CHARLESTON — The West Virginia Intermediate Appellate Court issued a reversal on a business court decision, finding that a motion to dismiss should have been denied.
Kapitus Servicing Inc. appealed a December 20, 2022, order of the Tucker Circuit Court Business Court Division, which granted a motion to dismiss filed by Timberline Four Seasons Utilities Inc. and Canaan Valley Public Service District.
The central issue is the validity of the contractual relationship between Kapitus and Timberline, according to an October 30 opinion in the West Virginia Intermediate Court of Appeals.
The circuit court's decision is challenged because it erroneously granted the motion to dismiss, as res judicata, according to Kapitus, precluded any other determination regarding the contract's validity after rulings by the U.S. Bankruptcy Court for the Northern District of West Virginia.
Chief Judge Dan Greer authored the court’s opinion. Judge Charles Lorensen voluntarily recused himself and Judge Jason Wharton sat on temporary assignment.
The dispute originated from a Revenue-Based Factoring Agreement entered into by Timberline and Kapitus in April 2017. Under this agreement, Kapitus advanced $130,000 to Timberline in exchange for future receipts and other financial assets. Timberline made several representations, including its financial stability and authorization to enter the agreement.
Timberline stopped making payments in June 2017 and Kapitus filed a civil suit in Virginia in May 2019. That court granted a default judgment in favor of Kapitus in January 2020.
Timberline filed for Chapter 11 bankruptcy protection in March 2021, and Kapitus filed a proof of claim. The bankruptcy court ruled in favor of Kapitus, but Timberline filed a motion to reconsider, arguing that the Virginia judgment was void due to lack of jurisdiction and that the agreement was void without approval from the West Virginia Public Service Commission.
The bankruptcy court set aside the Virginia judgment but concluded that the agreement was valid without PSC approval based on recognized exceptions. The PSC sought to investigate the agreement's validity, but the bankruptcy court, in December 2021, confirmed the enforceability of Kapitus' claim, stating it was valid regardless of the PSC investigation. Timberline then moved to dismiss its bankruptcy case in December 2021.
In March 2022, Kapitus filed a civil action in Tucker Circuit Court against Timberline and Canaan PSD, asserting breach of contract and other claims. However, the PSC declared the agreement void in April 2022, and the respondents filed a motion to dismiss Kapitus' complaint, claiming it failed to state a claim upon which relief could be granted.
Kapitus argued that the bankruptcy court's orders, which confirmed the validity of its claim, were binding under res judicata. The business court, however, dismissed Kapitus' breach of contract claim, relying on deference rather than addressing the res judicata argument.
The appellate court reversed the business court's decision, asserting that res judicata, as established by the bankruptcy court's Oct. 25, 2021, order, should be applied in this case, rendering the business court's error dispositive. The case is remanded to the Business Court Division of Tucker Circuit Court with instructions to deny the respondents' motion to dismiss.
Attorneys for the parties declined to comment on the decision by the intermediate appellate court.
West Virginia Intermediate Court of Appeals case number: 23-ICA-22
