Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Kan. Bankr.: Claims for recovery of funds from insurance agency franchisees not subject to arbitration, (Jun 27, 2013)

By John W. Arden, J.D., LL.M.

A bankrupt insurance company’s claims for recovery of more than $1.1 million advanced to its franchised insurance agencies could not be dismissed based on mandatory arbitration provisions in the franchise agreements, according to the U.S. bankruptcy court in Topeka, Kansas (In Re: Brooke Corporation, June 24, 2013, Somers, D.). The franchisees were found to have waived their right to arbitration by filing proofs of claims and participating in litigation before the bankruptcy court.

Prior to its bankruptcy, insurance company Brooke Corporation signed a franchise agreement with Bucheli Insurance Agency, Inc. and Hosford Insurance Agency, Inc. Each of those franchise agreements included arbitration provisions. These provisions required binding arbitration of claims relating to the franchise agreement or the relationship between the parties in lieu of the filing of lawsuits.

The Brooke Corporation filed for bankruptcy relief under Chapter 11 in October and November 2008. In October 2010, the trustee filed a complaint, seeking to recover $10,543 from Bucheli Insurance Agency and $1,105,663 from Hosford Insurance Agency and its principal Fausto Bucheli. These balances were for moneys advanced by Brooke to each agency.

The defendants filed a motion to dismiss, premised on the arbitration provision of the franchise agreements. They asserted that the mandatory arbitration applied to all claims, arbitration was favored, and there was no conflict between the Bankruptcy Code and arbitration because the claims asserted by the trustee were state law claims to collect amounts owed prepetition.

The trustee responded that (1) the claims against Fausto Bucheli were not subject to arbitration, since there was no arbitration clause in the guaranty he signed; (2) all defendants waived any right to compel artbitration; and (3) the court should exercise its discretion to refuse to enforce the arbitration agreement. Even if arbitration were required, the trustee claimed case should be stayed pending arbitration rather than dismissed.

The bankruptcy court denied the defendants’ motion to dismiss the claims, holding as follows:

Claim against individual defendant. The court found that Bucheli was not subject to arbitration because he was a nonparty to the franchise agreement. Even if the two agencies had a contractual right to mandatory arbitration, the claims against Bucheli would not be arbitrable.

Waiver of right to arbitration. The right to arbitration, like any other right, can be waived, and the agencies’ conduct during the litigation evidenced such a waiver, according to the court. The agencies’ actions—including filing proofs of claims with the bankruptcy court—were inconsistent with the right to arbitrate.

Defendants’ first proof of claim was filed on November 9, 2009, more than a year prior to the filing of the adversary proceeding. It sought to recover $1,105,663 as an unsecured claim. No attempt was made to preserve arbitration rights. On January 18, 2013, Hosford Insurance Agency filed a proof of claim for $1,125,000 for breach of the franchise agreement and the buyer assistant program. This proof of claim made no attempt to preserve the right to arbitrate. Although fully aware of the arbitration clause in the franchise agreement, Horsford Insurance Agency elected to invoke the jurisdiction of the bankruptcy court, rather than seeking to arbitrate its claims against Brooke.

Defendants’ primary defense to a waiver finding was the argument that they were unaware that the franchise agreements provided the basis for the trustee’s claims until October 1, 2012, when he sent a copy of the franchise agreement containing Bucheli’s guaranty to their counsel. However, any attorney reading the complaint filed by the trustee in October 2010 would surmise that the franchise agreements were the basis for the claims. The agencies had copies of the franchise agreements, which were the basis for their entire insurance business with Brooke.

Thus, the defendants’ participation in this litigation for more than two years before seeking arbitration was inconsistent with an intent to enforce the arbitration provisions, the court ruled.

Postpetition causes of action. A trustee stepping into the shoes of a debtor and asserting prepetition claims of the debtor is subject to the same defenses as the debtor, including an arbitration agreement. However, a trustee asserting claims that are unique to the trustee and are not derivative of the debtor is not, in the court’s view. Neither the trustee nor the creditors on whose behalf the claims are brought were parties to the prepetition agreements to arbitrate.

To the extent that these claims arose postpetition and were independent of Brooke’s prepetition claims, they were not subject to the arbitration agreements.

The case is No. 08-22786.

Attorneys: Kathryn B. Bussing (Husch Blackwell LLP) for the Trustee.

Companies: Brooke Corporation; Bucheli Insuance Agency, Inc.; Hosford Insurance Agency, Inc.

Cases: FranchisingDistribution KansasNews