KANSAS CITY, Kan., Apr 10, 2009 (A. M. Best via COMTEX) -- BXXXQ | Quote | Chart | News | PowerRating -- Former franchisees of bankrupt Brooke Corp. have filed a federal lawsuit charging a company subsidiary, Aleritas Capital Corp., with fraud and civil racketeering.

 

A group representing 75 former Brooke agencies charged that Brooke, other subsidiaries and Aleritas, which ?provided loans to essentially 100%? of Brooke franchisees, overstated the value of the agencies and charged very high fees ? as much as half of total commissions ? for a variety of services and support activities that were never delivered.

?Over 50% of the Brooke entities' revenue was earned from transaction fees related to the purchase of agencies from third parties, and the sale of the same agencies to franchise agents such as plaintiffs,? the suit said.

The suit seeks unspecified damages and cancellation of the loans and any interest due.

It said Brooke (OTC: BXXXQ.PK) ceased making commission payments to the franchisees and then secretly sold the loans as it headed into bankruptcy last year.

Brooke Corp. had been one of the fastest-growing insurance franchisers, with more than 900 agencies across the United States. However, the suit charges that Brooke ?artificially inflated? the valuation of agencies because ?the higher the value of the agencies, the higher the franchise fees consulting fees ? and other fees they could charge plaintiffs.?

?Moreover, the more franchise failures meant the more times the Brooke entities could resell the same agencies and generate additional transaction fees,? the suit alleged. "Some agencies were sold multiple times by the Brooke entities."

Efforts to obtain comment from the company were not immediately successful.

Brooke is under federal investigation, and agents from the Federal Bureau of Investigation seized company files last December. It is also being investigated by the Missouri Department of Insurance.

Brooke is being operated by a special master and filed for bankruptcy last October. An effort to sell off Brooke's insurance operations failed in November (BestWire, Dec. 17, 2008).

(By Alyn Ackermann, senior associate editor, BestWeek: Alyn.Ackermann@ambest.com