DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt Am Main, New York Branch v. McCranie

Filing 172

FINDINGS of fact and conclusions of law. Proposed judgment due 9/21/2015. Signed by Magistrate Judge Monte C. Richardson on 9/6/2015. (ADM)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
JACKSONVILLE DIVISION
DZ BANK AG DEUTSCHE ZENTRALGENOSSENSCHAFTSBANK a/k/a
DZ BANK AG DEUTSCHE ZENTRALGENOSSENSCHAFTSBANK,
FRANKFURT AM MAIN, NEW YORK
BRANCH a/k/a DZ BANK AG DEUTSCHE
ZENTRAL-GENOSSENSCHAFTSBANK,
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,
v.

CASE NO. 3:10-cv-222-J-MCR

MICHAEL MCCRANIE a/k/a
MICHAEL J. MCCRANIE,
Defendant.
________________________________/
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This action for damages came before the Court for a bench trial on October
14 and 15, 2014. After reviewing the parties’ proposed findings of fact and
conclusions of law, the Court is now prepared to decide the case.
I. Procedural History
On March 11, 2010, Plaintiff DZ Bank initiated this action for breach of a
promissory note against Defendant Michael McCranie. (Doc. 1-4.) On
September 13, 2010, this case was reassigned to the undersigned upon the
parties’ consent. (Docs. 23, 24.) On August 31, 2011, the Court entered an

Order granting DZ Bank’s first Motion for Summary Judgment and denying
McCranie’s first Motion for Summary Judgment. (Doc. 71.) On September 29,
2011, the Court entered Judgment in favor of DZ Bank and against McCranie for
the sum of $484,425.42, plus pre- and post-judgment interest, attorney’s fees,
and costs. (Doc. 76.) McCranie appealed the Judgment and the Court’s Order of
August 31, 2011. (Doc. 77.)
On March 21, 2013, the Eleventh Circuit Court of Appeals reversed and
remanded the case for further proceedings. (Doc. 79.) Following the remand,
the Court allowed the parties to engage in additional discovery. In November
2013, the parties filed their Cross-Motions for Summary Judgment, both of which
were denied on March 18, 2014. (Docs. 109, 118, 138.) On June 30, 2014, DZ
Bank filed its First Amended Complaint, to which McCranie responded on
September 24, 2014. (Docs. 151, 156.) On October 14 and 15, 2014, the case
came before the Court for a bench trial. (Docs. 163, 164.) On November 20,
2014, the parties filed their annotated proposed findings of fact and conclusions
of law. (Docs. 170, 171.)
II. Findings of Fact
1.

On or about October 30, 2000, McCranie,1 as purchaser, and Brooke

1

McCranie has been in the insurance business since 1984, buy ing and selling
“many independent [insurance] agencies.” (Trial Tr. Vol. 2, 192:16-193:2.)
2

Corporation (“Brooke”),2 as seller, entered into an “Agreement for Sale of Agency
Assets” for the purchase of a Brooke franchise insurance agency in Live Oak,
Florida, for the sum of $1,045,000, which “has been or will be purchased by
[Brooke] on October 30, 2000, from First South, Inc. and First South Insurors
LLC.”3 (Pl.’s Ex. 1; Trial Tr. Vol. 1, 32:15-33:4; Trial Tr. Vol. 2, 187:7-188:7.) The
parties agreed, inter alia, that McCranie would “not terminate its Franchise
Agreement with [Brooke] prior to five (5) years from the closing date.” (Pl.’s Ex.
1, § 5.) The parties also agreed that Brooke’s “directors, officers and employees
[would] assist and cooperate with [McCranie] in transferring to [McCranie] the
agency assets conveyed under the terms of this Agreement.” (Id. at § 8.) The
parties further agreed that certain exhibits, including the Bill of Sale, the List of
Office Equipment and Other Personal Property, the Franchise Agreement, the
Agreement for Purchase of Agency Assets (from First South, Inc. and First South
Insurors LLC d/b/a First South Insurance), and the Listing of Obligations
Assumed by Purchaser, were “an integral part” of the Agreement. (Id. at §
14(B).)
2.

The Franchise Agreement was also entered on October 30, 2000

2

“Brooke [was] primarily in the business of providing certain services and
assistance to businesses selling insurance[.]” (Def.’s Ex. 13 at 1.)
3

Earlier, on September 12, 2000, Brooke, as buyer, had entered into an
Agreement for Purchase of Agency Assets with the two sellers, First South, Inc. and
First South Insurors LLC d/b/a First South Insurance, of the same insurance agency.
(Def.’s Ex. 19.)
3

between Brooke, as franchisor, and Home Options Financial Group LLC (“Home
Options”), by and through McCranie, as franchisee, whereby Home Options
became a franchisee of Brooke for the purpose of issuing insurance policies.
(Trial Tr. Vol. 2, 235:21-23; Def.’s Ex. 13.) Under its terms, Brooke became the
Agent of Record, i.e., the “[p]erson designated on Company’s records as the
agent or representative regarding a specific Policy and the owner of all Sales
Commissions.” (Def.’s Ex. 13, ¶ 1.2.) Brooke’s obligations included providing
“services with respect to accounting for and processing of Policies for Franchise
Agent.” (Id. at ¶ 2.1.) Brooke had “the absolute right to and [was] fully vested in
all Net Premiums. Franchise Agent ha[d] no right, title or interest in such
amounts.” (Id. at ¶ 2.3(a).) Brooke was required to “calculate and credit
Franchise Agent Account monthly for amounts due Franchise Agent by Brooke,”
which amounts “shall be Eighty-five percent (85%) of any Sales Commissions
from Companies for Customer Accounts.” (Id. at ¶ 2.4.)
The Franchise Agreement authorized the creation of a Receipts Trust
Account, “established and owned by Brooke, but controlled by a trustee, to which
premiums, fees, Sales Commissions and Other Receipts received by Franchise
Agent or Brooke from Companies or customers shall be deposited and from
which Brooke, or its designee, makes regular withdrawals by Electronic Funds
Transfer.” (Id. at ¶¶ 1.15, 7.1.) The Trustee had the “sole right to withdraw funds
from the Receipts Trust Account” and was required to “distribute to Franchise
4

Agent and/or Brooke Sales Commissions and Other Receipts in accordance with
the terms of the Trust Agreement.” (Id. at ¶ 7.2.)
The Franchise Agreement directed the Franchise Agent to “change the
Agent of Record for all existing Customer Accounts to Brooke,” subject to prior
approval of the Companies involved (id. at ¶ 3.3), and “for all Policies sold,
renewed, serviced or delivered through Franchise Agent with an effective date for
coverage after the effective date of this agreement, unless prior written approval
is obtained from Brooke” (id. at ¶ 3.5), as well as to “process all applications for
Policies exclusively through the facilities of Brooke” (id. at ¶ 3.4). The Franchise
Agent agreed and acknowledged that “by making Brooke the Agent of Record, all
Sales Commissions and Profit Sharing Commissions [were] assigned to Brooke
for accounting and distribution to Franchise Agent Account” and Brooke was
appointed as Franchise Agent’s “attorney in fact to endorse or deposit checks
made payable to Franchise Agent by customers, Companies or master general
agents.” (Id. at ¶ 3.5.)
The Franchise Agreement also provided:
3.7 Franchise Agent shall be solely responsible for the collection
of all Agency Bill Policy premiums from Customer Accounts, which
amounts shall be made payable to [Brooke]. Franchise Agent shall
not have authority to endorse or deposit such payments to its own
account. . . .
3.8 Franchise Agent shall be responsible for payment to Brooke of
all Agency Bill Policy net premiums and Direct Bill Policy return
commission resulting from Customer Accounts.
3.9 Franchise Agent authorizes Brooke to retain Fifteen percent
5

(15%) of any Sales Commissions from Companies under contract
with Brooke for Customer Accounts . . . .
(Id. at ¶¶ 3.7-3.9.)
The term of the Franchise Agreement was five years, but it was subject to
renewal at expiration. (Id. at ¶ 6.1.) The Franchise Agent had “the unilateral right
to terminate this Agreement for any reason upon not less than 30 days advance
notice to Brooke.” (Id. at ¶ 6.4.) Upon termination of the Franchise Agreement,
Brooke was obligated to “request the pertinent Companies involved to make the
Franchise Agent the Agent of Record for all Customer Accounts.” (Id. at ¶ 6.5.)
Section 9.8 of the Franchise Agreement provided: “This Agreement (including all
Exhibits and Addenda hereto) contains the entire agreement between the parties
hereto and shall supersede and take precedence over any and all prior
agreements, arrangements or understandings between the parties relating to the
subject matter hereof.” (Id. at ¶ 9.8.)
3.

To finance his purchase of the insurance agency, on October 30,

2000, McCranie entered into two Promissory Notes with Brooke Credit
Corporation (“Brooke Credit” or “BCC”), now known as Aleritas Capital. (Pl.’s Ex.
2; Trial Tr. Vol. 1, 33:5-34:3; Trial Tr. Vol. 2, 188:8-189:13, 190:7-9.) The first
Promissory Note in the sum of $990,000, known as loan number 2244, was to
acquire insurance agency assets, and the second Promissory Note in the sum of
$40,000, known as loan number 2245, was to finance agency operations. (Pl.’s

6

Ex. 2.) These Promissory Notes were signed by both McCranie and a
representative of Brooke Credit, they were made payable to Brooke Credit or its
successors and assigns, and they referenced the Agreement for Advancement of
Loan under “Additional Terms.” (Id.)
4.

The Agreement for Advancement of Loan (a/k/a “Advancement

Agreement”) was also entered on October 30, 2000 between Brooke Credit, as
lender, and McCranie, as borrower. (Pl.’s Ex. 5.) Under its terms, Brooke Credit
agreed to loan to McCranie the sum of $990,000 for the purpose of acquiring
insurance agency assets. (Id. at 1.) It provided that the Agreement and the Loan
Documents defined therein “shall apply to all existing and future loans or
advances made by [Brooke Credit] to [McCranie].” (Id.) Loan documents were
defined 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 [McCranie] and delivered to [Brooke Credit] in connection therewith,
including, without limitation, the documents referenced in paragraphs 1 through
11 herein.” (Id. at 2.)
With respect to assignment of agency assets, the Agreement for
Advancement of Loan provided:
(a) [McCranie] grants, conveys and assigns to [Brooke Credit] as
additional security all 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. . .
7

(b) [McCranie] may 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. . . .
(Id. at ¶ 12.)
With respect to default, the Agreement provided:
(a)
[Brooke Credit] may upon written notice to [McCranie], declare
[McCranie] to be in default if: [McCranie] fails to fulfill or perform any
term, condition or obligation set forth in any Loan Document,
including without limitations [McCranie’s] failure to make payments
when due in accordance with the terms of the Note; or, if any
representation or warranty set forth in any Loan Document is not as
represented or warranted by [McCranie].
(b)
In addition, [Brooke Credit] may upon written notice to
[McCranie], declare [McCranie] to be in default upon the occurrence
of any of the following events:
i.
[McCranie’s] failure to fulfill, perform or enforce any
term, condition or obligation set forth in any agreement
by [McCranie] to purchase Agency Assets that are
related to or the subject of the Loan Documents;
ii.
[McCranie’s] failure to fulfill, perform or enforce any
term, condition or obligation set forth in the Agent
Agreement;
iii.
any representation or warranty set forth in the Agent
Agreement is not as represented or warranted by
[McCranie];
iv.
the Agent Agreement is terminated by [McCranie] or
Master Agent . . . .
(c)
A default by [McCranie] in performing under the terms of one
Loan Document shall constitute a default under the terms of all other
Loan Documents.
(d)
A default by [McCranie] in performing the obligations and
duties of any contract relating to [McCranie’s] business shall
constitute a default under the terms of this Agreement.
(Id. at ¶ 13.)
With respect to allocation of loan payments, the Agreement for

8

Advancement of Loan provided:
[McCranie] hereby agrees that [Brooke Credit] may allocate the
payments it receives in any manner which [Brooke Credit] deems
necessary. This allocation may include but is not limited to current
loan amounts, any prepayments, and any past due payments which
may otherwise place [McCranie] in default. This discretion also
allows [Brooke Credit] to determine whether to apply the loan
payment proceeds to interest or principal. [McCranie] hereby further
agrees that the allocation of the loan payment proceeds is absolutely
within the discretion of [Brooke Credit] and therefore waives any
objections that [McCranie] might otherwise express with the
allocation amounts.
(Id. at ¶ 27.) Finally, pursuant to the integration clause: “This Agreement
(including all exhibits and addenda hereto) together with the other Loan
Documents contains the entire agreement between the parties hereto and shall
supersede and take precedence over any and all prior agreements,
arrangements or understandings between the parties relating to the subject
matter hereof.” (Id. at ¶ 36.)
5.

Also on October 30, 2000, Brooke Credit, as lender, and McCranie,

as borrower, entered into a Security Agreement (“October 30, 2000 Security
Agreement”), whereby McCranie gave Brooke Credit additional security in all of
his Agency Assets, including inventory, equipment, accounts, rights to payment,
and general intangibles. (Pl.’s Exs. 6 & 22; Trial Tr. Vol. 1, 57:15-57:23, 78:2079:3; Trial Tr. Vol. 2, 190:4-190:6.) All terms in the Security Agreement had the
same meaning ascribed to them in the Agreement for Advancement of Loan.
(Pl.’s Ex. 6.)
9

6.

On April 11, 2002, Brooke Credit agreed to refinance and

consolidate the two Promissory Notes from October 30, 2000. (Pl.’s Ex. 3; Trial
Tr. Vol. 1, 34:4-34:18; Trial Tr. Vol. 2, 193:7-193:13.) On April 17, 2002, Brooke
Credit, as lender, and McCranie, as borrower, entered into a new Promissory
Note, known as loan number 2752, under which Brooke Credit loaned to
McCranie the sum of $831,407.78 to consolidate pre-existing agency debt at a
lower interest rate. (Pl.’s Ex. 4; Stipulated fact (Doc. 143) #5; Trial Tr. Vol. 1,
35:1-37:8; Trial Tr. Vol. 2, 193:14-194:2.) This Promissory Note was payable to
Brooke Credit or its successors and assigns, and referenced the Agreement for
Advancement of Loan dated October 30, 2000 under “Additional Terms.” (Pl.’s
Ex. 4.) A day earlier, on April 16, 2002, McCranie’s attorney examined this Note
and related documents, and opined that “the [loan] documents constitute[d] a
valid, legally binding obligation of [McCranie] enforceable against [him] in
accordance with its terms.” (Pl.’s Ex. 5 at 657, ¶ 7; Trial Tr. Vol. 1, 55:21-57:8.)
7.

On August 27, 2004, Brooke Credit, as seller, Brooke Credit

Funding, LLC (“Brooke Funding” or “BCF”), as buyer and issuer, and Textron
Business Services, Inc. (“Textron”), as initial servicer, entered into a Sale and
Servicing Agreement (“Sale Agreement”), for the transfer of certain loans from
Brooke Credit to Brooke Funding. (Pl.’s Ex. 7; Trial Tr. Vol. 1, 42:9-42:14, 42:21-

10

43:8; Zierlein Dep. 38:24-41:25.)4 There is no evidence that McCranie’s April 17,
2002 Promissory Note was included in the initial Schedule of Loans. However,
the Sale Agreement provided for the transfer of then-future loans from Brooke
Credit to Brooke Funding upon the parties’ agreement. (Pl.’s Ex. 7, § 2.1(a).)
Although there were certain conditions precedent to transfer, such
conditions could be deemed satisfied. (See id. at § 2.3, bates 044 (“[Brooke
Credit] by accepting the Purchase Price for any purchase hereunder, shall be
deemed to have certified to the Issuer [i.e., Brooke Funding] and the Agent that
the conditions precedent for such Purchase set forth in Section 2.3(a) have been
satisfied. . . . Notwithstanding anything herein to the contrary, the conditions
precedent to any Purchase specified in this Section 2.3(b) shall conclusively be
deemed to have been satisfied on the related Purchase Date unless the Seller
[i.e., Brooke Credit] delivers a written notice to the contrary to each of the Agent,
the Servicer, the Custodian and the Issuer . . . .”).)
8.

Also on August 27, 2004, Brooke Funding, as borrower, Brooke

Credit, as seller and subservicer, Brooke, as master agent servicer and

4

The telephonic deposition of Gage Zierlein, a former employee of Brooke
Credit, who executed the Allonge mentioned infra and who was responsible for
transferring McCranie’s April 17, 2002 Promissory Note from Brooke Credit to Brooke
Funding and then to DZ Bank, took place on August 14, 2014 and was admitted into
evidence during the bench trial. (Trial Tr. Vol. 1, 178:15-178:21.)
11

guarantor, Autobahn Funding Company, LLC (“Autobahn Funding”),5 as lender,
and DZ Bank, as agent for Autobahn Funding, entered into a Credit and Security
Agreement (“Security Agreement”), whereby Autobahn Funding agreed to finance
Brooke Funding’s acquisition of various loans under the Sale Agreement.6 (Pl.’s
Ex. 8; Trial Tr. Vol. 1, 42:15-42:17, 42:21-43:8; Zierlein Dep. 38:24-41:25.)
To secure Brooke Funding’s obligations to Autobahn Funding, Brooke
Funding and Brooke Credit granted DZ Bank, as Autobahn’s agent, a security
interest in: (1) all right, title, and interest in and to various loans that Brooke
Funding had purchased from Brooke Credit under the Sale Agreement; (2) all
right, title, and interest in and to various loans that Brooke Funding would be
purchasing from Brooke Credit in the future under the Sale Agreement; and (3)
various other collateral. (See Pl.’s Ex. 8, §§ 2.12-2.13.) With respect to any loan,
the “loan documents” included the original counterpart of the loan and an allonge,
the related loan agreement, the related franchise agreement, the related lender
protection addendum, the related customer agreement, the related security
agreement and financing statement, any related insurance agreements, all
guarantees relating to the loan, and “all other instruments, documents and

5

Autobahn Funding was “a capital markets funding vehicle” without any
employees of its own. (Trial Tr. Vol. 1, 30:2-30:3, 30:14.)
6

Also on August 27, 2004, DZ Bank filed UCC Financing Statements as to
Brooke Funding and Brooke Credit with the Delaware Department of State and Kansas
Secretary of State, respectively. (Pl.’s Exs. 9 & 10; Trial Tr. Vol. 1, 43:9-44:1.)
12

agreements executed and/or delivered under or in connection with any of the
foregoing.” (Pl.’s Ex. 8, bates 571.)
9.

On August 31, 2004, Brooke Credit, as originating lender, and Home

Federal Savings and Loan (“Home Federal”), as participating lender, entered into
a Participation Certificate and Agreement (“Participation Agreement”), under
which Brooke Credit sold a 99.74% interest in McCranie’s April 17, 2002 Note to
Home Federal.7 (Pl.’s Ex. 20; Trial Tr. Vol. 1, 76:14-77:15.) Pursuant to
paragraph 12 of the Participation Agreement, Brooke Credit was allowed to
“administer the Loan and any related security and guaranties as though it were
the sole owner and holder thereof.” (Pl.’s Ex. 20, ¶ 12.) Pursuant to paragraph
23, as amended, the transfer was intended to be a true sale; therefore, it could
not be revoked, and Brooke Credit could not maintain control over Home
Federal’s interest in the loan. (Pl.’s Ex. 26, bates 183.)
Pursuant to paragraph 17, Home Federal acknowledged that “it [had] made
an independent investigation of the Loan, and [had] satisfied itself with respect to
the credit standing of any Obligor of the Loan, the value of any security for the
Loan, the validity and enforceability of the Loan agreement, the Promissory Note
and any guaranty and security and all other matters in connection with the Loan.”

7

Earlier, on July 8, 2003, Brooke Credit offered to sell McCranie’s loan to Home
Federal with the understanding that Brooke Credit would repurchase the loan “within
one business day of the Participant’s request.” (Pl.’s Ex. 26, bates 262-63.) Home
Federal signed the Participation Agreement and returned it to Brooke Credit on July 9,
2003 with effective date of June 16, 2003. (Pl.’s Ex. 26, bates 174-75.)
13

(Pl.’s Ex. 20, ¶ 17.) However, prior to entering into the Participation Agreement,
Home Federal did not conduct a UCC search on any of the Brooke entities.
(Haskell Dep. 19:22-19:25.)8
Home Federal never took possession of McCranie’s April 17, 2002 Note
(Haskell Dep. 20:6-20:18), and it did not file a UCC Financing Statement
regarding its interest in the Note (Haskell Dep. 21:10-21:17). DZ Bank, who had
possession of the Note at the trial and who had filed UCC Financing Statements
as to Brooke Funding and Brooke Credit on August 27, 2004 (Pl.’s Exs. 9 & 10;
Trial Tr. Vol. 1, 43:9-44:1) , was not aware of the Participation Agreement in

February 2008 when it funded McCranie’s April 17, 2002 Note, and the
Participation Agreement did not become a part of DZ Bank’s file (Trial Tr. Vol. 1,
57:24-58:14, 66:19-67:6, 76:14-77:3; Zierlein Dep. 35:10-38:13, 155:6-156:9).
10.

On August 29, 2006, Brooke Funding, as issuer, Textron, as initial

servicer, and Brooke Credit, as seller, entered into an Amended and Restated
Sale and Servicing Agreement (“Amended Sale Agreement”), containing the
same relevant provisions as the Sale Agreement. (Pl.’s Ex. 11.) Pursuant to
Article V, Textron was appointed as the custodian of the loan files for the benefit
of DZ Bank. (Id.) Pursuant to Section 2.5(a), as to any ineligible promissory note
sold by Brooke Credit to Brooke Funding and pledged to DZ Bank, DZ Bank
8

The deposition of Scott Haskell, Executive Vice President of Home Federal,
took place on August 30, 2013 and was admitted into evidence during the bench trial.
(Trial Tr. Vol. 1, 178:15-178:21.)
14

could compel Brooke Credit to either repurchase the note or substitute it with one
or more eligible notes. (Pl.’s Ex. 11; Trial Tr. Vol. 1, 51:13-51:25.) DZ Bank did
not ask any of the Brooke entities for either repurchase or substitution of
McCranie’s April 17, 2002 Note, because it did not realize the Note was ineligible
for transfer. (Trial Tr. Vol. 1, 52:1-52:7.) Nevertheless, the parties contemplated
the possibility that ineligible loans could be transferred. (Trial Tr. Vol. 2, 314:4315:1, 314:15-315:1; Def.’s Ex. 22 at 8-9 and New Schedule V.) Pursuant to
Section 8.6, only “the parties hereto and their respective successors and
permitted assigns, including the Agent on behalf of the Secured Parties pursuant
to the Credit Agreement” had “any legal or equitable right, remedy or claim under
the Agreement.” (Pl.’s Ex. 11, bates 704; Trial Tr. Vol. 1, 159:12-61:2.)
11.

Also on August 29, 2006, Brooke Funding, as borrower, Brooke

Credit, as seller and subservicer, Brooke, as master agent servicer and
performance guarantor, Autobahn Funding, as lender, and DZ Bank, as agent for
Autobahn Funding, entered into an Amended and Restated Credit and Security
Agreement (“Amended Security Agreement”), whereby Autobahn Funding agreed
to finance Brooke Funding’s acquisition of various loans from Brooke Credit
under the Amended Sale Agreement. (Pl.’s Ex. 12, § 2.04.) Brooke Funding
reaffirmed DZ Bank’s security interest in the collateral, namely, (1) all right, title,
and interest in and to various loans that Brooke Funding had purchased from
Brooke Credit under the Amended Sale Agreement; (2) all right, title, and interest
15

in and to various loans that Brooke Funding would be purchasing from Brooke
Credit in the future under the Amended Sale Agreement; and (3) various other
collateral. (Pl.’s Ex. 12, bates 123-24.) The Amended Security Agreement
contained the same relevant provisions as the Security Agreement. Any
promissory note originated prior to August 30, 2004 was still ineligible to be
pledged to DZ Bank. (Id., bates 114 (purchase of eligible loans only), 096
(defining “eligible loan”), 098 (defining “existing loan”).)
12.

On February 19, 2008, Brooke Funding sent a Borrowing Base

Certificate to DZ Bank requesting that Autobahn Funding advance $3,901,457 to
Brooke Funding under Section 2.02 of the Amended Security Agreement for its
purchase of McCranie’s April 17, 2002 Note and various other notes from Brooke
Credit (the “Advance Request”). (Pl.’s Ex. 13; Trial Tr. Vol. 1, 61:3-63:12.)
Pursuant to Section V.A., of the $3,901,457 requested by Brooke Funding,
$416,947.14 was requested for Brooke Funding’s purchase of McCranie’s Note,
which represents 81% (the Maximum Advance Rate) of $514,749.55, the
outstanding amount on the Note. (Pl.’s Ex. 13; Zierlein Dep. 19:3-24:8.)
13.

Also on February 19, 2008, Textron certified to DZ Bank in its

“Custodian & Servicer’s Certificate” that: (1) it was in possession of the original
April 17, 2002 Note, the Allonge thereto, and related documents (including the
Agreement for Advancement of Loan, the Lender Protection Addendum, the
Security Agreement, the Pre-Authorized Collection Form, the Collateral
16

Preservation Agreement, the Credit File, and UCC); and (2) Brooke Credit
transferred McCranie’s April 17, 2002 Note, among others, and its interest in the
collateral securing it, to Brooke Funding pursuant to the Amended Sale
Agreement, which Note would be pledged by Brooke Funding to DZ Bank to
secure its obligations under the Amended Security Agreement. (Pl.’s Ex. 14; Trial
Tr. Vol. 1, 63:13-65:23; Zierlein Dep. 24:9-33:22.)
14.

On February 20, 2008, in conjunction with Brooke Credit’s sale of the

April 17, 2002 Note to Brooke Funding under the Amended Sale Agreement,
Brooke Credit endorsed the Allonge making the Note payable to Brooke Funding.
(Pl.’s Exs. 4 & 14; Trial Tr. Vol. 1, 39:12-40:11, 47:4-47:10; Zierlein Dep. 17:1619:2.) The same day, in conjunction with Brooke Funding’s pledge of the Note to
DZ Bank under the Amended Security Agreement, Brooke Funding endorsed the
Allonge making the Note payable to DZ Bank. (Id.) The Allonge, which expressly
references loan number 2752 in the upper right-hand corner, provides: “Pay to
the order of [Brooke Funding], its successors and assigns . . . , without recourse
(except as otherwise set forth in [the Amended Sale Agreement] . . .). Pay to the
order of DZ Bank, its successors and assigns.” (Pl.’s Ex. 4.) The original April
17, 2002 Note and Allonge thereto were presented at the trial. (Trial Tr. Vol. 1,
35:25-37:8, 39:5-40:11, 59:5-59:10, 105:1-106:5.) The Allonge was part of the
original file. (Trial Tr. Vol. 1, 106:4-106:5.)
15.

Also on February 20, 2008, DZ Bank wired Brooke Funding
17

$3,901,456.68, of which $416,947.14 was for Brooke Funding’s purchase of the
April 17, 2002 Note from Brooke Credit. (Pl.’s Ex. 15; Trial Tr. Vol. 1, 65:2466:15; Zierlein Dep. 33:23-34:22.) At the time, DZ Bank had no reason to believe
that any of the Brooke entities would fail to fulfill their loan obligations, or that
McCranie would have any defenses as to enforcement of his Note. (Trial Tr. Vol.
1, 93:15-94:2, 171:9-171:22; Zierlein Dep. 44:6-45:1, 155:6-156:9.)
16.

On April 15, 2008, Brooke Credit assigned to DZ Bank its UCC

Financing Statement regarding McCranie’s pledge under the October 30, 2000
Security Agreement. (Pl.’s Ex. 25; Trial Tr. Vol. 1, 79:25-80:7.)
17.

From 2002 until June 2008, payments on behalf of McCranie were

made under the Note as agreed. (Trial Tr. Vol. 2, 196:13-197:1, 197:21-200:4;
Haskell Dep. 25:15-25:22, 26:14-27:19; Pl.’s Ex. 17 (“As of August 31, 2008 the
outstanding principal amount of your Loan Obligations was $481,232.18.”).) On
or about June 19, 2008, DZ Bank terminated its line of credit with Brooke
Funding. (Def.’s Ex. 22, § 1.9; Trial Tr. Vol. 2, 297:10-298:9.)
18.

Around June of 2008, McCranie became aware of certain allegations

and concerns regarding the stability and viability of the Brooke entities. (Trial Tr.
Vol. 2, 263:4-265:24.) When Brooke failed to distribute McCranie’s commissions
due in July 2008, McCranie sent multiple e-mails declaring that Brooke breached
their obligations. (Id.) On September 2, 2008, McCranie sent letters to Brooke
and Brooke Credit that he was terminating the Franchise Agreement and
18

requesting immediate transfer of the agent of record to him effective September
3, 2008, in order to preserve the collateral. (Pl.’s Ex. 16 at 2-6.) The letter to
Brooke Credit provided:
As you the lender are aware my account with you is current. I have
an excellent eight year payment history with you. Never have I been
even one day late. In order to continue honoring my loan
agreement, I must have control of the commissions.
(Id. at 2.) Despite his demands, the agent of record status was not transferred to
McCranie. (Trial Tr. Vol. 2, 271:8-271:12.)
19.

In September 2008, Home Federal stopped receiving payments from

Brooke Credit under the Participation Agreement. (Haskell Dep. 22:11-22:17.) In
October 2008, Brooke filed for bankruptcy in the District of Kansas. (Trial Tr. Vol.
1, 68:9-68:14.)
20.

On October 1, 2008, DZ Bank informed McCranie that Brooke Credit

had sold his April 17, 2002 Note to Brooke Funding and that Brooke Funding had
pledged the Note to DZ Bank as collateral under the Amended Security
Agreement. (Pl.’s Ex. 17; Trial Tr. Vol. 1, 70:19-72:5.) DZ Bank directed
McCranie to submit all amounts due under the Note directly to DZ Bank. (Id.) As
of August 31, 2008, the outstanding principal was $481,232.18. (Pl.’s Ex. 17.)
21.

On October 9, 2008, Home Federal issued separate demand letters

to McCranie (for payments under the Note) and to Brooke Credit (for the entire
loan file and any payments received under the Note) due to Brooke Credit’s

19

failure to comply with its contractual obligations under the Participation
Agreement. (Pl.’s Ex. 26, bates 207-08, 333-34; Haskell Dep. 22:18-24:9.)
Following its demand letters, Home Federal received no further payments on
McCranie’s Note under the Participation Agreement. (Haskell Dep. 25:10-25:14.)
In a report to the Board of Directors in regards to McCranie’s Note, Home
Federal’s Executive Vice President, Scott A. Haskell, stated in relevant part:
10/31/08 . . . . There is no new additional data from the borrower and
this promissory note appears to have been sold multiple times.
Based on my earlier visit with this borrower I believe that the
borrower will walk away and no payments will be received. I will call
again to get an updated status report but feel it would be prudent to
charge this off as of November 30, 2008.
11/30/08 . . . . We did not receive a file or original note. Based on
the number of banks calling the borrower this note was sold several
times and whoever has the original note will be [t]he holder in due
course. This note was charged off on November 25, 2008.
(Pl.’s Ex. 21; Haskell Dep. 25:15-25:22.)
Based on Mr. Haskell’s recommendation, McCranie’s April 17, 2002 Note
in the principal sum of $488,862 was charged off (or written off) to zero, but was
still eligible for collection. (Haskell Dep. 26:14-27:19.) Home Federal never
pursued a legal action with respect to the Note because it wanted to avoid any
legal expenses and partly because it did not have possession of the original Note.
(Haskell Dep. 26:14-27:19, 36:22-37:2.) No other creditors have asserted claims
with respect to McCranie’s Note. (Trial Tr. Vol. 1, 94:6-94:10.)
22.

Starting on October 13, 2008, McCranie began receiving suspension

20

notices from his insurance carriers, some of which became effective October 17,
2008. (Def.’s Exs. 1-4; Trial Tr. Vol. 2, 284:25-286:1.)
23.

On October 14, 2008, McCranie received an Acknowledgment and

Agreement from DZ Bank, but refused to execute it. (Def.’s Ex. 5; Trial Tr. Vol. 2,
286:2-290:9.) It provided, inter alia, that McCranie’s loan had been assigned to
Brooke Funding, which in turn had pledged it to DZ Bank. (Id.) It further provided
that DZ Bank would consent to McCranie’s termination of the Franchise
Agreement and would assist McCranie with becoming the agent of record for the
insurance policies serviced through Brooke, if McCranie acknowledged he was
liable to DZ Bank under the Note. (Id.)
24.

As a result of Brooke Funding’s default on its obligations to DZ Bank

under the Amended Security Agreement, on October 30, 2008, DZ Bank, as
agent of the lender Autobahn Funding, Brooke Credit, and Brooke Funding, as
debtor, entered into a Surrender of Collateral, Consent to Strict Foreclosure,
Release and Acknowledgment Agreement (“Surrender of Collateral”). (Pl.’s Ex.
18; Trial Tr. Vol. 1, 69:4-69:18, 163:1-163:8.) Pursuant to the Surrender of
Collateral, DZ Bank had a first priority security interest in the collateral and was
entitled to proceed immediately to foreclose upon the collateral in partial
satisfaction of Brooke Funding’s obligations under the Credit Agreement, which at
that time amounted to almost $35 million. (Pl.’s Ex. 18, bates 15, 23; Trial Tr.
Vol. 1, 69:19-70:18, 85:19-86:6.)
21

25.

On October 31, 2008, DZ Bank and Brooke Funding entered into an

Omnibus Assignment Agreement (“Omnibus Assignment”), whereby Brooke
Funding conveyed to DZ Bank all right, title, and interest to the loans listed in
Annex A, including McCranie’s April 17, 2002 Note, the security interests in the
collateral, the loan file related to each loan, and the proceeds of any and all of the
foregoing. (Pl.’s Ex. 19; Trial Tr. Vol. 1, 76:1-76:13; Trial Tr. Vol. 2, 315:9-316:5.)
At the trial, DZ Bank remained in possession of the original McCranie loan file,
including the Note and Allonge thereto. (Trial Tr. Vol. 1, 39:9-39:15, 59:4-59:10,
106:4-106:5.)
26.

On December 3, 2009, DZ Bank’s attorneys sent a letter to McCranie

in an attempt to collect on his April 17, 2002 Note. (Pl.’s Ex. 27B, bates 804-08.)
The letter informed McCranie that his loan with Brooke Credit had been assigned
to Brooke Funding, which had pledged it to DZ Bank. (Id.) The letter provided:
As a result of [Brooke Funding’s] default to DZ Bank, DZ Bank has
foreclosed upon the Loan and is enforcing its rights thereunder. As
you are aware, you are in default under the terms of the Loan by
failing to make payments when due. The current balance due is
$484,425.42, plus attorneys’ fees, costs and prejudgment interest. . .
. We trust that you will agree that it is in your best interest to contact
us immediately to resolve this matter.
(Id.) McCranie stamped the letter as “deficient” and added the following before
sending it back to DZ Bank:
This constitutes [a] timely response: 12-5-2009[.] I cannot make a
legal determination about what you are asking me.
Your offer of contract is being rejected and returned to you unsigned
22

under regulation “Z” of the Federal Fair Debt Collection Practices
Act. Anyone who signed this document and writes in response to
this must respond to me under penalties of perjury.
MICHAEL MCCRANIE
[signature]
“With power of attorney in fact”
(Trial Tr. Vol. 1, 82:21-85:4; Trial Tr. Vol. 2, 200:15-200:25.)
27.

McCranie has not made any payments under the Note to DZ Bank.

(Trial Tr. Vol. 1, 85:5-85:7, 94:3-94:5.) McCranie testified at the trial that even
though he terminated his agreement with Brooke, he would have made payments
under the Note if the agent of record status had been transferred to him. (Trial
Tr. Vol. 2, 279:9-279:13.) The balance due under McCranie’s April 17, 2002 Note
is $484,425.42 in principal, plus interest. (Pl.’s Ex. 29.)
28.

DZ Bank has not foreclosed upon, or taken any action with respect

to, the collateral pledged by McCranie under the October 30, 2000 Security
Agreement. (Trial Tr. Vol. 1, 86:7-86:23, 172:1-172:16.)
III. Conclusions of Law
1.

The Court has diversity jurisdiction over this action pursuant to 28

U.S.C. § 1332(a)(2) because the matter in controversy exceeds $75,000 and is
between a citizen (McCranie) of a State (Florida) and a citizen or subject (DZ
Bank) of a foreign state (Germany). Venue is proper in this Court pursuant to 28
U.S.C. § 1391(b) because McCranie resides in this District and a substantial part
of the events or omissions giving rise to DZ Bank’s claim occurred in this District.

23

2.

Kansas substantive law applies in this case.

Under Kansas law: “The primary rule for interpreting written contracts is to
ascertain the parties’ intent. If the terms of the contract are clear, the intent of the
parties is to be determined from the language of the contract without applying
rules of construction.” Osterhaus v. Toth, 249 P.3d 888, 896 (Kan. 2011).
“Contracts should not be interpreted by isolating one particular sentence or
provision, but by construing and considering the entire instrument.” Byers v.
Snyder, 237 P.3d 1258, 1265 (Kan. Ct. App. 2010). “Where ambiguity or
uncertainty is involved, the parties’ intentions are ascertained by considering the
language employed, the circumstances existing when the agreement was made,
the object sought, and other circumstances tending to clarify the parties’ real
intentions.” Id.
3.

DZ Bank bears the burden of proving that McCranie is liable under

the Note by a preponderance of the evidence. See Student Loan Mktg. Ass’n v.
Hollis, 121 P.3d 462, 465 (Kan. Ct. App. 2005); Hoke v. Zent, 63 P. 1128, 112930 (Kan. Ct. App. 1901).
4.

McCranie’s April 17, 2002 Note is a negotiable instrument.

“Negotiable instrument” is defined in Section 84-3-104 of the Kansas Statutes as
follows:
(a) Except as provided in subsections (c) and (d), “negotiable
instrument” means an unconditional promise or order to pay a fixed
amount of money, with or without interest or other charges described
24

in the promise or order, if it:
(1) is payable to bearer or to order at the time it is issued or
first comes into possession of a holder;
(2) is payable on demand or at a definite time; and
(3) does not state any other undertaking or instruction by the
person promising or ordering payment to do any act in addition to the
payment of money, but the promise or order may contain (I) an
undertaking or power to give, maintain, or protect collateral to secure
payment, (ii) an authorization or power to the holder to confess
judgment or realize on or dispose of collateral, or (iii) a waiver of the
benefit of any law intended for the advantage or protection of an
obligor.
Kan. Stat. § 84-3-104. Further, Section 84-3-106 of the Kansas Statutes
provides:
(a)
Except as provided in this section, for the purposes of K.S.A.
84-3-104(a), a promise or order is unconditional unless it states (1)
an express condition to payment, (2) that the promise or order is
subject to or governed by another writing, or (3) that rights or
obligations with respect to the promise or order are stated in another
writing. A reference to another writing does not of itself make the
promise or order conditional.
(b)
A promise or order is not made conditional (1) by a reference
to another writing for a statement of rights with respect to collateral,
prepayment, or acceleration, or (2) because payment is limited to
resort to a particular fund or source.
Kan. Stat. § 84-3-106.
The April 17, 2002 Promissory Note is an unconditional promise by
McCranie to pay a fixed amount of money ($831,407.78), plus interest, to Brooke
Credit by April 1, 2014, and the purpose of the loan was to consolidate preexisting agency debt at a lower interest rate. (Pl.’s Ex. 4; Stipulated fact (Doc.
143) #5; Trial Tr. Vol. 1, 35:1-37:8, 55:21-57:8; Trial Tr. Vol. 2, 193:14-194:2; Pl.’s

25

Ex. 5 at 657, ¶ 7.) The reference to the Agreement for Advancement of Loan in
the Note does not make the promise to pay conditional or indicate any
impermissible undertakings. 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. . . . Given the
precise terms on the face of the notes, the mere reference to the bill-of-lading
date did not impair the notes’ negotiability.”); In re AppOnline.com, Inc., 321 B.R.
614, 622 (E.D.N.Y. 2004) (“The distinction is between a mere recital of the
existence of the separate agreement or a reference to it for information, which . . .
will not affect negotiability, and any language which, fairly construed, requires the
holder to look to the other agreement for the terms of payment.”), aff’d, 128 F.
App’x 171 (2d Cir. Jan. 24, 2004); United States v. Cottrell, 287 F. Supp. 877,
883 (E.D. Cal. 1968) (“A reference in a note to an extrinsic agreement does not
destroy negotiability unless the reference actually makes the note ‘subject to’ the
terms of that agreement. . . . This is so even though the security agreement may
require the maker to do many acts other than the payment of money, i.e.,
covenants in a mortgage.”).
McCranie’s payment obligations are plainly stated on the face of the Note
and there is no need to examine the Agreement for Advancement of Loan, or any
other document, to calculate the amount due under the Note. Further, there are
26

no impermissible undertakings because, as DZ Bank points out, the Agreement
for Advancement of Loan merely contains a statement of rights with respect to
preservation of collateral and McCranie’s obligation to provide certain financial
reports and additional documents to the lender. (Pl.’s Ex. 5, ¶¶ 10, 12.)
Although the Agreement for Advancement of Loan includes references to
other agreements, it incorporates only the agreements executed by and/or on
behalf of McCranie and delivered to Brooke Credit, i.e., the “loan documents.”
(Pl.’s Ex. 5, bates 3, 6-7, 11.) Because Brooke Credit is not a party to either the
Agreement for Sale of Agency Assets or the Franchise Agreement, these
agreements are not considered incorporated into the Agreement for
Advancement of Loan. Therefore, even if Brooke breached the Franchise
Agreement, it did not relieve McCranie of his obligations to Brooke Credit, and
ultimately to DZ Bank, under the Note.
5.

DZ Bank is a holder of McCranie’s April 17, 2002 Note. A holder is,

inter alia, “[t]he person in possession of a negotiable instrument that is payable
either to bearer or to an identified person that is the person in possession.” Kan.
Stat. § 84-1-201(b)(21). Here, DZ Bank has possession of the original Note and
the Allonge, under which the Note is ultimately payable to DZ Bank, following its
transfer from Brooke Credit to Brooke Funding, and from Brooke Funding to DZ
Bank.
The Allonge was a proper endorsement of the Note. As demonstrated at
27

the trial, the original Allonge was part of the original loan file, and the loan number
on the Allonge and on the Note matched. (Pl.’s Ex. 4; Trial Tr. Vol. 1, 106:4106:5.) Even if the Allonge was not originally attached to the Note,9 the
endorsement is still valid because the parties intended that the documents be
attached, as shown by the matching loan number on the documents and their
appearance in the original loan file. See Kohler v. U.S. Bank Nat’l Ass’n, 2013
WL 3179557, *6 (E.D. Wis. June 21, 2013) (“[E]ven if the allonges had not been
physically attached soon after execution . . . , the information on the allonges
established that they were intended to be affixed. The sticker on each allonge
matches the allonge to the particular note signed by the Kohlers, with the
pertinent loan number. Thus, the information on each allonge indicates an intent
to serve as an endorsement of the respective note. . . . The lack of a statement in
the allonge indicating that it was to be attached to the note is not persuasive; the
loan number referencing the same number on the note indicates such intent.”);
see also In re Nash, 49 B.R. 254, 261 (D. Ariz. 1985).
Further, the parties intended to transfer the Note from Brooke Credit to
Brooke Funding and then to DZ Bank, as shown by the events surrounding the
Advance Request and the Custodian & Servicer’s Certificate taking place on
February 19, 2008. Once the Allonge was endorsed, making the Note payable to

9

“For the purpose of determining whether a signature is made on an instrument,
a paper affixed to the instrument is a part of the instrument.” Kan. Stat. § 84-3-204(a).
28

DZ Bank, DZ Bank wired $416,947.14 to Brooke Funding for its purchase of the
Note from Brooke Credit. (Pl.’s Ex. 15; Trial Tr. Vol. 1, 65:24-66:15; Zierlein Dep.
33:23-34:22.) The parties’ intent to transfer the Note to DZ Bank is also evident
from the Surrender of Collateral, pursuant to which DZ Bank held a first priority
security interest in the collateral when Brooke Funding defaulted on its obligations
under the Amended Security Agreement, and from the Omnibus Assignment,
under which DZ Bank was transferred all rights, title, and interest to McCranie’s
loan, the security interest in the collateral, the loan file, and the proceeds of any
and all of the foregoing. (Pl.’s Ex. 18, bates 15, 23; Pl.’s Ex. 19; Trial Tr. Vol. 1,
69:19-70:18, 76:1-76:13, 85:19-86:6; Trial Tr. Vol. 2, 315:9-316:5.)
As shown earlier, the Allonge provided: “Pay to the order of [Brooke
Funding], its successors and assigns . . . , without recourse (except as otherwise
set forth in [the Amended Sale Agreement] . . . ).” (Pl.’s Ex. 4.) The language
“except as otherwise set forth in [the Amended Sale Agreement]” modifies the
term “without recourse,” not the word “pay.”10 If the parties intended to create a
conditional endorsement as McCranie suggests, they would have likely placed
the “except” language before the word “pay.”
Moreover, although the April 17, 2002 Note was ineligible for transfer from
Brooke Credit to Brooke Funding and then to DZ Bank because both the Security

10

Pursuant to Section 1.5 of the Amended Sale Agreement, no recourse could
be taken except as specifically set forth therein. (Pl.’s Ex. 11.)
29

Agreement and the Amended Security Agreement specifically exclude promissory
notes “originated by [Brooke Credit] on or before August 30, 2004,” the parties
contemplated the possibility that ineligible loans could nevertheless be
transferred, because Section 2.5(a) of the Amended Sale Agreement expressly
provides for repurchase or substitution of ineligible notes with eligible ones. (Pl.’s
Ex. 11; Trial Tr. Vol. 1, 51:13-51:25.) Had DZ Bank realized that the Note was
ineligible, it could have asked for its repurchase or substitution. (Trial Tr. Vol. 1,
52:1-52:7.) However, the fact that it did not, does not void the transfer.
In any event, only the parties to the Amended Sale Agreement and their
successors and assigns could assert a claim under the agreement. Because
McCranie was neither a party nor a secured party to the Amended Sale
Agreement (as well as the Sale Agreement, the Security Agreement, and the
Amended Security Agreement), he cannot assert a legal or equitable claim
thereunder. (Trial Tr. Vol. 1, 60:12-61:2.)
In addition, McCranie has failed to establish that he has standing to bring a
claim under those agreements as an intended third-party beneficiary. See Byers,
237 P.3d at 1265 (stating that “only intended beneficiaries have standing to sue
for damages resulting from the breach of a contract” and “[t]he burden of
establishing standing to bring suit as a third-party beneficiary rests with the party
asserting it”). “[P]arties are presumed to contract for themselves, and their intent
that a third person receive a direct benefit must be clearly expressed in the
30

contract.” Id.
Here, Section 8.6 of the Amended Sale Agreement expressly provides that
only the parties thereto and their respective successors and permitted assigns
have any legal or equitable right, remedy, or claim under the agreement. (Pl.’s
Ex. 11, bates 704.) Therefore, non-parties, like McCranie, lack standing to bring
any claim under the agreement. See Livonia Prop. Holdings, L.L.C. v. 1284012976 Farmington Rd. Holdings, L.L.C., 717 F. Supp. 2d 724, 737 (E.D. Mich.
2010) (holding that a borrower lacks standing to challenge the validity of
assignments to which it was not a party or third-party beneficiary, where it has not
been prejudiced, and the parties to the assignments do not dispute their validity).
6.

DZ Bank is a holder in due course of the April 17, 2002 Note. Under

Section 84-3-302(a) of the Kansas Statutes:
[A] “holder in due course” means the holder of an instrument if:
(1) The instrument when issued or negotiated to the holder does not
bear such apparent evidence of forgery or alteration or is not
otherwise so irregular or incomplete as to call into question its
authenticity; and
(2) the holder took the instrument (A) for value, (B) in good faith, (C)
without notice that the instrument is overdue or has been dishonored
or that there is an uncured default with respect to payment of another
instrument issued as part of the same series, (D) without notice that
the instrument contains an unauthorized signature or has been
altered, (E) without notice of any claim to the instrument described in
K.S.A. 84-3-306, and (F) without notice that any party has a defense
or claim in recoupment described in K.S.A. 84-3-305(a).
Kan. Stat. § 84-3-302(a).
Here, the Note is free of forgery and alteration, and its authenticity is not
31

questioned.11 (See Trial Tr. Vol. 2, 195:8-195:18.) In addition, DZ Bank took the
Note for value on February 20, 2008, when it advanced $416,947.14 in the
regular course of its business as agent for Autobahn Funding for Brooke
Funding’s purchase of the Note under the Amended Security Agreement, in
exchange for Brooke Funding’s endorsement of the Allonge and transfer of the
original Note and Allonge to DZ Bank’s custodian Textron as collateral. See
Bricks Unlimited, Inc. v. Agee, 672 F.2d 1255, 1258 (5th Cir. 1982) (“[A] holder
who takes a negotiable instrument as collateral for a loan takes ‘for value’ . . . .”).
At that time, DZ Bank was not aware of any financial difficulties or
wrongdoing by any of the Brooke entities and its expectation was that Brooke
Funding would repay its debt under the Amended Security Agreement. (Trial Tr.
Vol. 1, 93:15-94:2, 171:9-171:22; Zierlein Dep. 44:6-45:1, 155:6-156:9.) In

11

At the trial, McCranie questioned the completeness of the loan documents,
stating that the Agreement for Advancement of Loan, the Security Agreement, and the
Security Agreement Addendum were no longer attached to his Promissory Notes,
thereby altering the terms of the Notes. (Trial Tr. Vol. 2, 188:8-189:4, 194:10-195:18.)
This goes to McCranie’s argument that there was a collective, integrated, and
conditional agreement to purchase agency assets, which the Court rejects. As stated
recently in DZ Bank AGDeutsche Zentral-Genossenschaftbank, Frankfurt Am Main v.
Choice Cash Advance, LLC:
Although the Franchise Agreement and the Loan Agreement were
executed on the same day, there is no evidence that performance of one
agreement was contingent upon performance of the other. Specifically,
there is no evidence that Choice Insurance’s performance of the Loan
Agreement was subject to BCC’s performance of the Franchise
Agreement. . . . [T]he two contracts are separate. Each contains separate
promises and separate consideration, and significantly, each contains its
own integration clause.
918 F. Supp. 2d 1156, 1167-68 (W .D. Wash. 2013).
32

addition, at that time, DZ Bank did not have notice of Home Federal’s interest in
the Note because Home Federal did not file a UCC Financing Statement and
nothing on the face of the Note suggested that it had been sold to Home Federal.
Therefore, DZ Bank took the Note in good faith and without notice of any claims
or defenses. See Third Nat’l Bank in Nashville v. Hardi-Gardens Supply of
Illinois, Inc., 380 F. Supp. 930, 941 (M.D. Tenn. 1974) (“‘Notice’ means notice at
the time of the taking, the time of the negotiation of the note[.]”); see also Bricks
Unlimited, Inc., 672 F.2d at 1259 (“Knowledge learned subsequent to the time of
negotiation of an instrument does not impair holder in due course status.”).
Because DZ Bank took the Note for value, in good faith, and without notice of any
claims or defenses, DZ Bank is a holder in due course of the April 17, 2002 Note.
As such, DZ Bank’s interest in the Note is superior to Home Federal’s
99.74% interest under the Participation Agreement. See Kan. Stat. § 84-3-203(d)
(“If a transferor purports to transfer less than the entire instrument, negotiation of
the instrument does not occur. The transferee obtains no rights under this article
and has only the rights of a partial assignee.”). DZ Bank’s interest is also
superior because Home Federal never took possession of the original Note, while
DZ Banks gave value and took possession of the Note and the Allonge in good
faith and without knowledge that the purchase may have violated Home Federal’s
rights. See Kan. Stat. § 84-9-330(d) (“[A] purchaser of an instrument has priority
over a security interest in the instrument perfected by a method other than
33

possession if the purchaser gives value and takes possession of the instrument in
good faith and without knowledge that the purchase violates the rights of the
secured party.”). Further, in light of its status as a participant bank, Home
Federal lacks standing to enforce the Note against McCranie. See First Bank of
WaKeeney v. Peoples State Bank, 758 P.2d 236, 238 (Kan. Ct. App. 1988) (“The
participant bank has no legal relationship with the borrower. The borrower’s and
participant’s relationships are solely with the lead bank.”).
7.

DZ Bank, as named in the First Amended Complaint (Doc. 151), has

standing to enforce the Note.
8.

McCranie breached the Note. Under Kansas law, the elements of a

breach of contract claim are: (1) existence of a contract, (2) sufficient
consideration to support the contract, (3) plaintiff’s performance or willingness to
perform in compliance with the contract, (4) defendant’s breach of the contract,
and (5) damages to plaintiff caused by the breach. City of Andover v. Sw. Bell
Tel., L.P., 153 P.3d 561, 565 (Kan. Ct. App. 2007). All of these elements have
been satisfied in this case.
First, McCranie, as borrower, and Brooke Credit, as lender, entered into
the Promissory Note (loan number 2752) on April 17, 2002, under which Brooke
Credit loaned McCranie $831,407.78 to consolidate pre-existing agency debt at a
lower interest rate. (Pl.’s Ex. 4; Stipulated fact (Doc. 143) #5; Trial Tr. Vol. 1,
35:1-37:8; Trial Tr. Vol. 2, 193:14-194:2.) The Note was payable to Brooke
34

Credit or its successors and assigns. (Pl.’s Ex. 4.) Following the transfer of the
Note from Brooke Credit to Brooke Funding and then to DZ Bank, which was
accomplished through the Allonge in February 2008, DZ Bank became a holder in
due course of the Note, and has standing to enforce the Note. (Id.)
Second, there was sufficient consideration to support the Note.12
“[C]onsideration is sufficient if there is a benefit to the debtor or an inconvenience
or deprivation to the creditor.” State of Kan. ex rel. Ludwick v. Bryant, 697 P.2d
858, 861 (Kan. 1985). There is consideration in this case because McCranie
benefitted from the funds received under the Note — it refinanced his pre-existing
debt at a lower interest rate.
Third, DZ Bank performed its obligations as assignee of Brooke Credit and

12

McCranie argues “there was a lack of consideration to support the collective,
integrated and conditional agreement to purchase agency assets, and its sub-parts
including the Promissory Note,” because he never took ownership and control of the
insurance agency assets he contracted to purchase. (Doc. 170 at 17.) Prelim inarily,
the Court does not interpret the evidence as supporting a “collective, integrated and
conditional agreement.” Moreover, although McCranie did not receive the agent of
record status, which would have happened after the loan was repaid (Trial Tr. Vol. 1,
131:13-131:18), he did receive agency assets in the form of commissions (Trial Tr. Vol.
2, 197:25-198:11, 257:24-258:6), as well as the funds to purchase the agency. Further,
McCranie entered into the subject agreements as an experienced, sophisticated
businessman who understood the terms of the agreements and was satisfied with the
contract arrangements for years, up until the payments stopped in 2008. (See Trial Tr.
Vol. 2, 192:16-193:2, 196:18-197:1.) In f act, McCranie’s counsel inspected the
Promissory Note the day before it was signed and opined that the loan docum ents were
valid and enforceable against McCranie. (Pl.’s Ex. 5 at 657, ¶ 7.) Under these
circumstances, McCranie understood that the agent of record status would not be
transferred to him until the loan was fully repaid, but he nevertheless entered into the
agreements and made his payments as agreed. (See Pl.’s Ex. 16 at 2 (“I have an
excellent eight year payment history with you. Never have I been even one day late.”).)
Therefore, McCranie’s argument as to lack of consideration is rejected.
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Brooke Funding by providing the funds as agreed and otherwise acting in
accordance with the terms of the Note. As an affirmative defense, McCranie
alleges that his performance under the Note is excused by the doctrine of good
faith and fair dealing because DZ Bank and/or its alleged predecessors took
actions that destroyed the benefit of McCranie’s bargain and prevented him from
carrying out his obligations. (Doc. 156 at 4; Doc. 170 at 17-18.) However, due to
DZ Bank’s holder in due course status, all of McCranie’s affirmative defenses13
fail under Kan. Stat. § 84-3-305(a)(1). The only permissible defenses under
Section 84-3-305(a)(1) are:
(A) infancy of the obligor to the extent it is a defense to a simple
contract, (B) duress, lack of legal capacity, or illegality of the

13

McCranie raises fourteen affirmative defenses: (1) DZ Bank lacks standing to
bring this action; (2) the alleged contract is part of a single, integrated, collective, and
conditional agreement for the purchase of insurance agency assets; (3) McCranie’s
performance is excused due to DZ Bank and/or its alleged predecessors in interest’s
and Brooke’s material breach, which led McCranie to terminate or cancel any further
obligations under the contract; (4) McCranie’s performance is excused due to the
doctrine of impossibility of performance; (5) McCranie’s performance is excused
pursuant to the doctrine of commercial frustration; (6) DZ Bank is barred from recovery
because it and/or its alleged predecessors in interest violated the implied covenant of
good faith and fair dealing; (7) the contract is unenforceable and/or void because of DZ
Bank’s misrepresentations; (8) DZ Bank is barred from recovery by reason of unclean
hands; (9) the contract between DZ Bank and/or its alleged predecessors in interest
and McCranie lacked adequate consideration; (10) DZ Bank and/or its alleged
predecessors in interest did not act in good faith and violated the UCC by failing to
adequately preserve the collateral and/or assure performance; (11) DZ Bank is required
to account for all collateral received, including, but not limited to, payments received
and other agency assets, and McCranie is owed any surplus; (12) DZ Bank and/or its
alleged predecessors in interest failed to act in a commercially reasonable manner; (13)
DZ Bank is unable to establish damages in that it has been made whole; and (14)
McCranie is entitled to a set-off or a claim of recoupment for amounts previously paid
under the contract. (Doc. 156 at 3-5.)
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transaction which, under other law, nullifies the obligation of the
obligor, (C) fraud that induced the obligor to sign the instrument with
neither knowledge nor reasonable opportunity to learn of its
character or its essential terms, or (D) discharge of the obligor in
insolvency proceedings[.]
Kan. Stat. § 84-3-305(a)(1). McCranie does not raise any of these defenses.
Even assuming that McCranie could properly raise any of his fourteen
affirmative defenses, he has failed to prove those defenses. For example, to the
extent he alleges that Brooke breached its obligations under the Franchise
Agreement, it is unclear how Brooke Credit and/or DZ Bank, neither of whom is a
party to the agreement, would be liable for Brooke’s acts or omissions.
Fourth, McCranie breached the Promissory Note by failing to make or
ensure that payments were made under the Note to DZ Bank. McCranie testified
that in accordance with the Franchise Agreement, he did not personally make any
payments under the Note because the payments were always made out of his
commissions. (Trial Tr. Vol. 2, 198:1-198:11.) Although the Franchise
Agreement provided for the creation of a Receipts Trust Account and made
Brooke the Agent of Record, this agreement was not a part of the loan
documents, which obligated McCranie to make payments under the Note through
April 1, 2014. As stated earlier, even if there was a breach under the Franchise
Agreement, it did not excuse McCranie’s obligations under the Note.
Fifth, as a result of McCranie’s breach, DZ Bank has been damaged in the
principal amount of $484,425.42, plus interest. (Pl.’s Ex. 29; Trial Tr. Vol. 2,
37

204:14-204:24, 313:18-313:23.) Contrary to McCranie’s argument, the evidence
does not show that his loan has been paid off; rather, it shows that the loan has
been charged off or written off. (See Def.’s Ex. 10; Trial Tr. Vol. 2, 208:3-209:3,
313:1-313:23; see also Haskell Dep. 26:14-27:19.) In addition, there is no
evidence that DZ Bank has received any sum under the “Lender’s Financial
Guaranty Policy” from DB Indemnity, Ltd., for McCranie’s loan. (See Def.’s Ex.
10.)
IV. The Court’s Decision
DZ Bank has satisfied its burden of proof, by a preponderance of the
evidence, that McCranie breached his obligations under the April 17, 2002
Promissory Note. As a result, DZ Bank has been damaged in the principal
amount of $484,425.42, plus interest. Within fourteen (14) days of the date of
this Order, DZ Bank shall provide the Court with a proposed judgment. DZ Bank
may file a properly supported motion for attorneys’ fees and/or costs in
accordance with Fed.R.Civ.P. 54.
DONE AND ORDERED at Jacksonville, Florida, on September 6, 2015.

Copies to:
Counsel of Record
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