April 17, 2026|Franchise Frontlines
April 17, 2026 | U.S. Bankruptcy Court, Eastern District of Tennessee | Memorandum Opinion
Executive Summary
In a detailed memorandum opinion following a multi-day confirmation hearing, the Bankruptcy Court for the Eastern District of Tennessee confirmed a franchisor’s Subchapter V plan of reorganization, but only after imposing significant modifications, including extending the plan term from three to five years. The debtor, a handyman services franchisor, argued that its plan satisfied all confirmation requirements and reflected a good-faith effort to reorganize following a substantial arbitration award in favor of a former franchisee. The objecting creditor, a former multi-unit franchisee, contended that the plan was not proposed in good faith, failed to maximize the estate, improperly favored insiders, and understated projected disposable income. The court rejected most of the creditor’s objections, finding the plan was proposed in good faith and feasible, but concluded that the debtor’s structure and projected expenditures required a longer commitment period to ensure that unsecured creditors received the full benefit of the debtor’s projected income.
Relevant Background
Honey Do Franchising Group, Inc. operates a franchise system providing residential and commercial handyman services. The system generates revenue primarily through royalties and fees paid by franchisees, with additional revenue from new franchise sales when permitted. As is typical in franchise systems, the debtor’s ability to expand depended on maintaining a compliant and updated franchise disclosure document (“FDD”), which must be provided to prospective franchisees and updated annually.
The debtor’s financial distress arose largely from a dispute with a multi-unit franchisee, 5 Talents, Inc., which had acquired and operated several territories. The relationship deteriorated, leading to litigation and arbitration. The arbitrator ultimately found that the debtor improperly terminated the franchise agreements and awarded the franchisee more than $1.3 million in damages, including attorneys’ fees. That award was confirmed by a federal district court, leaving the debtor with a substantial unsecured liability.
Faced with the judgment and unable to satisfy it through operations or liquidation, the debtor filed for Chapter 11 protection under Subchapter V. At the time of filing, the debtor had approximately ten franchisees operating under its system and relied heavily on royalty income from those franchisees. Critically, the debtor had failed to timely update its FDD, which prevented it from selling new franchises and further constrained its revenue.
The debtor proposed a plan that divided unsecured creditors into two classes—one consisting solely of the judgment creditor and the other consisting of all remaining unsecured creditors—and committed its projected disposable income over a three-year period to repay those claims. The plan also sought to assume a lease for its headquarters, which was owned by an entity affiliated with the debtor’s principals.
Decision
The court undertook a comprehensive analysis of the confirmation requirements under 11 U.S.C. §§ 1129 and 1191, ultimately concluding that the plan was confirmable, but only with significant modifications.
The court first rejected arguments that the debtor’s plan was proposed in bad faith. Although the creditor emphasized prepetition conduct, including the underlying franchise dispute and alleged insider advantages, the court focused on whether the plan itself served a legitimate reorganizational purpose. The court found that the debtor’s objective—to preserve the franchise system as a going concern and generate value through continued operations—aligned with the purposes of Chapter 11. The court also credited testimony that the debtor had attempted to negotiate a settlement and lacked the financial ability to satisfy the arbitration award outside of bankruptcy.
The court also addressed challenges to the debtor’s disclosures and asset valuation. While the debtor failed to explicitly list certain intangible assets—such as trademarks, goodwill, and system know-how—the court concluded that these omissions did not reflect an attempt to conceal value. Instead, the court emphasized that the true value of the franchisor’s business derived from its royalty stream and franchise contracts, rather than from the standalone value of intellectual property. The court accepted the debtor’s valuation evidence, which attributed minimal independent value to trademarks and other intangibles, and instead focused on projected cash flow from existing franchise agreements.
The court further found that the plan satisfied the best interests of creditors test. Based on expert testimony, the court concluded that a liquidation scenario would yield little or no recovery for unsecured creditors, particularly given the secured creditor’s blanket lien and the limited standalone value of the debtor’s assets. As a result, even modest payments under the plan exceeded what creditors would receive in a Chapter 7 liquidation.
The most significant aspect of the decision involved the court’s analysis of whether the plan was “fair and equitable” under Subchapter V. Although the debtor proposed to commit all projected disposable income over a three-year period, the court determined that a longer period was necessary under the circumstances. The court identified several factors supporting a five-year commitment period. First, the debtor’s projected expenses included significant costs—such as franchise development and marketing—that would primarily benefit the franchisor’s long-term growth rather than current creditors. Second, the debtor’s principals had increased their compensation and maintained insider arrangements, including lease payments to an affiliated entity, which warranted closer scrutiny. Third, the debtor’s projections included minimal benefit to creditors from future franchise sales, even though the debtor intended to incur substantial expenses to support those efforts.
The court also considered the debtor’s failure to timely update its FDD, which prevented franchise sales and constrained revenue. While the court accepted the debtor’s explanation for the delay, it emphasized the practical consequence: the debtor’s ability to generate new revenue—and thus repay creditors—was directly tied to its compliance with franchise disclosure requirements.
Balancing these factors, the court exercised its authority to require a five-year plan term and imposed additional conditions to ensure that creditors would receive the full benefit of the debtor’s projected income. These conditions included mechanisms to capture additional disposable income if actual performance exceeded projections and provisions preserving potential avoidance actions for the benefit of the estate.
Looking Forward
This decision provides a detailed and practical roadmap for franchisors operating in distressed conditions and illustrates how courts evaluate franchise systems in a restructuring context.
First, the case underscores that FDD compliance is not merely a regulatory requirement—it is fundamental to a franchisor’s ability to generate revenue. The debtor’s inability to sell new franchises due to an outdated FDD directly impacted its financial projections and the structure of its plan. For franchisors, maintaining a current and compliant FDD is essential not only for growth but also for demonstrating viability in any restructuring scenario.
Second, the decision highlights the central role of royalty streams in valuing franchise systems. The court’s analysis makes clear that the economic value of a franchisor lies primarily in its ongoing contractual relationships with franchisees, rather than in the standalone value of trademarks or other intellectual property. This distinction has important implications for both litigation and restructuring, particularly when evaluating asset value and creditor recoveries.
Third, the case demonstrates how franchise disputes can create existential risk for franchisors. A single arbitration award arising from franchise termination can generate liabilities that exceed the franchisor’s operational capacity, forcing a restructuring. This underscores the importance of careful compliance with franchise agreements and termination procedures.
Fourth, the decision reflects the scrutiny courts will apply to insider transactions and operational decisions in a restructuring context. While the court ultimately permitted the debtor to maintain its operational structure—including compensation levels and lease arrangements—it examined those decisions closely and adjusted the plan to ensure that creditors were not disproportionately disadvantaged.
Finally, the court’s imposition of a five-year plan term illustrates that Subchapter V’s flexibility cuts both ways. While the statute allows debtors to propose shorter plans, courts may extend the commitment period where necessary to ensure that creditors receive a fair share of the debtor’s projected income. For franchisors, this reinforces the importance of aligning projected expenses, growth strategies, and creditor recoveries when structuring a plan.
Taken together, the decision illustrates how franchise operations, compliance obligations, and financial structuring intersect in a restructuring context. It provides a practical example of how courts will evaluate franchisor conduct, system value, and plan feasibility, and offers clear guidance for franchisors navigating both operational challenges and financial distress.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Partner at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
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