Unicredit Bank AG, New York Branch v. RKC Financial Corporation et al

Filing 58

MEMORANDUM AND ORDER: 18 Motion to Dismiss is granted in part and denied in part as set forth in order. Plaintiff's motion to dismiss amended counterclaims and to strike affirmative defenses of defendants 26 , the plaintiff's motion to d ismiss second amended counterclaims and to strike affirmative defenses of defendants 47 and BONY's motion to dismiss counterclaim 45 this case are granted on the grounds stated in this order and subject to the court's consideration of the defendants' motion for leave to amended counterclaims and/or affirmative defenses filed within 20 days of the filing date of this order. Signed by U.S. District Senior Judge Sam A. Crow on 6/26/14. (mb)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
UNICREDIT BANK AG, NEW YORK
BRANCH, f/k/a BAYERISCHE HYPOUND VEREINSBANK AG, as agent for
THE BANK OF NEW YORK MELLON,
Plaintiff/Counterclaim Defendant,
vs.

Case No. 13-2311-SAC

RKC FINANCIAL CORPORATION, et al.,
Defendants/Counterclaim Plaintiffs,
vs.
THE BANK OF NEW YORK MELLON,
Counterclaim Defendant.
MEMORANDUM AND ORDER
The plaintiff, UniCredit Bank AG, New York Branch (“UniCredit”),
brings this action as the agent of The Bank of New York Mellon (“BONY”) to
recover on a defaulted securitized loan against RKC Financial Corporation
(“RKC”) and the guarantors of that loan, Roger and Mary Cunningham
(collectively “defendants or counterclaim plaintiffs”). The case comes before
the court on the following pending motions: the defendants’ motion to
dismiss (Dk. 18), the plaintiff’s motion to dismiss amended counterclaims
and to strike affirmative defenses (Dk. 26), the counterclaim defendant
BONY’s motion to dismiss counterclaims (Dk. 45); and the plaintiff’s motion
to dismiss the second amended counterclaims and to strike affirmative

defenses (Dk. 47). For the reasons stated below, the court grants in part
and denies in part the defendants’ motion and grants the plaintiff’s and
BONY’s motion subject to consideration of a timely motion by the defendants
for leave seeking to file an amended pleading.
FACTUAL BACKGROUND
This case is the fourth in a group of related actions filed by
UniCredit to recover on defaulted promissory notes held, pooled, sold and
securitized by various corporate and business entities flying the Brooke1 flag.
As an aid in understanding the court’s factual background, here is a useful
summary of the securitization process taken from a recent decision by Chief
Judge Marten:
A securitization involves two steps, which may occur simultaneously or
separately. Initially, an entity that creates loans in its normal course of
business (the “Originator”) sells its loans to a special purpose entity
(“SPE”). The sale will be performed in a manner that qualifies as a
“true sale,” as opposed to a secured transaction, which is done in part
to protect the loans and their streams of revenue from creditors of the
Originator. Second, the SPE will issue and sell debt securities, referred
to as Notes, to investors. The Notes are secured by the loans the SPE
bought from the Originator. Additionally, the SPE will satisfy its
obligations on the Notes using the proceeds of the loans it bought from
the Originator. When the securitization is “closed,” funds flow from the
purchasers of the Notes (the investors) to the SPE, and then from the
SPE to the Originator.
UniCredit Bank AG, New York Branch v. Deborah R. Eastman, Inc., 2013 WL
237810 at *1 (D. Kan. 2013). Now, it is just a matter of putting names,

Brooke Corporation, through various and related subsidiaries and
companies, operated an insurance agency franchise business and offered the
financing to businesses and individuals purchasing these agencies.
1

2

dates, documents and details to this process after first describing the
original loan that was pooled and sold.
Defendants’ Loan Documents
On June 29, 2005, the defendant RKC signed a promissory note
designated as “loan number 4683” in the amount of $2,700,000.00 for the
stated purpose, “[t]o acquire insurance agency assets and purchase buyer’s
assistance plan.” (Dk. 1-6, pp. 1-2). The lender was Brooke Credit
Corporation (“BCC”). Id. In support of the note, the parties executed an
“Agreement for Advancement of Loan” which set forth the terms and
conditions of their contractual relationship involving the loan. (Dk. 1-5).
They also executed a commercial security agreement which gave BCC a
security interest in RKC’s personal property and agency assets. (Dk. 1-7).
Also on June 29, the defendant Cunninghams executed a guaranty to secure
the RKC loan. (Dk. 1-9). This loan was made in the State of Kansas.
Securitization of Defendants’ Loan
As the originator of the loan, BCC funded it from a line of credit
issued by a bank under a warehouse arrangement whereby BCC also gave
some interest in the loan to the bank and some interest also to Brooke
Credit Funding, LLC. Over time, more loans of a similar nature were made
and then pooled in the warehouse. (Dk. 1, ¶ 16). BCC and related Brooke
entities sponsored securitizations by creating special purpose limited liability
securitization companies which were sold the pooled warehouse loans in
3

exchange for cash raised by the securitization companies from the issuing of
notes to investors. BCC would sell these loans to the securitization
companies under a Sale and Servicing Agreement.
Pursuant to the Sales and Servicing Agreement dated December
1, 2005, BCC sold all of its “right, title and interest in and to the Loans and
the Other Conveyed Property relating thereto” to the SPE, Brooke
Securitization Company V (“Brooke Securitization” or “Issuer”) (Dk. 1-1, p.
19). This Agreement spelled out the transfer in these terms:
[T]he Seller shall sell, transfer, assign, grant, set over and otherwise
convey to the Issuer, without recourse (subject to the obligations
herein), all right, title and interest of the Seller in and to: (i) the
Loans, all monies due thereunder after the Cutoff Date and all
Liquidation Proceeds and recoveries received with respect to such
Loans; (ii) the security interests in the collateral (including the
Agency’s Assets, Customer Files and Sales Commissions, if any,
securing the Loans; (iii) any proceeds from claims on any repossession
loss, physical damage, credit life and credit accident and health
insurance policies covering such collateral, if any, or the Obligors; (iv)
the Loan File (including the Loan Documents) related to each Loan; (v)
the Trust Accounts and all funds on deposit in the Trust Accounts from
time to time, and all investments and proceeds thereof (including all
income therein) (although the parties hereto acknowledge that the
Seller has no interest in the items described in this clause (v)); and
(vi) the proceeds of any and all of the foregoing.
(Dk. 1-1, p. 19). RKC’s loan promissory note, No. 4683, was in this pool of
loans sold to Brooke Securitization on December 1, 2005. (Dk. 1-1, p. 61).
For these loans Brooke Securitization paid cash raised by issuing
a series of Notes (“2005-2 Notes”) pursuant to an indenture dated December
1, 2005, between itself, as the issuer, and BONY as indenture trustee. The

4

Indenture spelled out that the Issuer granted a first priority perfected
security interest to the Trustee in the following “Indenture Asset Pool:”
All of the Issuer’s right, title and interest in and to: (a) the Loans, all
monies received thereunder after the Cutoff Date and all Liquidation
Proceeds and recoveries received with respect to such Loans; (b) the
security interest in the collateral (including the Agency’s Assets,
Customer Files and Sales Commissions), if any securing the Loans; (c)
any proceeds from claims on any repossession loss, physical damage,
credit life and credit accident and health insurance policies, if any,
covering such collateral or the Obligors; (d) the Loan File (including
the Loan Documents) related to each Loan; (e) the Trust Accounts and
all funds on deposit from time to time in the Trust Accounts and in all
investments and Proceeds thereof (including all income thereon); (f)
the Sale and Servicing Agreement, including the right to cause the
Seller to repurchase Loans from the Issuer under certain
circumstances, the Master Agent Security Agreement and the other
Related Documents; and (g) all present and future claims, demands,
causes and choses in action in respect of any or all of the foregoing
and all payments on or under and all proceeds of every kind and
nature whatsoever in respect of any or in lieu of the foregoing, . . . .
(Dk. 1-2, p. 5). RKC’s loan No. 4683 was among the loans identified in the
Indenture Asset Pool. (Dk. 1-3, p. 31). Thus, the Issuer, Brooke
Securitization, owned RKC’s loan No. 4683, pledged it and all of the Issuer’s
assets to secure its obligation under the Indenture to pay the 2005-2 Notes,
and granted the Indenture Trustee, BONY, a security interest in RKC’s loan
and all other loan assets for the benefit of the holders of 2005-2 Notes.
UniCredit purchased 58.25% of the 2005-2 Notes.
BONY, as the Indenture Trustee, is the secured party in relation
to Brooke Securitization and obtained a security interest in the security
interests that secure RKC’s loan. As the complaint alleges, the Indenture
authorizes BONY as trustee to “(i) collect the funds generated by the
5

collateral (i.e. the loans in the Asset Pool) under the indenture; (ii) liquidate
the collateral following an event of default under the Indenture, the proceeds
of which are to be held in trust for holder of the Notes; and (iii) take
measures to protect the collateral under the indenture.” (Dk. 1, ¶ 33). These
terms became operative upon the default events set out below.
This Sales and Servicing Agreement also designated Textron
Business Services, Inc. (“Textron”) to act as “Servicer” for the Issuer Brooke
Securitization. It provides, in relevant part:
The Servicer is hereby authorized to act as agent for the Issuer and in
such capacity shall manage, service, administer and make collections
on the Loans, and perform the other actions required by the Servicer
under this Agreement. . . . The Servicer is hereby authorized to
commence, in its own name or in the name of the Issuer (provided the
Servicer has obtained the Issuer’s consent, which consent shall not be
unreasonably withheld), a legal proceeding to enforce a Loan pursuant
to Section 3.3 or to commence or participate in any other legal
proceeding (including a bankruptcy proceeding) relating to or involving
a Loan, an Obligor or the collateral, if any, securing the Loan. If the
Servicer commences or participates in such a legal proceeding in its
own name, the Issuer shall thereupon be deemed to have
automatically assigned such Loan to the Servicer solely for purposes of
commencing or participating in any such proceeding as a party or
claimant, and the Servicer is authorized and empowered by the Issue
to execute and delver in the Servicer’s name any notices, demands,
claim, complaints, responses, affidavits or other documents or
instruments in connection with any such proceeding.
(Dk. 1-1, p. 29, § 3.1). With execution of the Sales and Servicing
Agreement, Textron then entered into a subservicing agreement with BCC
whereby BCC would service the loans for Textron performing only those
obligations specifically described and set forth on the schedule of services
attached to the subservicing agreement. (Dk. 27-4, pp. 1, 9).
6

Arbitration Proceedings
On March 7, 2007, RKC and Roger Cunningham filed a petition in
Tarrant County District Court of Texas against Brooke Corporation, d/b/a
First Brooke Corporation, Brooke Credit Corporation, Brooke Franchise
Corporation, Brooke Agency Services, L.L.C. and others alleging various
claims regarding the loan and the related franchise agreement (“Tarrant
suit”). (Dk. 27-1). This suit was abated and stayed on the parties’ agreed
order on September 25, 2007, to arbitrate the claims before the American
Arbitration Association (“AAA”). (Dk. 27-2). On October 15, 2008, the
Arbitrator conducted a telephonic hearing to discuss the final hearing
scheduled for October 20, 2008. Jeff Nourse appeared for all party
respondents and “announced that because of financial shortcomings within
some or all of the Respondents, none of the Respondents would appear at
the hearing, neither he nor anyone else would be making an appearance for
any Respondent, and all Respondents would be defaulting.” (Dk. 27-3). The
parties stipulated to the same with Mr. Nourse also stating that he
“anticipated that one or more of the Respondents would be seeking debtor
relief under the U.S. Bankruptcy laws prior to the time of the hearing.” Id.
Based on the parties’ stipulation of default and on the claimants’
presentation of “evidence proving liability, causation and damages,” the
Arbitrator entered on October 21, 2008, a final award finding for the
claimants on their claims of fraud, fraud in the inducement, conspiracy,
7

breach of contract2, civil RICO, conversion, and violations of the Texas
Deceptive Trade Practices Act, and finding actual damages of $3,350,000;
consequential damages of $500,000; exemplary damages of $3,350,000;
and attorneys’ fees of $187,500. (Dk. 34-1). Before this arbitration award
could be confirmed, the Brooke Corporation filed for Chapter 11 bankruptcy
on October 28, 2008. In May of 2010, RKC moved for relief from the
automatic bankruptcy stay in order to confirm its arbitration award, and
BONY as indenture trustee opposed that motion.
Defaults
The plaintiff’s complaint alleges that RKC has breached the loan
documents by not making the required loan payments, and the loan is in
default. (Dk. 1, ¶¶ 43-51). Because of this breach, the plaintiff is also
seeking payment from the guarantors, Roger and Mary Cunningham, who
guaranteed this loan. The plaintiff alleges the Cunninghams have refused to
make the payments required by the guaranty. (Dk. 1, ¶¶ 60-62).
The Complaint further alleges that the Issuer Brooke
Securitization defaulted on its obligations under the Notes. (Dk. 1, ¶¶ 3742). UniCredit notified the Trustee BONY on October 9, 2008, that the Issuer
had defaulted on the Notes, and it requested BONY to exercise the
acceleration clause and demand the remainder of the payments due and to
Specifically, the Arbitrator found “that Respondents materially breached the
Agreement for Sale of Agency Assets, Franchise Agreement, Buyers
Assistance Plan, and Agreement for Advancement of Loan” by engaging in
conduct outlined from (a) through (k). (Dk. 34-1, p. 4-5).

2

8

pursue all available remedies against the collateral. Id. at ¶ 38. On October
22, 2008, UniCredit and BONY executed a letter agreement and power of
attorney making UniCredit the Trustee’s agent “with full power of
substitution to take all actions with respect to the rights and remedies
permitted under the Indenture, including the right to pursue collection on
any collateral securing the Notes.” Id. at ¶ 36.
BONY’s Federal Action Against Brooke Entities
On September 11, 2008, BONY filed a complaint in the United
States District Court for the District of Kansas against various Brooke entities
alleging fraud and “misappropriation of millions of dollars pledged to
noteholders under certain securitizations.” The Bank of New York Mellon v.
Aleritas Capital Corporation, et al. No. 08-2424-JWL (Dk. 1, ¶ 1). Alleging
that the Brooke entities were “in a rapidly deteriorating financial state” and
were “facing a revolt by hundreds of their franchisees,” BONY requested the
appointment of a receiver. Id. at ¶ 3. BONY filed an emergency motion for
receiver and the defendant Brooke entities countered with a motion to
appoint a special master. On September 17, 2008, the district court entered
a consent order appointing Albert Riederer as Special Master. (Dk. 27-6).
The counterclaim plaintiffs in the instant action allege the Special Master
“controlled the defense of the Tarrant County Case filed by RKC and the
related arbitration.” (Dk. 34, ¶ 38). The consent order also provided that the
Special Master could not interfere with “[t]he exercise of duties, rights and
9

remedies by the Noteholders and the Bank of New York Mellon as Indenture
Trustee in respect of the Indenture for each Securitization Company.” (Dk.
27-6, ¶ 4).
Brooke Bankruptcy
As mentioned above, certain Brooke entitles filed for Chapter 11
relief in the United States Bankruptcy Court for the District of Kansas on
October 28, 2008. “On September 20, 2012, the bankruptcy court entered
an Order permitting BONY and UniCredit, among others, to pursue the
collateral of the securities without any further relief required from the
bankruptcy court.” UniCredit Bank AG v. Jue-Thompson, 2013 WL 6185750
at *3 (D. Kan. Nov. 26, 2013).
Present Action
According to the complaint, the plaintiff demanded the
defendants’ collateral in June 2013, and their refusal resulted in this action
being filed on June 25, 2013. (Dk. 1, ¶¶ 63-64, 143). As the Trustee’s acting
agent, UniCredit alleges through the above chain of transactions it has
acquired the right to enforce the RKC loan documents including the right to
pursue the collateral for the collection of the same. UniCredit alleges the
following causes of action: (1) Action on the Loan against RKC Agency; (2)
Action on the Guaranty against Roger Cunningham and Mary Cunningham;
(3) Detinue and Collateral Foreclosure Judgment against RKC Agency; (4)
Quantum Meruit against all Defendants; (5) Breach of Implied Covenant of
10

Good Faith and Fair Dealing against all Defendants; (6) Conversion against
all Defendants; and (7) Account Notice/Declaratory Relief against all
Defendants. (Dk. 1, ¶¶ 72-159).
As presently alleged in their Second Amended Answer and
Counterclaim, the defendants are pursuing counterclaims against UniCredit
and BONY. (Dk. 34, pp. 29-45). The counterclaim plaintiffs are seeking a
declaratory judgment that UniCredit and BONY are liable vicariously for the
causes of action and damages contained in the Arbitration Award. (Dk. 34,
p. 44). As theories for this liability, the counterclaim plaintiffs allege agency,
partnership, joint venture and successor liability between the counterclaim
defendants and the named parties in the Tarrant suit. The counterclaims
section further asserts that UniCredit and BONY were in privity or had the
same interests with the parties in the Tarrant suit as to justify res judicata or
collateral estoppel bars. Finally, the counterclaims assert the Brooke Entities
are alter egos of the BONY and Unicredit.
STANDARDS GOVERNING MOTIONS
Dismiss for Lack of Standing/Subject Matter Jurisdiction
A prong of Article III jurisdiction is that a plaintiff has standing to
sue. Hill v. Vanderbilt Capital Advisors, LLC, 702 F.3d 1220, 1224 (10th Cir.
2012). “To have Article III standing, Petitioners must demonstrate: ‘(i) an
injury in fact that is both concrete and particularized as well as actual or
imminent; (ii) an injury that is traceable to the conduct complained of; and
11

(iii) an injury that is redressable by a decision of the court.’” Wyoming v.
U.S. Dept. of Interior, 674 F.3d 1220, 1230 (10th Cir. 2012) (quoting
Wyoming ex rel. Crank v. United States, 539 F.3d 1236, 1241 (10th Cir.
2008) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61, 112
S.Ct. 2130, 119 L.Ed.2d 351 (1992))).
Rule 12(b)(1) of the Federal Rules of Civil Procedure authorizes a
district court to dismiss a complaint for lack of subject matter jurisdiction.
Rule 12(b)(1) attacks on subject matter jurisdiction are typically either facial
attacks on the sufficiency of jurisdictional allegations or factual attacks on
the accuracy of those allegations. Holt v. United States, 46 F.3d 1000,
1002–03 (10th Cir. 1995). A facial attack questions the sufficiency of the
allegations in the complaint as they relate to subject matter jurisdiction. See
Holt, 46 F.3d at 1002. In reviewing a facial attack on the complaint, the
court must accept all allegations in the complaint as true. Id. If the moving
party factually challenges the subject matter allegations, then it falls to the
district court to make findings of fact after allowing “affidavits, other
documents, and a limited evidentiary hearing.” Id. at 1003. The court may
decide these matters without converting to a Rule 56 proceeding, unless
“resolution of the jurisdictional question is intertwined with the merits of the
case” and requires the conversion to a Rule 12(b)(6) motion or a Rule 56
motion. Id. The defendants here lodge a facial attack to the sufficiency of
the jurisdictional allegations. A court lacking subject matter jurisdiction must
12

dismiss the cause at any stage of the proceeding in which it becomes
apparent that jurisdiction is lacking. Laughlin v. Kmart Corp., 50 F.3d 871,
873 (10th Cir.), cert. denied, 516 U.S. 863 (1995).
Dismiss for Failure to State a Claim
In deciding a Rule 12(b)(6) motion, a court accepts as true “all
well-pleaded factual allegations in a complaint and view[s] these allegations
in the light most favorable to the plaintiff.” Smith v. United States, 561 F.3d
1090, 1098 (10th Cir.2009), cert. denied, 130 S.Ct. 1148 (2010). This duty
to accept a complaint's allegations as true is tempered by the principle that
“mere ‘labels and conclusions,' and ‘a formulaic recitation of the elements of
a cause of action’ will not suffice; a plaintiff must offer specific factual
allegations to support each claim.” Kansas Penn Gaming, LLC v. Collins, 656
F.3d 1210, 1214 (10th Cir. 2011) (quoting Bell Atlantic Corp. v. Twombly,
550 U.S. 544, 555 (2007)). As recently clarified by the Supreme Court, the
standard under 12(b)(6) is that to withstand a motion to dismiss, “’a
complaint must contain enough allegations of fact, taken as true, to state a
claim to relief that is plausible on its face.'” Al–Owhali v. Holder, 687 F.3d
1236, 1239 (10th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009)). Thus, “a plaintiff must offer sufficient factual allegations to ‘raise a
right to relief above the speculative level.’” Kansas Penn Gaming, 656 F.3d
at 1214 (quoting Twombly, 550 U.S. at 555). “The plausibility standard is
not akin to a ‘probability requirement,’ but it asks for more than a sheer
13

possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678
(quoting Twombly, 550 U.S. at 556). It follows then that if the “complaint
pleads facts that are ‘merely consistent with’ a defendant's liability it ‘stops
short of the line between possibility and plausibility of ‘entitlement to relief.’”
Id. “‘A claim has facial plausibility when the [pleaded] factual content . . .
allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.’” Rosenfield v. HSBC Bank, USA, 681 F.3d 1172,
1178 (10th Cir. 2012). “Thus, in ruling on a motion to dismiss, a court
should disregard all conclusory statements of law and consider whether the
remaining specific factual allegations, if assumed to be true, plausibly
suggest the defendant is liable.” Kansas Penn Gaming, 656 F.3d at 1214.
DEFENDANTS’ MOTION TO DISMISS (DK. 18)
Standing
While the complaint alleges that UniCredit brings this action as
an agent of BONY, the defendants contend the complaint fails to show how
BONY obtained the power to sue the original debtors on these notes. The
defendants deny that the Indenture or other documents give UniCredit the
authority to pursue this litigation. The defendants argue that UniCredit does
not have standing as a holder of the promissory note because it has failed to
allege a viable chain of title for the lack of an affixed allonge in compliance
with the Uniform Commercial Code and in strict compliance with the
Indenture. The defendants also argue lack of proof of consideration paid
14

between Brooke Securitization and Brooke Credit (BCC) for the transfer of
loans.3 The court has reviewed the defendants’ arguments against standing
and concludes that the recent orders in UniCredit Bank AG v. Jue-Thompson,
2013 WL 6185750 (D. Kan. Nov. 26, 2013), and UniCredit AG v. Deborah R.
Eastman, 2013 WL 237810 (D. Kan. Jan. 22, 2013), persuasively find similar
complaints filed by the same plaintiffs’ counsel did allege sufficient standing
for UniCredit under nearly identical circumstances. For these reasons, it is
sufficient to concur with Judge Melgren’s findings and conclusions:
The Loan Documents in this case identified Brooke Credit as
initial payee, and therefore, the original holder.FN21 Brooke Credit
then sold and transferred all of its rights in the Loan Documents to
Brooke Securitization, delivering the original instrument and executing
a complete assignment of all rights in the instrument pursuant to the
Sale and Servicing Agreement. By virtue of this transfer, Brooke
Securitization became a person entitled to enforce the Loan
Documents without consideration of any allonge.FN22
FN21. Kan. Stat. Ann. § 84–1–201(b)(21)(A).
FN22. See Kan. Stat. Ann. § 84–3–203(b).
Further, under the Indenture, Brooke Securitization granted
BONY all of its rights to enforce loan obligations in the Asset Pool,
including Defendants' Loan Documents. The Uniform Commercial Code
applies to securitization transactions involving promissory notes, and
an indenture trustee like BONY constitutes a “secured party” under
Article 9.FN23 By operation of the Power of Attorney, BONY granted
UniCredit authority to exercise its rights to enforce the Loan
Documents. Plaintiff's interest in Defendants' Loan Documents
constitutes a “security interest” enforceable under Article 9.FN24
FN23. See Kan. Stat. Ann. § 84–9–102(72)(E) (defining “secured
party” as, among other things, “a trustee, indenture trustee, agent,
collateral agent, or other representative in whose favor a security
interest or agricultural lien is created or provided for.”).
This argument is more than a facial attack. Because the defendants offer
only the barest of allegations, the court summarily rejects this factual
challenge at this juncture. The court also rejects this argument for the same
reasons expressed in Eastman, 2013 WL 237810 at *7.
3

15

FN24. See Kan. Stat. Ann. § 84–1–201(b)(35).
The Court finds that Brooke Securitization obtained the rights of a
holder, namely Brooke Credit, through the transfer effected by the
Sale and Servicing Agreement. Similarly, the Court must find that
BONY obtained the rights of a holder, namely Brooke Credit and/or
Brooke Securitization, by virtue of the transfer effected in the
Indenture.
By operation of the Power of Attorney, BONY authorized UniCredit to
enforce all of its rights pertaining to the Loan Documents. For this
reason, the Court finds that these transfers render Plaintiff UniCredit,
at minimum, a “person entitled to enforce” the Loan Documents as a
“nonholder in possession of the instrument who has the rights of a
holder.” FN25 Because Plaintiff has standing as a nonholder, the Court
does not reach whether Plaintiff constitutes a holder or a holder in due
course under the disputed allonge. The parties may therefore proceed
to engage in discovery concerning Plaintiff's status as a holder and
other matters relevant to UniCredit's enforcement of the Loan
Documents. Defendants' motion to dismiss for lack of standing must
be denied.FN26
FN25. Kan. Stat. Ann. § 84–3–301.
FN26. See UniCredit Bank AG, New York Branch v. Deborah R.
Eastman, Inc., 2013 WL 237810, at *6–8 (D. Kan. Jan. 22, 2013).
UniCredit Bank AG v. Jue-Thompson, 2013 WL 6185750 at *4-*5. In sum,
UniCredit has alleged a sufficient basis for standing to avoid dismissal at this
time.
Quantum Meruit
For its fourth cause of action, the plaintiff alleges that Brooke
Credit provided monetary benefit and valuable services to the defendants
who knew these were provided with the expectation of repayment and
compensation. The defendants seek dismissal because UniCredit is not the
entity who conferred the benefit which is one of the required elements for
quantum meruit in Kansas. As before Judge Marten and Judge Melgren,
UniCredit responds with the same argument and reliance on a Texas state
16

appellate court decision, McElroy v. Unifund CCR Partners, 2008 WL
4355276 (Tex. App. 14th Dist. 2008). See Jue-Thompson, 2013 WL 6185750
at *5; Eastman, 2013 WL 237810 at *7-*8. Following the lead of other
federal district courts in Kansas, this court also declines to adopt the Texas
court’s interpretation of quantum meruit claims as no Kansas court has yet
to adopt it. Id. The court grants the defendants’ motion to dismiss this cause
of action.
Breach of Implied Covenant Claim
The defendants seek dismissal arguing the plaintiff has not
alleged a particular term of the contract that has been breached by reason of
the defendants’ failure to act with good faith. As part of its sixth cause of
action, the plaintiff alleges at ¶ 136 that the, “Defendants breached their
implied obligations of good faith and fair dealing under the RKC Loan
Documents by, among other things, failing and refusing to turn over their
commissions or Plaintiffs’ Collateral.” (Dk. 1). This allegation suffices to
identify “the contractual provision relating to defendants’ breach” of the
implied covenant of good faith. Jue-Thompson, 2013 WL 6185750 at *6;
Eastman, 2013 WL 237810 at *8. The court denies the motion to dismiss
this claim.
Conversion
The defendants assert the two-year statute of limitations expired
before this suit was filed on June 25, 2103, as the plaintiff knew in 2009 of
17

the default on the securitization notes. For its seventh cause of action, the
plaintiff alleges the defendants converted the collateral by “failing to deliver
possession of the Collateral upon such demand” made in June 2013. (Dk. 1).
Until UniCredit made a demand upon the collateral following the notice of
default and the defendants’ failure to cure, “the conversion was not
reasonably ascertainable by UniCredit.” Jue-Thompson, 2013 WL 6185750 at
*7; Eastman, 2013 WL 237810 at *9 (internal quotation marks and citation
omitted). Thus, the conversion claim appears to have been brought within
the two-year statute of limitations. Id.
Illegality and Fraud
Citing U.C.C. 3-305(a)(1)(B) and (C), the defendants point to
the findings and conclusions in the unconfirmed Arbitration Award as
establishing their complete defenses of illegality and fraud. The defendants
seek dismissal on these grounds based on two cursory paragraphs of
argument in their initial motion and memorandum. In response, the plaintiff
simply incorporates its memorandum filed in support of its motion to dismiss
the defendants’ amended counterclaims and to strike affirmative defenses.
(Dk. 25, p. 20). The plaintiff summarily states that the defendants’ motion to
dismiss on this ground should be rejected as based on “an unconfirmed,
defaulted Arbitration Award, obtained in absentia against non-defending
insolvent business entities” and the plaintiff was not a party to the
Arbitration. Id. In reply, the defendants expand on their argument by
18

several pages. The defendants stake their defenses on the proposition that
the UniCredit/BONY as assignees stand in the shoes of the original lender
and first assignor, BCC/Aleritas, and can obtain no better and no greater
interest than the assignor. The defendants’ reply, however, fails to deal with
the central question of what application should the Arbitration Award have in
this proceeding. The court will take up those issues in deciding the plaintiff’s
motion to dismiss and herein denies the defendants’ motion to dismiss on
this ground.
PLAINTIFF’S MOTION TO DISMISS AMENDED COUNTERCLAIMS AND
TO STRIKE AFFIRMATIVE DEFENSES OF DEFENDANTS (DK. 26) AND
MOTION TO DISMISS SECOND AMENDED COUNTERCLAIMS AND TO
STRIKE AFFIRMATIVE DEFENSES OF DEFENDANTS (DK. 47) AND
BONY’S MOTION TO DISMISS COUNTERCLAIM (Dk. 45).
The defendants/counterclaim plaintiffs (RKC and Cunninghams
hereinafter collectively referred to as “defendants”) have filed a second
amended answer and counterclaims. (Dk. 34).They assert counterclaims for
declaratory judgment that “UniCredit and BONY are jointly and severally
liable for the causes of action and damages contained in the Arbitration
Award” or, that “[a]lternatively, the Arbitration Award represents a
contractual debt that” defendants may collect from UniCredit and BONY.
(Dk. 34, p.44-45). As part of their counterclaims, the defendants group their
allegations under the following liability theories: agency, partnership, joint
venture, successor liability, and alter ego. “Defendants also allege that the
doctrines of res judicata and collateral estoppel preclude” BONY and
19

UniCredit “from re-litigating the findings of the Arbitration Award.” (Dk. 52,
p. 11).
BONY seeks to dismiss the counterclaim (Dk. 46) while UniCredit
seeks not only to dismiss the counterclaim but also to strike the affirmative
defenses. (Dk. 26 and 47). UniCredit argues for applying the heightened
pleading standards of Fed. R. Civ. P. 9(b) and (c) against the counterclaim
and affirmative defenses because of the underlying fraud claims or failure of
conditions precedent included in the Arbitration Award and because of the
affirmative defenses alleged as fraud, fraudulent inducement, accord and
satisfaction, and prior material breach. Defendants’ position is that their
declaratory judgment counterclaims are not subject to the heightened
pleading standards, and, if they were, then they would still meet the basic
requirements and purposes of Rule 9(b) and (c).
Rule 12(f) Standards
A motion to strike an affirmative defense under Rule 12(f) asks a
court to “strike from a pleading an insufficient defense.” The party
responding to a claim for relief “must state in short and plain terms its
defenses to each claim asserted against it.” Fed. R. Civ. P. 8(b)(1)(A). The
Supreme Court in Twombly and Iqbal “limited its reasoning to complaints
and made no mention of the standards for answers.” RES-MO Springfield,
LLC v. Tuscany Properties, L.L.C., 2013 WL 3991794 at *3 (D. Kan. Aug. 5,
2013) (citations omitted). “[T]he plain language of Rule 8 appears to make
20

sections (b) and (c) markedly less demanding than that of Rule 8(a).” Id.
(internal quotation marks and citations omitted).
A motion to strike is “generally disfavored and considered a
drastic remedy.” UniCredt Bank AG v. Bucheli, 2011 WL 4036466 at *5 (D.
Kan. 2011). Consequently, the Rule 12(f) standards are as follow:
Within the meaning of Rule 12(f), a defense is insufficient if it cannot
succeed, as a matter of law, under any circumstances. To warrant
striking a defense, its insufficiency must be clearly apparent and no
factual issues exist that should be determined in a hearing on the
merits. Furthermore, absent prejudice to an opposing party, courts
should not strike a defense. Striking a defense should further the
purpose of Rule 12(f) to minimize delay, prejudice and confusion by
narrowing the issues for discovery and trial. The party seeking to
strike a pleading or part thereof has a demanding burden to show
adequate grounds under Rule 12(f).
Layne Christensen Co. v. Bro-Tech Corp., 2011 WL 3847076 at *6 (D. Kan.
Aug. 29, 2011) (internal quotation marks, footnotes and citations omitted);
see also Boardwalk Apartments, L.C. v. State Auto Property and Cas. Ins.
Co., 2013 WL 4504351 at *1 (D. Kan. Aug. 23, 2013). If the affirmative
defense fails the applicable Rule 9(b) standards, then the court may strike it
but allow the offending party the chance to amend and conform to Rule 9(b)
requirements, particularly during the early stages of litigation. See Bowers v.
Mortg. Elec. Registration Sys., 2011 WL 2149423, at *4 (D. Kan. Jun. 1,
2011).
Rules 9(b) and 9(c) Standards
Rule 9(b) states that “[i]n alleging fraud or mistake, a party
must state with particularity the circumstances constituting fraud or mistake.
21

Malice, intent, knowledge, and other conditions of a person's mind may be
alleged generally.” Fed. R. Civ. P. 9(b). The complaint must “set forth the
time, place and contents of the false representation, the identity of the party
making the false statements and the consequences thereof.” Schwartz v.
Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir.1997) (internal
quotation marks and citation omitted). “At a minimum, Rule 9(b) requires
that a plaintiff set forth the who, what , when and how of the alleged fraud.”
U.S. ex rel. Sikkenga v. Regence Bluecross, 472 F.3d 702, 726–27 (10th Cir.
2006). Rule 9(c) requires that “when denying that a condition has occurred
or been performed, a party must do with particularity.” “This special
pleading requirement has been applied to conditions precedent in common
law contracts claims.” Anderson v. United Telephone Co. of Kansas, 933 F.
2d 1500, 1505 (10th Cir. 1991) (citations omitted).
UniCredit first contends that the defendants’ counterclaim and
several affirmative defenses are based upon fraud and subject to Rule 9(b)
requirements. The court summarily rejects this argument as the defendants
concede they are not alleging that UniCredit “committed fraud.” (Dk. 32).
Rather, the defendants seek to use, offensively and defensively, the
arbitrator’s decision and award against UniCredit and BONY, and it is that
decision which has already found that Brooke Entities had defrauded the
defendants. Thus, the defendants are bringing declaratory judgment
counterclaims against UniCredit and BONY seeking that they be found
22

vicariously or contractually liable for the Arbitration Award. Likewise, the
defendants appear to be asserting affirmative defenses based on connecting
UniCredit and BONY to the Arbitration Award and not on allegations of now
proving independent fraudulent conduct or independent conditions
precedent. If the defendants were intending to allege defenses based on
UniCredit and BONY actually and individually participating in the fraudulent
conduct or in failing to perform conditions precedent and to defend on the
basis of that proof regardless of the Arbitration Award, then the court would
find that the defendants plainly have not alleged such defenses with
sufficient particularity.
UniCredit and BONY take issue with the defendants’ use of
“Brooke Entities” in the counterclaims without defining or listing what
entities come under this title. From the attached Arbitration Award and the
defendants’ pleadings here, the movants find eight such “Brooke entities,”
but the allegations offer an arguable connection only between the
defendants and two entities: Brooke Securitization and BCC. The court will
address the alleged connections and relationships in discussing the
defendants’ different theories of alleged liability. The court agrees with
movants that it is not enough for the defendants to make conclusory
allegations about status or general relationships under the Indenture without
specifying what terms or provisions specifically support such conclusions.
Nor can defendants rest claims on the mere incidence of common stock
23

ownership as somehow proving another relationship different in kind. These
points will be addressed further below.
Agency
The defendants allege the Sales and Servicing Agreement
obligated Textron to act as Brooke Securitization’s agent and gave Textron
“full power and authority, acting alone, to do any and all things in connection
with such managing, servicing, administration and collection that it may
deem necessary or desirable.” (Dk. 34, ¶¶ 20-21). The defendants also
allege that the Agreement “authorized Textron to participate in its own name
in any legal proceeding relating to or involving RKC’s loan” and that “Textron
subsequently conveyed its rights, duties, and powers as servicer back to
Aleritas pursuant to a Subservicing Agreement.” Id. at ¶¶ 22-23. Under the
heading of “Agency”, at ¶ 54 of their counterclaims, the defendants allege
first an express agency theory, “[u]pon information and belief, Brooke
Securitization V, BONY, and the 2005-2 noteholders, including UniCredit,
delegated authority to Aleritas [BCC], through Textron, by way of the Sale
and Servicing Agreement to participate in the Tarrant County lawsuit and
related arbitration on their behalf.” They also allege an apparent agency
theory at ¶ 56, “Brooke Securitization V, BONY and the 2005-2 noteholders,
including UniCredit, intentionally or by want of ordinary care induced
Counterclaim Plaintiffs to believe that Aleritas had the authority to act with
regard to the Loan by using Aleritas as both the original lender and the
24

actual servicer of the loan.” Id. The defendants wrap up their agency section
with a theory of agency by ratification, that BONY and UniCredit “ratified
Aleritas’s participation in the arbitration” and “learned about the arbitration
award by November 2008—at the latest—and did not enforce the loan
documents or otherwise repudiate the Arbitration Award until several years
later.” Id. at ¶ 57. As pled and argued, these agency allegations look at
only whether Aleritas or BCC was authorized to act on behalf of or bind
Brooke Securitization, BONY and/or UniCredit in the arbitration proceedings.
Quoting the relevant terms of the two agreements cited by the
defendants, the movants lay out how these terms do not support an express
agency by which Aleritas or BCC could bind Brooke Securitization, UniCredit
or BONY in the arbitration proceeding. The Sales and Servicing Agreement
attached to the plaintiff’s complaint authorized Textron “to commence or
participate in any other legal proceeding (including a bankruptcy proceeding)
relating to or involving a Loan, an Obligor or the collateral, if any, securing
the Loan.” (Dk. 1-1, p. 29, § 3.1). As the movants point out, neither Brooke
Securitization nor Textron were named parties in the arbitration proceeding.
The defendants rely on the Subservicing Agreement to allege that Textron’s
agency authority was then transferred to BCC or Aleritas. The movants
attach a copy of the Subservicing Agreement to their motions. (Dks. 27-4
and 46-4). From that agreement, the movants show that Textron delegated
the authority to “[c]ommence enforcement proceedings against Obligors
25

and/or the collateral securing the Loans.” (Dk. 27-4, p. 9). But in contrast to
the Sales and Servicing Agreement, the Subservicing Agreement did not
include a term which authorized BCC to “participate” in any legal proceeding
“relating to or involving a Loan, an Obligor or the collateral.” The movants
conclude that the defendants have failed to allege facts plausibly asserting
that BCC or Aleritas had the authority to act as the agent of Brooke
Securitization, BONY or UniCredit in the arbitration proceedings.
Under Kansas law, an express agency is where the principal
delegates authority to the agent “‘by words which expressly authorize the
agent to do a delegable act.’” Professional Lens Plan, Inc. v. Polaris Leasing
Corp., 238 Kan. 384, 390, 710 P.2d 1297 (1985) (internal quotation marks
and citation omitted). The counterclaim must offer sufficient factual
allegations as to show a right of relief that is plausible and more than
speculative. There must be enough facts as to make it plausible that BCC or
another Brooke entity was an agent, express, apparent or ratified, with the
authority to bind Brooke Securitization, and/or UniCredit and BONY. See
Vestring v. Halla, 920 F. Supp. 2d 1189, 1192-1193 (D. Kan. 2013). While
the Subservicing Agreement gave BCC the authority to sue to enforce or
collect on the loans, the agreement did not confer the authority to be sued
or to participate in any other legal proceeding relating to the loans or
collateral. The defendants do not allege any terms of the Subservicing
Agreement that expressly authorized BCC or Aleritas to act as the agent of
26

Brooke Securitization, BONY or UniCredit and participate in any legal
proceeding, like this arbitration proceeding, relating to the original lender’s
loans. The Subservicing Agreement expressly limited BCC’s services to those
specifically set forth on an attached exhibit which did not include this general
authority to participate in or defend lawsuits. The defendants’ filings lack a
cogent response to the plain lack of a contractual term expressly delegating
authority to BCC or Aleritas. With this argument being uncontested and with
the relevant terms of the agreements before the court, the motion to dismiss
this express agency claim is granted.
“An ostensible or apparent agency may exist if a principal has
intentionally or by want of ordinary care induced and permitted third persons
to believe a person is his or her agent even though no authority, either
express or implied, has been actually conferred upon the agent.”
Professional Lens Plan, Inc., 238 Kan. at 391 (internal quotation marks and
citation omitted). “[A]n apparent agent is one who, with or without
authority, reasonably appears to third persons to be authorized to act as the
agent of another. . . . [T]he apparent authority of an agent to bind the
principal rests upon words or conduct of the principal which leads the third
party dealing with the agent to reasonably believe the agent's authority is
sufficient to cover the transaction in question.” Mulholland v. Metropolitan
Life Ins. Co., 546 F. Supp. 2d 1231, 1235 (D. Kan. 2008) (quoting Bucher &
Willis Consulting Engineers, Planners and Architects v. Smith, 7 Kan.App.2d
27

467, 469, 643 P.2d 1156 (1982)). “In determining whether an apparent
agency existed, the court will look to the intentional acts or words of the
principal to a third party and if those acts or words reasonably induced the
third party to believe that an agency relationship existed.” Town Center
Shopping Center, LLC v. Premier Mortg. Funding, Inc., 37 Kan. App. 2d 1, 6,
148 P.3d 565 (Kan. App. 2006) (citing Mohr v. State Bank of Stanley, 241
Kan. 42, 46, 734 P.2d 1071 (1987)).
In their counterclaim, the defendants allege at ¶ 56 that BONY,
Brooke Securitization and the 2005-2 noteholders, including UniCredit,
“intentionally or by want of ordinary care induced Counterclaim Plaintiffs to
believe that Aleritas [BCC] had the authority to act with regard to the Loan
by using Aleritas as both the original lender and the actual servicer of the
loan.” (Dk. 34). The defendants argue the transfer of their loan from BCC to
Brooke Securitization was hidden from them by BCC who then eventually
regained the authority to administer the loan. The defendants also assert the
named Brooke defendants in the Texas case/arbitration proceeding
represented themselves to be “the real parties in interest with respect to the
Loan and that no other parties had an interest with respect to the Loan.”
(Dk. 34, ¶ 35). The movants point out that the alleged agent’s
representations do not establish an agent’s apparent authority.
As this matter has been argued and presented to the court, the
plain impression left is that the defendants have not alleged facts, that is,
28

words or conduct by the asserted principals, which led them to believe that
BCC, as the servicer of the loan, had the authority to be sued on behalf of
Brooke Securitization, BONY or UniCredit. What the defendants allegedly
relied upon were the words and conduct of the supposed agent or other
entities. The use of Aleritas/BCC to service the loan resulted from an
agreement between BCC and Textron, and there are no allegations of what
the counterclaim defendants said or did in this regard which would support
an apparent agency theory. The court grants the motion to dismiss the
apparent agency theory subject to the defendants’ timely effort to provide
curing amendments.
Under the agency heading, the defendants also allege that
“Brooke Securitization V, BONY, and the 2005-2 noteholders, including
UniCredit, ratified Aleritas’s participation in the arbitration. BONY and
UniCredit learned about the arbitration award by November 2008—at the
latest—and did not enforce the loan documents or otherwise repudiate the
Arbitration Award until several years later.” (Dk. 34 ¶ 57). The defendants
rely on the law that a principal “acquiring knowledge of the unauthorized act
of an agent . . . should promptly repudiate the act, otherwise it will be
presumed that he has ratified and affirmed the act.” Theis v. DuPont, Glore
Forgan Inc., 212 Kan. 301, 304, 510 P.2d 1212 (1973) (citation omitted).
BONY and UniCredit argue for dismissal in that the defendants
have failed to allege that the Brooke entities in the state arbitration matters
29

also professed, represented or assumed to have been acting as the agent of
BONY, UniCredit or Brooke Securitization. “Before an act or contract can be
the subject of ratification, the one who performed the act or entered into the
contract must have professed, represented or assumed to have been the
agent of the one alleged to have ratified the act or contract.” Kramer v.
Farmers Elevator Co., 193 Kan. 438, 442, 393 P.2d 998 (1964). The Kansas
Supreme Court in Kramer quoted from an agency treatise:
Since the effect of ratification is to confirm the act as done, it is
indispensable, in order to have an act of agency, that the act ratified
must have been done by the assumed agent as agent and in behalf of
a principal. If the act was done by him as principal and on his own
account, or on account of some third person, it cannot thus be ratified.
And not only must the assumed agent have intended to act as
agent for the person ratifying, but, as declared by the house of lords
after most elaborate consideration and according to the weight of
authority in the United States, he must have professed to act for a
principal, though it is not necessary that he should have disclosed who
that principal was if he be capable of identification within the rule
already laid down.
Id. (quoting 1 Mechem on Agency, 2d ed., § 386 and citing 3 Am.Jur.2d
Agency, p. 555, § 171; 2 C.J.S. Agency, p. 1079, § 41(b)). Absent from the
defendants’ counterclaim is the allegation that BCC/Aleritas represented,
professed or assumed to have been the agent of Brooke Securitization,
BONY or UniCredit. Instead, the defendants alleged that the defending
parties in the Texas suit “represented that they were the real parties in
interest with respect to the Loan and that no other parties had an interest in
the Loan.” Dk. 34, ¶ 35). The court dismisses this theory of agency liability
subject to the defendants’ amending to cure the pleading deficiencies.
30

Partnership
Under this counterclaim theory, the defendants allege “on
information and belief” that several pools of franchisee loans were
securitized, that BONY serves as trustee on several indenture notes secured
by these loans, and that UniCredit is majority owner of indenture notes on
multiple pools. (Dk. 34, ¶¶ 58-60). As to factual circumstances offered for
the partnership theory, the defendants alleged on “information and belief”
that “Brooke Entities, BONY and the 2005-2 noteholders, including UniCredit,
shared in the gross returns and in the losses associated with these
securitized pools of loans,” that “through their contractual and business
relationships Brooke Securitization V, BONY, and the 2005-2 noteholders,
including UniCredit, shared control over the management of the Loan” and
“were partners with respect to RKC’s loan.” (Dk. 34, ¶¶ 62-64).
BONY and UniCredit challenge these allegations as stating no
more than the relationships existing by reason of the Indenture and
Indenture Notes and as offering no facts supporting elements to a
partnership under Kansas law. The defendants respond that they have
alleged sharing in profits and losses in that the premiums or the lack of them
from customers of the franchisee/obligors were the source of profits and
losses shared between the Brooke Entities and the noteholders under the
securitization. As for the parties’ intentions, the defendants argue it’s
enough that they have alleged the involvement of BONY and UniCredit in
31

multiple securitization pools from which one can infer a “sophisticated
commercial relationship” and an intent “to be partners rather than to enter
into a single arms-length transaction.” (Dk. 32, p. 11). The defendants also
point to BONY’s judicial filing to secure a master after it no longer approved
of the Brooke Entities’ management. In reply, BONY and UniCredit note that
the contractual agreements and relationships cited by the defendants do not
create “a sharing of revenues.” Moreover, the allegations are not plausible
on their face in showing such a sharing, an intent to be partners, or an
active participation in the management of any joint enterprise.
A working definition of partnership in Kansas is “[a] contract of
two or more competent persons, to place their money, effects, labor and
skill, or some or all of them, in lawful commerce or business and to divide
the profit and bear the loss, in certain proportions.” Beverly v. McCullick,
211 Kan. 87, 97, 505 P.2d 624 (1973) (internal quotation marks and
citations omitted). For a more complete definition and test, there is the
following:
Numbered among the often approved tests to which we have referred
are the following: Intention of parties to the contract; sharing in profits
and losses; charging of losses against accumulated profits; community
of control over management and direction of the business; active
participation in management of the affairs of the enterprise; joint
control and exercise of ownership over all or part of the business
assets; participation in division of the net earnings; sharing in
payment of expenses of operation; fixing of salaries by joint
agreement; investment in the business of undistributed profits for the
purpose of building up a substantial cash reserve; division of
undistributed profits in the event of liquidation contingent upon
repayment to one of the parties of cash originally invested in capital.
32

Id. (quoting Potts v. Lux, 161 Kan. 217, 222, 166 P.2d 694 (1946). In sum,
a Kansas partnership fundamentally reflects an agreement to pool resources
for business reasons and then sharing the profits and losses from the
business venture, and there are other factors that may evidence such an
agreement.
Even if made upon “information and belief,” the defendants’
allegations must rise above mere suspicions, implausibly sweeping
conclusions, and speculation. The defendants have failed in this regard. In
Twombly, the Supreme Court required “a complaint with enough factual
matter (taken as true) to suggest that an agreement was made. Asking for
plausible grounds to infer an agreement does not impose a probability
requirement at the pleading stage; it simply calls for enough fact to raise a
reasonable expectation that discovery will reveal evidence of illegal
agreement.” 550 U.S. at 556 (footnote omitted). Alleging no more than the
Indenture and its related agreements, the defendants would have it be
enough that if the parties engage in multiple indentures then one could
suppose and allege that a partnership exists particularly when one of the
parties later sues the others alleging they had diverted revenues contrary to
the governing agreements and obtains a court-appointed special master
regarding only the others’ operations. Not citing any particular terms of the
Indenture documents, the defendants would have this court transform this
particular kind of transaction into a partnership on no more than the
33

allegation that the transaction was repeated. The suspicion of a partnership
from the mere fact of multiple indentures is not enough. The defendants’
allegations of profit and loss sharing here are too strained and sweeping to
be plausible. The federal court lawsuit and the appointment of a special
master in that proceeding are hardly what the court would regard as facts
showing joint management of assets pursuant to a partnership. The court
grants the motion to dismiss this theory subject obviously to curing
amendments.
Joint Venture
“Upon information and belief,” the defendants allege “Brooke
Securitization V, BONY, and the 2005-2 noteholders, including UniCredit,
associated with one another to carry out the single business enterprise of
making, pooling, and securitizing loans to franchisees like RKC for profit” as
evidenced by the Sale and Servicing Agreement. (Dk. 34, ¶¶ 65-66). Also
“[u]pon information and belief,” the defendants allege these entities “had
joint ownership and/or control of” RKC’s loan and “effectively shared in the
expenses, profits and losses associated with the Loan.” Id. at ¶¶ 67-68. As
with the partnership theory, the movants seek dismissal arguing the
defendants have alleged no more than the Indenture and Notes and the
terms of those agreements do not plausibly support a theory of joint
venture. The defendants respond with the same points made under the
partnership theory.
34

Under Kansas law, a joint venture is defined as:
an association of persons with intent, by way of contract, express or
implied, to engage in and carry out a single business venture for joint
profit, for which purpose they combine their efforts, property, money,
skill and knowledge, without creating a partnership or a corporation,
pursuant to an agreement that there shall be a community of interest
among them as to the purpose of the undertaking, and that each joint
venturer shall stand in the relation of principal, as well as agent, as to
each of the other co-venturers, with an equal right of control of the
means employed to carry out the common purpose of the venture ....
Goben v. Barry, 234 Kan. 721, 725, 676 P.2d 90 (1984) (internal quotation
marks and citations omitted). For the same reasons that the defendants
failed to allege a plausible claim of partnership, their allegations of a joint
venture fail the plausibility standard. The court grants the motion to dismiss
this theory again conditioned upon the defendants timely submitting
amendments to cure.
Successor Liability
The defendants allege that, “the 2005-2 noteholders, including
UniCredit, purchased a security interest in all of the assets of Brooke
Securitization V” and that this transaction “amounted to a consolidation or
merger of the corporations because the 2005-2 noteholders, including
UniCredit, took a security interest in the pool of loans, but Aleritas [BCC]
continued to service them.” (Dk. 34, ¶¶ 74-76). The defendants further
allege that “BONY and the 2005-2 noteholders, including UniCredit,
benefitted from the malfeasance of their predecessor, Aleritas, because

35

without that malfeasance RKC would not have taken the Loan in the first
place.” Id. at ¶ 77.
As with the prior theories, the movants challenge that the
defendants have not alleged and cannot allege facts sufficient to meet
critical elements. The secured transactions documented in the Indenture and
Indenture Notes “do not remotely resemble an agreement by the Indenture
Trustee or UniCredit to assume debts of any ‘Brooke Entities,’ or a merger
agreement of the Indenture Trustee or UniCredit with any “Brooke Entities,’
or that the Indenture Trustee or UniCredit are mere continuations of any
‘Brooke Entities.’” (Dk. 27, p. 36). The movants observe that the defendants
purport to allege a successor liability between them and Brooke
Securitization who is not liable for the Arbitration Award. In response, the
defendants summarily argue that the purchase of a security interest in
assets amounts “to a consolidation or merger” and that Brooke
Securitization “is merely a continuation of Aleritas” with BONY and UniCredit
now “servicing the Loan.” (Dk. 32, p. 14).
’The general rule of successor corporate liability in Kansas is
stated as follows:
Generally where one corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and
liabilities of the transferor, except: (1) where the purchaser expressly
or impliedly agrees to assume such debts; (2) where the transaction
amounts to a consolidation or merger of the corporation; (3) where
the purchasing corporation is merely a continuation of the selling
corporation; and (4) where the transaction is entered into fraudulently
in order to escape liability for such debts.
36

Comstock v. Great Lakes Distributing Co., 209 Kan. 306, 310, 496 P.2d
1308 (1972) (quoting 15 Fletcher Cyclopedia of the Law of Private
Corporations § 7122 (perm. ed.)). The defendants have not plausibly alleged
any facts showing a transaction that amounts to a consolidation or merger.
The defendants’ allegations presume a merger or consolidation from nothing
more than the fact of an Indenture and Indenture notes. Considering such
allegations defy the legal terms and the distinct legal relationships
established in those documents, the court is at a loss to find how they could
be plausible. Nor can the court see the plausibility in alleging BONY and
UniCredit are a continuation of Aleritas, simply because they are now
exercising their legal rights to collect on the defaulted loans which secured
the Indenture notes. The defendants’ allegations and arguments fail to state
a claim for successor liability. The court grants the motion to dismiss this
theory again conditioned upon the defendants timely submitting
amendments to cure.
Alter Ego
The defendants allege that “UniCredit, BONY, and the Brooke
Entities had a unity of interest in enforcing the loan documents against” the
defendants and that they “did not respect their separate corporate identities”
in that (1) Aleritas originated the loans and later serviced them; (2) 2005-2
noteholders are undisclosed except for UniCredit; (3) UniCredit is both a
majority noteholder and the agent for BONY who is the trustee for the
37

noteholders; and (4) the securitization process used here was repeated with
“many other loans to franchisees.” (Dk. 34, ¶¶ 91-92). The movants attack
these allegations as “threadbare legal conclusions” which do not make a
plausible claim “that the Brooke Entities are merely the alter ego of the
Indenture Trustee and UniCredit.” (Dk. 27, p. 36).
Established Kansas law recognizes that one corporation can be
the alter ego of another corporation:
The fiction of separate corporate identities of two corporations will not
be extended to permit one of the corporations to evade its just
obligations; to promote fraud, illegality, or injustice; or to defend
crime. Under circumstances where the corporate entity is disregarded,
the parent corporation may be held liable for the acts of the
subsidiary. The mere fact, however, that a subsidiary corporation was
organized for the avowed purpose of avoiding liability on the part of
the holding company does not, of itself, constitute fraud justifying
disregard of the corporate entity of the subsidiary. The courts will
disregard the fiction of a separate legal entity when there is such
domination of finances, policy, and practices that the controlled
corporation has no separate mind, will, or existence of its own and is
but a business conduit for its principal.
Dean Operations, Inc. v. One Seventy Assocs., 257 Kan. 676, 681, 896 P.2d
1012 (1995); see Ice Corp. v. Hamilton Sundstrand Inc., 444 F.Supp.2d
1165, 1169–70 (D. Kan. 2006) (“The ultimate test for imposing alter ego
status is whether, from all of the facts and circumstances, it is apparent that
the relationship between the parent and subsidiary is so intimate, the
parent's control over the subsidiary is so dominating, and the business and
assets of the two are so mingled that recognition of the subsidiary as a
distinct entity would result in an injustice to third parties.” (citation
38

omitted)). The following ten factors guide a factfinder’s evaluation of
whether separate entities have a “unity of interest”:
(1) whether the parent [organization] owns all or a majority of the
capital stock of the subsidiary; (2) whether the [organization] have
common directors or officers; (3) whether the parent [organization]
finances the subsidiary; (4) whether the parent [organization]
subscribed to all of the capital stock of the subsidiary or otherwise
caused its incorporation; (5) whether the subsidiary has grossly
inadequate capital; (6) whether the parent [organization] pays the
salaries or expenses or losses of the subsidiary; (7) whether the
subsidiary has substantially no business except with the parent
[organization] or no assets except those conveyed to it by the parent
[organization]; (8) whether in the papers of the parent [organization]
and in the statements of its officers, the subsidiary is referred to as
such or as a department or division; (9) whether the directors or
executives of the subsidiary do not act independently in the interest of
the subsidiary but take direction from the parent [organization]; and
(10) whether the formal legal requirements of the subsidiary as a
separate and independent [organization] are not observed.
Commerce Bank, N.A. v. Liebau-Woodall & Assocs., L.P., 28 Kan. App. 2d
674, 679-680 (2001) (internal quotation marks and citations omitted). “In
addition to concluding that some of the 10 factors for determining alter ego
status exist, it must be shown that allowing the legal fiction of separateness
of the corporate structures results in an injustice.” Dean Operations, Inc.,
257 Kan. at 687.
The defendants purport to allege that the “Brooke Entities” are
the alter egos of BONY and UniCredit. The defendants’ counterclaim fails to
allege facts that would make this theory plausible. The defendants allege
that BONY owned “some” stock of Brooke Corporation and that BONY
executives personally owned more Brooke Corporation stock. Owning “some”
39

stock is not a factor. The defendants next allege that UniCredit financed
Brooke Securitization by purchasing the notes in its pool of loans and that
Brooke Securitization’s business was only with UniCredit and BONY. These
are no than an inherent and normal elements of the securitization process,
and the court fails to see how this transaction necessarily changes a SPE into
the alter ego of the largest noteholder or the noteholders’ trustee. That this
securitization process is repeated between the parties may be a
circumstance, but it does not move the possibility of dominion or control
from speculative to plausible. The defendants allege no facts from which to
plausibly infer that UniCredit, BONY, and the Brooke Entities “did not respect
their separate corporate identities.” (Dk. 34, ¶ 92). That separate entities
perform multiple functions does not show a “lack of respect” particularly
when each of those functions was the result of separate contractual
arrangements. Unable to find a plausible alter ego claim, the court grants
the motion to dismiss this theory but will allow the defendants timely
opportunity to cure the pleading deficiencies.
Res Judicata and Collateral Estoppel
The defendants explain that they “have pled . . . the doctrines of
res judicata and collateral estoppel [to] show that the Arbitration Award has
already established the causes of action so that they do not need to be relitigated here.” (Dk. 32, p. 17). The defendants allege that the Arbitration
Award is a “final judgment on the merits of” their relationship to the Brooke
40

entities, the Loan, and related agreements. (Dk. 34, ¶¶ 80-81). The
defendants further allege that UniCredit and BONY are “precluded from
litigating issues that were or could have been raised in the arbitration”
because they were in privity with Aleritas, Brooke Corp., Brooke Agency
Services Co., and Brooke Franchise Corp., all of whom were parties named
in the arbitration proceeding. Id. at ¶ 82-84. Under the title of collateral
estoppel, the defendants similarly allege that “all of the issues of fact and
law related to” the “validity of the Loan, the enforceability of the guarantees
. . ., and liability owed to the defendants” were decided and that BONY and
UniCredit “were related in fact and via contracts” to the Brooke Entities who
“had the same interest in the arbitration that UniCredit and BONY have in
this case.” Id. at ¶¶ 85-88. The defendants allege the “same issues are
precluded from relitigation in this case.” Id. at ¶ 90.
The operative elements to claim and issue preclusion in Kansas
are as follow:
Kansas law provides that four conditions must be met in order that a
prior adjudication becomes res judicata. Kansas law also sets forth
three conditions before a party will be estopped from collaterally
attacking a prior adjudication:
“An issue is res judicata when four conditions concur: (1)
identity in the thing sued for, (2) identity of the cause of action,
(3) identity of persons and parties to the action, and [4] identity
in the quality of persons for or against whom claim is made.
[Citation omitted.] The requirements of collateral estoppel are:
(1) a prior judgment on the merits which determined the rights
and liabilities of the parties on the issue based upon ultimate
facts as disclosed by the pleadings and judgment; (2) the parties
must be the same or in privity; and (3) the issue litigated must
have been determined and necessary to support the judgment.
41

[Citation omitted.]” Regency Park v. City of Topeka, 267 Kan.
465, 478, 981 P.2d 256 (1999).
Waterview Resolution Corp. v. Allen, 274 Kan. 1016, 1023, 58 P.3d 1284,
1290 (Kan. 2002). The movants challenge these preclusion claims and
defenses on numerous grounds. The court will address only those prevailing
grounds.4
Valid Arbitration Award
“An arbitrator's power to resolve a dispute originates from an
agreement to arbitrate between the parties. Without such an agreement to
establish the parties' consent, the arbitrator has no jurisdiction.” Anderson v.
Dillard's, Inc., 283 Kan. 432, 436, 153 P.3d 550 (2007) (citation omitted).
“It is a cardinal rule that arbitration is a matter of contract, and parties are
bound by arbitration awards only if they agreed to arbitrate a matter.” In re
Kaplan, 143 F.3d 807, 815 (3rd Cir. 1998); see First Options of Chicago, Inc.
v. Kaplan, 514 U.S. 938, 942 (1995) (“a party who has not agreed to

On the issue of privity, the defendants allege that “UniCredit and BONY
were in privity with Aleritas, Brooke Corp., Brooke Agency Services Co., and
Brooke Franchise Corp” who were parties to the arbitration. (Dk. 34, ¶¶ 8384). The movants argue a lack of privity in that they obtained their rights to
the subject Loan prior to the Texas case and Arbitration Award and that at
the time of the Arbitration Award they had sued the Brooke entities and thus
had adverse interests to them. The defendants respond that privity can exist
by reason of a pre-existing substantial relationship and that their allegations
can be defended on principles of fundamental fairness in a due process
sense. Considering the equitable principles guiding privity determinations,
the court would have allowed the defenses to go forward despite the privity
issues because of the relaxed Rule 12(f) standards. The court cannot say the
same with respect to the plain legal deficiencies with the Arbitration Award
discussed above.
4

42

arbitrate will normally have a right to a court’s decision about the merits of
its dispute”). Movants argue the arbitrator lacked the power to enter an
arbitration award here, because the Loan Agreement at ¶ 44 authorized
arbitration only at the “option of Lender” and the Lender at the time of
arbitration was Brook Securitization which did not elect to arbitrate this
dispute and which was not a party to arbitration. The defendants respond
that Aleritas was the lender when the Loan Agreement was executed and
that UniCredit has not proven that Brooke Securitization had exclusive rights
under ¶ 44 at the time of the arbitration or had opposed arbitration.
The allegations are uniform that RKC’s loan was in the pool of
loans sold to Brooke Securitization on December 1, 2005. (Dk. 1-1, p. 61).
The defendants allege that Aleritas eventually sold the Loan to Brooke
Securitization. (Dk. 34, ¶ 19). Paragraph eighteen of the Loan Agreement
addresses the Lender’s assignment:
(a) Lender may assign or delegate all or any part of its rights, title,
interest or obligations in and to this Agreement or under any Loan
Document to one or more Persons without the consent of Borrower.
Lender may also assign or delegate all or any part of its rights, interest
or obligations to service the loan which is the subject of the Loan
Documents to one or more Persons without the consent of Borrower.
Any such assignment by Lender shall be without further recourse to
Lender.
(Dk. 1-5, p. 8). The defendants did not file their state court petition in Texas
until March 7, 2007, or after the transfer of RKC’s loan to Brooke
Securitization. For all the reasons discussed above, the defendants have not
alleged a plausible claim that Brooke Securitization consented or opted for
43

arbitration pursuant to the terms of ¶ 44 of the Loan Agreement: “At the
option of Lender, any issue, claim, dispute or controversy that may arise out
of, in connection with or relating to the Loan Documents or their breach, and
which the parties are not able to resolve themselves, shall be settled by
arbitration . . . .” (Dk. 1-5, p. 12). From the face of the Loan Agreement and
the allegations of their counterclaims, the defendants have failed to allege
facts establishing that a valid arbitration award “in connection with or
relating to the Loan Documents or their breach” was entered by an arbitrator
who acted within the jurisdiction conferred by the agreement.
Necessary and Indispensable Party
The movants contend that Brooke Securitization as the owner of
the Loan was a necessary and indispensable party to RKC’s efforts to void
the Loan in the state court and arbitration. There is no question but that
Brooke Securitization’s ownership of the loan would be adversely affected by
a judgment in the arbitration proceeding interest, and so the arbitration
proceeding could not make a “just adjudication, without joining that party in
the action.” McGinty v. Hoosier, 291 Kan. 224, 235, 239 P.3d 843 (2010). As
found above, the defendants have failed to allege grounds showing
Aleritas/BCC to have been authorized to participate on behalf of Brooke
Securitization or the plaintiffs in the Texas/arbitration proceedings. The court
appreciates that the Rule 12(f) standards are not as strict as those under
Rule 12(b)(6). Yet, the defendants offer no plausible legal theory for how the
44

representations made by the other Brooke entities in those proceedings
prevent the movants now from making this legal argument.
As movants argue, the allegations, on their face, show no more
than the defendants simply sued the wrong entities in Texas and completed
the arbitration process without the correct parties. Brooke Securitization and
the movants were never joined as parties to the Arbitration Award. The
court’s rulings above have found that the defendants have not made a
plausible claim for vicarious liability against the movants, UniCredit or BONY.
In short, as apparent from the face of the pleadings, the defendants have
not alleged that the Arbitration Award is a final judgment on the merits of
the Loan between the actual owner of the Loan and the defendants.
Conclusion
In sum, the defendants have not alleged “a valid and final award
by arbitration” entitled to the same “rules of res judicata . . . as a judgment
of a court.” Restatement (Second) of Judgments § 84 (1982). Nor have they
alleged a plausible claim of vicarious liability against the movants for this
award. The defendants do not provide the court with any sound arguments
and authorities for giving any preclusive effect or other legal effect to the
arbitration award in light of the above rulings.
Declaratory Judgment: Statute of Limitations and Money Damages
The defendants deny that the statute of limitations for fraud,
breach of contract and Civil RICO are applicable here and also deny that
45

they are making a claim for monetary damages. Instead of relitigating these
claims and defenses, the defendants say they are only seeking to have the
Arbitration Award enforced by declaratory judgment. The above rulings
foreclose the defendants from relying on the Arbitration Award as the legal
and factual basis for their affirmative defenses and declaratory judgment
relief.
Opportunity to Seek Leave to Amend
The defendants ask the court to grant them an opportunity to
seek leave to file amended counterclaims and/or affirmative defenses
pursuant to Fed. R. Civ. P. 15(a)(2). It is not for the court to imagine
whether there are possible amendments or facts to be alleged in support of
them that would cure the pleading deficiencies discussed above. Toone v.
Wells Fargo Bank, N.A., 716 F.3d 516, 524 (10th Cir. 2013). The defendants
do not submit for the court’s consideration either a proposed amendment or
a discussion of possible curing amendments. Id. Mindful of the discretionary
policy favoring an opportunity to amend and cure the pleading problems,
Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1189 (10th Cir. 2012), the
court shall grant the movants’ motions subject to its consideration of the
defendants’ motion for leave to amended counterclaims and/or affirmative
defenses filed within 20 days of the filing date of this order. The court notes
that to date the parties’ pleadings reveal utmost regard for exhausting the
full range of possible claims and defenses. Consequently, the court wants to
46

remind the parties of its right to consider whether “it appears that the
plaintiff is using Rule 15 to make the complaint a moving target, to salvage
a lost case by untimely suggestion of new theories of recovery, [or] to
present theories seriatim in an effort to avoid dismissal. . . .” Minter v. Prime
Equip. Co., 451 F.3d 1196, 1206 (10th Cir. 2006) (quotations, alterations,
and citations omitted).
IT IS THEREFORE ORDERED that the defendants’ motion to
dismiss (Dk. 18) is granted in part and denied in part as set forth above;
IT IS FURTHER ORDERED that the plaintiff’s motion to dismiss
amended counterclaims and to strike affirmative defenses of defendants
(Dk. 26), the plaintiff’s motion to dismiss second amended counterclaims
and to strike affirmative defenses of defendants (Dk. 47) and BONY’s motion
to dismiss counterclaim (Dk. 45) this case are granted on the grounds stated
above and subject to the court’s consideration of the defendants’ motion for
leave to amended counterclaims and/or affirmative defenses filed within 20
days of the filing date of this order.
Dated this 26th day of June, 2014, Topeka, Kansas.

s/Sam A. Crow
Sam A. Crow, U.S. District Senior Judge

47