DZ Bank AG Deutche Zentral-Gen v. Michael McCranie

Filing

Opinion issued by court as to Appellant Michael McCranie. Decision: Affirmed. Opinion type: Non-Published. Opinion method: Signed. The opinion is also available through the Court's Opinions page at this link http://www.ca11.uscourts.gov/opinions.

Case: 16-14773

Date Filed: 01/10/2018

Page: 1 of 32

[DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 16-14773
________________________
D.C. Docket No. 3:10-cv-00222-MCR

DZ BANK AG DEUTCHE ZENTRAL-GENOSSENSCHAFTSBANK, a.k.a. DZ
Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main, New York
Branch, a.k.a. DZ Bank AG Deutsche Zentral-Genossensschaftsbank, Frankfurt
AM Main, a.k.a. DZ BK AG Deutsche Zentra NY BR, a.k.a. DZ Bank AG, a.k.a.
DZ Bank,
Plaintiff-Appellee,
versus

MICHAEL MCCRANIE, a.k.a. Michael J. McCrainie,
Defendant-Appellant.

________________________
Appeal from the United States District Court
for the Middle District of Florida
________________________

(January 10, 2018)

Case: 16-14773

Date Filed: 01/10/2018

Page: 2 of 32

Before MARTIN, JILL PRYOR, and MELLOY, ∗ Circuit Judges.
MELLOY, Circuit Judge:
In this breach-of-contract action, the district court conducted a bench trial
and concluded a written contract (“the Note”) was a negotiable instrument,
Plaintiff-Creditor DZ Bank AG Deutche Zentral-Genossenschaftsbank (“DZ
Bank”) was a holder in due course, and this status alone defeated DefendantDebtor Michael McCranie’s defenses to enforcement of the Note. The district
court held in the alternative that, even if McCranie could assert his defenses, he
failed to prove them. The district court then determined McCranie defaulted on the
Note and was liable for damages. McCranie appeals. We conclude the Note is not
a negotiable instrument but was properly transferred to DZ Bank. Moreover, we
conclude McCranie’s defenses fail and the Note is enforceable. Accordingly, we
affirm the judgment of the district court.1
I. Background
A. Introduction
Because the parties tried this case without a jury, we present the facts in the
light most favorable to the district court’s findings and verdict. See Tartell v. S.

∗

Honorable Michael J. Melloy, United States Circuit Judge for the Eighth Circuit, sitting
by designation.
1
McCranie asserts no arguments on appeal to challenge the finding that he breached the
Note or to challenge the computation of damages, interest, or fees.
2

Case: 16-14773

Date Filed: 01/10/2018

Page: 3 of 32

Fla. Sinus & Allergy Ctr., Inc., 790 F.3d 1253, 1257 (11th Cir. 2015) (“After a
bench trial, we review the district court’s conclusions of law de novo and the
district court’s factual findings for clear error.”). In general, this case involves a
dizzying number of contracts related to the purchase of an insurance agency, the
resale of that agency as a franchise, loans and security agreements related to the
franchisee’s purchase of the agency, loans from outside lenders to the franchisor,
and grants of security interests to these outside lenders (loans and security
agreements to which the franchisee was not a party, but for which the franchisee’s
loan was pledged as collateral). Although the parties’ various arguments are
technical in nature, their basic positions are simple. Defendant-Debtor McCranie
argues the underlying contracts were part of one integrated agreement under which
his obligation to pay the Note was conditioned upon the success of the franchise
endeavor and the absence of a breach by any of the parties to the various contracts.
Plaintiff-Creditor DZ Bank argues the Note itself is a stand-alone instrument
enforceable without reference to the success or failure of the franchise endeavor
and without reference to the breach of other agreements. DZ Bank argues in the
alternative that, even if we could view the separate contracts as one integrated
agreement, none of the writings grant to McCranie the right he asserts—the right to
avoid performance under the Note.

3

Case: 16-14773

Date Filed: 01/10/2018

Page: 4 of 32

Ultimately, we conclude DZ Bank has the better argument.

While

McCranie’s situation is unfortunate, he entered into the franchise and lending
relationships as a sophisticated actor with the assistance of counsel knowing that
his loan might be sold. The eventual breach of the franchise agreement by a party
to that agreement, and the commercial failure of the franchise endeavor, were
foreseeable events. DZ Bank’s predecessor in interest on the Note secured for
itself protection against such events. McCranie did not. He entered into the Note
without conditioning his obligations on the absence of such a breach or on the
success of the franchise. Simply put, his obligation to pay the Note is independent
from and not excused by these other failures.
B. History
Brooke Corporation (“Brooke”) was in the business of buying existing
insurance agencies and selling them as franchises to agents who financed their
purchases through a separate Brooke-related entity: Brooke Credit Corporation
(“Brooke Credit”). McCranie purchased a Brooke agency franchise in Florida in
October 2000.

He entered into two agreements with Brooke: a Franchise

Agreement and an Agreement for Sale of Agency Assets. At the same time, he
entered into four agreements with Brooke Credit: a large promissory note to fund
the purchase of agency assets, a smaller promissory note to fund initial operating
expenses, a Security Agreement, and an Agreement for Advancement of Loan
4

Case: 16-14773

Date Filed: 01/10/2018

Page: 5 of 32

(“Advancement Agreement”). McCranie, an experienced insurance agent who
previously had bought and sold “many independent [insurance] agencies,” was
represented by counsel during negotiation and execution of these agreements.
The Advancement Agreement defined a term, “Loan Documents,” as “[t]his
Agreement and all other agreements, instruments and documents, . . . now and/or
from time to time hereafter executed by and/or on behalf of Borrower [McCranie]
and delivered to Lender [Brooke Credit] in connection therewith.” The
Advancement Agreement expressly referenced the large promissory note and the
Security Agreement, and provided several protections for Brook Credit, allowing
Brooke Credit to declare McCranie in default and accelerate sums due upon the
occurrence of any of several different events. Examples of such events included:
McCranie’s failure to meet certain sales quotas under his Franchise Agreement
with Brooke; McCranie’s breach or failure to perform under any Loan Documents;
and McCranie’s death or insolvency.

The Advancement Agreement did not

contain parallel protections for McCranie. It did not grant McCranie parallel rights
in the event of another party’s breach of the Franchise Agreement or insolvency.
The Advancement Agreement imposed upon McCranie certain additional duties
above and beyond performance under the Loan Documents such as financial
reporting requirements. Finally, through the Advancement Agreement, McCranie
“grant[ed], convey[ed] and assign[ed] to [Brooke Credit] as additional security all
5

Case: 16-14773

Date Filed: 01/10/2018

Page: 6 of 32

the right, title and interest in and to [McCranie’s] Agency Assets, including
without limitation, [McCranie’s] rights, title and interest in and to the Agent
Agreement, Subagent Agreements, Agent’s Account and Customer Accounts . . . ,”
reserving the right to “collect, receive, enjoy and use the Agency Assets so long as
[McCranie] is not in default under the terms of any of the Loan Documents.” All
parties appear to agree that the “Agency Assets” that mattered—the assets that held
value in the eyes of the parties—were the contractual rights with the underlying
insurers and the existing and future commissions related to those relationships.
Pursuant to the Agreement for Sale of Agency Assets, McCranie purchased
agency assets from Brooke, and pursuant to the Security Agreement, he
immediately pledged those assets to Brooke Credit as collateral to secure the two
October 2000 promissory notes. Through the Franchise Agreement, Brooke served
as “agent of record” in the underlying contracts with the underwriting insurers for
whom McCranie sold policies. As agent of record, Brooke was the owner of all
sales commissions. Pursuant to the Franchise Agreement, Brooke was to receive
the commissions from McCranie’s sales of policies and was then to pay 85% of
those commissions to McCranie (or apply them to McCranie’s outstanding loan
from Brooke Credit).

In addition, Brooke was to serve as a back office for

McCranie’s franchise operations. Finally, McCranie could unilaterally terminate
the Franchise Agreement upon 30 days’ notice. Upon termination of the Franchise
6

Case: 16-14773

Date Filed: 01/10/2018

Page: 7 of 32

Agreement, Brooke was to “request the pertinent [insurance] Companies . . . to
make the Franchise Agent [McCranie] the Agent of Record for all Customer
Accounts.”2
In 2002, McCranie entered into another promissory note, Loan No. 2752,
with Brooke Credit in the amount of $831,407.78 to refinance his earlier loans.
Loan No. 2752 is the Note at issue in this appeal. On its face, the Note contains
text in a box indicating, “This note is separately secured by . . . Security
Agreement dated October 30, 2000.” Apart from this boxed text, in a different
section, the Note states, “ADDITIONAL TERMS: See Agreement for
Advancement of Loan dated October 30, 2000.” The Note on its face does not

2

Paragraph 6.5 of the Franchise Agreement also apportioned responsibility for securing
replacement coverage for agency clients in the event of non-transfer of agent-of-record status.
Paragraph 6.5 provided, in full:
Upon termination of this Agreement, Brooke shall request the pertinent
Companies involved to make the Franchise Agent the Agent of Record for all
Customer Accounts. In the event that a Company refuses to make the Franchise
Agent the Agent of Record for Customer Accounts, then Franchise Agent shall,
on or before the next Policy term expiration date following termination of this
Agreement, obtain replacement coverages for said Customer Accounts with
another Company. Brooke shall continue to account for and process Customer
Accounts until the Policy term expiration date following termination of this
Agreement. Although Brooke shall not be obligated to assist Franchise Agent in
obtaining replacement coverages for Customer Accounts, Brooke shall provide to
Franchise Agent the Policy term expiration data and Customer Account data
available through Brooke’s Document Manager system. If the Franchise Agent
does not obtain replacement coverages for Customer Accounts on or before the
policy term expiration date following termination of this Agreement, then Brooke
shall obtain coverages for said Customer Accounts and Franchise Agent thereby
relinquishes to Brooke all ownership of, possession of, or other right to or interest
in said Customer Accounts and any related files.
7

Case: 16-14773

Date Filed: 01/10/2018

Page: 8 of 32

indicate what subject matter the additional terms address or otherwise indicate how
they affect the parties’ rights and obligations.
McCranie operated his Brooke franchise for approximately eight years, from
2000 to 2008, receiving payments from Brooke for commissions that McCranie
generated and Brooke received as agent of record. McCranie paid on the original
two promissory notes for two years and on the Note for approximately six years.
By mid-2008, he had reduced the principal balance on the Note to under $500,000.
Meanwhile, in 2004, Brooke Credit entered into a series of contracts with
several entities, including another Brooke-related entity, Brooke Credit Funding
(“Brooke Funding”). Brooke Funding was a vehicle for obtaining funding from
outside sources, and McCranie was not a party to the contracts between Brooke
Credit and Brooke Funding. In August 2004, Brooke Credit and Brooke Funding
entered into a Sale and Servicing Agreement with Brooke Credit as seller and
Brooke Funding as purchaser of various loans owned by Brooke Credit. Pursuant
to the Sale and Servicing Agreement, eligible loans included loans Brooke Credit
entered into after August 2004. That same day, these two parties along with DZ
Bank and Brooke, entered into a Credit and Security Agreement through which the
current plaintiff, DZ Bank 3, ultimately agreed to extend a line of credit to Brooke

3

DZ Bank actually served as an agent for a separate entity, but for purposes of the present
appeal, we refer herein to these parties as DZ Bank.
8

Case: 16-14773

Date Filed: 01/10/2018

Page: 9 of 32

Funding and take a security interest in the loans Brooke Funding was purchasing
from Brooke Credit. Under this Credit and Security Agreement, Brooke Credit
was the seller and servicer of the loans, Brooke Funding was the purchaser, Brooke
served as the Master Agent and as a guarantor, and DZ Bank served as the lender.
DZ Bank filed Uniform Commercial Code (“U.C.C.”) financing statements in
Delaware and Kansas as to Brooke Funding and Brooke Credit on August 27,
2004.
Four days later, however, Brooke Credit entered into a “Participation
Certificate and Agreement” with a different entity: Home Federal Savings and
Loan (“Home Federal”) purporting to sell to Home Federal a 99.74% interest in the
Note. Pursuant to this agreement, Brooke Credit was the originating lender and
Home Federal was a participating lender. Home Federal did not search U.C.C.
filings for prior claims on the Note nor did Home Federal file any U.C.C.
statements regarding its purported rights to the Note. Then, two years later in
August 2006, Brooke Credit, Brooke Funding, Brooke, and DZ Bank entered into
updated versions of their 2004 agreements: an Amended and Restated Sale and
Servicing Agreement, and an Amended and Restated Credit and Security
Agreement.
Eventually DZ Bank advanced to Brooke Funding tens of millions of dollars
in several separate tranches. In February 2008, DZ Bank advanced a tranche of
9

Case: 16-14773

Date Filed: 01/10/2018

Page: 10 of 32

$3,901,457 to Brooke Funding pursuant to the 2006 Amended Credit and Security
Agreement. Of those funds, $416,947.14 were expressly designated for Brooke
Funding’s purchase of the Note from Brooke Credit. Although the Note was
identified in connection with this tranche of funding, and although the 2004 and
2006 agreements identified loans for sale to Brooke Funding as loans originated
after 2004, the Note itself had been executed in 2002.

Notwithstanding the

apparently non-qualifying nature of the Note under the 2004 and 2006 agreements,
these agreements contained provisions acknowledging the fact that loans other than
those described might be sold. These provisions permitted, but did not require, the
parties to the 2004 and 2006 agreements to object to the inclusion or transfer of
non-qualifying loans. In the event of an objection, these parties could demand that
Brooke Credit substitute a qualifying loan or repurchase the non-qualifying loan.
Neither Brooke Funding nor DZ Bank objected to the inclusion of the Note in the
February 2008 tranche of funding. Neither party sought to force the repurchase of
the Note or request substitution with a different loan as permitted by the
agreements.
Throughout this time, Brooke’s business was not thriving, and relationships
between lenders, insurers, franchisor, and franchisees broke down. On June 19,
2008, DZ Bank terminated its line of credit with Brooke Funding. In June, July,
and August 2008, Brooke failed to forward commission payments to McCranie. On
10

Case: 16-14773

Date Filed: 01/10/2018

Page: 11 of 32

September 3, 2008, McCranie demanded payment, notified Brooke that he could
not meet his obligations to Brooke Credit without commissions from Brooke, and
notified Brooke that he was terminating the Franchise Agreement. In doing so, he
expressly demanded that Brooke take steps to have insurers transfer “agent of
record” status to him so he could continue to sell policies for the insurers
associated with the franchise. According to McCranie, Brooke’s failure to pay
commissions served as a material breach of the Franchise Agreement.

Also

according to McCranie, he was not at that point in default under the Franchise
Agreement with Brooke or the Advancement Agreement or Note with Brooke
Credit, and, as such, he was entitled to continue using Agency Assets. McCranie
also sent notice to Brooke Credit because, according to McCranie, (1) Brooke
Credit had to authorize the transfer of “agent of record” status, and (2) the
Advancement Agreement with Brooke Credit authorized McCranie’s use of
Agency Assets—assets McCranie needed to operate his franchise. Neither Brooke
nor Brooke Credit took steps to make McCranie agent of record with the
underlying insurers.

Then, throughout September and October 2008, many

insurers pulled their business from Brooke franchises such as McCranie’s agency.
In mid-October 2008, McCranie received a notice from DZ Bank dated
October 1, indicating DZ Bank was aware of McCranie’s notice of termination.
DZ Bank instructed McCranie to make future loan payments to DZ Bank rather
11

Case: 16-14773

Date Filed: 01/10/2018

Page: 12 of 32

than to Brooke Credit, citing the transfers through which Brooke Funding pledged
the Note to DZ Bank. McCranie, however, had not previously dealt with Brooke
Funding or DZ Bank. Further, the notice included no documentation of DZ Bank’s
asserted ownership of the Note. Also in October 2008, McCranie received a
similar but competing demand for payment from Home Federal. Home Federal
attached the August 31, 2004 Agreement purporting to transfer a 99.74% interest
in the Note from Brooke Credit to Home Federal.
Then, on October 14, McCranie received a second letter from DZ Bank
stating:
In connection with [the Note], we are enclosing a letter from Brooke
Capital Corporation, Brooke Agency Services Company, LLC and
Brooke Investments, Inc. (collectively, “Brooke”), pursuant to which
Brooke has agreed to the termination of your franchise agreement,
effective upon DZ Bank’s consent to such termination. We are
pleased to inform you that we are prepared to grant such consent
following our receipt of an executed acknowledgement from you in
the form attached hereto . . . .
Once we have received the original executed Acknowledgment, we
will work with you to arrange for you to become the Agent of Record
for insurance policies purchased from, serviced, renewed or delivered
through you. As part of that process, you will need to contact the
insurance carriers directly to obtain an agency appointment. Once
you have obtained an appointment, please contact us to let us know
the producer code and we will work with you and the relevant carriers
to complete the transition. If you are not able [] to obtain an
appointment, we will, upon your request, do what we can to assist you
in establishing a relationship with a master general agent so that you
can continue in business.

12

Case: 16-14773

Date Filed: 01/10/2018

Page: 13 of 32

Please note that DZ Bank has obtained a power of attorney from
Brooke authorizing DZ Bank to take actions to facilitate your
appointment as Agent of Record. In addition, we may be able to
assist you in locating contact persons at the insurance carriers to
facilitate your appointment and/or in locating a master general agent
with whom you can establish a relationship. If you believe we can be
of assistance in this process, or have any additional questions
regarding the matters described in this letter, please contact any of the
following individuals . . . .

Brooke Capital Corporation, Brooke Agency Services Company, LLC, and Brooke
Investments, Inc., were not the parties McCranie had contracted with in 2000 and
2002. DZ Bank included with this letter an acknowledgement for McCranie to
execute and return.

McCranie did not execute the acknowledgement, instead

returning it with a note indicating he did not have enough information to assess the
situation. McCranie does not allege he took any action to call upon DZ Bank for
assistance in preserving relationships with insurers.
In October 2008, Brooke filed for bankruptcy. On October 30, DZ Bank,
Brooke Credit, and Brook Funding entered into an agreement to perfect the transfer
of ownership of collateral (including the Note) to DZ Bank: a Surrender of
Collateral, Consent to Strict Foreclosure, Release and Acknowledgement
Agreement. And on October 31, DZ Bank and Brooke Funding entered into an
Omnibus Assignment Agreement, further confirming DZ Bank’s ownership of

13

Case: 16-14773

Date Filed: 01/10/2018

Page: 14 of 32

Brooke Funding’s rights as Brooke Credit’s assignee.

At that time, Brooke

Funding owed DZ Bank approximately $35 million.
On March 11, 2010, DZ Bank filed the present action claiming McCranie
was liable to DZ Bank on the Note for an outstanding balance of “$484,425.42
plus attorney’s fees, costs and interest.”

The district court granted summary

judgment in DZ Bank’s favor. On appeal to our court, we held a triable question
of fact precluded summary judgment because DZ Bank’s “chain of title [was]
anything but overwhelming,” and other evidence suggested the Note had been sold,
instead, to Home Federal Savings and Loan. DZ Bank v. McCranie, 513 F. App’x
911, 914 (11th Cir. 2013). On remand, at the bench trial, DZ Bank provided
further evidence of title to the Note, and the district court ruled in DZ Bank’s
favor, entering judgment against McCranie.
II. Discussion
McCranie’s arguments on appeal, while technical in nature, are simple at
heart. He argues generally that Brooke’s breach of the Franchise Agreement
excuses his breach of the Note. To advance this argument he asserts a general
theory that all (or most) of the underlying contracts in this case were part of one
overall integrated agreement governing the franchise endeavor such that his
obligation to honor the Note rests upon the viability of the endeavor and the
absence of a breach of the Franchise Agreement by Brooke. In pressing this
14

Case: 16-14773

Date Filed: 01/10/2018

Page: 15 of 32

theory, he argues strenuously that the Note is not a negotiable instrument and that
DZ Bank is not a holder in due course because, if the Note is a negotiable
instrument and DZ Bank is a holder in due course, most of his arguments are
barred by statute. See Kan. Stat. Ann. § 84-3-305 (listing the limited defenses
available to a debtor as against the holder in due course of a negotiable
instrument). He then presents several specific arguments in an attempt to defeat
enforceability of the Note. The parties agree Kansas law applies. We address
McCranie’s several arguments in turn.
A. Negotiable Instrument
Pursuant to the U.C.C., as adopted in Kansas, “‘negotiable instrument’
means an unconditional promise . . . to pay a fixed amount of money, with or
without interest . . . to bearer or to order . . . [that] does not state any other
undertaking or instruction by the person promising . . . payment.” Kan. Stat. Ann.
§ 84-3-104(a).

Although this definition appears rigid, certain conditions and

additional promises or undertakings are permitted without defeating negotiability:
those that relate to security interests, prepayment rights, or duties surrounding the
preservation of collateral.

See id. § 84-3-104(a)(3) (“[T]he promise . . . may

contain (i) an undertaking or power to give, maintain, or protect collateral to secure
payment, [or] (ii) an authorization or power to the holder to confess judgment or
realize on or dispose of collateral . . . .”).
15

Case: 16-14773

Date Filed: 01/10/2018

Page: 16 of 32

A hallmark of negotiability, however, is the self-contained nature of the
instrument and the ability to determine the entirety of the parties’ rights and duties
without consulting additional writings. See 6 William D. Hawkland & Larry
Lawrence, Uniform Commercial Code Series § 3-106:2 (rev. supp. 2016) (“An
instrument does not freely circulate in commerce if a purchaser must examine a
separate agreement to determine whether payment of the instrument is conditioned
upon the performance of some act or event. . . . The mere existence of the
requirement that another writing be consulted is sufficient to destroy negotiability;
it is irrelevant that examination of the other writing does not reveal a condition
precedent to payment.”). In general, a mere reference to a separate document does
not preclude a note from being deemed a negotiable instrument. See A.I. Trade
Fin., Inc. v. Laminaciones de Lesaca, S.A., 41 F.3d 830, 836 (2d Cir. 1994) (“[A]
note containing an otherwise unconditional promise is not made conditional merely
because it refers to, or states that it arises from, a separate agreement or
transaction.”); see also Williams v. Regency Fin. Corp., 309 F.3d 1045, 1049 (8th
Cir. 2002) (“[W]here there is a paucity of [controlling] case law interpreting a
provision of the U.C.C., . . . courts . . . look for guidance to decisions of other
jurisdictions . . . .”); Black v. Don Schmid Motor, Inc., 657 P.2d 517, 523–24
(Kan. 1983) (looking to other jurisdictions). Mere references provide context for

16

Case: 16-14773

Date Filed: 01/10/2018

Page: 17 of 32

the commercial transactions giving rise to the instrument and do not, on their face,
suggest the promise to pay is subject to additional terms, conditions, or promises.
In contrast, a “disqualifying” reference is one that indicates a need to
examine a separate document to determine the parties’ rights and duties, i.e., one
that indicates the promise to pay is “subject to” or “governed by” the other writing.
Kan. Stat. Ann. § 84-3-106(a) (“[A] promise or order is unconditional unless it
states . . . (2) that the promise or order is subject to or governed by another
writing.”).

Even a reference indicating a need to consult a separate writing,

however, will not defeat negotiability if the reference makes clear that the terms in
the separate writing relate to a grant or preservation of collateral or to prepayment
or acceleration. These exceptions are express on the face of § 84-3-106(b)(1), and
they relate simply to the permissible undertakings and promises pursuant to § 84-3104(a)(3).
The distinction between when a note’s reference to another writing does or
does not defeat negotiability, therefore, rests on two factors: the completeness and
clarity of the note itself in setting forth the parties’ obligations and the clarity and
completeness of the reference. This is true regardless of whether the separate
writing actually amends the material terms of the parties’ agreement. It is the need
to consult the other writing that makes the note incomplete on its face and defeats
negotiability. The applicable official U.C.C. comment makes this clear:
17

Case: 16-14773

Date Filed: 01/10/2018

Page: 18 of 32

[A] promissory note is not [a negotiable] instrument . . . if it contains
any of the following statements: 1. “This note is subject to a contract
of sale dated . . . between the payee and maker of this note.” 2. “This
note is subject to a loan and security agreement dated . . . between the
payee and maker of this note.” 3. “Rights and obligations of the
parties with respect to this note are stated in an agreement dated . . .
between the payee and maker of this note.” It is not relevant whether
any condition to payment is or is not stated in the writing to which
reference is made. The rationale is that the holder of a negotiable
instrument should not be required to examine another document to
determine rights with respect to payment. But subsection (b)(i)
permits reference to a separate writing for information with respect to
collateral, prepayment, or acceleration.
For example, a note would not be made conditional by the
following statement: “This note is secured by a security interest in
collateral described in a security agreement dated . . . between the
payee and maker of this note. Rights and obligations with respect to
the collateral are [stated in][governed by] the security agreement.”
The bracketed words are alternatives, either of which complies.

U.C.C. § 3-106, cmt. (emphasis added).
Here, McCranie argues the Note’s reference to the Advancement Agreement
which states, “ADDITIONAL TERMS: See Agreement for Advancement of Loan
dated October 30, 2000,” defeats negotiability because this reference indicates not
merely the existence of a separate agreement, but the existence of unidentified
“additional terms.”

According to McCranie the phrase “additional terms”

necessarily describes contractual terms that govern the parties’ relationship under
the Note, unambiguously informing a reader of the Note that the Note is not wholly
self-contained. DZ Bank counters that the Advancement Agreement creates no
18

Case: 16-14773

Date Filed: 01/10/2018

Page: 19 of 32

additional rights for DZ Bank and imposes no additional duties on McCranie other
than rights and duties that are permissible under Kansas Statutes §§ 84-3-104 and
106, namely, rights and duties concerning the grant of security interests, the
preservation of collateral, and the right of the lender to declare default and demand
accelerated payment in the event of default. In the alternative, DZ Bank asserts the
quoted reference is a mere reference indicating the existence of a separate
agreement.
Given the Advancement Agreement’s myriad protections for Brooke Credit
and obligations for McCranie, we have serious doubts as to DZ Bank’s assertion
that the Advancement Agreement contains only permissible undertakings.
Regardless, the actual contents of the Advancement Agreement do not matter for
our analysis of this issue. The reference in the Note, in and of itself, defeats
negotiability. The Note does not merely recite the existence of the Advancement
Agreement, but instead, indicates that the Advancement Agreement contains
“additional terms.” This reference is akin to a disqualifying statement that the
Note is “subject to” or “governed” by the separate writing. Kan. Stat. Ann. § 84-3106(a)(2). Further, nothing about the reference to the Advancement Agreement, as
expressed in the Note, suggests that these additional terms relate solely to the
permissible subjects of granting or preserving collateral or spelling out acceleration
or prepayment rights. Simply put, no party examining the Note can know with any
19

Case: 16-14773

Date Filed: 01/10/2018

Page: 20 of 32

reasonable assurance what the subject matter of the “additional terms” might be
without obtaining and consulting the Advancement Agreement.
Further, and importantly, the reference to the Advancement Agreement is
additional to and wholly apart from the Note’s separate reference to the Security
Agreement. The Note, several lines below the reference to the Advancement
Agreement, employs a box to set off text from the balance of the document and
draw attention to the statement, “SECURITY: This note is separately secured by
(describe separate document by type and date): Security Agreement dated October
30, 2000.”

This identification of a second separate writing as governing the

parties’ security arrangement—a different writing separate and apart from the
referenced Advancement Agreement—most naturally suggests that the additional
terms in the Advancement Agreement relate to something other than a security
interest. At a minimum, the inclusion of this separate reference does nothing to
clarify that the Advancement Agreement might contain only permissible
undertakings pursuant to § 84-3-106(b)(1).
DZ Bank’s arguments concerning the actual contents of the Advance
Agreement, therefore, are misplaced. Given the inability to determine from the
face of the Note that the “additional terms” might relate solely to permissible

20

Case: 16-14773

Date Filed: 01/10/2018

Page: 21 of 32

topics under § 84-3-106(b)(1), the Note is not negotiable.4 Because we conclude
the Note is not a negotiable instrument, we need not address whether DZ Bank is a
“holder in due course” as that term is a term of art under the UCC.
B. DZ Bank’s Standing to Enforce the Note
The fact that the Note is not a negotiable instrument does not mean the Note
is unenforceable or non-transferable. At trial, McCranie contested broadly the
adequacy of DZ Bank’s proof of its chain of title to the Note. The district court
determined DZ Bank adequately established that Brooke Credit sold the Note to
Brooke Funding, Brook Funding pledged the Note to DZ Bank as collateral, and
4

DZ Bank, as a substantial lender to Brooke Funding, has been involved in litigation with
several parties throughout the country in situations similar to the present dispute. In briefing to
our court, DZ Bank cites opinions from such cases, stating, “Several other district courts have
considered identical promissory notes under Kansas law and granted judgments in favor of DZ
Bank, none of which concluded that the note was non-negotiable.” Several of the cited cases
involved acknowledgements by the borrower that DZ Bank had standing to enforce the note, and
in some cases the borrower had actually entered into forbearance agreements with DZ Bank prior
to litigation. In none of the cited cases did any court hold an underlying note between a
franchise agency borrower and a Brooke entity qualified as a negotiable instrument. See, e.g.,
DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main v. Choice Cash
Advance, LLC, 918 F. Supp. 2d 1156 (W.D. Wash. 2013) (finding a borrower liable on a similar
note after the borrower acknowledged DZ Bank’s status as creditor and defaulted on the note),
aff’d, 608 F. App’x 497 (9th Cir. 2015) (affirming the denial of a motion to reconsider); DZ Bank
AG Deutsche Zentral-Genossenschaftsbank v. All Gen. Lines Ins., LLC, No. 10-2126-CM, 2013
WL 1151277 (D. Kan. Mar. 20, 2013) (granting summary judgment in favor of DZ Bank without
reference to Article 3), confirming on reconsideration, No. 10-2126-CM, 2013 WL 3869947 (D.
Kan. July 26, 2013) (confirming on reconsideration the grant of summary judgment); DZ Bank
AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main, N.Y. Branch v. McCauley, No.
2:10-00008-RWS, 2010 WL 3943735 (N.D. Ga. Oct. 6, 2010) (entering summary judgment
against the debtor without reference to Article 3 and finding allegations of fraud against various
Brooke entities “irrelevant” to the question of liability towards DZ Bank as the assignee). In
short, these cases do nothing to bolster DZ Bank’s argument that the Note in the present case is a
negotiable instrument. And we find it telling that the parties cite no cases in which a court
actually held a contract similar or identical to the Note qualified as a negotiable instrument. That
having been said, consistent with the result we reach herein, the courts in all of these cited cases
actually determined that DZ Bank held enforceable rights.
21

Case: 16-14773

Date Filed: 01/10/2018

Page: 22 of 32

DZ Bank foreclosed upon and took possession of the Note, receiving a full
assignment of the Note.
On appeal, McCranie does not present arguments renewing all of his
challenges to this series of transactions. Rather, McCranie makes a single, focused
legal argument based upon the August 27, 2004 Sale and Servicing Agreement and
the August 29, 2006 Amended and Restated Sale and Servicing Agreement.
Specifically, McCranie argues these agreements applied only to loans Brooke
Credit entered into after 2004 whereas the Note was executed in 2002. According
to McCranie, this discrepancy shows the Note could not have been included in the
bundle of notes sold by Brooke Credit to Brooke Funding and eventually pledged
and transferred to DZ Bank.
McCranie was not a party to the August 29, 2006 Amended and Restated
Sale and Servicing Agreement (or to the corresponding 2004 agreement it
updated). As such, he may not challenge the sale of the Note based upon the
Note’s supposed ineligibility under that agreement.

These agreements gave

Brooke Funding and DZ Bank, and no unlisted parties, the right to accept or reject
certain loans that might otherwise be deemed ineligible for transfer and the right to
demand substitution or repurchase of objected-to loans.

These agreements,

therefore, anticipated the possibility that ineligible loans might be transferred,
creating for the parties substitution and repurchase rights. It follows from the
22

Case: 16-14773

Date Filed: 01/10/2018

Page: 23 of 32

permissive rather than mandatory nature of these rights of rejection that the
underlying agreement envisioned the transfer of otherwise ineligible loans.
Because DZ Bank established the transfer of the Note and no party to the
2006 Amended and Restated Sale and Servicing Agreement contested the transfer,
we conclude DZ Bank properly obtained the Note. Any attempt by McCranie to
invoke protections of the 2006 agreement fall short, as that agreement expressly
precludes the creation of rights in a third party beneficiary. The 2006 agreement,
in Section 8.6, states:

Nothing in the Agreement, express or implied, shall give to any
Person, other than the parties hereto, the Agent [Brooke] and the
Secured Parties [DZ Bank] and their successors hereunder and
permitted assigns, any benefit or legal or equitable right, remedy or
claim under this Agreement.

The Note on its face was transferable and payable to Brooke Credit “or its
order.” Brooke Credit and Brooke Funding, in fact, transferred the Note and
treated it as being subject to the August 29, 2006 Amended and Restated Sale and
Servicing Agreement. McCranie, therefore, as a stranger to that agreement, cannot
enforce its terms or challenge the transfer based on non-compliance with that
agreement. See Noller v. GMC Truck and Coach Div., Gen. Motors Corp., 772
P.2d 271, 275 (Kan. 1989) (“Contracting parties are presumed to act for
themselves and therefore an intent to benefit a third person must be clearly
23

Case: 16-14773

Date Filed: 01/10/2018

Page: 24 of 32

expressed in the contract. . . . The intention of the parties is to be determined from
the instrument itself where the terms are plain and unambiguous.” (internal
citations omitted)). Not only did the contract fail to list McCranie as an intended
third-party beneficiary, its terms expressly excluded that possibility. See State ex
rel. Stovall v. Reliance Ins. Co., 107 P.3d 1219, 1232 (Kan. 2005) (“Performance
of a contract will often benefit a third person. But unless the third person is an
intended beneficiary as here defined, no duty to him is created.” (quoting
Restatement (Second) of Contracts § 302, cmt. e (1979))). The district court did
not err in its legal determination that McCranie was not permitted to invoke the
2004 or 2006 agreements to defeat the transfer.
C. Defenses—Sale of Goods
Citing provisions from U.C.C. Article 2, McCranie argues that his contracts
with Brooke and Brooke Credit were one integrated agreement for the purchase of
goods. According to McCranie, he never received the contracted-for “goods”
because, upon entering into the asset-purchase agreement, he was required to
transfer all title to the agency assets to Brooke Credit as security for his loans.
McCranie concludes that, because he did not receive “the goods,” he is excused of
the obligation to continue making payments.
McCranie’s attempt to invoke Article 2 fails because he does not identify
what he purchased that might qualify as “goods.” He makes reference to agency
24

Case: 16-14773

Date Filed: 01/10/2018

Page: 25 of 32

assets as a whole (which presumably include real property and personal property in
addition to the underlying rights arising from contractual relationships with the
insurers such as the rights to existing and future commissions). McCranie makes
no attempt to explain how these varied assets including intangible property and
ancillary contractual rights, might satisfy the definition of “goods” set forth in
Kansas Statutes § 84-2-105(1) & (2).
Even assuming some individual assets among the agency assets might
qualify as goods, however, the Franchise Agreement and Sale of Agency Assets
(viewed collectively as urged by McCranie) would be, at most, a mixed contract
for the sale of “goods” and services. In this regard, Kansas long ago adopted the
“predominant purpose” test for assessing when a contract for a mixture of goods
and services might qualify as a contract for the sale of goods pursuant to Article 2.
See Golden v. Den–Mat Corp., 276 P.3d 773, 791 (Kan. Ct. App. 2012) (quoting
Care Display, Inc. v. Didde–Glaser, Inc., 589 P.2d 599, 605 (Kan. 1979)). Here,
the predominant purpose for the Franchise Agreement and Sale of Agency Assets
quite clearly was to establish the franchise relationship as a joint service endeavor
between Brooke and McCranie. To the extent McCranie attempts to invoke any
protections of Article 2, we reject his arguments.5

5

At trial, when discussing his prior experience in the purchase and sale of independent insurance
agencies, McCranie summarized such transactions as follows, effectively clarifying that a
purchase of an agency franchise is not a contract for the sale of goods:
25

Case: 16-14773

Date Filed: 01/10/2018

Page: 26 of 32

D. Defenses—One Integrated Agreement and Doctrines of Commercial
Frustration and Impossibility of Performance
The context and purposes for the original promissory notes, and later, the
Note, were to fund the initial purchase and operation, and subsequent refinancing,
of the franchise agency. Brooke Credit, as the lender, secured for itself myriad
protections to permit itself to monitor McCranie’s performance under the
Franchise Agreement between McCranie and Brooke, and to declare default and
accelerate the Note upon the occurrence of any number of events. McCranie did
not negotiate or obtain reciprocal protections in the Note or the Advancement
Agreement.

Well, in the insurance business, the value is the revenue that the company is
paying you for the contracts – the policies that you place with them. . . . But it’s
important to understand that it is extremely—especially back then—difficult to
get any bank to finance these agencies, because they were based on the service
contract, and those service contracts with each individual carrier is—simply, can
be cancelled at any time. Those contracts required the insurance agent to, you
know, be in—compliant with all the laws, all the laws; be in complian[ce] with
having an office open to the public, all those issues, and be—of the utmost, not
have any kind of fraudulent dealings or anything. They also can be cancelled at
any time.
So I’m just getting to the point, they’re very fragile contracts. And that in itself—
there’s a lot of talk about—we say collateral, we say assets, we say asset
securitization. All those words are used, but the bottom line is, what you’re
purchasing when you buy an insurance agent, is you’re purchasing the right to be
the owner of that service contract with a third-party insurance company. That is
your—that’s your title.
(Emphasis added)
26

Case: 16-14773

Date Filed: 01/10/2018

Page: 27 of 32

McCranie did obtain the right to demand that Brooke ask the underlying
insurers to transfer “agent of record” status to him upon his own termination of the
Franchise Agreement. McCranie did not, however, secure for himself a guarantee
that such a transfer would occur, a set of remedies to invoke in the event of nontransfer, or an “escape valve” for his obligations on the Note in the event such a
transfer did not take place. As such, we must reject McCranie’s theory that all of
the contracts between himself and Brooke or Brooke Credit comprise “one
integrated agreement” under which one breach might excuse another. Whether
viewed individually or collectively, nothing in the agreements McCranie cites
grant to him a right to avoid performance under the Note with Brooke Credit based
upon Brooke’s non-performance under the Franchise Agreement.
Turning to McCranie’s more specific theories of defense, Kansas has
recognized and discussed the doctrines of commercial frustration of purpose and
impossibility (or impracticability) of performance. See T.S.J. Holdings v. Jenkins,
924 P.2d 1239, 1247–49 (Kan. 1996) (collecting cases); see also Columbian Nat’l
Title Ins. v. Twp. Title Serv., 659 F. Supp. 796, 802–04 (D. Kan. 1987) (discussing
differences between impossibility or impracticability of performance and
commercial frustration). These doctrines, however, are not a panacea for ill-fated
business relationships.

And they are inapplicable where the reasons for the

frustration of purpose or impracticability of performance were foreseeable at the
27

Case: 16-14773

Date Filed: 01/10/2018

Page: 28 of 32

time of contract formation. See Winfrey v. Galena Auto. Co., 214 P. 781, 782
(Kan. 1923) (“[The party] was liable for the breach of the contract, although
contingencies or circumstances arose which made it difficult or even beyond its
power to perform—circumstances which might have been provided against when
the contract was made.”); Sunflower Elec. Coop., Inc. v. Tomlinson Oil Co., 638
P.2d 963, 971–72 (Kan. Ct. App. 1981) (doctrine inapplicable where oil producer
could have, but failed to, foresee an oil field’s inability to meet the contract’s
needs); Wichita Props. v. Lanterman, 633 P.2d 1154, 1161 (Kan. App. Ct. 1981)
(“[T]he defense of impossibility is only available where the performance is
rendered impossible by the happening of an unanticipated event which could not
be foreseen or guarded against in the contract.” (quoting Ogdensburg Urban
Renewal Agency v. Moroney, 345 N.Y.S.2d 169, 171 (N.Y. App. Div. 1973))).
Here, McCranie argues his inability to perform under the Note is due to
Brooke’s breach of the Franchise Agreement and the resulting termination of
relationships by the agency’s underwriting insurers.

This failure and these

terminations, however, were not only foreseeable risks, they were foreseen by
Brooke Credit and McCranie. The Advancement Agreement provided Brooke
Credit protection against these contingencies, including the right to declare
McCranie in default of the Advance Agreement upon McCranie’s failure to
perform under the Agreement to Purchase Agency Assets (Advancement
28

Case: 16-14773

Date Filed: 01/10/2018

Page: 29 of 32

Agreement paragraph 13(b)(i)), his failure to perform under the Franchise
Agreement (Advancement Agreement paragraph 13(b)(ii)), or his “default . . . in
performing the obligations and duties of any contract relating to Borrower’s
[McCranie’s] business . . .” (Advancement Agreement paragraph 13(d)).
McCranie admits that, at the time he entered into the agreements in 2000, he
was experienced in purchasing and selling insurance agencies.

Further, the

Franchise Agreement (to which Brooke Credit itself was not a party) demonstrates
that Brooke and McCranie recognized the critical importance of maintaining
relationships with the underwriting insurers and protecting against lapses in
performance by the “agent of record” with those companies. 6 The Franchise
Agreement granted McCranie the right to terminate the agreement on 30-days’
6

Again, McCranie’s own trial testimony largely defeats his own legal arguments. At trial, when
discussing the sale of insurance agencies, McCranie stated:
Well, you would never purchase an agency without terms and contingencies.
When I say that, just to use an example, if you’re going to sell me an agency and I
had cash to give you, you have to place an order with the third party, which would
be the insurance company, to transfer those agency contracts to me. So I can
hand you $50,000, but if we don’t stipulate the agreement and the conditions, I
may not get one company to agree to transfer the agent of record. If that happens,
I have nothing for my money.
So it’d be very rare, if ever, that the purchase would happen with no agreement,
just money. I just – you know, because the companies are going to decide
whether they’re going to contract with that person that you’re selling to. And ask
me about my experience, I sold eight to ten agencies that I had operated and ran
for quite a while, and every one of those agencies, I had to sell and do the
financing. And it’s a very risky financing, because I transferred the agent of
record to the individuals, and if they quit paying me, I would have a real hard time
getting my hands on any collateral, because it’s up to the companies to
recontract—there’s nothing that I can retake.
29

Case: 16-14773

Date Filed: 01/10/2018

Page: 30 of 32

notice and imposed on Brooke a duty to “request the pertinent Companies involved
to make [McCranie] the Agent of Record for all Customer Accounts.”
Maintenance of relationships with the insurers was not a matter of trivial
importance to McCranie, Brooke, or Brooke Credit. And yet, McCranie entered
into the Note and Advancement Agreement without securing reciprocal protections
that would excuse his performance under the Note in the event the Brooke’s
failures damaged relationships with insurers. Moreover, McCranie entered into the
Advancement Agreement and Note knowing that Brooke Credit might sell the
Note and that some unknown future party (possibly a stranger to Brooke) might be
his creditor if and when the agency failed. 7
Finally, McCranie was not only experienced in the sale and purchase of
insurance agencies, he was represented by counsel. Execution of the Advancement
Agreement and the Note required him to provide letters from counsel describing
examination of the Loan Documents and opining as to their enforceability and as to
the absence of various misrepresentations. He provided such a letter in 2000 and
again in 2002. If McCranie believed at the time of contracting that his obligation
to pay on the Note was dependent upon the success of the agency, such a belief
needed to be expressed in the writings. Simply put, if one sophisticated and well7

Paragraph 18 of the Advancement Agreement granted Brooke Credit the right to assign the
Note without McCranie’s consent and precluded McCranie from assigning his interests in any
Loan Documents. And paragraph 10(b) imposed upon McCranie duties to assist Brooke Credit
to “sell, convey, or market . . . the Loan Documents to any Person.”
30

Case: 16-14773

Date Filed: 01/10/2018

Page: 31 of 32

counseled party to a contract secures for itself protections against particular
contingencies, the occurrence of such contingencies to the detriment of another
party cannot later be deemed unforeseen. If Brooke Credit could anticipate and
guard against a failure by McCranie under the Franchise Agreement, McCranie
could anticipate and guard against a failure by Brooke.

The defenses of

impossibility (impracticability) of performance and frustration of purpose are
unavailable in this case.
E. Defenses—Impairment of Collateral and Duty of Good Faith and Fair
Dealing
In related arguments, McCranie argues he is excused from paying on the
Note because Brooke, Brooke Credit, or DZ Bank impaired the value of the
collateral by failing to take steps necessary to preserve agency assets—to preserve
the relationships with the underlying insurers and agency’s right to sell policies.
He also argues these failures amount to breaches of a duty of good faith and fair
dealing and excuse his liability on the Note. McCranie cites no authority to
support the assertion that a collateral impairment or breach-of-good-faith defense
can find application when the alleged impairment: (1) relates to the failure to
preserve contractual relationships with third parties independent of the creditor;
and (2) the debtor himself would be a necessary participant in the efforts to
maintain those relationships.

31

Case: 16-14773

Date Filed: 01/10/2018

Page: 32 of 32

Because the note was properly transferred and McCranie’s defenses fail, we
affirm the judgment of the district court.
AFFIRMED.

32