against NCMIC on May 5, 2012. His Complaint alleges five counts: Count I for avoidance of a security interest; Counts II and III for recovery of allegedly preferential transfers; and Counts IV and V for recovery of allegedly constructively fraudulent transfers. ⁶ Counts I, II, and III were dismissed by consent, after NCMIC filed a motion for summary judgment.⁷ Defendant describes the Trustee's pending claims to avoid fraudulent transfers ⁸ as seeking recovery of the following: (1) $5.6 million in loan payments made by Aleritas on loans to franchisees that were assigned to NCMIC; (2) $17 million in loan payments to other lenders which allegedly benefitted NCMIC; and (3) $22.3 million in franchisees' operating expenses that were paid to third parties, such as landlords and utility companies, which allegedly benefitted NCMIC.⁹ NCMIC responded to the Complaint with an answer denying the allegations and asserting its “Counterclaim for Purposes of Recoupment, Offset and/or Administrative Claim” (the Counterclaim Complaint).¹⁰ Under various tort theories, NCMIC seeks compensation for multi-million dollar losses allegedly relating to the following described activities engaged in during the period that the Special Master was in charge of the Debtors' estates, plus limited claims for the conduct of Riederer as Chapter 11 Trustee.

Some of the claims asserted by NCMIC arise from NCMIC's relationship with CJD & Associates, LLC (CJD), a limited liability company which was a wholly-owned subsidiary of Brooke Brokerage Corporation, which, in turn, was wholly owned by Brooke Corp. On September 13, 2005, NCMIC purchased a 74.803% interest in a $2.525 million loan from Aleritas to CJD. In the spring of 2008, NCMIC loaned $2.5 million to Brooke Corp., secured by an assignment of Brooke Brokerage's 100% interest in CJD. NCMIC alleges that on September 17, 2008, the first day Riederer served as Special Master, unbeknownst to CJD and NCMIC, $1.38 million was transferred from CJD's bank account to Brooke Corp., and that an additional $428,000 was transferred from CJD to Brooke on the following day. CJD's financial condition deteriorated, and Brooke Corp. defaulted on the CJD loan. On December 22, 2008, after Brooke Corp. filed for bankruptcy relief, Riederer, as Trustee, filed an emergency motion requesting permission to abandon the stock of CJD to NCMIC. The motion was granted. Thereafter, NCMIC entered into an “Agreement to Accept Collateral in Satisfaction of Obligations” and, in accord with that agreement, made two $25,000 payments to the Trustee and became the owner of CJD. In an effort to prop up CJD, NCMIC alleges it incurred obligations of approximately $2.94 million and also paid $25,000 to acquire the remaining 25.197% participation interest in the loan from Aleritas to CJD.

Some elements of NCMIC's counterclaim arise out its longstanding relationship in providing commercial insurance premium financing to Brooke Capital, Brooke franchisees, and insureds who dealt with Brooke franchisees. Under this arrangement, NCMIC advanced funds for premium payments, and the insureds assigned to NCMIC as security all unearned premiums and dividends which became payable under the financed policies. If financed policies were cancelled, NCMIC was entitled to the return of any unearned premiums and commissions. NCMIC claims that Riederer as Special Master wrongfully retained $178,541.20 in unearned premiums and $17,517.85 in unearned commissions. NCMIC also seeks to recover $170,724.86 as amounts which it advanced to Brooke for financed premiums but which it alleges Brooke failed to remit to the insurance carriers. In addition, NCMIC financed Brooke Capital's purchase of errors and omissions policies for its franchisees. Despite Brooke Capital's failure to make timely payment of the funds due to NCMIC under this arrangement, on September 25, 2008, upon receipt of partial payment, NCMIC alleges it honored Trustee Riederer's request not to cancel the policies and continued to make payments that allowed the policies to stay in effect until December 2008. NCMIC asserts a loss of $126,000 stemming from its financing of the E & O policies.

NCMIC also seeks to recover various payments made to Riederer as Special Master and as Chapter 11 Trustee. These include payments related to FTI Consulting, which was utilized by Riederer with respect to Brooke Corp. issues, and Silverman Consulting, which was utilized by Riederer with respect to Aleritas issues. In addition, NCMIC asserts a claim based upon its purchase of 100% participation interests in one loan from Aleritas to Midwest Funeral Real Estate Management Company and another to RKC Financial Corporation, a...