Timberline Four Seasons Utilities, Inc.

1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: )
)
TIMBERLINE FOUR SEASONS ) Case No.: 2:21-bk-00125
UTILITIES, INC., )
)
Debtor. ) Chapter 11
____________________________________)
MEMORANDUM OPINION
Pending before the court are two related contested matters. First, Timberline Four Seasons
Utilities Inc. (the “Debtor”) asks the court to reconsider its August 5, 2021 order overruling its
objection to proof of claim #4 filed by Kapitus Servicing, Inc. (“Kapitus”). Specifically, the Debtor
asks this court to reconsider its finding that Kapitus’s claim is supported by a judgment entered in
the Commonwealth of Virginia on January 28, 2020. Additionally, the Debtor objects to Kapitus’s
proof of claim #4 on the grounds that the agreement upon which it is based is void for illegality.
Kapitus opposes both motions. As to the reconsideration, Kapitus contends that the
Virginia state court rendered a valid judgment and that this court should enforce it. In the
alternative, Kapitus argues that if the court is to reconsider its order, it should nonetheless find the
agreement enforceable because Kapitus detrimentally relied upon misrepresentations of the Debtor
when it entered into the agreement. The court held evidentiary hearings on the matter on June 16
and August 5, 2021 at which it heard from all concerned parties.
For the reasons stated herein, the court will grant Debtor’s motion for reconsideration, but
in reconsidering, will overrule Debtor’s objection to Kapitus’s claim.
I. BACKGROUND
These contested matters present a relatively complex factual scenario given the size and
scope of the Debtor and its assets. This is due to pre-petition regulatory involvement of the West
Virginia Public Service Commission (“PSC”), the seemingly lax business practices by former
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 1 of
15

2
(since removed) officer-owners of the Debtor, and relevant state court judgments in both West
Virginia and Virginia.
In the 1980s, Allegheny Properties, Inc. (“Allegheny”), was a developer of the Timberline
Ski Resort in Tucker County, West Virginia. As part of this development scheme, Allegheny
created sewer and water systems. It then conveyed these utilities to Frederick Reichle and
Frederick Herz, who immediately transferred ownership to Herz, Herz, and Reichle, Inc. Reichle
and Herz then created the Debtor and transferred some, but not all, of the utilities to the new entity.
As a public utility, the entity is subject to regulations of the West Virginia PSC and cannot enter
into certain agreements without PSC approval under W. Va. Code. § 24-2-12. Debtor claims that
in September 1985, it pledged these utilities to be owned and controlled by a public service district
to be created by Tucker County. However, Tucker County did not create such a district until over
twenty years later, with the formation of the Canaan Valley Public Service District (“CVPSD”) in
2007.1
On April 28, 2017, the Debtor entered two agreements with Kapitus in which Kapitus
funded the Debtor with a $130,000 payment in exchange for Debtor’s future accounts receivable.
Under the agreement, Kapitus was to receive daily payments of $1,374.00 from the Debtor until
the point it had received payment in the amount of $169,000.2 Herz and Reichle signed and
guaranteed the agreement both personally and as corporate representatives of the Debtor. Both
agreements contained clauses stating that the Debtor had all necessary authorizations and licenses
and that the signers had full power and authority of the entity to enter into the agreement on its
behalf. Despite this representation, the Debtor did not have PSC approval under W.Va. Code § 24-
2-12.
In 2019, the PSC sought to put the Debtor into receivership and filed a petition in that
regard in the Circuit Court of Tucker County, West Virginia (“Tucker County Court”) in February
2019, seeking to appoint CVPSD as the receiver.3 The Tucker County Court appointed CVPSD as
1 Whether the Debtor ever transferred its assets remains an issue to be determined, if necessary, in this case. As it is
not support for the claim objection at issue, however, the court need not resolve that apparent dispute at this time.
2 Notably, the agreement further included, on the front page in bold conspicuous typeface, “Any misrepresentation
made by merchant or owner in connection with this agreement may constitute a separate cause of action for fraud or
intentional fraudulent inducement to obtain financing.”
3 This was after several investigations were conducted with the belief that Herz, Herz, and Reichle, LLC was
diverting funds intended for the Debtor into other affiliates and had incurred monthly deficiencies in both 2016 and
2018.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 2 of
15

3
receiver of the Debtor the following month. According to Kapitus, neither the Debtor, its officers,
nor the CVPSD ever informed it of the receivership before it subsequently filed the civil suit in
Virginia.
On May 16, 2019, Kapitus filed a civil action against the Debtor, Herz, and Reichle, in
Hanover County, Virginia and obtained a default judgment (the “Judgment”) on January 28, 2020.
That court, after entering default against the Debtor, Herz, and Reichle, awarded Kapitus
$129,606.00 plus six-percent interest and $8,250.00 in attorney’s fees. The Debtor never appeared,
but now seeks reconsideration here based on its assertion that the Virginia court entered default
judgment without proper jurisdiction. Further, the Debtor argues that Kapitus failed to effectuate
proper service because the lawsuit was served upon Herz after he had been ousted from authority.
On March 11, 2021, the Debtor filed this case under Subchapter V of Chapter 11 of the
Bankruptcy Code. Debtor filed its amended plan for reorganization two weeks later. Kapitus filed
a proof of claim on May 20, listing a secured claim in the amount of $146,569.75 plus interest,
fees, and costs based on the aforementioned agreements. Pursuant to the agreements, Kapitus
claims that it has a security interest in accounts receivable, secured by Debtor’s property.4 Kapitus
perfected its security interest by filing a UCC-1 Financing Statement with the West Virginia
Secretary of State on August 10, 2016.5 On June 10, 2021, Kapitus validly renewed the Financing
Statement. The following day, Debtor filed an objection to the claim in this case, alleging the
agreement was unenforceable due to lack of PSC approval and seeking non-consensual
confirmation of its Chapter 11 plan.
II. DISCUSSION
Debtor first asks this court to reconsider its order overruling the Debtor’s claim objection
based on the premise that the Virginia judgment is void. Specifically, the Debtor contends that the
Virginia court lacked jurisdiction after Tucker County exercised jurisdiction in appointing a
receiver. Additionally, Debtor asserts that the Virginia court lacked jurisdiction based on Kapitus’s
failure to appropriately serve the complaint. Beyond its contention that the judgment was a valid
4 Invision Funding, LLC, an affiliate of Kapitus, is the party listed on the UCC-1 and UCC-3 as the secured party.
Invision is authorized to file on Kapitus’s behalf pursuant to the terms of the agreement. Further, both Virginia and
West Virginia law permit a filing which includes only a representative of the debtor. See Va. Code Ann. § 8.9A-
502(a)(2); W. Va. Code § 46-9-502(a)(2).
5 U.C.C. § 9-502(d) permits a financing statement to be filed before a security agreement is made or the security
interest otherwise attaches.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 3 of
15

4
one entitled to full faith and credit, Kapitus argues Debtor cannot deny the agreement by using its
own fraud as an “argument of convenience” such that the court cannot confirm the Debtor’s plan
without proper treatment of the claim.6 This opinion deals only with the former, which has
significant implications on the latter.
A. The Virginia State Court Judgment is Void for Lack of Jurisdiction
The Debtor, in seeking reconsideration, argues that the Virginia state court judgment is
void due to a lack of jurisdiction and thus not entitled to full faith and credit in this court.
Specifically, the Debtor alleges that the Tucker County Court appointment of a receiver in March
2019 constituted an act of in rem jurisdiction such that Tucker County possessed exclusive
jurisdiction over all assets and claims that may be made against the Debtor. Accordingly, the
Debtor asserts that the Tucker County Court was the only place to bring a claim against property
of the Debtor at the time Kapitus filed civil suit in Virginia. Kapitus contends that reconsideration
is inappropriate because the judgment was validly rendered and entitled to enforcement in this
court. Additionally, it asserts that Debtor, its officers, or CVPSD never informed it of the
proceedings in Tucker County.
Kapitus correctly asserts that motions for reconsideration under Bankruptcy Rule 3008 are
“an extraordinary remedy which should be used sparingly.” Pac. Ins. Co. v. Am. Nat’l Fire Ins.
Co., 148 F.3d 396, 403 (4th Cir. 1998). Further, the burden to overcome is a great one and the
movant must demonstrate adequate cause for reconsideration. Dorula v. Flanders (In re Starlight
Group, LLC), 515 B.R. 290, 293 (Bankr. E.D. Va. 2014); Cassell v. Shawsville Farm Supply Inc.,
208 B.R. 380, 382 (W.D. Va. 1996). Kapitus rests their argument on the fact this motion was filed
after the 14-day appeal period and thus must comply with Fed. R. Civ. P. 60(b) as incorporated by
Bankruptcy Rule 9024. In re Aguilar, 861 F.2d 873, 874 (5th Cir. 1988). Kapitus points out that
FRCP 60(b) does not allow reconsideration on the merits absent the existence of one of six factors.7
6 Debtor’s amended plan proposes transferring full title to CVSPD notwithstanding Kapitus’s interest. Debtor lists
no assets of the bankruptcy estate other than the right to pursue claims against the former officers for fraudulent
activity, but Kapitus points out that Debtor’s filed “Monthly Operating Reports” from April, May, and June of 2021
show reported cash receipts from utility customers in the amounts of $58,032.56, $65,689.31, and $55,083.26,
respectively. Further, Debtor listed $76,013.86 in accounts receivable on Schedule A/B, which was filed on March
16, 2021.
7 FRCP 60(b) states: “On motion and just terms, the court may relieve a party or its legal representative from a final
judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a
new trial under Rule 59(b); (3) fraud, misrepresentation, or misconduct by an opposing party; (4) the judgment is
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 4 of
15

5
Its defense focuses on evidence which it claims under the second factor should have been known,
stating that “Debtor’s argument for reconsideration is based on facts that were known, or should
have been known, at the time the issues were briefed before this Court.” This attention is
misplaced, however, as Debtor’s basis for reconsideration actually rests primarily on the fourth
factor of FRCP 60(b)—that the judgement is void.
One of the oldest principles of this nation’s legal system is the respect accorded by one
state to the judgments rendered in the courts of another. Appropriately, the Constitution ensured
“Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial
proceedings of every other State.” U.S. CONST. amend. IV § 1. Congress later expanded this
abstention to the federal courts with the passage of 28 U.S.C. § 1738 to ensure a state judgement
received full enforcement in both the remaining states and the federal courts. Meindl v. Genesys
Pac. Techs, Inc. (In re Genesys Data Techs.), 204 F.3d 124, 127 (4th Cir. 2000). However, the
deference a federal court must grant to a state court judgment is not absolute. Id. at 127-28; 28
U.S.C. § 1738. “If that court did not have jurisdiction over the subject matter or the relevant parties,
full faith and credit need not be given.” Underwriters Nat. Assur. Co., 455 U.S. 691, 704-05
(1982). If an exception to § 1738 applies, a federal court is permitted to refuse to give the judgment
the preclusive effect to which it would otherwise be entitled. Meindl, 204 F.3d at 128 (citing
Kremer v. Chemical Constr. Corp., 456 U.S. 461, 468 (1982)).
One such exception to the applicability of § 1738 and general res judicata is in the case of
a jurisdictional defect. In West Virginia, “adjudication by a court having jurisdiction of the subject
matter and the parties is final and conclusive . . . .” Jefferson Cnty. Planning Comm’n v. Far Away
Farms, LLC, No. 3:09-CV-45, 2009 U.S. Dist. LEXIS 100975 (N.D.W. Va. Oct. 29, 2009) (citing
Conley v. Spillers, 171 W. Va. 584 (1983) (emphasis added). Where a state court judgment is made
without proper jurisdiction, it has no preclusive effect in a subsequent bankruptcy proceeding and
cannot be enforced. Lawler v. Kulik (In re Kulik), 400 B.R. 313 (Bankr. M.D. Fla. 2007). The
Kulik court held that in applying Virginia law, a Virginia court’s default judgment against a debtor
was ineffectively rendered due to jurisdictional defects because the debtor was never adequately
served. Id. at 321. Accordingly, the creditor could not enforce the judgment against the debtor in
void; (5) the judgment has been satisfied, released, or discharged; it is based on an earlier judgment that has been
reversed or vacated; or applying it prospectively is no longer equitable; or (6) any other reason that justifies relief.”
(emphasis added).
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 5 of
15

6
a subsequent Florida bankruptcy court proceeding. Id. at 320-21. A plethora of authority supports
the contention that judgments rendered by a court with a defect in jurisdiction are subject to
collateral attack in later proceedings.8
The full faith and credit statute which applies the principle to federal courts “directs a
federal court to refer to the preclusion law of the State in which the judgment was rendered.”
Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985). Because the
judgment was rendered in Virginia, this court must apply Virginia preclusion law to determine its
enforceability. Id.; Capital Hauling, Inc. v. Forbes, 75 Fed Appx. 170, 171 (4th Cir. 2003). The
judgment is subject to the same preclusive effect in this Court that it would receive within the
Commonwealth of Virginia. Kulik, 400 B.R. at 319; Allen v. McCurry, 449 U.S. 90, 96 (1980). In
Virginia, a default judgment is valid only if the court had territorial jurisdiction, subject-matter
jurisdiction, and if the defaulting party was granted adequate notice to appear. Landcraft Co., Inv.
v. Kincaid, 220 Va. 865, 870 (1980). More importantly, the Virginia Supreme Court recently
reiterated in Watson v. Commonwealth that a judgment is void ab initio if: (1) it was procured by
fraud; (2) the court lacked subject-matter jurisdiction; (3) the court lacked jurisdiction over the
parties; (4) the judgment is of a character that the court lacked power to render; or (5) the court
adopted an unlawful procedure. 297 Va. 347, 350 (2019). The application in Watson was derived
from Virginia-Pilot Media Cos. in which the Virginia Supreme Court held a circuit court order
null and void because it was entered without proper subject matter jurisdiction. Virginia-Pilot
Media Cos., LLC v. Dow Jones & Co., 280 Va. 464 (2010). The Virginia Constitution models the
Federal Rules of Civil Procedure and the “lack of subject matter jurisdiction cannot be waived and
such jurisdiction cannot be conferred on a court by the litigants.” Id. at 468 (citing In re
Commonwealth of Virginia, 278 Va. 1, 11 (2009)). Like within the federal rules, a lack of subject
matter jurisdiction in Virginia court may be raised at any time. In re Commonwealth of Virginia,
278 at 11.
8 Vanderbilt v. Vanderbilt, 354 U.S. 416, 418 (1957) (Divorce decree in Nevada court which did not have personal
jurisdiction over the wife due to her New York domicile was ruled void and thus not entitled to full faith and credit
in a New York court); Borg-Warner Acceptance Corp. v. Lovett & Tharpe, Inc., 734 F.2d 639, 640 (11th Cir. 1984)
(“… the defendant may defeat subsequent enforcement in another forum by demonstrating that the judgment issued
from a court lacking personal jurisdiction.”) (citing Hazen Research, Inc. v. Omega Minerals, Inc., 497 F.2d 151,
154 (5th Cir. 1974)); Rash v. Rash, 173 F.3d 1376 (11th Cir. 1999) (holding that Florida judgment was not entitled
to full faith and credit because a New Jersey court that had jurisdiction determined that the Florida court had not
when decision was rendered); Lawler, 400 B.R. at 321 (“…State Court was without in personam jurisdiction over
the Debtor when it entered the Judgment Order and the Judgment Order has no preclusive effect.”).
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 6 of
15

7
Additionally, a court exercising in rem or quasi in rem jurisdiction does so to the exclusion
of all others. Princess Lida of Thurn & Taxis v. Thompson, 305 U.S. 456, 465-68 (1939);
Mandeville v. Canterbury, 318 U.S. 47, 48-49 (1943). Notably, this exclusivity is not restricted to
cases where property has actually been seized by the court. Princess Lida of Thurn, 305 U.S. at
466 (citing Farmer’s Loan & T. Co. v. Lake Street E. R. Co., 177 U.S. 51, 61 (1900)); Palmer v.
Texas, 212 U.S. 118, 129 (1909). The Supreme Court in Palmer noted that the appointment of a
receiver vests a court with jurisdiction regardless of whether the receiver has taken actual
possession of the property. 212 U.S. at 129-30. Importantly, “the settled rule with respect to suits
in equity for the control by receivership of the assets of an insolvent corporation” is that jurisdiction
of a later court yields to the jurisdiction of the original appointing court. Penn General Casualty
Co. v. Pennsylvania, 294 U.S. 189, 195 (1935).
With these considerations in mind, the court finds two jurisdictional defects with the
Virginia court’s judgment. The judgment is thus not entitled to full faith and credit. Specifically,
the Virginia court entered default judgment against the Debtor on January 28, 2020. Notably, this
date is several months after the Tucker County Court exercised jurisdiction over the Debtor and
its assets under W. Va. Code § 24-2-7(b) when it appointed a receiver in March 2019. It is the
Debtor’s contention—and this Court agrees—that the Tucker County Court was vested with
exclusive jurisdiction in March 2019.9
Under the principles established by the Supreme Court over a century ago in Palmer, the
Tucker County Court acquired exclusive jurisdiction over the Debtor’s assets when it appointed a
receiver such that any subsequent claims against the Debtor and its assets had to be brought in the
Tucker County Court. A judgment without proper jurisdiction is entitled to no enforcement
mechanism, whether intrastate or elsewhere. As such, a judgment rendered without jurisdiction in
Virginia is void and not entitled to full faith and credit in a Virginia court, this court, or in any
court across this nation.
9 Despite the Tucker County Court’s jurisdiction over the Debtor and its assets, the filing of bankruptcy by the
Debtor and subsequent filing of proof of claim by Kapitus allows this court to rule on the matter notwithstanding
that court’s exercise of in rem jurisdiction. By filing a proof of claim, the creditor submits itself to the equitable
jurisdiction of the bankruptcy court. Langenkamp v. Culp, 498 U.S. 42, 44-45 (1990). The filing of a proof of claim
confers upon this court personal jurisdiction over the claimant in addition to conveying subject matter jurisdiction
over the claim. Id. Bankruptcy courts are vested with the jurisdictional power to “hear and determine all cases under
title 11 and all core proceedings arising under title 11.” 28 U.S.C.S. § 157. Accordingly, this Court is able to
exercise jurisdiction over claims against the estate in such circumstances.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 7 of
15

8
Additionally, the record reflects that although Kapitus served Herz, it failed to effectuate
service on the Debtor post-receivership. As the Debtor notes, service was made only by certified
mail to Herz after he was ousted as an officer of the entity. It appears that neither the Debtor nor
receiver was properly served, a requirement for personal jurisdiction. In considering both federal
law and the law of the Commonwealth of Virginia, this court is well convinced that the judgment
rendered by a court without jurisdiction antecedent to filing of the matter would not be enforced
by a Virginia state court, and accordingly is not to be enforced by this court. While this court is
cautious to overturn a state judgment in light of its duty to grant full faith and credit to validly
rendered judgments of other courts, it is clear here that the Virginia court did not render a valid
judgment.
Based on the foregoing, the court will grant the Debtor’s motion to reconsider and
ultimately set aside the Virginia judgment because the judgment is void as to the Debtor. The court
will now undertake disposition of the Debtor’s claim objection. In that regard, the parties
previously conceded that the record is complete.
B. The Agreement Entered Without PSC Approval is Enforceable
Debtor argues that Kapitus cannot enforce the agreement because the Debtor did not obtain
prior PSC approval despite its agents representing that it had obtained or would obtain the
necessary government authorizations. Debtor’s argument in this regard relies upon Lockard v.
Salem, 127 W. Va. 237 (1944). Kapitus contends that, unlike the Debtor, it is not in the utility
industry and beyond the misrepresentations made by the Debtor and its agents, it had no knowledge
of these requirements. It further asserts any requirement to obtain approval was placed upon the
Debtor under the agreement, if not also under state law. This opinion will later address the effects
of those misrepresentations on enforceability generally, but this court, based upon the analysis that
follows, is of the opinion that Kapitus may still enforce the agreement.
Notably, most of the authority on this point addresses either public utilities unilaterally
raising rates without state authority or contracts between two public utilities, service districts, or
other providers of public resources. As a public utility, Debtor is regulated by the state of West
Virginia and more specifically, the provisions of W. Va. Code Ch. 24. The Supreme Court of
Appeals of West Virginia elaborated in 1919 that when a business entity “becomes so closely and
intimately related to the public . . . as to make welfare of the public . . . dependent upon the proper
conduct of such business, it becomes subject for the exercise of the regulatory power of the state.”
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 8 of
15

9
Clarksburg Light & Heat Co. v. Public Serv. Comm’n, 84 W. Va. 638, 646 (1919). Further, private
contract rights may yield to the powers of the state to regulate matters of public welfare when the
contract involves a public utility. Manigault v. Springs, 199 U.S. 473 (1905); Atl. C. L. R. Co. v.
Goldsboro, 232 U.S. 548 (1914). Although originally privately owned and managed, the Debtor
is nevertheless subject to state regulation as the provider of a public utility.
Pertinent to the agreement that Kapitus now seeks to enforce, contracts entered into by a
public utility to sell or otherwise dispose of “franchises, licenses, permits, plants, equipment,
business, or other property” require PSC approval. W. Va. Code § 24-2-12. Any contract in which
the public entity fails to obtain such approval is void “to the extent that the interests of the public
in [West Virginia] are adversely affected.” Id.; see City of S. Charleston v. W. Va. PSC, 204 W.
Va. 566 (1999). Effectively, a contract executed by a West Virginia public service entity without
prior PSC approval is void, but only to the extent it is contrary to the public interest. Compare with
Cal. Pub. Util. Code § 851(a) (“Every sale, lease, assignment, mortgage, disposition, encumbrance,
merger, or consolidation made other than in accordance with the advice letter and approval from
the commission authorizing it is void.”) (emphasis added), Mo. Rev. Stat. § 393.220 (“. . . shall
be void, unless an order of the commission authorizing [indebtedness] shall have been obtained
from the commission prior to such issue”). California, Missouri, and several other states render all
contracts without public service commission approval void without exception, whereas West
Virginia grants some limited freedom from this stringent prohibition.
The court finds the Debtor’s reliance upon Lockard in an attempt to contravene this
freedom to be misplaced. In Lockard, West Virginia’s highest court held a lease of a city’s
municipal water system to a private individual for operation to be outright void under § 24-2-12
because it lacked PSC approval. 127 W. Va. at 246.10 The court’s analysis focused on the fact that
the transaction was in the form of a municipality’s lease of a public utility to be operated by a
private individual in ruling to invalidate the agreement. Id. The case here, however, deals with a
financing agreement in which the Debtor continued controlling and operating the utility, rather
10 The court nevertheless allowed the plaintiff to recover expenses, stating
[i]t would be decidedly inequitable for (the city) to accept the benefit of plaintiff’s expenditures of
money and services without any compensation therefor in view of the fact [the] defendant itself,
through its own inaction and lack of diligence, was partly responsible for plaintiff’s failure to obtain
the consent and approval of the [PSC] to the lease in question.
Lockard, 127 W. Va. at 246. Despite Debtor’s reliance upon Lockard, this line of thinking runs contrary to the
Debtor’s argument and instead supports the position that the public entity is the party responsible for obtaining PSC
approval.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 9 of
15

10
than leasing it to a private individual. In sum, Kapitus funded the Debtor in the short term and
rather than taking ownership of the Debtor, was to be paid at a daily rate over time until the loan
was recouped in whole. For this reason, Lockard is easily distinguishable. The court must also note
that unlike the city municipal water system there, the Debtor (at least as far as Kapitus was aware)
was still privately held and run by Herz and Reichle at the time of the agreement. Notwithstanding
the important factual distinction above, this court finds the dissent’s analysis of the voidability
language to be more in line with prevailing state case law.
Under the holding of the majority opinion, regardless of whether a contract of the
kind here considered has any effect on the public interest, adverse or otherwise, it
is wholly void in the absence of approval by the Public Service Commission. I do
not think the Legislature intended any such result. It is reasonable to say that the
converse of the rule laid down in the statute would be true: that if the contract does
not affect the public interest, or if the public interest is favorably affected, that the
ban of the statute has no application and that such contract is valid and
enforceable.
Id. at 247-48 (Lovins, J., dissenting) (emphasis added). This court finds that the plain language of
the statute more closely leads to the conclusion drawn by Judge Lovins, rather than that of the
majority in Lockard.
In addition to the statutory language providing that a contract without PSC approval is void
only to the extent it is contrary to public policy, the state’s highest court has held that an otherwise
valid contract which does not have PSC approval is nevertheless “binding on the parties to it until
a departure from such contract has been directed by competent authority.” Preston Cnty. Light &
Power Co. v. Renick, 145 W. Va. 115, 129 (1960) (citing 43 Am. Jur., Public Utilities and Services,
Section 98); see City of Benwood v. Public Serv. Comm’n, 75 W. Va. 127 (1914). Although the
PSC placed the Debtor in receivership and supplanted Herz and Reichle from leadership by
seeking the appointment of CVPSD, neither party has alleged on the record that the PSC stated a
position as to the extant agreement’s enforceability. Accordingly, under Preston Cnty. Light &
Power Co., the agreement is still binding on the parties so long as it is a valid and enforceable
contract notwithstanding the lack of PSC approval.11 This court finds no other grounds upon which
to invalidate the contract.
11 It is worth noting that in the past, the PSC has retroactively acted to approve agreements that were entered and
performed before seeking PSC approval. Morgantown Utility Bd and Scotts Run PSD, Case No. 13-0732-S-PSD-
PC, 2014 W. Va. PUC LEXIS 2272 (W. Va. P.S.C. Oct. 24, 2014). The PSC there held that a merger agreement
between two West Virginia sewage districts entered without PSC approval and carried out prior to seeking approval
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 10 of
15

11
Ultimately, it appears the only shortcomings within the agreement were the result of
misrepresentations by the Debtor, through its agents. Nothing in the record insinuates that these
shortcomings are attributable to Kapitus’s actions or that the public served by the utility suffered
any detriment as a result of the agreement. If anything, the detriment to the public as a result of
alleged mismanagement was offset to some degree by the financing provided by Kapitus. In sum,
the agreement is valid notwithstanding the lack of PSC authority.
C. Debtor’s Misrepresentation Renders the Contract Voidable
Notwithstanding the enforceability of the contract despite lack of PSC approval as set forth
above, the court finds it necessary to still consider the allegations of fraud and misrepresentation
and their impact here. Debtor seeks to hide behind the alleged fraud of its former officers in order
for this agreement to be rendered unenforceable under West Virginia law. As previously
established, the record indicates that the Debtor obtained Kapitus’s mutual assent by the
contractual misrepresentations of the Debtor that its agents had authority to enter into the
agreement and that all necessary government licenses and authorizations necessary for the contract
were (or would be) acquired. The parties appear to agree that neither of these representations were
accurate. The Debtor, however, argues that it was defrauded by its own officers and thus is just as
much—if not more—a victim as Kapitus. It is this court’s opinion, under prevailing ideas of equity
and contract law that this cannot be the result.
As is well established under West Virginia law since the state’s inception, “[a]ny contract,
the making of which is induced by fraud of either party practiced upon the other at the time the
contract is made, or while negotiations in regard to it are being carried on, is voidable, and may be
rescinded at the election of the party defrauded.” Cunningham v. Legrand, No. 2:11-cv-0142, 2012
U.S. Dist. LEXIS 77778, at *19 (S.D. W. Va. June 5, 2012) (citing Engeman v. Taylor, 46 W. Va.
669 (1899)). This is the case whether the mistake is deliberate or the result of purportedly innocent
mutual mistake. In the event where a mutual mistake “as to a basic assumption on which the
contract was made has a material effect on the agreed exchange of performances, the contract is
voidable by the adversely affected party unless he bears the risk of the mistake.” First Am. Title
Ins. Co. v. Firriolo, 225 W. Va. 688, n.5 (2010) (citing McGinnis v. Cayton, 173 W. Va. 102
nevertheless presented no evidence that failure to obtain approval had in any way adversely affected the public
interest. Id. at *14-15. In applying § 24-2-12, the PSC approved the agreement nearly two years after it was entered
in to. Id. at *21-22. This further supports the proposition that if the agreement is not contrary to public policy, it is
not void until the PSC renders it as such.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 11 of
15

12
(1984)); Restat 2d of Contract, § 164; see also Herrod v. First Republic Mortg. Corp., 218 W. Va.
611 (2005). The party seeking to have the contract rendered voidable must show: (1) that there
was a misrepresentation; (2) that the misrepresentation was either fraudulent or material; (3) that
the misrepresentation induced the recipient to enter into the contract; and (4) that the recipient’s
reliance on the misrepresentation was reasonable. Restat 2d of Contract, § 164.
The mistake here does not appear to have been mutual, as the record alludes to the
conclusion that the Debtor (or Herz and Reichle on its behalf) knowingly misrepresented to
Kapitus that the agreement would have PSC approval when it did not.12 Notably, Clause 2.2 of the
contract states “Merchant is in compliance and shall comply with all laws and has valid permits,
authorizations and licenses to own, operate and lease its properties and to conduct the business in
which it is presently engaged. Further, Clause 2.3 represents that “Merchant, and the person(s)
signing this Agreement on behalf of Merchant, have full power and authority to incur and perform
the obligations under this Agreement, all of which have been duly authorized.” As Debtor and its
officer in fact did not have state approval under W. Va. Code § 24-2-12, this Court finds that those
clauses amount to a material representation by the Debtor.
Specifically, it is not reasonable that the burden to ensure PSC approval would fall upon
the private corporation rather than the public entity regularly subject to the regulation of the PSC.
The language of Clause 2.2, that the Debtor was “in compliance and shall comply” with all
governmental requirements appears to adopt this duty as that of the Debtor. Where the Debtor’s
owner-officers asserted in the agreement that necessary authorization was obtained, further inquiry
is not necessary. Rather, the Debtor bears the burden of this failure. This proposition is further
supported by the court’s dicta in Lockard. 127 W. Va. at 246 (holding that it would be inequitable
to punish the individual when the failure to obtain PSC approval was partly attributable to
“defendant itself, through its own inaction and lack of diligence . . . .”). The Debtor cannot now
seek to invalidate the agreement because of the fraud of its own officers. This court finds it to be
a reasonable conclusion that Kapitus reasonably relied upon Debtor’s representation that
authorization had been acquired when the parties entered the agreement.
12 Notably, Herz and Reichle are not parties to this contested matter. Without rendering judgment as to Herz and
Reichle, the court’s finding that they made a knowing misrepresentation on behalf of the Debtor is based on the
concession of the Debtor as it pertains to the claim objection. The court’s finding shall not have preclusive effect in
subsequent litigation.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 12 of
15

13
Debtor further asserts that, in essence, because complaints had been filed against the Debtor
before the agreements and that the PSC hearings on these matters were public record, Kapitus was
on inquiry notice of possible fraud committed by the officers. As West Virginia’s highest court
held in Reed v. Bachman, inquiry notice “charges the purchaser with notice, not merely of facts on
the face of the title papers, but also with notice of those facts which they suggest for prudent inquiry
. . . .” 61 W. Va. 452, 464 (1907). The Debtor, in citing Reed, neglects the application of the
doctrine in that case, which held that a title informing lessees that the land was held in a joint estate
put the parties on inquiry notice that there may be another party of interest. Id. at 465-67; see
Janvey v. GMAG, LLC, 592 S.W.3d 125, 130 (Tex. 2019) (“A person is on inquiry notice when he
or she is ‘aware of facts that would have prompted a reasonable person to investigate.’” (citing
Inquiry Notice, Black’s Law Dictionary (11th ed. 2019)).
The Debtor’s reliance on inquiry notice is misplaced. The Debtor points to several PSC
hearings now included in the record which it alleges should have raised a red flag to Kapitus of
possible wrongdoing by the officers of the Debtor who co-signed this agreement. Nothing on the
face of the agreements signal a red flag or otherwise make Kapitus aware of the PSC proceedings
or alleged fraud by Herz and Reichle.13 Inquiry notice does not support the proposition that a
financing agreement with a public utility requires a deep dive into the full history of PSC hearings
of that utility. Most notably, the hearing which resulted in a recommendation of placing the Debtor
in receivership did not occur until January 31, 2019—nearly two years after the agreement.
Lastly, it is worth addressing Debtor’s contention that the agreement cannot be enforced
because the Debtor is a victim of its own officers. As indicated by their removal and the subsequent
appointment of a receiver, this may very well be true. However, the Debtor can bring the claims
against those former officers that it offers to Kapitus under its current proposed plan. Debtor cites
Clark v. Milam to support its contention that adverse domination allows it to bring such a suit. 872
F. Supp. 307 (S.D.W. Va. 1994). The court there handled a conspiracy to loot company assets and
13 Of nearly 900 pages of PSC hearings included in the record, the pertinent ones relating to Herz’s alleged fraud
occurred after this agreement was entered in to. The Debtor points specifically to extraneous comments regarding
Herz made during a PSC hearing regarding a customer rate complaint on March 13, 2017—approximately a month
before the agreement. This hearing stated on the record that Debtor had distributed $368,402 to affiliates but further
indicated “He is learning quickly about the legalities of operating a utility. He understands that utility revenue
cannot be used to run the other affiliates . . . Mr. Herz testified that he did not understand originally that he could not
take money from the [Debtor] account to support the affiliates. He has been recently instructed as to that idea.” Were
there any serious allegations of fraud as the Debtor contends were indicated in that record, it seems unlikely the PSC
would’ve permitted Herz to remain in control for nearly two years beyond this hearing.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 13 of
15

14
whether the doctrine permitted tolling the statute of limitations in a subsequent shareholder
derivative lawsuit and is not necessarily applicable here. Id. at 310-13. Where both the Debtor and
Kapitus were victimized by the actions of the Debtor’s former owner-officers, it is not equitable
that the Debtor is the party who ultimately comes away unvictimized. Kapitus carried out its end
of the agreement—paying $130,000 to the Debtor—while Debtor defaulted on its obligations less
than two months later. A party may not gain a benefit from a contract while simultaneously
avoiding the obligations under that same contract. United States use of Humble Oil & Ref. Co. v.
Fid. & Cas. Co., 402 F.2d 893 (4th Cir. 1968); see Home Base Litter Control, LLC v. Claiborne
Cnty., 183 So. 3d 94, 101 (Miss. App. 2015). Despite this well-settled concept of contract law,
Debtor’s arguments to avoid the agreement due to fraud of its own former officers attempts to do
just that. Kapitus carried out its end of the agreement after entering it in reliance upon the
misrepresentations of the Debtor, ultimately instilling a benefit upon the Debtor in the amount of
$130,000. The agreement, however, provided that Kapitus would receive future accounts
receivable. These payments to which Kapitus has an interest under the agreement are the very
same which the Debtor seeks to transfer to CVPSD for no return value in its Chapter 11 plan.
Beyond the unconscionability of this result, it would allow the Debtor to leave unscathed from the
resulting aftermath of its negligent officers. This result would leave Kapitus to bear the cost of
entering into a contract in reliance upon the intentional misrepresentations of those same officers
and grant an inequitable financial windfall to the Debtor and its former officers.
Accordingly, the agreement is voidable at Kapitus’s discretion and may be enforced if it
so chooses. Kapitus does wish to enforce the agreement, evidenced by its security agreement and
contesting of the Debtor’s current proposed plan which treats Kapitus’s claims as invalid. Pursuant
to the agreement and valid UCC-3 Continuation Statement dated June 10, 2021, Kapitus has a
valid security interest in the Debtor’s accounts receivable.
III. CONCLUSION
For the foregoing reasons, the court finds it appropriate to find in favor of the Debtor as to
the motion to reconsider under Fed. R. Bankr. P. 3008 because the Virginia court judgment against
the Debtor is void for lack of jurisdiction. Upon reconsideration of the merits, the court finds that
the agreement is voidable in favor of Kapitus and can be enforced at Kapitus’s discretion.
Accordingly, the Debtor’s objection to Kapitus’s claim is overruled. Consistent with Fed. R. Civ.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 14 of
15

15
P. 58, made applicable by Fed. R. Bankr. P. 7058, the court will enter an order stating as much and
will set further proceedings on the matter.
No. 2:21-bk-00125 Doc 114 Filed 10/25/21 Entered 10/25/21 13:54:51 Page 15 of
15