# K3D Property Services, LLC

> United States Bankruptcy Court, E.D. Tennessee · November 12, 2021

URL: https://www.frixlaw.com/law-library/cases/10462173

## Case

- **Court:** United States Bankruptcy Court, E.D. Tennessee
- **Decided:** November 12, 2021
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10462173

## How later opinions describe it (automated extraction)

- declining to extend stay without proof that the partnership was insolvent
- discussing that a temporary injunction sought to protect non-debtors may be proper in “unusual circumstances”
- discussing legislative history of section 524(e)

## Opinion text

ES BANKROD>
ke □□
□□
of Oy
SIGNED this 12th day of November, 2021
Q Rusher
‘) Shelley D. Rucker
CHIEF UNITED STATES BANKRUPTCY JUDGE

IN THE UNITED STATES BANKRUPTCY COURT FOR
THE EASTERN DISTRICT OF TENNESSEE

In re: )
)
K3D Property Services, LLC, ) No. 1:19-bk-15361-SDR
) Chapter 11
)
Debtor. )

MEMORANDUM OPINION
The Debtor, K3D, is a painting contractor that has been through a significant
restructuring of its business since it filed for bankruptcy in December of 2019. A more focused
company has emerged, leaving behind an unprofitable home construction and remodeling
business. It has found new revenue streams which take advantage of the needs created by the
pandemic of 2020. Those new business lines apply the Debtor’s experience in painting
contracting to restocking and renovating commercial retail spaces. The Debtor has proposed an
Amended Plan that restructures its debt, provides an estimated dividend of 20% to unsecured

creditors, and projects a growing business that should not require further financial restructuring.
It has overwhelming creditor support based on the voting. The issue before the court is whether
that plan can be confirmed over two objections to a plan provision that temporarily enjoins
collection actions against third parties.
The objections focus on a provision in the plan which protects the owners of the Debtor

and their spouses during a four-year period. The owners want this time without litigation
expenses and distractions to come up with personal funds that provide a portion of the proposed
distribution to unsecured creditors. Approving a plan with such protections requires this court to
adopt a different test for the appropriateness of a temporary post-confirmation, third-party
injunction than the test used by the Sixth Circuit for the appropriateness of a permanent
injunction. Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.
3d 648 (6th Cir. 2001). The Debtor advocates that this court apply the test for approval of a
temporary post-confirmation injunction suggested in Feld v. Zale Corporation (In re Zale), 62
F.3d 746, 765 (5th Cir. 1995). For the reasons given below, the court finds that the appropriate

test remains the Dow Corning test, even where the injunction is temporary. Therefore, the court
concludes that the temporary third-party injunction in the plan is not appropriate where the
Debtor cannot show that it meets the Dow Corning factors. As such, the court cannot confirm a
plan containing the proposed provision. For the reasons stated below, the court will deny
confirmation of the Amended Plan. The Debtor may be able to amend its plan in such a way as to
meet those factors and obtain confirmation, so the court will take no additional action.
I. Jurisdiction
The court has jurisdiction to determine the issues before it under 28 U.S.C. § 1334(b) and
§ 157(b)(2)(L) (confirmations of plans) and (O) (adjustment of debtor and creditor relationships).
As for imposition of an injunction on creditors which prevents them from pursuing their claims
against non-debtors, the court has jurisdiction to grant such an injunction provided the injunction
is otherwise appropriate. See Dow Corning, 280 F.3d at 656.

The Bankruptcy Code does not explicitly prohibit or authorize a
bankruptcy court to enjoin a non-consenting creditor’s claims
against a non-debtor to facilitate a reorganization plan. In re
Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000). However,
bankruptcy courts, ‘as courts of equity, have broad authority to
modify creditor-debtor relationships.’ United States v. Energy
Resources Co., 495 U.S. 545, 549, 109 L. Ed. 2d 580, 110 S. Ct.
2139 (1990). For example, § 105 (a) of the Bankruptcy Code grants
a bankruptcy court the broad authority to issue ‘any order, process,
or judgment that is necessary or appropriate to carry out the
provisions of this title.’ 11 U.S.C. § 105(a). […] Consistent with
section 105(a)’s broad grant of authority, the Code allows
bankruptcy courts considerable discretion to approve plans of
reorganization. Energy Resources Co., 495 U.S. at 549.
Dow Corning, 280 F.3d at 656.
II. Findings of Fact
A. Disclosure Statement and Plan
K3D Property Services, LLC is the Debtor in this case. On December 23, 2019, it filed a
voluntary petition for chapter 11 relief. The plan and disclosure statement were filed on February
26, 2021. (Docket No. 346 & 347). The court held a hearing April 15, 2021, on objections that
were filed to that disclosure statement. At the hearing, the Debtor announced that it would make
changes to the disclosure statement to address the objections and amend the plan. The court
approved the disclosure statement on April 16, 2021, contingent on the Debtor’s making those
amendments. The Debtor did file the Amended Disclosure Statement (Docket No. 370) and the
Amended Plan (Docket No. 371) on April 22, 2021. The Amended Disclosure Statement and the
Amended Plan were sent to the creditors for voting. (Docket No. 376, 387, and 388).
Prior to the confirmation hearing, the Debtor noticed an inconsistency between the
Amended Disclosure Statement and the Amended Plan in the treatment of the Unsecured Creditors
(Class 8) and filed a Motion to Amend. (Docket No. 405). The court granted the Motion to Amend
(Docket No. 418), and the Debtor renoticed the Class 8 members to clear up any confusion about
their distribution. The creditors were also provided with an opportunity to change their votes. The

Debtor sent appropriate notice of the Amended Disclosure Statement, the Amended Plan, and the
deadline to accept or object to all creditors. With respect to the temporary third-party injunction,
the Debtor also sent supplemental notice to those parties being enjoined that were not listed in the
original matrix. (Hr’g. Digit. Audio, July 20, 2021, at 10:20:07-10:23:39). This solicitation
complied with the requirements under 11 U.S.C. § 1123. No party objected to notice or the method
of solicitation.

B. Contents of the Plan
Brothers Kenneth (Ken) and Kurtis (Kurt) Morris operated several businesses, including
Morris Holdings, LLC; Scenic City Investments, LLC; Plato’s Closet; Style Encore; and the
Debtor and all of its divisions. They formed the Debtor in 2013 and acquired a license to use the
Painter Ready name. In 2015, the Debtor started its Builder Ready division. (Disclosure Statement,
Docket No. 370 at 3). The Debtor is owned by the Morris brothers, 50% each.
The petition lists twelve different trade names for the Debtor’s businesses, but the most

active businesses were home construction and painting. The Builder Ready operation was very
unprofitable and was closed with the filing of the case. The Debtor focused on its painting business,
Painter Ready. When the pandemic hit, only a couple of months after the case was filed, Ken
Morris developed a new line of business, restocking shelves and remodeling for businesses who
were adapting to new customer safety requirements.
The Amended Plan provides for the continued operations of the Debtor under the
supervision of the Morris brothers. From the operations, the Debtor will make payments to its
secured creditors equal to the value of their secured claims. It will also make periodic payments to
unsecured creditors. Those payments, plus a contribution from the Morris brothers, should provide
a dividend of approximately 20% on their unsecured claims. The liquidation analysis included in

the Disclosure Statement showed that the recovery to unsecured creditors in the event of a
liquidation would be zero. (Disclosure Statement, Docket No. 370 at 25). All of the testimony at
the confirmation hearing supported a finding that a liquidation would provide no recovery for
unsecured creditors.
The Morris brothers are proposing to make two contributions to retain their equity interests.
One contribution of $100,000 will be made in the first month following confirmation of the plan.

It will primarily be used for administrative expenses and operations. A second contribution of
another $100,000 will be made in the forty-fourth month and it will be used to pay unsecured
creditors. (Amended Plan, Docket No. 371 at 13). The Debtor argues in its brief that the Morrises
will retain equity worth only $166,540 for their $200,000 contribution. (Memorandum, Docket
No. 419 at 32; Trial Exhibit R, Docket No. 438-1 at 228). This value was not challenged at the
confirmation hearing. In fact, it was not even discussed because the Debtor had the votes of the
impaired classes and did not have to conduct an auction of its equity to meet the absolute priority
rule.

C. Original Release and Injunction
Article 10 of the Plan contains the problematic provision. Article 10, as originally
proposed, provided complete releases to the professionals, directors, and officers for any of their
actions during the case, whether those actions were grossly negligent or even fraudulent. The
injunction provided that the confirmation order would temporarily restrain any creditor, party-in-
interest, or any third party from pursuing any officer, director, shareholder, managing person,
guarantor, or co-borrower of the Debtor for collection of their claims. It specifically protected the
Morris brothers and their wives as long as they retained their equity in the Debtor or remained in
the Debtor’s employment. The injunction terminated upon conclusion of payment to the

unsecured creditors, which would be six years after the effective date of the plan. (Amended
Plan, Docket No. 371 at 11). The consideration given to obtain the protection of the injunction is
the $200,000 equity contribution mentioned above. The initial $100,000 is currently available,
and the second $100,000 will be funded from the Morris brothers’ salaries. The Morris wives are
not contributing anything for their protection against suits, unless the contribution required in
month 44 needs to come from assets in their names or jointly with their spouses. However, there
was no evidence that any such assets had been identified to be contributed on their behalf. The
Morris brothers testified that they are committed to spending the next four years making this plan
work and that this amount is the best that they can do.

There were numerous problems with the original injunction. It included a provision that
the statute of limitations was not tolled with respect to the actions enjoined during the term of the
injunction. Parties who denied even being creditors of the Debtor and creditors who had never
been scheduled as creditors were enjoined. The provision even allowed the Debtor to determine
if there were others that it might deem “potentially” to be a creditor and thereby subject that
party to the injunction. Ken Morris was concerned that other parties might try to sue him, even if
he believed the debt was rightfully the Debtor’s. Due to the large number of entities through

which the Morrises had operated their construction services and real estate businesses, who was
actually the party that owed the debt had been an issue in several matters and adversary
proceedings filed prior to confirmation. This catch-all provision for potential creditors was
included by the Debtor to address the risk that there might be other parties whom the Morrises
would consider creditors of the Debtor but who might seek to recover against the members
personally or against other entities which the members owned.

The Debtor substantially altered Article 10 at the confirmation hearing. The release was
changed to an exculpation only for negligence.
The injunction was also narrowed. The original injunction could have prevented Truist
from pursuing PCNooga, LLC d/b/a Plato’s Closet and SENooga, LLC, d/b/a Style Encore, two

other companies operated by the Morrises which are in the retail clothing business and had
guaranteed the Truist obligations. Truist and the Debtor stipulated at the confirmation hearing
that the entities were not injunction beneficiaries. The catch-all provision applying the
injunction to “[a]ny lawsuit or enforcement action where an entity or person is seeking
compensation from any injunction beneficiary for a debt potentially owed by the Debtor” was
deleted. (Amended Plan, Docket No. 371 at 22). Settlements were reached with other enjoined
parties who had previously contended they were creditors of other Morris entities. The duration
of the injunction was shortened to four years. Applicable statutes of limitation were tolled during
the injunction. The discretion left to the Debtor in the original version of the injunction gave rise
to issues of due process and good faith and was a violation of Fed. R. Bankr. P. 3016(c)’s

requirement that enjoined parties be identified. However, that is no longer the version the court is
called upon to consider.
D. Final Version of Temporary Injunction
The final version of the injunction was filed as a post-hearing exhibit. (Docket No. 459).
The injunction reads as follows:
10.05(C) Temporary Post-Confirmation Injunction Protecting
Officers, Directors, Members and their Assets, Equity Holders in the
Reorganized Debtor, Guarantors and Co-Borrowers that Contribute
Monies to the Plan.
For 48 months following the effective date of the Plan, the
Confirmation Order shall temporarily restrain any creditor, party-in-
interest or any third party from pursuing any officer, director,
shareholder, managing person, guarantor, or co-borrower of the
Debtor for collection of all or any portion of their Claims or any
claim that could have or should have been brought against the
Debtor. The temporary injunction shall restrain claims against
Kenneth and Denia Morris (husband and wife) and Kurtis and Kyle
M. Morris (husband and wife), (collectively the “injunction
beneficiaries”) but only if the injunction beneficiaries retain their
equity in Reorganized Debtor) and for as long as the Ken and/or
Kurtis Morris remain with the Debtor. If Ken Morris or Kurtis
Morris leaves K3D’s employ during the plan payment term, then as
to the person leaving, the injunction terminates upon his (or their)
departure from employment with K3D.
Claims included within the injunction are those that arose
prepetition or that arise up through the Effective Date. The
injunction shall terminate at the end of the 48th month following the
effective date of the Plan or at such other time as the Court, in the
Confirmation Order, may direct.
The injunction shall apply to any lawsuit brought against any of the
injunction beneficiaries including, but not limited to the following
actions or persons and shall act to stay any such lawsuit, action
and/or efforts to enforce any judgment against any injunction
beneficiary:
1. Thomas Shayne Rollins and Katerina Rolls[sic] vs. Scenic City
Investments, LLC and Ken Morris, individually, Case no. 10 C
1432, in the Circuit Court of Hamilton County, Tenn. The Rollins
have covenanted to be bound by the proposed temporary injunction.
The order confirming the plan shall provide that the Rollins hold an
allowed unsecured claim in the amount of $70,000.
2. Jacobs and Baughman vs. Scenic City Investments, Hemlock
Homes, LLC and Kenneth Morris, individually, Case no. 20-0213,
in the Chancery Court of Hamilton County, Tenn. Jacobs and
Baughman, through counsel at the confirmation hearing,
affirmatively represented that they too had covenanted to be bound
by the proposed temporary injunction. The order confirming the
plan shall provide that Jacobs and Baughman hold an allowed
unsecured claim in the amount of $50,000.
3. Acme Brick Tile & Stone, LLC vs. Kenneth Morris, Case no. 20
GS 746, Court of General Sessions, County of Hamilton, Tenn.
4. Lee Paint Center vs. Kenneth Morris, individually, and d/b/a
Painter Ready of Chattanooga, Case no. 20 GS 1675, Court of
General Sessions, County of Hamilton, Tenn.
5. FORA Financial Advance vs. K3D, Kurtis Morris and Kenneth
Morris, Index no. 615 772/2019, Supreme Court of the State of New
York, County of Nassau.
6. Ferguson Enterprises v. K3D Properties d/b/a Builder Ready &
Ken Morris, Case no. 20GC1789, General Sessions Court of
Davidson County.
7. Pearson v. Ken Morris, Kurt Morris, Scenic City Investments and
Morris Holdings, Case no. 21 GS 611, Court of General; Sessions,
County of Hamilton, Tenn. The Pearsons, through counsel after the
confirmation hearing, affirmatively represented that they too had
covenanted to be bound by the proposed temporary injunction. The
order confirming the plan shall provide that the Pearsons hold an
allowed unsecured claim in the amount of $25,000.
8. Swift Financial, LLC v K3D Property Services, LLC /d/b/a
Builder Ready and Kurtis Morris, Arbitration.
9. [Intentionally left blank.]
10. Yorshire Properties v. Kenneth Morris, in the Chancery Court
for Hamilton County, TN, Docket no. 20-0397.
Should the Debtor be in violation of the Plan’s payment terms and
if that violation remains uncured for a period of 30 days after receipt
by the Debtor of written notice from any party directly affected by
such violation, the affected party may apply to this Court to dissolve
the temporary injunction but only as to the affected party. As the
issuing court, the Bankruptcy Court shall have exclusive jurisdiction
to extinguish or modify the temporary injunction. The Debtor retains
the right to file a motion to continue or to reinstate the temporary
injunction.
The injunction is not a discharge or release. To the extent they have
liability, the injunction beneficiaries shall not be discharged or
released from any liability for any claim and debt. The injunction
does not discharge or release a third party’s liabilities. While the
injunction operates, any applicable statute of limitations shall be
tolled to preserve any claim or cause of action.
The injunction applies to the individual person and entity and also
to their assets both real property and personal property.
(Revised Article 10 of the Proposed Plan, Docket No. 459 at 4-6).
E. Necessity of the Injunction to Reorganization

At the hearing on July 19, 2021, the Debtor proffered that Ken and Kurt Morris were
essential to a successful reorganization. The undisputed proffer demonstrated that Ken and Kurt
have years of experience operating businesses, including during K3D’s chapter 11
reorganization. In addition, Ken Morris is a CPA, and Kurt Morris has significant real estate and
construction experience. The testimony also indicates that K3D will compensate the Morrises
approximately $39,000 each annually for their continued work as the officers of K3D. (Hr’g.
Digit. Audio, July 19, 2021, at 11:07:00; Debtor’s Plan Confirmation Memorandum, Docket No.
419 at 20). The Debtor presented no evidence that either of the Morris wives was active in the
Debtor’s business.

Ken Morris testified that in order to make the plan succeed he would need to devote a
significant amount of his time to the plan. (Hr’g. Digit. Audio, July 19, 2021, at 1:38:15-1:39:30).
He testified that he was essential for the plan’s success and that the injunction was necessary
because it would allow the Morris brothers to focus their efforts on running the business for the
next four years rather than defending suits brought against them individually. He testified that he
had spent substantial amounts litigating with Jacobs and Baughman and that he would not be able
to afford continued litigation expenses. He did admit that the settlement he had reached with Jacobs

and Baughman would alleviate that financial expense. Kurt also testified that his arbitration and
the negotiated payments required by the Forebearance Agreement with Swift had put a financial
strain on him. Both testified that the success of the plan depended on their participation. While
there was proof that the Morrises were training a new manager to assist as the business grew, that
employee was not yet ready. There was no evidence presented by any other party that they could
be easily replaced with other managers. For these reasons the court finds that Ken and Kurt are
essential to the operation of the Debtor.

F. Creditor Class Acceptance
The Debtor filed an amended summary of ballots on July 17, 2021. (Docket No. 442).
Truist, the sole creditor in Class 1 with a claim of $1,530,362.73, rejected the treatment proposed
for its secured claim, but withdrew its rejection and its objection at the confirmation hearing. First
Citizens National Bank, as the sole creditor in Class 2, holding a claim in the amount of
$193,487.50, accepted the plan. The City of Chattanooga, the creditor in Classes 3 and 4 and the
Hamilton County Trustee, the creditor in Classes 5 and 6 were both designated as unimpaired and
did not vote. Robert Gustafson, the sole creditor in Class 7, was designated as unimpaired and did
not submit a ballot.

Class 8 is composed of the general unsecured creditors holding claims in excess of $2,500.
The total dollar amount of votes submitted was $1,345,686.27. Eighty-nine percent of that amount
accepted. Twenty-two out of twenty-six creditors voted in favor of the plan, which equals an
eighty-five percent in number acceptance rate. (Docket No. 442). Class 9 was de minimis
unsecured claims and no votes were cast in that class. Class 10, who General Unsecured Insider
Claims, consisted of only Denia Morris, the former spouse of Ken Morris, who accepted the plan.
Class 11, composed of the equity interest holders Ken and Kurt Morris, accepted the plan. (Docket

No. 442). The court finds that the Debtor has met the requirement that each impaired class has
accepted the plan. 11 U.S.C. § 1129(a)(7)(a)(i). To the extent that a class cast no votes, the court
finds that each class will receive under the plan on account of its claim an interest in property with
a value in excess of what the claimant would receive in a liquidation based on the liquidation
analysis provided with the Disclosure Statement. (Disclosure Statement, Exhibit E. Docket No.
370-5).

G. Objections
Six parties in interest filed objections to confirmation of the Debtor’s plan – four
individual creditors plus the United States Trustee and Official Unsecured Creditor’s Committee
(“Committee”). The first two are secured creditors Truist Bank and First Citizens Bank. Prior to
the confirmation hearing, First Citizens filed a Motion for Permission to Change its Ballot
Rejecting the Debtor’s Chapter 11 Plan to an Acceptance of the Chapter 11 Plan, which was
heard on July 15, 2021. (Docket No. 402). The court granted the motion, and First Citizens did
not pursue its objection at the hearing based on its stipulated treatment described in the motion to
change its vote. (Docket No. 441). On the morning of the hearing, July 19, 2021, Truist withdrew

its objections to the plan based on the proposed interest rate for its claim and the injunctions. It
also withdrew its rejection of the plan and did not cast a vote. The Debtor and Truist’s
stipulations regarding Truist’s treatment under the plan were read into the record.
The third objector is a couple who are treated as one party. Jacobs and Baughman were
scheduled by the Debtor as creditors who are owed nothing. Jacobs and Baughman have
maintained through the case that they contracted with another entity owned by the Morris
brothers, Scenic City Investments, LLC (SCI), for the construction of a home which was never

completed. The court received extensive proof regarding the relationship between SCI and K3D
in the hearing on the Debtor’s motion to substantively consolidate the two entities. The court
ultimately denied the motion to consolidate the two companies. (Docket No. 266). On the
morning of the confirmation hearing, Jacobs and Baughman announced that they had reached a
settlement with the Debtor which would provide them with an allowed claim in the case of
$50,000 provided they would admit that they were creditors of the Debtor. In the course of his
testimony, Ken Morris testified that their agreement also included a nondisclosure agreement
regarding his personal liability for the obligation. No information was provided regarding
whether SCI would continue to be liable. The parties told the court that they did not believe a
Rule 9019 Compromise would be necessary. The counsel for the Committee also represented to

the court that the Committee was aware that the settlement would add $50,000 to the total
amount of unsecured claims. The Committee did not oppose the terms of the resolution of the
Jacobs and Baughman objection.
The fourth objecting creditor is Swift Financial, LLC (Swift), an unsecured creditor.
Swift’s claim arises from a Business Loan Agreement executed on May 16, 2019, by K3D and
guaranteed by Kurt Morris. (Stipulated Facts, Docket No. 447). Kurt Morris acknowledged a

default and consented to entry of an arbitration award in the amount of $76,095 on January 11,
2021. He also entered into a forbearance agreement to pay the debt in installments and to extend
the one-year statute of limitations to confirm the award in a state court. (Id.). Swift objected
specifically to Section 10.05 of the Amended Plan on the basis that the temporary third-party
injunction is not appropriate because it is inconsistent with the provisions of chapter 11. 11
U.S.C. § 1123(b)(6). Swift also joined in the “Other objections filed to confirmation of the plan
to the extent that they were not inconsistent.” (Swift Objection, Docket No. 407 at 3). Swift’s
objection remains pending.

The Committee objected for a number of reasons, most of which focused on the
Morrises’commitment to staying with the company and its ability to make the payments. After
obtaining satisfactory answers to its concerns in the testimony of Ken and Kurt Morris at the
confirmation hearing, the Committee announced in its closing argument that it supported
confirmation and the inclusion of the injunction as a provision in the plan.

The U.S. Trustee objected to the original plan on three grounds, all of which related to
the injunction provision of Article 10. (Docket No. 401). Relying on the Sixth Circuit standards
expressed in Dow Corning, 280 F. 3d at 765, the trustee objected that an injunction that would
bar non-creditors, namely Jacobs and Baughman, from pursuing claims against non-debtors, such
as Ken Morris and SCI, was not fair or equitable and potentially exceeded the court’s
jurisdiction. The settlements reached the day of the hearing with Jacobs and Baughman, and with
two other parties who had argued that they were not creditors of the Debtor, helped resolve the
U.S. Trustee’s concern that the “non-creditors” would be involuntarily enjoined by the provision.
The Debtor also addressed giving notice to parties who had not originally been listed in the

matrix as creditors. The provision that included parties who could “potentially” be creditors was
deleted. That deletion further addressed the U.S. Trustee’s due process concerns. Second, the
U.S. Trustee objected that a six-year injunction was effectively a permanent injunction. That
concern was mitigated by reducing the duration of the injunction from six to four years and
allowing the applicable statutes of limitations to be tolled. The U.S. Trustee objects now only on
the general grounds that such an injunction should be used sparingly, and this case is not the
unusual case where a third-party injunction is appropriate. The trustee recognized that the Sixth
Circuit Court of Appeals had not addressed the Dow Corning factors in the context of a
temporary, post-confirmation injunction.
III. Analysis
A. Introduction
Chapter 11 provides that a plan shall and may contain various provisions that restructure
the Debtor’s obligations to its creditors. 11 U.S.C. § 1123(a) and (b). Creditors may vote to accept
or reject those proposed changes to the terms of those obligations. 11 U.S.C. § 1122. In addition,

creditors may object to the confirmation of the plan if the Debtor’s proposed treatment of those
obligations does not meet the requirements of 11 U.S.C. § 1129. The burden is on the Debtor to
show that it has met those requirements and has gained the required level of support from its
creditors if its plan is to be confirmed. If it meets the other requirements but cannot garner the
required level of support, then chapter 11 provides a “cram down process” through which the
Debtor can demonstrate that its plan is fair and equitable in its treatment of the objecting creditor
despite the creditor’s opposition. 11 U.S.C. § 1129(b)(2)(B)(i).

B. The Requirements for Confirmation the Debtor Has Met
The Debtor has cleared the hurdles of section 1129 except for those that are implicated by
the temporary post-confirmation, third-party injunction. K3D has complied with the applicable
provisions of the bankruptcy code as a debtor in possession, is a proponent of a plan, and is
proceeding in good faith. The payments made or to be made by K3D under the plan have been
approved by the court or are subject to court approval. K3D has disclosed the identity of any insider
that will be employed by the reorganized Debtor and the nature of any compensation to be paid to
that insider. Each holder of an impaired claim has accepted the plan or will receive payments in
an amount that is not less than the creditor would have received under a liquidation. The Debtor

has made provision to pay the administrative claims in the case from cash it projects it will have
on hand at confirmation. Its plan has been accepted by more than one impaired class, including the
strong support of the unsecured creditors.

As to its ability to complete the plan and avoid the need for further reorganization, the
Debtor provided financial statements that reflected the improvement in net operating income over
the course of the case from December 2019 through March 2021. (Trial Exhibit A2, Docket No.
438-1 at 5-13). At the end of that period, the Profit and Loss Statement reflected cumulative net
operating income of $26,807. Id. at 13. At confirmation, the Debtor expected to have a balance on
hand of $230,000 from operations, $104,000 from an Economic Disaster Injury Loan, plus the
$100,000 contribution from the Morrises. (Disclosure Statement, Docket No. 370 at 26).

At the hearing, the Debtor also provided projections which showed gross revenue during
the first year after confirmation of $1,875,000 compared with the Debtor’s prior twelve months
performance of $2,611,529 in gross revenue for the period April 2020 to March 2021. (Trial
Exhibit J, Docket No 438-1 at 197). The Debtor’s Gross Margin for April 2021 through March
2022 was projected to be $729,00 compared to $942,577 reported for the prior 12 months. (Docket
438-1 at 202). The Debtor projected expenses to be about $115,017 less in year one of the Plan
than the preceding year (Id. at 211). Ken Morris testified that the months which reflected lower
sales are generally December through February with business picking up in March. (Hr’g. Digit.
Audio, July 19, 2021, at 3:27:15-3:33:20). The Debtor’s projections appear to be conservative

based on the past years’ performance. The monthly operating reports for April and May reflect
that the Debtor had revenue of approximately $130,200 and $270,000 respectively, exceeding the
$340,000 projected for the two months. The cost of goods sold and operating expenses were higher
than projected for these two months.1 (Docket Nos. 412 at 51 and 413 at 53). Nevertheless, the
company was showing net positive income for April and May. No party challenged the projected
cash position or projections, although there was some concern expressed even by the Debtor about
whether the commercial remodeling business would remain as strong. (Disclosure Statement,
Docket No. 370 at 9). Based on the projections and the monthly operating reports, the court finds

that the Debtor carried its burden with respect to showing that confirmation of a plan would not
likely be followed by liquidation or the need for further reorganization of the Debtor.
C. The Objectionable Injunction
The sole remaining hurdle to clear for confirmation is for this court to find that the
temporary, post-confirmation, third-party injunction contained in the plan is an appropriate
provision in this case. 11 U.S.C. § 1126(b)(6). Article 10.05(c) of the plan seeks to enjoin creditors,

parties-in-interest, or third parties from pursuing their collection rights against the officers,
directors, shareholders, guarantors, or coborrowers of the Debtor, specifically the Morris brothers
and their spouses, referred to as the “injunction beneficiaries.” While a debtor may use its plan to
modify its obligations to its creditors within the requirements of chapter 11, neither §§ 1122, 1123,
nor 1129 expressly provide that a debtor may use its plan to modify or discharge the obligations
owed by “injunction beneficiaries” to those same creditors. Section 523(e) states that “[e]xcept as
provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the
liability of any other entity on, or the property of any other entity for such debt.” 11 U.S.C. §542(e).

1 Monthly operating reports for June and July were not filed until October 1, 2021well after the confirmation
hearing. (Docket Nos. 463 and 464). They show revenues of $298,000 and $173,00 with gross profits in excess of
projections; however, operating expenses were substantially higher. (Docket Nos. 463 at 48 and 464 at 45).
Unlike chapter 12 or 13, there are no statutory protections for co-obligors in chapter 11 either
during the case or after confirmation. Compare 11 U.S.C. § 1201 with § 1301.2

One circuit has found that § 524(e) provides a basis for prohibiting any third-party
injunction. Under its reasoning, such a provision violates applicable law and, therefore, makes a
plan containing such an injunction unconfirmable. See In re Rohnert Park Auto Parts, Inc., 113
B.R. 610, 616 (B.A.P. 9th Cir. 1990). (Although the injunction did not release the co-obligors, it
did “affect[] the liability of the co-debtors” and did not comply with 524(e)). The Ninth Circuit
was one of the first circuits to analyze the issue of post-confirmation injunctions. See American
Hardwoods, Inc. v. Deutch Credit Corp. (In re American Hardwoods, Inc.), 885 F.2d 621 (9th Cir.
1989). That case found that the permanent injunction requested by the debtor in that case “[fell]
squarely within the definition of a discharge under Section 524(a)(2).” Id. at 626. Extending that

“discharge” to third parties violated the specific provision of section 524(e). Id. For a
comprehensive review of the development of the case law discussing whether section 524(e) can
be the basis disallowing third-party injunctions, See Judge Drain’s discussion in In re Purdue
Pharma, L.P., __ B.R. ___, 2021 Bankr. LEXIS 2555, 2021 WL 4240974, at *41 (Bankr. S.D.
N.Y. Sept. 17, 2021). Judge Drain concludes that reading section 524(e)’s language as the basis
for preclusion of third-party injunctions has been “effectively refuted.” Id. at 119 (citing In re
Airadigm Communs., 519 F.3d 640, 656 (7th Cir. 2008) (discussing legislative history of section
524(e))). He also cites the Sixth Circuit’s rejection of that argument and its interpretation that
section 524(e) “explains the effect of a debtor’s discharge. It does not prohibit the release of a non-
debtor.” Id. at 120 (citing Dow Corning, 280 F. 3d at 657).

2 The only injunction specifically sanctioned in chapter 11 is for creditors being paid through a trust. See 11 U.S.C.
§ 524(g)and (h).
D. Use of Section 105 to Accomplish Goals of Reorganization / Sixth Circuit Limits on
Permanent Injunctions
As noted above, the Sixth Circuit Court of Appeals has not gone so far as the Ninth Circuit
to prohibit courts from approving third-party releases or permanent injunctions in plans of
reorganization. The Sixth Circuit, notes in Dow Corning, that while there is no express authority
for releases and injunctions, there is no explicit prohibition. See Dow Corning, 280 F.3d at 656. It
further noted that “bankruptcy courts, as courts of equity, have broad authority to modify creditor-
debtor relationships.” Id. (internal quotation marks and citation omitted). The court’s broad
authority derives from 11 U.S.C. § 105(a) which allows a bankruptcy court to issue “any order,
process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11
U.S.C. § 105(a).

Further, the Court of Appeals noted that the bankruptcy code allows bankruptcy courts
considerable discretion to approve plans of reorganization whose provisions are “not inconsistent
with any applicable provisions of [Title 11].” Dow Corning, 280 F.3d at 656 (citation omitted).
The plan at issue in Dow Corning attempted to resolve complex mass tort litigation involving the
company’s silicone breast implant product. The plan channeled thousands of plaintiffs involved in
multidistrict tort litigation into either a Settlement or Litigation Facility, both of which were funded

with $2.35 billion in contributions from insurers and the debtor’s shareholders and from the
debtor’s cash reserves. In exchange for their contribution, the shareholders were released from tort
claims; and the claimants were enjoined from pursuing the shareholders outside of the plan’s
Settlement or Litigation Facilities. In that context, the court found that, where a plan provides for
payment in full of all claims against the non-debtor, “enjoining claims against a non-debtor so as
not to defeat reorganization is consistent with the bankruptcy court’s primary function.” Id.
To reach that conclusion, the court discussed the doctrine of marshalling as a basis for the
use of equitable powers in approving such an injunction. Citing In re A.H. Robins Co., 880 F.2d
694, 701 (4th Cir. 1989), the court noted that the bankruptcy court has the power to order a creditor
who has two funds to satisfy his debt to resort to the fund that will not defeat the other creditors.
“[I]t is an ancient but very much alive doctrine that a creditor has no right to choose which of two

funds will pay his claim.” Dow Corning, 280 F.3d at 656 (citing In re A.H. Robins, 880 F.2d at
701). (internal editorial marks omitted).
The Court of Appeals concluded in Dow Corning that “enjoining a non-consenting
creditor’s claim against a non-debtor is not inconsistent with the Code” but then clarified under
what circumstances such an injunction would be “appropriate.” Id. at 658. It described such an
injunction as a “dramatic measure to be used cautiously” and only in “unusual circumstances.” Id.

Allowance of releases and injunctions under a plan are authorized “in appropriate, narrow
circumstances” in a majority of circuits. In re Purdue Pharmacy, 2021 Bankr. LEXIS 2555, 2021
WL 4240974, at *118 (collecting circuit court cases authorizing plan injunctions).
E. Sixth Circuit Factors for Post-Confirmation Injunctions Against Non-Consenting
Creditors
The Sixth Circuit set its parameters for consideration of authorization of an injunction in
Dow Corning. The Court of Appeals listed seven factors to consider when determining whether an
injunction is an appropriate provision.
[W]hen the following seven factors are present, the bankruptcy court
may enjoin a non-consenting creditor’s claims against a non-debtor:
(1) There is an identity of interests between the debtor and the third
party, usually an indemnity relationship, such that a suit against the
non-debtor is, in essence, a suit against the debtor or will deplete the
assets of the estate; (2) The non-debtor has contributed substantial
assets to the reorganization; (3) The injunction is essential to
reorganization, namely, the reorganization hinges on the debtor
being free from indirect suits against parties who would have
indemnity or contribution claims against the debtor; (4) The
impacted class, or classes, has overwhelmingly voted to accept the
plan; (5) The plan provides a mechanism to pay for all, or
substantially all, of the class or classes affected by the injunction;
(6) The plan provides an opportunity for those claimants who choose
not to settle to recover in full and; (7) The bankruptcy court made a
record of specific factual findings that support its conclusions.
Dow Corning. 280 F.3d at 658. (citations omitted). The Debtor acknowledges that its plan does
not meet the fifth factor — its plan has no mechanism to pay all of the class of unsecured creditors.
The Debtor gets around this deficiency by arguing that Dow Corning is not the right test.
F. Argument for a Different Standard for a Temporary Injunction
The Debtor argues that the Dow Corning factors are not the correct ones to consider in this
plan. It asks the court to find that the factors to determine the appropriateness of a permanent post-
confirmation injunction are different than those for a temporary post-confirmation injunction. The
foundation of the Debtor’s argument relies on cases which held that under section 105, the
automatic stay could be extended to third parties involved in formulating or funding a plan. See In
re Lazarus Burman Assocs., 161 B.R. 891, 898 (Bankr. E.D.N.Y. 1993) (compiling pre-
confirmation cases in which the court entered injunctions protecting third parties).3 Prior to
confirmation, a third-party injunction extends injunctive relief to nondebtor parties for the purpose

3 In the case before the court, the Debtor has made repeated efforts to obtain such protections. See K3D Property
Services, LLC v. Fora Financial Advance, LLC, No. 20-01003 (E.D. Tenn. filed Jan. 23, 2020); K3D Property
Services, LLC v. Red Rooster Welding, No. 20-01004 (E.D. Tenn. filed Jan. 23, 2020); K3D Property Services, LLC
v. Acme Brick Tile & Stone, Inc., No. 20-01021 (E.D. Tenn. filed May 19, 2020); K3D Property Services, LLC v.
Jacobs et al, No. 20-01029 (E.D. Tenn. filed June 23, 2020); K3D Property Services, LLC v. Rollins et al, No. 20-
01041(E.D. Tenn. filed Aug. 24, 2020). In only one instance has the court granted that request, and in that case the
creditor did not appear to oppose the motion. See Jacobs et al, No. 20-01029. In another instance, the court granted
the injunction for only two months. See Red Rooster Welding, No. 20-01004. Each time the Debtor pled that the
litigation would prevent the Debtor from moving forward to a plan. The Morris brothers have a number of
businesses and are quite capable of keeping several entities operating and have been able to propose a plan for this
company. In fact, the process of addressing confirmation objections has resulted in settlements with many of those
same parties whose lawsuits against Ken Morris and other Morris entities were the Debtor’s reason for needing the
protection of an injunction.
of protecting the debtor while it develops a plan. The stay may be extended to preserve the orderly
conduct and integrity of the reorganization proceedings. See id. Another court described its
purpose as follows:

The purpose of this section by its various subsections is to protect
the debtor from an uncontrollable scramble for its assets in a number
of uncoordinated proceedings in different courts, to preclude one
creditor from pursuing a remedy to the disadvantage of other
creditors, and to provide the debtor and its executives with a
reasonable respite from protracted litigation, during which they may
have an opportunity to formulate a plan of reorganization for the
debtor.
A.H. Robins Co. v. Piccinin, 788 F.2d at 998 (Matter of Holtkamp, 669 F.2d 505, 508 (7th
Cir.1982)). It may be extended where the third-party actions “would interfere with, deplete or
adversely affect property of the [debtor’s] estates or which would frustrate the statutory scheme
embodied in Chapter 11 or diminish [the debtor’s] ability to formulate a plan of reorganization.”
In re Johns-Manville Corp., 33 B.R. 254, 263 (Bankr. S.D.N.Y 1983). It may be extended to
shareholders who are “required to devote substantial time and effort overseeing not only the day
to day affairs of the business, but the bankruptcy proceedings as well. ….[O]fficers must be free
at this stage to devote all their efforts to the operation of the business and the formulation of a
plan..” In re MacDonald/Associates, Inc., 54 B.R. 865, 870 (Bankr. D. R.I. 1985) (emphasis in
original) (citation omitted).
The stay extension cases focus on getting the debtor to confirmation and preserving the
debtor’s assets so that a plan can be formulated. Early in the case, the debtor need only show that
there is a likelihood that it can confirm a plan, that loss of its key participant at a critical time in
the reorganization may constitute irreparable harm to the estate or the reorganization effort, that
the stay will not cause more harm to the claimant than it provides benefit to the debtor, and that
the stay is supported by public policy. 4 The type of facts that support such an extension are similar
to the facts that support the second and third Dow Corning factors — the contribution of the
protected party and the reason that protection is essential to the reorganization.

This court is hesitant to accept the argument that the Sixth Circuit would abandon the Dow
Corning factors applied at confirmation in favor of a standard resembling pre-confirmation
injunctions. The circuit has been hesitant to even expand the benefits of the stay to third parties.
In one of the early cases which discussed whether the automatic stay should be extended to third
parties prior to confirmation, the Sixth Circuit denied extending the relief, finding no basis in law
or equity to extend the debtor’s stay to solvent codefendants in asbestos litigation. See Lynch v.
Johns-Manville Sales Corp., 710 F.2d 1194, 1199 (6th Cir. 1983). The court stated that “[i]t is
universally acknowledged that an automatic stay of proceedings accorded by § 362 may not be

invoked by entities such as sureties, guarantors, co-obligors, or others with a similar legal or factual
nexus to the chapter 11 debtor.” Id. at 1196. The court reviewed the legislative history for
authority:
Nothing in the legislative history counsels that the automatic stay
should be invoked in a manner which would advance the interests
of some third party, such as the debtor’s co-defendants, rather than
the debtor or its creditors. This Court concurs with the district
court’s conclusion that it would distort congressional purpose to
hold that a third party solvent co-defendant should be shielded
against his creditors by a device intended for the protection of the
insolvent debtor and creditors thereof.
Id. at 1197. (Citation omitted.)

4 Debtor’s memorandum in support of its request for an injunction extending the stay to the Morrises. (K3D Property
Services, LLC v. Fora Financial Advance, LLC, No. 1:20-ap-01003, (E.D. Tenn. filed Jan. 23, 2020) Docket No. 3
at 19-24).
Nevertheless, the Debtor asks the court to distinguish Dow Corning as a mass tort case,
and employ a test used in the Fifth Circuit for a smaller, closely held corporation. It also bases that
request on differentiating a temporary plan injunction from a permanent one. Based solely on its
shorter duration and the absence of a release, a temporary stay could be viewed as being more like
the temporary stay extension than Dow Corning’s permanent injunction accompanied by a release.

If a temporary injunction is appropriate to assist the Debtor while it is formulating a plan, then the
Debtor contends that a temporary injunction should be appropriate to assist the Debtor in
performing that plan, especially if the duration is reasonable, the scope is narrow, and it is used
“so as not to defeat reorganization.” Dow Corning, 280 F.3d at 656. That appears to be the
approach taken by the Fifth Circuit Court of Appeals in Zale, 62 F.3d 746, the case on which the
Debtor relies heavily. “The impropriety of a permanent injunction does not necessarily extend to
a temporary injunction of third-party actions. Such an injunction may be proper under unusual
circumstances.” Id. at 761.

While this language supports the Debtor’s position, the temporary post-confirmation third-
party injunction analysis in Zale is dicta. In Zale, the Fifth Circuit Court of Appeals did not approve
a plan with such an injunction. In fact, it found that the bankruptcy court lacked jurisdiction over
the enjoined parties’ tort actions. It lacked power under section 105 to permanently enjoin contract
actions held by the enjoined parties. Finally, the court found that even a temporary injunction
would require an adversary proceeding under Fed. R. Bankr. P. 7001. See id. at 766. Nevertheless,
the Fifth Circuit opened the door to the argument that a temporary third-party injunction could be
an appropriate provision in a plan under “unusual circumstances,” the same term used by the Sixth

Circuit in its consideration of the permanent injunction in Dow Corning.
The Zale court even attributes the term to a Sixth Circuit case, Patton v. Bearden, 8 F.3d
343 (6th Cir. 1993) (discussing that a temporary injunction sought to protect non-debtors may be
proper in “unusual circumstances”). In Patton, the phrase was used by the Sixth Circuit in its
discussion of whether it could extend the stay imposed by section 362 to partners of a partnership
in bankruptcy who were involved in litigation on account of their status as partners and who had

signed the license agreement between licensor and the debtor. The court ultimately decided the
injunction issue by concluding the partners would have to seek that relief first from the bankruptcy
court by obtaining an injunction “after hearing and the establishment of unusual need to take this
action to protect the administration of the bankruptcy estate,” but not before discussing whether
such an injunction could be issued at all in the case. Id. at 349. The court recognized that some
courts have issued such injunctions in “unusual circumstances.” The court found that the partners
had not brought forth any evidence of circumstances that would justify such an injunction. See id.
The partners argued that any proceeding against them would impair the debtor’s right to compel
contributions from the partners and thus interfere with the debtor’s property. The court

acknowledged two other cases where the partners’ argument had been made and, in one, had even
been successful. See In re Litchfield Co. of South Carolina, L.P., 135 B.R. 797 (W.D.N.C. 1992)
(extending the stay where partner promised to devote assets to the reorganization and entry of the
judgments by creditors could render him insolvent); In re Marley Orchards Income Fund I, Limited
Partnership, 120 B.R. 566 (Bankr. E.D. Wash. 1990) (declining to extend stay without proof that
the partnership was insolvent). The Patton court found the partners had failed to show that
judgments against the partners, if allowed to be taken, would render the partners insolvent or
impair their ability to help with reorganizational efforts. Patton, 8 F.3 at 349.
The Zale court’s reliance on Patton underscores that the Fifth Circuit was looking to the
stay extension cases for authority to approve the injunction and what factors would make the
provision appropriate. Reviewing that Sixth Circuit case underscores for this court that the Sixth
Circuit is a demanding jurisdiction when it comes to using its equitable powers to impose a stay
where the bankruptcy code does not expressly create one. In Patton, the Sixth Circuit attributed its

requirement of “unusual circumstances” to A.H. Robins, 788 F.2d at 999, and In re Kanawha Trace
Dev. Partners, 87 B.R. 892 (Bankr E.D. Va. 1988). The A.H. Robins court, in addressing an
extension of the automatic stay prior to confirmation, described the unusual circumstances as
follows:
[I]n order for relief for such non-bankrupt defendants to be available
under [362](a)(1), there must be “unusual circumstances” and
certainly [s]omething more than the mere fact that one of the parties
to the lawsuit has filed a Chapter 11 bankruptcy must be shown in
order that proceedings be stayed against non-bankrupt parties. This
“unusual situation,” it would seem, arises when there is such identity
between the debtor and the third-party defendant that the debtor may
be said to be the real party defendant and that a judgment against the
third-party defendant will in effect be a judgment or finding against
the debtor. An illustration of such a situation would be a suit against
a third-party who is entitled to absolute indemnity by the debtor on
account of any judgment that might result against them in the case.
To refuse application of the statutory stay in that case would defeat
the very purpose and intent of the statute.

A.H. Robins, 788 F.2d at 999 (internal quotation marks and citation omitted). Both Robins and
later Dow Corning required a very close identity of interests to create unusual circumstances that
would justify an injunction. Contractual indemnification meets that test, but there is no
indemnification obligation that the injunction beneficiaries can point to in this case. Nevertheless,
Patton seems to indicate that identity of interest may be based on something other than
indemnification. Patton, albeit in dicta, recognizes that an injunction may be appropriate to protect
the solvency of partners who are promising to devote assets to the reorganization. Even if the court
ultimately rejects Zale as the applicable test, Patton provides a basis on which Debtor can argue
that it meets the first factor of Dow Corning without showing the existence of indemnification
claims. Like the partners in Patton, Ken and Kurt Morris are the members of the Debtor. They are
making contributions totaling $200,000 to the Debtor’s reorganization. However, they also
testified that their solvency is at risk if the lawsuits by creditors continue and that the litigation

impairs their ability to help the reorganization.
As noted above, the Zale court relied on the pre-confirmation stay cases as the basis to find
that a bankruptcy court might have power to enjoin actions by third parties against the debtor post-
petition. The Zale court elaborated on what it considered “unusual circumstances.” Zale, 62 F.3d
at 761. Such circumstances could be found “(1) when the nondebtor and the debtor enjoy such an
identity of interests that the suit against the nondebtor is essentially a suit against the debtor, and
(2) when the third-party action will have an adverse impact on the debtor’s ability to accomplish
the reorganization.” Id. (citing In re Drexel Burnham Lambert, Inc, 960 F. 2d 285, 293). Assuming
the first requirement can be met, the second element provides the court with substantial discretion

in determining the degree of “adverse impact” that must be present to justify the injunction. If
unusual circumstances are found to exist, the courts following Zale then apply a standard
injunction analysis in determining whether the temporary stay may be imposed:
The four prerequisites to the issuance of such an injunction are: (1)
a substantial likelihood that the movant will prevail on the merits;
(2) a substantial threat that the movant will suffer irreparable injury
if the injunction is not granted; (3) that the threatened injury to the
movant outweighs the threatened harm an injunction may cause to
the party opposing the injunction; and (4) that the granting of the
injunction will not disserve the public interest.
In re Seatco Inc., 257 B.R. 469, 477 (Bankr. N.D. Texas 2001). The Zale test notably omits
any express requirement for the debtor to pay the enjoined party in full or to provide an opportunity
for the enjoined party to recover in full elsewhere. Although Zale does not list the amount of
payment as a factor, the dividend has been relevant to courts that have followed the Zale test.

G. The Texas Temporary, Post-Confirmation Injunction Cases
The Debtor relies on two cases from the Northern District of Texas that have addressed
post-confirmation injunctions, using the test suggested in Zale to determine if unusual

circumstances exist and the injunction is appropriate. See In re Bernhard Steiner Pianos USA, Inc.,
292 B.R. 109 (Bankr. N.D. Tex. 2002); see Seatco, 257 B.R. 469. The court has found a third. See
In re Couture Hotel Corp., 536 B.R. 712 (Bankr. N.D. Tex. 2015).
In Seatco, the court found “unusual circumstances” in a case where the injunction
beneficiary was the sole shareholder who had guaranteed the debt of the enjoined creditor. Seatco,

257 B.R. at 477. The court also found that the debtor met the first test by showing that a suit against
the guarantor was essentially a suit against the debtor. It met the second test by showing that the
principal was “vital” to a successful reorganization. Id. Although it is not part of the Zale test, this
court notes that the Seatco court specifically addressed what was being paid to the objecting
creditor through the plan and how the injunction affected the liability owed to the creditor. The
injunction prevented collection of only 35% of the debt, which was the amount being paid under
the plan. The creditor was “free to pursue [the injunction beneficiary] on the Guaranty for any
amounts owing to it that are not being paid under the Plan ….” Id. The Sixth Circuit might have
referred to this as the mechanism to pay the creditor in full or an opt out had it been faced with this
case. The injunction was narrow enough to protect the injunction beneficiary only to the extent

that the debtor was paying the third-party under the plan.
In In re Bernhard Steiner Pianos Inc., 292 B.R. 109, the court upheld a temporary
injunction in favor of the principal of a piano sales company. It found that there was an identity of
interests between the principal and the company because “the public identif[ied] the Debtor and
[the principal] as one and the same.” Id. at 113. The unusual circumstances test was met because
“[t]he success or failure of the Debtor [lay] mainly, if not exclusively, with the efforts, reputation,

and dedication of [the injunction beneficiary].” Id. at 117. The injunction ended if there was a
default. The court also found that the debtor had business reasons to pay the creditors as quickly
as possible so that the duration of the injunction was likely to be as short as possible. Finally, as
in Seatco, the court noted that the plan provided for payment in full. See id. at 118.
In In re Couture Hotel Corp., the court addressed the confirmability of a plan that provided

creditors would be temporarily enjoined from taking any action to prosecute their claims against
any of the injunctive relief parties, so long as the plan was not in uncured default. See Couture
Hotel, 536 B.R. at 749. Even though this debtor also proposed to pay creditors in full with interest,
the court found that the debtor had failed to satisfy the Zale factors, i.e., the debtor failed to show
an identity of interests in the way that the debtors in Seatco and Steiner Pianos had. See id. at 736.
The court found that ownership of the debtor coupled with a guaranty was not sufficient to satisfy
the identity of interest discussed in Zale. See id. at 752 (citing Zale, 62 F.3d at 761). “Indeed, this
type of overlap between shareholders and guarantors exists in a significant number of bankruptcy
cases involving closely-held corporations. Granting an injunction on those grounds would make

third party plan injunctions common place, which is the incorrect outcome under Fifth Circuit
precedent.” Id.
The injunction relief parties in Couture Hotel held and controlled 100 percent of the
debtor’s stock. Like the Morrisses in this case, they warned that, if their stock interests were
executed upon after a judgment was obtained by the creditors that held guaranties, then a transfer
of ownership could jeopardize the franchises necessary for a successful reorganization. Finally,
the debtor argued that a change in ownership could jeopardize the debtor’s ability to use “valuable
Net Operating Losses.” Id. The court still found that the identity of interests to be lacking and
concluded that the other arguments were “simply too attenuated to be grounds to grant a third-

party plan injunction.” Id.
These cases do not persuade the court that the Sixth Circuit’s requirements are not
workable or that its payment requirement is unreasonable in a smaller case. Therefore, the court
will not reject the Dow Corning factors as the applicable test for a plan injunction, even if the
injunction is temporary. The Sixth Circuit spoke clearly in its statement of what must be present

to make an injunction appropriate for a plan. The length of such an injunction was not a factor. If
a debtor pays the creditor in full, an injunction may be appropriate. As the Sixth Circuit noted in
Dow Corning, the court may exercise its equitable powers to marshal assets and direct a creditor
to recover from a specific fund. See Dow Corning, 280 F.3d at 656. This court finds the Sixth
Circuit’s equitable basis for delaying a creditor from pursuing its other sources of recovery
persuades this court that substantial payment or an ability to seek recovery elsewhere is a critical
piece of the analysis. Retaining this requirement also prevents abuse of the protection. The U.S.
Trustee expressed concern that the use of post-confirmation injunctions provides the injunction
beneficiaries with the protections of a bankruptcy without the need to file their own case and

provide the disclosures that protect creditors who are stayed. Finding unusual circumstances only
in cases which are providing very high returns to creditors will significantly reduce the number of
cases that may even qualify for this relief post-confirmation and ensure that plan injunctions are
authorized only in rare cases.
H. Developments in the Application of the Dow Corning Factors

While this court rejects the Zale test, it also recognizes that there have been other courts in
the Sixth Circuit that have applied the Dow Corning factors with some modifications. With respect
to the first factor, one court has determined that the identity of interests must include a finding that
the protection given to the third party is limited to claims that are related to obligations of the
debtors. See In re FirstEnergy Sols. Corp., 606 B.R. 720, 740 (Bankr. N. D. Ohio 2019) (“To the
extent that there is any flexibility in the requirement to analyze all of the Dow Corning factors,
this first factor is the least negotiable because it polices the same boundary that other courts have
analyzed as a jurisdictional issue.”). The court has already noted its willingness to expand identity
of interests from indemnification to other relationships which are clearly related to obligations of

the debtor.
The court has found one case in which the payment requirement was not met. The
applicability of the Dow Corning test to an injunction in a chapter 9 plan was addressed in In re
City of Detroit, Michigan, 524 B.R. 147 (Bankr. E.D. Mich. 2014). The bankruptcy court faced
confirmation objections from pensioners to a plan that provided a release of the State of Michigan

and related entities who would have been responsible for payment of their pensions in exchange
for a substantial settlement sum. The court in City of Detroit noted that “[s]ome courts, have
tailored the seven Dow Corning elements to suit the needs of the case and have not required
satisfaction of all seven factors,” citing to a case from the Fourth Circuit. Id. at 174 (citing Nat’l
Heritage Found., Inc. v. Highbourne Found., No. 13-1608, 2014 WL 2900933, at 6 (4th Cir. June
27, 2014)). After finding the Dow Corning factors applied, the court addressed each of the factors.
Its discussion adds some judicial gloss to the fifth and sixth factors. While there was a substantial
contribution made by the State of Michigan for $194.8 million to satisfy the second factor, the
claims of the class affected were in excess of a billion dollars,5 indicating that the pensions claims
were not going to be paid in full. See City of Detroit, 524 B.R. at 175. Nevertheless, Judge Rhodes
found that the “plan provides a mechanism to pay a substantial portion of the claims in the classes
affected by the release …. Without these contributions, the impairment to these classes would have
been much more significant.” Id. (citation omitted). The actual language of the factor requires a

mechanism “to pay for all, or substantially all, of the class or classes affected by the injunction.”
Dow Corning at 658. In City of Detroit, it appears this factor was interpreted as only requiring a
“substantial payment.” The approval of the injunction was one of the issues appealed following
confirmation. On appeal, the Sixth Circuit never reached the issue of the whether this release and
injunction were appropriate or whether the test was correctly applied. The appeal was dismissed
for equitable mootness. See Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d at 799.

As for the sixth factor, the Detroit plan did not provide any opportunity for those claimants
who chose not to settle to recover in full. The bankruptcy court concluded that it did not need to
determine whether that element applied. Instead, it held that the other Dow Corning factors weigh
so heavily in favor of approving the releases that it is appropriate to do so even if this element is
not met.” Id. at 175. This case therefore stands for the proposition that not all factors need to be
met if some of the other factors can be weighted more heavily.

5 The bankruptcy court estimated the total claims to be “potentially in the neighborhood of $3 billion.” In re City of
Detroit, 524 B.R. at 171-72. On appeal, the Sixth Circuit Court of Appeals noted that the pension plan was
underfunded by $1.87 billion. This court cannot determine from the cases what percentage of the pensioners’ claims
was actually paid through the plan. The appellate decision indicates that the Detroit was anticipating a 27%
reduction in the General Retirement System (GRS) pension when it filed the case, but with the settlement the
reduction was 4.5%, plus the reduction or loss of other benefits. Ochadleus v. City of Detroit (In re City of Detroit),
838 F.3d 792, 798 (6th Cir. 2016).
I. Application of the Dow Corning Factors to this Case

Having determined that the Dow Corning factors should be applied, the court reviews the
proposed injunction in this case.
1. Is this a case with unusual circumstances?

In any case proposing a post-confirmation third-party injunction, the court must consider,
as a general proposition, whether there are unusual circumstances that exist that justify granting
such relief. As to that question, the court finds the Texas cases helpful. The courts there found
unusual circumstances in small businesses. Ken and Kurt Morris share certain similarities to the
injunction beneficiaries in Seatco and Steiner Pianos. Ken Morris testified that he was the face of
the business with the restocking customers. The debtor is a closely held corporation whose

reorganization depends on their active participation. The Committee’s objection to the plan was
resolved by confirming that the Morris brothers were committed to stay for the duration of the
plan. To the Committee, this was a critical factor in making the plan feasible. The change in the
Committee’s position from opposition to support of confirmation bolsters the Morris brothers’
testimony that they are crucial to the reorganizational efforts, even if no creditor testified to that
fact.

As a result of Swift Financial’s objection, the Couture Hotel concern remains — can this
case be distinguished from the usual chapter 11 case of a closely held corporation with owners and
officers who have guaranteed the business’ debt? The court is aware of the growing concern that
third-party releases and injunctions are being approved without “considerable scrutiny” and that
the court’s equitable powers are being exercised in more than the “limited, rare cases.” In re
Purdue Pharma L.P., 2021 Bankr. LEXIS 2555, 2021 WL 4240974, at *125, see also In re
FirstEnergy Sols. Corp., 606 B.R. 720, 737-39 (Bankr. N. D. Ohio 2019) (discussing the increase
in requests for third-party releases and the need for courts to be circumspect about the legality of
the release and the fairness to the affected third parties). Nevertheless, the court does find that there
are aspects of this case that differentiate it from a typical, closely held business.

The Debtor was part of a morass of entities that the Morris brothers created. The structure
became so cumbersome that accounting became muddled. Bookkeepers were fired or quit. Losing
operations were closed too late. Intercompany transfers were legion and poorly accounted for.
Parties with whom the Debtor or its affiliates did business were given contracts in the names of
parties that the Morris brothers now contend were inaccurate. This web of entities has given rise
to numerous disputes about who was a creditor of whom. The Debtor’s reorganization has to a

great extent been a simplification of these related operations to achieve transparency for its
creditors and a clearer path forward for the owners to be able to perform under the plan.
Confirmation of that plan would be the last step in allowing the Debtor to move forward.
Swift, the only remaining objecting creditor, did not put on any proof to the contrary. Swift
in essence took the same view of the Morris brothers as Judge Houser did of the injunction

beneficiaries in Couture Hotel. It argued that the Morris brothers are just guarantors in the very
“usual” circumstance of a small, closely held business where owners are regularly guarantors of
their company’s debt. As the court has noted above, the court finds the history of this debtor to be
more complicated. This case needs a third-party injunction more than the average case to protect
the performance of the plan from being derailed by suits which may be based on the confusion
caused by the multiple Morris entities and trade names. Therefore, this court finds that the debtor’s
reorganization presents unusual circumstances in which the court may proceed to apply the factors
and determine if this injunction is appropriate.
2. Does the Injunction Meet the Dow Corning test?

While the relationship of the debtor with the injunction parties is not a traditional
indemnification, the court finds that there is an identity of interests between the Morris brothers
and the Debtor. It reaches this conclusion based on the following facts. Ken Morris is the face of
the business and is the key to the reorganization of this Debtor. Ken Morris testified that litigation
with creditors based on their guaranties will take time, energy, and “mind space.” They both
testified that continued defense would use personal and financial resources that they may need
based on their current financial conditions to ensure that they can make the reorganization
successful. They intend to save the funds necessary to make the month 44 contribution from their
salaries. They argue that litigation expenses could drive them to filing their own chapter 7 cases

and jeopardize the additional contribution. The court heard no evidence to the contradict their self-
analysis of their mental and financial condition. The court recognizes that the distraction that
litigation may cause the officers and the potential for a reduced balance sheet is a much less direct
connection than indemnity claims or claims competing for the debtor’s insurance fund.
Nevertheless, broadening the interpretation of “identity of interests” to include a consideration of
that connection would be consistent with the Sixth Circuit’s discussion of when an injunction
might be appropriate in a closely held chapter 11. To a lesser extent, it can also be said of Kurt
Morris. The importance of a connection between the owner’s efforts and prospects for a successful
reorganization has been acknowledge by the Sixth Circuit in Patton, discussed above. It also makes

the Dow Corning factors more easily applied in a smaller case.
The court does not find an identity of interests between the Debtor and the Morris brothers’
spouses. They are not part of the day-to-day operations of the business. They are not owners or
officers. They did not testify that they had incurred any time or expense defending claims or suits
against them.

With respect to the second factor, the court finds that the two contributions of $100,000 is
a substantial amount. While the court has some concern about how the calculation of substantial
contribution may be impacted when the same contribution is also used to retain the equity interest
in the Debtor, no creditor raised this issue, and the court has found no authority that the amount of
the contribution should be reduced by any consideration received by the injunction beneficiary
other than the protection of an injunction.

As to the third factor, the court finds the injunction for the Morris brothers is essential to
the reorganization based on the proof presented at the confirmation hearing, although it is a close
question because of the substantial settlements reached the morning of the confirmation hearing.
Ken Morris testified that his ability to be able to accumulate his second contribution will be
impaired and that the injunction is essential to the reorganization. If he must continue fighting off
creditors, it may bankrupt him. Judgments could result in the loss of his ownership and result in a
change of management. Although he was able to resolve several disputes prior to the confirmation

hearing, there was no contradictory testimony, and the court will take him at his word. The Morris
brothers both testified that the process of the plan has been both financially, physically, and
emotionally draining. Throughout this case, they have sought additional stay protection for
themselves and their other entities. The court denied this relief for various reasons, which are stated
in its prior opinions; but based on the changes they have made to their business, the hours they
have worked to reach this point, and their testimony at trial, the court finds that they are at a
breaking point. Relief from the prospect of other suits while they work for the next four years is
essential. Should Ken or Kurt Morris quit, the Committee is concerned that the reorganization will
stall, if not outright fail. The court therefore finds that the third factor is met as to Ken and Kurt
Morris.

As to their spouses, Debtor has not carried its burden of proof that an injunction protecting
the spouses is essential to the reorganization. The spouses are not involved in the Debtor’s
business. (Hr’g. Digit. Audio, July 19, 2021, at 1:27:38-1:29:36). Ken Morris testified that his wife
owns the home he lives in and that she works outside the home as a source of secondary income.
(Hr’g. Digit. Audio, July 19, 2021, at 3:25:07-3:25:13). The court did not hear any evidence
regarding pending lawsuits against them that relates to the Debtor. They are guarantors of the
Truist obligation which is also guaranteed by two other businesses of the Morrisses.

With respect to the fourth factor, the Debtor has the overwhelming support of the creditors
who will be enjoined from pursuing the injunction beneficiaries. As noted above, there was only
one objection to confirmation by a creditor, Swift, and that creditor represents only $73,586.08 of
the total $3,144,000 of unsecured debt. (Schedule D/E, Docket No. 1). The voting, unsecured
creditors accepted the plan both 85% in number and 89% in amount. (Amended Ballot Summary,
Docket No. 442).

The fifth factor remains a problem. The plan does not provide a mechanism to pay all, or
substantially all, of the classes affected by the injunction. It provides for a payment of only 20%
to unsecured creditors. This case is distinguishable from City of Detroit, because the other factors
do not weigh so heavily that the court can disregard this factor. The third factor is a close call and
other factors have not been met with respect to the spouses.

Finally, the sixth factor is not met. The injunction is temporary and so technically the
creditors who chose not to settle, or in this case the creditor who has objected, have the opportunity
to recover when the injunction terminates. There are numerous mechanisms to terminate the
injunction which may shorten the duration, such as a payment default, sale of equity, or one of the
Morris brothers leaving the Debtor’s employment; but as written, the injunction will delay a
creditor for four years while risk of the loss of the injunction beneficiaries’ assets continues. The
opportunity to pursue the amount not paid through the plan should be available at confirmation,

not four years later.
Because the Dow Corning factors have not been met, the injunction is not appropriate, and
confirmation is denied. Given that only one creditor is not consenting to the injunction, the debtor
may still be able to tailor the injunction to meet the factors or obtain the creditor’s consent. At the
confirmation hearing, the debtor suggested that additional provisions could be added to the plan to

protect any enjoined creditor’s position from deteriorating during the injunction period.
IV. Conclusion

For the reasons stated above, the court will not deviate from the Sixth Circuit’s guidance
on the requirements for third-party injunctions outlined in Dow Corning. The court finds the form
of the injunction is not appropriate because it fails to meet those requirements. Accordingly,
confirmation is denied.
A separate order will enter.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10462173. Public record. Not legal advice.