News Briefs

The proposed rules changes can be found at www.scc.virginia.gov/srf/s_12_40.pdf, and the rules for submitting a comment can be found at www.scc.virginia.gov/case.

Hotel Franchisee Sues for Lack of Support

A Crowne Plaza Hotel franchisee in Lenexa, KS, is suing franchisor InterContinental Hotels Group PLC (“IHG”) for breach of contract in the U.S. District Court for the District of Kansas. The lawsuit, Lenexa Hotel, LP v. Holiday Hospitality Franchising, Inc., Intercontinental Hotels Group PLC, and Six Continents Hotels, Inc., claims lack of promised marketing support and botched online and phone referrals after an existing hotel was converted from a Radisson to the Crowne Plaza brand in 2009.

Franchisee Stephen Craig claims in the lawsuit that he spent more than $7 million on hotel upgrades and met his contractual obligations for the rebranding. He is seeking reimbursement of his expenditures, as well as damages, attorneys' fees and interest. IHG has informed Craig that he has not met his obligations under the franchisor's Property Improvement Plan.

The complaint, provided to FBLA by one of Craig's attorneys, Tyler Hudson, a partner with Wagstaff & Cartmell, LLP in Kansas City, KS, states that Craig signed a 10-year franchise agreement in May 2008 after receiving assurances “through emails and in-person communications,” that IHG would “market the Hotel, which is located in suburban Lenexa, Kansas, to business travelers and other potential customers as an upscale Kansas City metropolitan hotel.” Lenexa is a suburb south of Kansas City.

In a statement provided to FBLA, IHG noted that it “is aware of the lawsuit filed in Kansas City district court by Lenexa Hotel Group and Mr. Stephen Craig. We have no further response regarding this pending litigation.”

Craig alleges that IHG has favored another Crowne Plaza hotel, located in downtown Kansas City, in descriptors used for online searches and in referrals made by phone reservation agents. For example, he alleges that online listings by IHG referenced the hotel as a Radisson more than a year after it had been rebranded to Crowne Plaza. Although Craig, an experienced owner-operator of hotels, made his complaints known to franchisor executives beginning in 2009 and received assurances that changes would be made, the complaint alleges that IHG continued to promote Craig's Crowne Plaza as a Lenexa, KS, facility, rather than his preferred designation as a hotel for business and upscale travelers who are visiting Kansas City and Overland Park. As a result, Craig's Crowne Plaza is severely underperforming expectations.

According to the complaint, the UFOC signed by Craig in 2008 included performance representations. These stated that the average occupancy rate of 53 “mature Crowne Plazas in suburban markets in 2007″ was 63.5% and yielded $70.43 in revenue per available room (“RevPar”), a standard industry metric. In contrast, Craig's hotel had a 28.07% occupancy rate and RevPar of $20.42 in 2009. The numbers inched up in 2010, and by 2011 they had reached 41.6% occupancy and $32.75 RevPar. Not only are those figures well below the national averages cited in the UFOC, but they are also below the performance of the hotel when it was a Radisson brand, Craig maintains.

Craig also alleges that he realized in 2009 that IHG's national reservation line was not referring guests to his hotel. He hired researchers to call the reservation system. “In many of these calls, IHG's call center representatives did not identify the Hotel at all. Instead, they identified only the downtown Crowne Plaza. In fact, the agents often suggested a Holiday Inn, a midscale IHG brand, even though the customer called the specific Crowne Plaza phone number and asked specifically for a Crowne Plaza hotel in Kansas City,” according to the complaint. After Craig provided records of the calls, a year of back-and-forth discussions with IHG executives did not resolve the problem, according to Craig.

Franchisor Execs Charged with Fraud

The SEC's settlement in May 2011 of fraud charges against five executives of the now-defunct Brooke Corp. has not ended government lawsuits filed against the former insurance agency franchisor. In November 2012, a federal grand jury in Kansas indicted two of the former executives, Robert D. Orr and Leland G. Orr, with one count each of conspiracy to defraud the Securities and Exchange Commission and three counts of making false statements in filings to the SEC. Robert Orr also was charged with two additional counts of making false statements in SEC filings and one count of bankruptcy fraud.

Brooke Corp., formerly based in Overland Park, KS, was a fast-growing franchisor of insurance agencies in Kansas and many other states. When the company ramped-up its expansion strategy after becoming a public company in 2003, it reached nearly 850 franchisees, according to media reports. Brooke's strategy was to offer franchises to existing insurance agencies. Franchisees would sell insurance policies, and the premiums were paid to Brooke, which would then send commissions back to the franchisees. In return, franchisees were told they would receive the marketing benefits of what was becoming a national brand, extensive software and bookkeeping support, and could borrow money through a Brooke-affiliated company, Aleritas Capital Corporation. Brooke would then repackage and resell those loans to outside investors.

However, those lending practices were apparently at the core of the company's demise and a major source of legal trouble. Brooke's business began to unravel in 2007 and 2008, and it declared Chapter 11 bankruptcy in October 2008. In 2011, five executives settled SEC charges that included alleged violations of the RICO Act, double-pledging loans as collateral, and misrepresenting to outside investors the financial health of the loans to franchisees that Brooke was repackaging and reselling. They paid fines and penalties, and they agreed to permanent officer and director bars, according to the SEC.

Insurance industry publications and regional business newspapers reported that several hundred franchisees failed in the wake of the bankruptcy, and also that several regional banks failed because they had extended large loans to Aleritas.

Virginia Proposes Changes to Franchise Rule

In order to harmonize Virginia's franchise disclosure regulations with those of other states, the Virginia Division of Securities and Retail Franchising has published recommended revisions to the Virginia Retail Franchising Act rules. The proposed changes would match Virginia's rules to the guidelines adopted by the North American Securities Administrators Association (“NASAA”). The changes are scheduled to come into effect on March 1, 2013, but a public comment period will be open through Jan. 15, 2013.

The proposals would require franchisors operating in Virginia to:

• Use NASAA's Guarantee of Performance form;
• File the Franchise Disclosure Document in CD-ROM format;
• Provide franchisees with copies of each “materially different” FDD used in the last three years; and
• File amendments to a franchise registration with the securities division when a material change is made (file within 30 days of the change).

Also, franchisors could not use the “seasoned franchisee” exemption if their audit report contains a “going concern” comment.

The proposed rules changes can be found at www.scc.virginia.gov/srf/s_12_40.pdf, and the rules for submitting a comment can be found at www.scc.virginia.gov/case.

Hotel Franchisee Sues for Lack of Support

A Crowne Plaza Hotel franchisee in Lenexa, KS, is suing franchisor InterContinental Hotels Group PLC (“IHG”) for breach of contract in the U.S. District Court for the District of Kansas. The lawsuit, Lenexa Hotel, LP v. Holiday Hospitality Franchising, Inc., Intercontinental Hotels Group PLC, and Six Continents Hotels, Inc., claims lack of promised marketing support and botched online and phone referrals after an existing hotel was converted from a Radisson to the Crowne Plaza brand in 2009.

Franchisee Stephen Craig claims in the lawsuit that he spent more than $7 million on hotel upgrades and met his contractual obligations for the rebranding. He is seeking reimbursement of his expenditures, as well as damages, attorneys' fees and interest. IHG has informed Craig that he has not met his obligations under the franchisor's Property Improvement Plan.

The complaint, provided to FBLA by one of Craig's attorneys, Tyler Hudson, a partner with Wagstaff & Cartmell, LLP in Kansas City, KS, states that Craig signed a 10-year franchise agreement in May 2008 after receiving assurances “through emails and in-person communications,” that IHG would “market the Hotel, which is located in suburban Lenexa, Kansas, to business travelers and other potential customers as an upscale Kansas City metropolitan hotel.” Lenexa is a suburb south of Kansas City.

In a statement provided to FBLA, IHG noted that it “is aware of the lawsuit filed in Kansas City district court by Lenexa Hotel Group and Mr. Stephen Craig. We have no further response regarding this pending litigation.”

Craig alleges that IHG has favored another Crowne Plaza hotel, located in downtown Kansas City, in descriptors used for online searches and in referrals made by phone reservation agents. For example, he alleges that online listings by IHG referenced the hotel as a Radisson more than a year after it had been rebranded to Crowne Plaza. Although Craig, an experienced owner-operator of hotels, made his complaints known to franchisor executives beginning in 2009 and received assurances that changes would be made, the complaint alleges that IHG continued to promote Craig's Crowne Plaza as a Lenexa, KS, facility, rather than his preferred designation as a hotel for business and upscale travelers who are visiting Kansas City and Overland Park. As a result, Craig's Crowne Plaza is severely underperforming expectations.

According to the complaint, the UFOC signed by Craig in 2008 included performance representations. These stated that the average occupancy rate of 53 “mature Crowne Plazas in suburban markets in 2007″ was 63.5% and yielded $70.43 in revenue per available room (“RevPar”), a standard industry metric. In contrast, Craig's hotel had a 28.07% occupancy rate and RevPar of $20.42 in 2009. The numbers inched up in 2010, and by 2011 they had reached 41.6% occupancy and $32.75 RevPar. Not only are those figures well below the national averages cited in the UFOC, but they are also below the performance of the hotel when it was a Radisson brand, Craig maintains.

Craig also alleges that he realized in 2009 that IHG's national reservation line was not referring guests to his hotel. He hired researchers to call the reservation system. “In many of these calls, IHG's call center representatives did not identify the Hotel at all. Instead, they identified only the downtown Crowne Plaza. In fact, the agents often suggested a Holiday Inn, a midscale IHG brand, even though the customer called the specific Crowne Plaza phone number and asked specifically for a Crowne Plaza hotel in Kansas City,” according to the complaint. After Craig provided records of the calls, a year of back-and-forth discussions with IHG executives did not resolve the problem, according to Craig.

Franchisor Execs Charged with Fraud

The SEC's settlement in May 2011 of fraud charges against five executives of the now-defunct Brooke Corp. has not ended government lawsuits filed against the former insurance agency franchisor. In November 2012, a federal grand jury in Kansas indicted two of the former executives, Robert D. Orr and Leland G. Orr, with one count each of conspiracy to defraud the Securities and Exchange Commission and three counts of making false statements in filings to the SEC. Robert Orr also was charged with two additional counts of making false statements in SEC filings and one count of bankruptcy fraud.

Brooke Corp., formerly based in Overland Park, KS, was a fast-growing franchisor of insurance agencies in Kansas and many other states. When the company ramped-up its expansion strategy after becoming a public company in 2003, it reached nearly 850 franchisees, according to media reports. Brooke's strategy was to offer franchises to existing insurance agencies. Franchisees would sell insurance policies, and the premiums were paid to Brooke, which would then send commissions back to the franchisees. In return, franchisees were told they would receive the marketing benefits of what was becoming a national brand, extensive software and bookkeeping support, and could borrow money through a Brooke-affiliated company, Aleritas Capital Corporation. Brooke would then repackage and resell those loans to outside investors.

However, those lending practices were apparently at the core of the company's demise and a major source of legal trouble. Brooke's business began to unravel in 2007 and 2008, and it declared Chapter 11 bankruptcy in October 2008. In 2011, five executives settled SEC charges that included alleged violations of the RICO Act, double-pledging loans as collateral, and misrepresenting to outside investors the financial health of the loans to franchisees that Brooke was repackaging and reselling. They paid fines and penalties, and they agreed to permanent officer and director bars, according to the SEC.

Insurance industry publications and regional business newspapers reported that several hundred franchisees failed in the wake of the bankruptcy, and also that several regional banks failed because they had extended large loans to Aleritas.