Howell v. Heafner

Howell v. Heafner, 2020 NCBC 65.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
MECKLENBURG COUNTY 19 CVS 21708

GAIL I. HOWELL, individually and
on behalf of the GAIL I. HOWELL
IRA; KEA L. HRVATIN; SCOTT J.
HRVATIN; STEVEN RAPP; ALICE
G. SHRADER, individually and on
behalf of the ALICE G.
SHRADER IRA; JONATHAN A.
TURNER, individually and on behalf
of the JONATHAN A. TURNER IRA;
CAROL B. WIGGINS, individually
and on behalf of the CAROL B.
WIGGINS IRA; DAVID M. ORDER AND OPINION ON
WRIGHT, JR.; BRIAN H. FETNER, DEFENDANTS’ MOTION TO DISMISS,
as executor of the ESTATE SHEILA OR, IN THE ALTERNATIVE, STAY
MARLOWE FETNER and personal
representative of SHEILA M. AND COMPEL ARBITRATION AND
FETNER; SUSAN A. GOLDMAN; PLAINTIFFS’ MOTION FOR LEAVE
and THOMAS B. ODELL, TO FILE A SURREPLY, TO STRIKE,
individually and on behalf of the OR TO ESTOP
THOMAS B O’DELL IRA,

Plaintiffs,

v.

JAMES H. HEAFNER;
FORMULAFOLIO INVESTMENTS,
LLC; and RETIREMENT WEALTH
ADVISORS, INC.,

Defendants.

1. THIS MATTER is before the Court upon Defendants FormulaFolio

Investments, LLC (“FFI”) and Retirement Wealth Advisors, Inc.’s (“RWA”; together,

the “Corporate Defendants”) Motion to Dismiss, or, in the Alternative, Stay and

Compel Arbitration (the “Motion to Dismiss”), (ECF No. 16), and Plaintiffs Gail I.

Howell (“Howell”), Kea L. Hrvatin (“Kea Hrvatin”), Scott J. Hrvatin (“Scott Hrvatin”),

Steven Rapp (“Rapp”), Alice G. Shrader (“Shrader”), Jonathan A. Turner (“Turner”),

Carol B. Wiggins (“Wiggins”), David M. Wright, Jr. (“Wright”), Susan A. Goldman
(“Goldman”), and Thomas B. ODell’s (“ODell”; collectively, the “IMA Plaintiffs” 1)

Motion for Leave to File a Surreply to Section III of Corporate Defendants’ Reply and

Either to Strike Section I and to Estop Contradictory Legal Positions or,

Alternatively, for Leave to File a Surreply to Section I (the “Motion to Strike”), (ECF

No. 43), (collectively, the “Motions”).

2. The IMA Plaintiffs allege in this action that they are unsophisticated

investors who entrusted their investment funds to Defendant James “Jim” H.

Heafner (“Heafner”), who in turn invested those funds in a sham company, 1 Global

Capital LLC (“1 Global”), resulting in losses to the IMA Plaintiffs of over $1.5 million.

(Am. Compl. ¶ 1, ECF No. 14.) The IMA Plaintiffs seek to recover their losses against

Heafner and the Corporate Defendants. The Corporate Defendants have moved for

the dismissal of the IMA Plaintiffs’ claims against them or, in the alternative, to stay

the case and compel the arbitration of the IMA Plaintiffs’ claims.

3. Having considered the Motions, the Amended Complaint, the related

briefing and attached exhibits, and the arguments of counsel at the hearing on the

Motions, the Court, for the reasons set forth below, DENIES the Motion to Strike as

1 The Corporate Defendants aver that neither FFI nor RWA has any record of doing business

with Plaintiffs Brian H. Fetner and the Sheila Marlowe Fetner Estate, (Aff. Braun ¶ 8, ECF
No. 18); hence, the Corporate Defendants do not bring the Motion to Dismiss as to the claims
asserted by these two Plaintiffs. Similarly, the Corporate Defendants acknowledge that the
Plaintiffs identified as individual retirement accounts (“IRA(s)”)—the Gail I. Howell IRA, the
Alice G. Shrader IRA, the Jonathan A. Turner IRA, the Carol B. Wiggins IRA, and the
Thomas B. O’Dell IRA—did not sign arbitration agreements with the Corporate Defendants,
(see Aff. Braun Exs. A– I, ECF Nos. 18.1–.9), and thus FFI and RWA do not bring the Motion
to Dismiss as to the claims brought by these Plaintiffs either. To avoid confusion, the Court
will hereinafter reference Plaintiffs Brian H. Fetner, the Sheila Marlowe Fetner Estate, the
Gail I. Howell IRA, the Alice G. Shrader IRA, the Jonathan A. Turner IRA, the Carol B.
Wiggins IRA, and the Thomas B. O’Dell IRA, collectively, as the “Non-IMA Plaintiffs.”
moot, DENIES the Motion to Dismiss, ORDERS all claims asserted by the IMA

Plaintiffs against the Corporate Defendants to arbitration, and STAYS the litigation

of all claims in this action pending the arbitration.

Alexander Ricks, PLLC, by Nathan Adam White, and Marquardt Law
Office, LLC, by Adam J. Marquardt, for Plaintiffs Gail I. Howell,
individually and on behalf of the Gail I. Howell IRA; Kea L. Hrvatin;
Scott J. Hrvatin; Steven Rapp; Alice G. Shrader, individually and on
behalf of the Alice G. Shrader IRA; Jonathan A. Turner, individually
and on behalf of the Jonathan A. Turner IRA; Carol B. Wiggins,
individually and on behalf of the Carol B. Wiggins IRA; David M.
Wright, Jr.; Brian H. Fetner, as executor of the Estate Sheila Marlowe
Fetner and personal representative of Sheila M. Fetner; Susan A.
Goldman; and Thomas B. ODell, individually and on behalf of the
Thomas B O’Dell IRA.

Parker Poe Adams & Bernstein LLP, by Morgan H. Rogers and Eric A.
Frick, and Warner Norcross + Judd LLP, by Brian J. Masternak, for
Defendants FormulaFolio Investments, LLC and Retirement Wealth
Advisors, Inc.

Bledsoe, Chief Judge.

I.

LEGAL STANDARD

4. The Court and parties agree that the IMA Plaintiffs’ Motion to Dismiss asks

the Court to determine whether there are enforceable agreements between the IMA

Plaintiffs and the Corporate Defendants to arbitrate the IMA Plaintiffs’ claims.

Under North Carolina law, “the Court is required to make finding[s] [of] fact[ ] in

order to determine whether an ‘enforceable agreement to arbitrate’ exists[.]” Cold

Springs Ventures, LLC v. Gilead Scis., Inc., 2015 NCBC LEXIS 1, at *6 (N.C. Super.

Ct. Jan. 6, 2015); see also Cornelius v. Lipscomb, 224 N.C. App. 14, 16, 734 S.E.2d

870, 871 (2012) (noting that our Court of Appeals has “repeatedly held” that an order
denying a motion to compel arbitration must include findings of fact as to

arbitrability). “Accordingly, for such limited purpose, the court also may consider

evidence as to facts that are in dispute.” Capps v. Blondeau, 2010 NCBC LEXIS 10,

at *5 n.6 (N.C. Super. Ct. Apr. 13, 2010). The Court therefore makes the following

findings of fact based on the evidence of record submitted by the parties and

conclusions of law solely for the purposes of resolving the Motion to Dismiss and

without prejudice to any inconsistent findings the Court may make in any subsequent

proceeding in this action.

II.

FINDINGS OF FACT 2

5. According to Plaintiffs, at all relevant times, the IMA Plaintiffs were North

Carolina residents in their fifties or sixties who had retired or were planning to retire

in the near future. They invested, and subsequently lost, funds ranging from

$94,307.66 to $442,332.00 in an investment recommended by Heafner called a

Memorandum of Indebtedness (“MOI”). (Am. Compl. ¶¶ 8–14, 16–17.) The MOI took

the form of a note issued by 1 Global. (Am. Compl. ¶¶ 2, 37, Ex. A.) Defendants have

not challenged Plaintiffs’ allegations in this regard, and the Court accepts them as

true for the limited purposes of this Motion.

6. Also according to Plaintiffs, at all relevant times, Heafner was also a North

Carolina resident providing investment services from his office in Charlotte, North

Carolina. (Am. Compl. ¶ 18.) He became licensed to sell variable life and variable

2 Any determination later stated as a conclusion of law that should have been stated as a

finding of fact is incorporated into these Findings of Fact.
annuity investment products in 2008, (Am. Compl. ¶ 22), and became a Certified

Financial Planner in 2014, (Am. Compl. ¶ 19). RWA registered Heafner as an

investment adviser representative (“IAR”) from approximately July 2014 until RWA

terminated its association with him on August 31, 2018. (Am. Compl. ¶ 20.)

Defendants have not challenged Plaintiffs’ allegations in this regard either, and the

Court accepts them as true for the limited purposes of this Motion.

7. RWA was incorporated in Michigan in 2005 and has been a Registered

Investment Adviser (“RIA”) with the United States Securities and Exchange

Commission (“SEC”) since March 2007. (Am. Compl. ¶ 27, Ex. F.) RWA advertises

that it provides investment management and personal finance planning services.

(Am. Compl. ¶ 77, Ex. F.)

8. FFI is a limited liability company formed in Michigan in 2010 and has been

registered as an RIA since November 2011. (Am. Compl. ¶ 29, Ex. H.) FFI produces

algorithmic software programs to generate trade orders for RWA accounts. (Am.

Compl. ¶¶ 113, 115–18, Ex. H.) Until September 5, 2018, Jason Wenk served as CEO

and President of both RWA and FFI. (Am. Compl. ¶¶ 27, 29, Exs. F, H.) At the times

relevant to this action, the Corporate Defendants shared the same officers and

owners. (Am. Compl. ¶ 3, Exs. F, H.)

9. RWA and FFI act through agents like Heafner to provide investment

services to clients. (Am. Compl. ¶¶ 214, 219, Exs. F, H.) According to the public

Investment Adviser Public Disclosure database at https://adviserinfo.sec.gov/, both
companies registered IARs in the State of North Carolina starting in 2014 and have

maintained at least twelve IARs in North Carolina since 2016. (Am. Compl. ¶ 34.)

10. RWA and FFI have held out to potential clients and in regulatory filings

that they are “committed to [their] obligations to ensure . . . that [they] fulfill their

fiduciary duty to clients or investors.” (Am. Compl. ¶¶ 211–12, 215, Exs. F, H.)

11. To reach potential clients, Heafner frequently advertised himself as a

retirement investing expert and an investment advisor with a fiduciary duty to his

clients. These advertisements included spots on Charlotte radio and television

stations, including WCNC’s Charlotte Today show and WBTV’s Morning Break

broadcast, during which he provided tax and investment advice targeted at retirees.

(Am. Compl. ¶¶ 60, 62–66, Ex. E.)

12. The IMA Plaintiffs describe themselves as unsophisticated investors,

although a majority of them have some post-secondary education. (Aff. Howell ¶¶ 1–

2, ECF No. 23; Aff. Kea Hrvatin ¶¶ 1–2, ECF No. 24; Aff. Scott Hrvatin ¶¶ 1–2, ECF

No. 25; Aff. Rapp ¶ 1, ECF No. 26; Aff. Shrader ¶¶ 1, 3, ECF No. 27; Aff. Turner ¶ 1,

ECF No. 28; Aff. Wiggins ¶ 1, ECF No. 29; Aff. Wright ¶¶ 1–2, ECF No. 30; Aff.

Goldman ¶¶ 1–2, ECF No. 31; Aff. ODell ¶¶ 1–2, ECF No. 32.)

13. Each IMA Plaintiff was familiar with Heafner from his television

appearances and advertising and, based on his representations, considered Heafner

a fiduciary with an expertise in retirement investing who could help investors create

a safe retirement plan. (Aff. Howell ¶ 3; Aff. Kea Hrvatin ¶ 3; Aff. Scott Hrvatin ¶ 3;
Aff. Rapp ¶¶ 2–3; Aff. Shrader ¶ 4; Aff. Turner ¶¶ 2, 4; Aff. Wiggins ¶¶ 2–3; Aff.

Wright ¶ 2; Aff. Goldman ¶ 3; Aff. ODell ¶ 3.)

14. With that understanding, each IMA Plaintiff reached out to and met with

Heafner in his Charlotte office to discuss hiring Heafner to invest some or all of that

IMA Plaintiff’s retirement savings. (Aff. Howell ¶ 4; Aff. Kea Hrvatin ¶¶ 3–4; Aff.

Scott Hrvatin ¶¶ 3–4; Aff. Rapp ¶¶ 3–4; Aff. Shrader ¶¶ 6–7; Aff. Turner ¶¶ 4–5; Aff.

Wiggins ¶¶ 3–4; Aff. Wright ¶¶ 2–3; Aff. Goldman ¶¶ 4–5; Aff. ODell ¶¶ 4–5.)

15. In initial meetings with each IMA Plaintiff at Heafner’s Charlotte office,

Heafner advised that he was a fiduciary and asked for (and received) information

from the IMA Plaintiff concerning that IMA Plaintiff’s finances, investments, and

goals so Heafner could prepare appropriate investment recommendations. Each IMA

Plaintiff advised Heafner that the IMA Plaintiff wanted a safe or conservative

investment strategy. (Aff. Howell ¶ 4; Aff. Kea Hrvatin ¶ 5; Aff. Scott Hrvatin ¶ 4;

Aff. Rapp ¶ 5; Aff. Shrader ¶ 8; Aff. Turner ¶ 5; Aff. Wiggins ¶ 5; Aff. Wright ¶ 3; Aff.

Goldman ¶¶ 5–7; Aff. ODell ¶ 5.)

16. Heafner subsequently created a proposed investment plan for each IMA

Plaintiff, recommending portfolios of annuities, FFI accounts, and 1 Global MOIs,

which Heafner advised the IMA Plaintiff were “safe” or “low risk.” (Aff. Howell ¶¶ 5–

6; Aff. Kea Hrvatin ¶¶ 7–8; Aff. Scott Hrvatin ¶¶ 6–7; Aff. Rapp ¶¶ 6–8; Aff. Shrader

¶¶ 10, 19; Aff. Turner ¶¶ 7–8; Aff. Wiggins ¶¶ 6–7, 10–12; Aff. Wright ¶¶ 4, 8–9; Aff.

Goldman ¶¶ 8–10; Aff. ODell ¶ 6.)
17. Each of the IMA Plaintiffs thereafter decided to retain Heafner as a financial

advisor and implement the recommended investment plan, including the proposed

investment in 1 Global’s MOIs. (Aff. Howell ¶ 9; Aff. Kea Hrvatin ¶ 9; Aff. Scott

Hrvatin ¶ 8; Aff. Rapp ¶ 11; Aff. Shrader ¶¶ 12, 19; Aff. Turner ¶ 8; Aff. Wiggins ¶¶ 8,

15; Aff. Wright ¶¶ 4, 10; Aff. Goldman ¶ 12; Aff. ODell ¶ 7.) 3

18. Prior to accepting an IMA Plaintiff’s funds for investment, Heafner required

the IMA Plaintiff to review and execute several documents. (Aff. Howell ¶ 10; Aff.

Kea Hrvatin ¶ 10; Aff. Scott Hrvatin ¶ 9; Aff. Rapp ¶ 12; Aff. Shrader ¶¶ 17, 22; Aff.

Turner ¶ 9; Aff. Wiggins ¶¶ 9, 15; Aff. Wright ¶¶ 5, 10; Aff. Goldman ¶ 13; Aff. ODell

¶ 12.)

19. Among these documents was an Investment Management Agreement

(“IMA”) between FFI and each IMA Plaintiff. (Aff. Braun Exs. A–I.) 4

20. Included in each IMA is a clause providing for “Binding Arbitration”:

Client and FFI each agree that, except as prohibited by applicable law,
all claims or controversies, and any related issues, which may arise any
time between the Parties (including FFI’s representatives, directors,
officers, employees, and agents) concerning any investment or planning
advice, recommendation, or exercise of limited discretionary authority
with respect to any subject matter; any transaction or order; the conduct
of FFI or its representatives, directors, officers, employees, and agents;
the construction, performance, or breach of this or any other agreement

3 Shrader argues that her IMA was not supported by consideration because she did not open

an FFI account. (See IMA Pls.’ Opp’n Corporate Defs. Mot. Dismiss or, Alternative, Stay &
Compel Arb’n 31 [hereinafter “Pls.’ Br. Opp’n”], ECF No. 34.) The Court finds this argument
without merit because the undisputed evidence shows that Shrader acquired the right to
fund an FFI account—a legal benefit—by entering into the IMA.

4There are two versions of the IMA—one version signed by Howell, Kea Hrvatin, Scott
Hrvatin, Rapp, Turner, Goldman, and ODell and a second version signed by Shrader,
Wiggins, and Wright, (compare, e.g., Aff. Braun Ex. A to Ex. D). The provisions at issue,
described below, are identical in both versions.
between the Parties, whether entered into prior to, on, or subsequent to
the date of this Agreement; the breach of any common law or statutory
duty; or the violation of any federal or state law of any nature shall be
resolved by binding arbitration rather than by a lawsuit in a court of law
or equity.

(Aff. Braun Ex. A ¶ 14(b); Ex. B ¶ 14(b); Ex. C ¶ 14(b); Ex. D ¶ 19(b); Ex. E ¶ 14(b);

Ex. F ¶ 19(b); Ex. G ¶ 19(b); Ex. H ¶ 14(b); Ex. I ¶ 14(b).)

21. The arbitration clause further provides that “[a]ny arbitration pursuant to

this Agreement shall be in accordance with, and governed by, the Code of Commercial

Arbitration of the American Arbitration Association” 5 and that “[a]ny arbitration

shall be held in the County of Kent, State of Michigan.” (Aff. Braun Ex. A ¶ 14(c);

Ex. B ¶ 14(c); Ex. C ¶ 14(c); Ex. D ¶ 19(c); Ex. E ¶ 14(c); Ex. F ¶ 19(c); Ex. G ¶ 19(c);

Ex. H ¶ 14(c); Ex. I ¶ 14(c).)

22. The arbitration provision also states, in relevant part, that (i) “[a]rbitration

shall be final and binding on all parties[,]” (ii) “[t]he parties are each waiving their

right to seek remedies in court, including the right to a jury trial[,]” (iii) “[p]re-

arbitration discovery is generally more limited than, and different from, court

proceedings[,]” (iv) “[t]he arbitrator’s award is not required to include factual findings

or legal reasoning[,]” (v) “any party’s right to appeal or to seek modification of rulings

by the arbitrators is strictly limited[,]” (vi) “[t]he panel of arbitrators may include a

minority of arbitrators who were or are affiliated with the securities industry[,]” and

5 The parties do not dispute that the IMAs’ reference to the “Code of Commercial Arbitration

of the American Arbitration Association” is a reference to the AAA Commercial Arbitration
Rules and Mediation Procedures (“AAA Commercial Rule(s)”). See Maggio v. Windward
Capital Mgmt. Co., 96 Cal. Rptr. 2d 168, 170 (Cal. Ct. App. 2000) (concluding that an
arbitration clause invoking the Code of Commercial Arbitration of the American Arbitration
Association invoked the AAA Commercial Rules).
(vii) “[t]his agreement to arbitrate does not constitute a waiver of the right to seek a

judicial forum to the extent that such a waiver would be void under applicable law[.]”

(Aff. Braun Ex. A ¶ 14(a); Ex. B ¶ 14(a); Ex. C ¶ 14(a); Ex. D ¶ 19(a); Ex. E ¶ 14(a);

Ex. F ¶ 19(a); Ex. G ¶ 19(a); Ex. H ¶ 14(a); Ex. I ¶ 14(a).)

23. Neither Heafner nor his office staff explained any of the documents to the

IMA Plaintiffs and, in particular, did not identify or discuss the IMA’s arbitration

provision. In addition, many IMA Plaintiffs were not provided copies of the

documents they signed, although the Corporate Defendants have provided copies of

each signed IMA in support of their Motion. (Aff. Howell ¶¶ 10–11, 13, 19–20; Aff.

Kea Hrvatin ¶¶ 11, 13–14, 21; Aff. Scott Hrvatin ¶¶ 9–10, 12, 14, 20; Aff. Rapp ¶¶ 12–

13, 28, 36; Aff. Shrader ¶¶ 22, 28; Aff. Turner ¶¶ 9–11, 19; Aff. Wiggins ¶¶ 9, 15, 18–

19, 26; Aff. Wright ¶¶ 5, 7, 12, 18; Aff. Goldman ¶¶ 13–14, 21, 27; Aff. ODell ¶¶ 11–

13, 20–21.)

24. There is no evidence any IMA Plaintiff invested funds with Heafner or the

Corporate Defendants prior to signing an IMA with FFI. (See Aff. Howell ¶ 10; Aff.

Kea Hrvatin ¶ 10; Aff. Scott Hrvatin ¶ 9; Aff. Rapp ¶ 13; Aff. Shrader ¶ 21; Aff. Turner

¶ 9; Aff. Wiggins ¶ 9; Aff. Wright ¶ 5; Aff. Goldman ¶ 13; Aff. ODell ¶ 9.)

25. Despite Heafner’s assurances that the 1 Global MOIs were safe investments,

1 Global mismanaged the funds raised through the MOIs and the MOIs proved to be

worthless. Ultimately, the SEC charged 1 Global with fraud and violation of

securities laws, and 1 Global filed for bankruptcy protection in July 2018. (Am.

Compl. ¶¶ 2, 49, 52, Ex. B.) Heafner has admitted that he recommended 1 Global
MOIs to about forty-five people, including the IMA Plaintiffs, for which he received

commissions. (Am. Compl. ¶¶ 71–72, Ex. E.)

26. The IMA Plaintiffs (other than Goldman and ODell) commenced this action

on November 5, 2019, alleging (i) a claim against all Defendants for breach of

fiduciary duty and liability under the Michigan Uniform Securities Act; (ii) claims

against Heafner for breach of duty to exercise reasonable skill, care, and diligence,

negligent misrepresentation, and liability under N.C.G.S. § 78A-56(a)(2); and (iii)

claims against the Corporate Defendants for vicarious liability, negligent and willful

or wanton supervision, negligent and willful or wanton breaches of duty, punitive

damages, N.C.G.S. § 78A-56(c)(1) control liability, violations of 15 U.S.C. § 77e(a) and

(c), and 15 U.S.C. § 77o(a) Securities Act of 1933 control liability. (Compl., ECF No.

1.) The IMA Plaintiffs later filed an Amended Complaint adding Goldman and ODell

as plaintiffs. (See Am. Compl.)

27. The Corporate Defendants filed the Motion to Dismiss on January 17, 2020,

seeking dismissal of all claims against them for improper venue or, alternatively, to

stay the action and compel arbitration on all claims asserted against them. (Defs.’

FFI & RWA’s Mot. Dismiss or, Alternative, Stay & Compel Arb’n, ECF No. 16.)

Heafner answered the Amended Complaint separately on March 2, 2020 and has not

joined the Motion to Dismiss. (Def. James H. Heafner’s Answer Am. Compl., ECF

No. 38.)

28. After the Corporate Defendants filed their reply brief on February 26, 2020,

(ECF No. 37), the IMA Plaintiffs filed the Motion to Strike on March 5, 2020, asking
the Court to strike Section I of the reply brief or grant the IMA Plaintiffs leave to file

a sur-reply to Sections I and III of the reply brief, (ECF No. 43).

29. After full briefing, the Court heard the Motion to Dismiss and the Motion to

Strike on March 10, 2020 (the “Hearing”), at which all parties were represented by

counsel.

30. After the Hearing, and in response to a request from the parties, the Court

permitted the parties the opportunity to submit both supplemental briefs and

supplemental reply briefs on the Motions, (see ECF No. 47), the last of which the

Court received on June 15, 2020, (see ECF Nos. 65, 73–75).

31. The Motions are now ripe for resolution.

III.

CONCLUSIONS OF LAW 6

A. Applicable Law

32. The North Carolina appellate courts have instructed that “it is incumbent

upon a trial court when considering a motion to compel arbitration to ‘address

whether the Federal Arbitration Act (“FAA”) or the North Carolina Revised Uniform

Arbitration Act [(“NCRUAA”)] applies’ to any agreement to arbitrate.” King v.

Bryant, 225 N.C. App. 340, 344, 737 S.E.2d 802, 806 (2013) (quoting Cornelius, 224

N.C. App. at 18, 734 S.E.2d at 872). “The FAA applies when ‘(a) a written arbitration

agreement exists that covers the dispute and (b) the contract containing the

arbitration provision evidences a transaction involving interstate commerce.’ ”

6 Any determination earlier stated as a finding of fact that should have been stated as a

conclusion of law is incorporated into these Conclusions of Law.
Bergenstock v. Legalzoom.com, Inc., 2015 NCBC LEXIS 66, at *10 (N.C. Super. Ct.

June 23, 2015) (quoting Capps, 2010 NCBC LEXIS 10, at *25–26); see also Am. Home

Assurance Co. v. Vecco Concrete Constr. Co., 629 F.2d 961, 963 (4th Cir. 1980) (to

similar effect).

33. Here, Defendants contend, and the IMA Plaintiffs do not dispute, that the

FAA applies to the IMA Plaintiffs’ agreements to arbitrate. The Court agrees. The

IMA Plaintiffs and Heafner are residents of North Carolina, Heafner performed his

services from his Charlotte office, RWA and FFI are business entities organized and

operating in Michigan, and the transactions contemplated under the IMAs involve

activity in and between North Carolina and Michigan and thus affect interstate

commerce, requiring application of the FAA. 7 See, e.g., Rickenbaugh v. Power Home

Solar, LLC, 2019 NCBC LEXIS 109, at *10 (N.C. Super. Ct. Dec. 20, 2019) (citing

Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 278–81 (1995)) (noting that the

FAA “requires only that the transaction involve interstate commerce; the parties to

the transaction need not “ ‘contemplate’ an interstate commerce connection”).

34. The Court notes, however, that “even when the FAA governs a dispute, state

law fills procedural gaps in the FAA as it is applied in state courts.” Cold Springs

Ventures, 2014 NCBC LEXIS 10, at *8; see also Carter v. TD Ameritrade Holding

Corp., 218 N.C. App. 222, 226, 721 S.E.2d 256, 260 (2012) (holding the trial court

7 The IMA Plaintiffs’ decision not to challenge the application of the FAA provides a separate

basis to apply the FAA to the IMAs. See, e. g., Maxum Founds., Inc. v. Salus Corp., 779 F.2d
974, 978 n.4 (4th Cir. 1985) (applying the FAA where “the party seeking arbitration alleges
that the transaction is within the scope of the Act” and there is no effort “to rebut jurisdiction
under the federal statute”).
properly considered motion to compel arbitration under N.C.G.S. § 1-569.7 in a

matter governed by FAA); Gaylor, Inc. v. Vizor, LLC, 2015 NCBC LEXIS 102, at *12

(N.C. Super. Ct. Oct. 30, 2015) (holding that North Carolina law fills procedural gaps

in the FAA, “including where claims might otherwise be governed by sections 3 and

4 of the FAA”).

35. In that regard, N.C.G.S. § 1-569.7(a) provides that “[o]n motion of a person

showing an agreement to arbitrate and alleging another person’s refusal to arbitrate

pursuant to the agreement: . . . (2) If the refusing party opposes the motion, the court

shall proceed summarily to decide the issue[.]”). Because N.C.G.S. § 1-569.7(a)(2)

describes the situation here, the Court “shall [therefore] decide the issue and order

the parties to arbitrate unless it finds that there is no enforceable agreement to

arbitrate.” N.C.G.S. § 1-569.7(a)(2).

B. Arbitrability

36. Under the FAA, “[d]isputes over arbitrability require a two-step inquiry:

‘First, [courts] determine who decides whether a particular dispute is arbitrable: the

arbitrator or the court. Second, if [the court] concludes that the court is the proper

forum in which to adjudicate arbitrability, [the court] then decides whether the

dispute is, in fact, arbitrable.’ ” Rickenbaugh, 2019 NCBC LEXIS 109, at *10 (quoting

Gaylor, 2015 NCBC LEXIS 102, at *14).

37. “[C]ourts presume that the parties intend courts, not arbitrators, to decide

what . . . have [been] called disputes about ‘arbitrability.’ These include questions

such as ‘whether the parties are bound by a given arbitration clause[.]’ ” BG Grp.
PLC v. Republic of Arg., 572 U.S. 25, 34 (2014) (quoting Howsam v. Dean Witter

Reynolds, Inc., 537 U.S. 79, 84 (2002)). 8 That said, “parties can, and often do, delegate

arbitrability to the arbitrator.” Charlotte Student Hous. DST v. Choate Constr. Co.,

2018 NCBC LEXIS 88, at *8 (N.C. Super. Ct. Aug. 24, 2018). Nevertheless, “[u]nless

the parties clearly and unmistakably provide otherwise, the question of whether the

parties agreed to arbitrate is to be decided by the court, not the arbitrator.” AT&T

Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649 (1986) (emphasis added);

see also Bailey v. Ford Motor Company, 244 N.C. App. 346, 352–53, 780 S.E.2d 920,

925 (“A party can overcome this presumption if it shows that the parties ‘clearly and

unmistakably’ intended for an arbitrator, instead of a court, to decide issues of

substantive arbitrability.”).

38. “Under the FAA, ‘the parties’ express adoption of an arbitral body’s rules in

their agreement, which delegate questions of substantive arbitrability to the

arbitrator, presents clear and unmistakable evidence that the parties intended to

arbitrate questions of substantive arbitrability.’ ” Rickenbaugh, 2019 NCBC LEXIS

109, at *12 (quoting Bailey, 244 N.C. App. at 353, 780 S.E.2d at 926); see also AP Atl.,

Inc. v. Crescent Univ. City Venture, LLC, 2016 NCBC LEXIS 60, at *16 (N.C. Super.

8 In determining whether a court or an arbitrator is to decide a dispute about arbitrability,

courts frequently “distinguish between issues of procedural arbitrability, on the one hand,
and issues of substantive arbitrability, on the other hand.” Local Soc., Inc. v. Stallings, 2017
NCBC LEXIS 94, at *14 (N.C. Super. Ct. Oct. 9, 2017). “[Q]uestions such as ‘whether the
parties are bound by a given arbitration clause,’ or ‘whether an arbitration clause in a
concededly binding contract applies to a particular type of controversy’ ” are those of
“substantive arbitrability.” Bailey, 244 N.C. App. at 351–52, 780 S.E.2d at 925 (quoting BG
Grp. PLC, 572 U.S. at 34). Hence, the issue presented here is one of substantive arbitrability.
There is a presumption that “issues of substantive arbitrability . . . are for a court to decide[.]”
Howsam, 537 U.S. at 85.
Ct. July 28, 2016) (“[B]y incorporating [AAA] Rules, ‘the parties agreed the arbitrator

should decide issues of substantive arbitrability.’ ” (quoting Epic Games, Inc. v.

Murphy-Johnson, 247 N.C. App. 54, 63–64, 785 S.E.2d 137, 144 (2016))).

39. Here, the Court agrees with the Corporate Defendants that the parties,

through the IMAs, agreed that they would arbitrate questions of substantive

arbitrability. Each IMA at issue provides that “[a]ny arbitration pursuant to this

Agreement, shall be in accordance with, and governed by, the Code of Commercial

Arbitration of the American Arbitration Association[,]” (Aff. Braun Ex. A ¶ 14(c); Ex.

B ¶ 14(c); Ex. C ¶ 14(c); Ex. D ¶ 19(c); Ex. E ¶ 14(c); Ex. F ¶ 19(c); Ex. G ¶ 19(c); Ex.

H ¶ 14(c); Ex. I ¶ 14(c)), thereby incorporating the AAA Commercial Rules.

40. Because Rule 7(a) of the AAA Commercial Rules provides that “[t]he

arbitrator shall have the power to rule on his or her own jurisdiction, including any

objections with respect to the existence, scope, or validity of the arbitration agreement

or to the arbitrability of any claim or counterclaim[,]” AAA Commercial Arbitration

Rules & Mediation Procedures, Rule 7(a) (emphasis added), the Court concludes that

the IMA Plaintiffs and the Corporate Defendants clearly and unmistakably delegated

issues of arbitrability to the arbitrator. See, e.g., United States ex rel. Beauchamp &

Shepherd v. Academi Training Ctr., Case No. 1:11cv371, 2013 U.S. Dist. LEXIS

46433, at *15 (E.D. Va. Mar. 29, 2013) (listing cases and holding that an agreement

to arbitrate under the AAA Commercial Rules “ ‘clearly and unmistakably’ delegates

to the arbitrator the question of arbitrability [under Rule 7] and thus, the . . .

arbitration clause, by referencing the AAA Commercial Rules, ‘clearly and
unmistakably’ does the same”); Gaylor, 2015 NCBC LEXIS 102, at *18 (“The Court

finds persuasive the Virginia federal district court’s reasoning in Beauchamp &

Shepherd . . . and similarly concludes that [a rule identical to Rule 7 of the AAA

Commercial Rules] ‘clearly and unmistakably’ submits the issue of . . . arbitrability

. . . to the arbitrator.”); see also, e.g., Epic Games, 247 N.C. App. at 63, 785 S.E.2d at

144 (“[U]nder the FAA, an arbitration clause which incorporated an arbitral body’s

rules, when those rules explicitly delegate the threshold issue of arbitrability to an

arbitrator, constitutes ‘clear and unmistakable’ evidence[.]” (emphasis added)).

41. Nevertheless, “[f]inding clear and unmistakable delegation, however, does

not end the inquiry. . . . [T]he Court must also determine whether plaintiff

specifically challenges the enforceability of the delegation clauses. If so, the Court

‘must consider the challenge’ under the relevant state law.” McCoy v. Dave &

Buster’s, Inc., No. 15-CV-0465 (JFB) (AYS), 2018 U.S. Dist. LEXIS 16655, at *19

(E.D.N.Y. Jan. 24, 2018) (quoting Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 71

(2010)); see also, e.g., Davis v. BSH Home Appliances Corp., No. 4:15-CV-103-FL, 2016

U.S. Dist. LEXIS 16321, at *7 (E.D.N.C. Feb. 10, 2016) (“When an arbitration

agreement containing a valid delegation clause is challenged, the validity of the

arbitration agreement itself is a matter for the arbitrator. . . . [But] a party may

challenge the validity of a delegation clause in court[.]” (citation omitted)); Barker v.

Fox Den Acres, Inc. (In re Barker), 510 B.R. 771, 777 (Bankr. W.D.N.C. 2014) (“Where,

as here, the agreement to arbitrate includes a delegation clause, which delegates

disputes about arbitrability to the arbitrator, the delegation clause must be enforced
unless there is a specific challenge to the delegation clause that is separate and

distinct from a challenge to the agreement to arbitrate overall.”).

42. The IMA Plaintiffs contend that the arbitration clause was induced by fraud

and that enforceability of the IMA in these circumstances is to be decided by the

Court. (See Pls.’ Br. Opp’n 21–27.) The IMA Plaintiffs rely on the United States

Supreme Court’s decision in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395, 403–04 (1967), a decision cited in King v. Bryant, 369 N.C. 451, 795 S.E.2d 340

(2017), a decision of the Supreme Court of North Carolina. (Pls.’ Br. Opp’n 22.) In

Prima Paint, the United States Supreme Court held that “if the claim is fraud in the

inducement of the arbitration clause itself—an issue which goes to the ‘making’ of the

agreement to arbitrate—the . . . court may proceed to adjudicate it.” 388 U.S. at 403–

04. 9 Relying on this principle, the IMA Plaintiffs argue that the Court should decide

the issue of arbitrability and determine the IMA Plaintiffs’ fraud-based defense to

enforcement. (See Pls.’ Br. Opp’n 24–27.)

43. Subsequent decisions of the United States Supreme Court, however, have

narrowed Prima Paint’s reach. First, the Supreme Court decided in Buckeye Check

Cashing, Inc. v. Cardegna, 546 U.S. 440, 445–46 (2006), that the trial court is to

decide arbitrability, despite clear and unmistakable evidence that the parties agreed

9 Similarly, the Supreme Court of North Carolina held in King, 369 N.C. at 467 n.5, 795

S.E.2d at 351 n.5, that “a breach of fiduciary duty ‘constitutes fraud,’ ” (quoting Link v. Link,
278 N.C. 181, 192, 179 S.E.2d 697, 704 (1971)), and that “arbitration agreements are subject
to invalidation based upon ‘generally applicable contract defenses, such as fraud, duress, or
unconscionability,’ but not by defenses that apply only to arbitration or that derive their
meaning from the fact that an agreement to arbitrate is at issue[,]” id. at 467–68, 795 S.E.2d
at 351 (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011))).
for the arbitrator to make that decision, only if the party seeking to avoid arbitration

challenges the enforceability of the arbitration clause itself, rather than the

arbitration agreement as a whole. Later, in Rent-A-Center, 561 U.S. at 72, the

Supreme Court took this principle a step further, holding that “unless . . . the

delegation provision [is challenged] specifically, we must treat it as valid . . . and must

enforce it . . . , leaving any challenge to the validity of the Agreement as a whole for

the arbitrator.” See also Brennan v. Opus Bank, 796 F.3d 1125, 1133 (9th Cir. 2015)

(“[S]ince [Plaintiff] failed to make any arguments specific to the delegation provision

and instead argued that the [Arbitration Clause] as a whole is unconscionable under

state law, we need not consider that claim because it is for the arbitrator to decide[.]”

(citations and internal quotation marks omitted)).

44. Based on its review of the IMA Plaintiffs’ briefs, the Court concludes that

the IMA Plaintiffs have challenged the delegation clause within the IMAs as well as

the arbitration provision as a whole:

[T]he Plaintiffs challenge the IMAs’ arbitration provision, and anything
construed as a delegation clause therein, because Plaintiffs were . . .
fraudulently induced to agree to clauses [that] apply to any claims (a)
against Heafner or RWA, (b) against FFI for Heafner’s or RWA’s
conduct, or (c) against FFI for products other than managed trading
accounts provided by FFI.

(Pls.’ Br. Opp’n 28 (emphasis added).) Even though the IMA Plaintiffs challenge the

delegation clause on the same grounds as the arbitration provision as a whole, they

have nonetheless made a distinct challenge to the provision’s delegation clause. See,

e.g., Gibbs v. Haynes Invs., LLC, 2020 U.S. App. LEXIS 22736, at *12 (4th Cir. July

21, 2020) (“[I]n specifically challenging a delegation clause, a party may rely on the
same arguments that it employs to contest the enforceability of other arbitration

provisions.” (quoting MacDonald v. CashCall, Inc., 883 F.3d 220, 226–27 (3d Cir.

2018))); see also, e.g., Parm v. Nat’l Bank of Cal., N.A., 835 F.3d 1331, 1335 n.1 (11th

Cir. 2016) (“Because [the plaintiff] directly challenged the delegation clause in her

opposition to the motion to compel, there is no waiver and we have jurisdiction to

consider [her] challenge.”).

45. Having thus concluded that the delegation clause has been specifically

challenged, the issue of enforceability of the delegation provision is one for the Court.

See, e.g., Minnieland Private Day Sch., Inc. v. Applied Underwriters Captive Risk

Assurance Co., 867 F.3d 449, 455 (4th Cir. 2017) (holding that since the plaintiff

“specifically challenged the enforceability of the delegation provision, [the court] then

must decide whether the delegation provision is unenforceable ‘upon such grounds as

exist at law or in equity’ ” (quoting 9 U.S.C. § 2)); see also, e.g., Davis, 2016 U.S. Dist.

LEXIS 16321, at *10 (“The delegation clause must be a binding contract before the

court can order the parties to arbitrate the validity and scope of the Arbitration

Agreement.”).

C. Enforceability of the Delegation Clause

46. “Although both federal and North Carolina law favor the enforcement of

arbitration provisions, each requires the existence of a valid agreement to arbitrate.”

Cold Springs Ventures, 2014 NCBC LEXIS 10, at *8; see also Brown v. Centex Homes,

171 N.C. App. 741, 744, 615 S.E.2d 86, 88 (2005) (“[B]efore a dispute can be ordered

resolved through arbitration, there must be a valid agreement to arbitrate.”).
47. “When deciding whether the parties agreed to arbitrate a certain

matter . . . , courts generally . . . should apply ordinary state-law principles that

govern the formation of contracts.” First Options of Chi., Inc. v. Kaplan, 514 U.S.

938, 944 (1995); see also Senior Mgmt., Inc. v. Capps, 240 F. App’x 550, 552–53 (4th

Cir. 2007) (“The issue of whether an arbitration agreement exists between the

parties, however, is a question of state contract law. Thus, state law determines

questions ‘concerning the validity, revocability, or enforceability of contracts

generally.’ ” (citations omitted) (quoting Perry v. Thomas, 482 U.S. 483, 492 n.9

(1987))). “The party seeking to compel arbitration has the burden of proving that a

valid arbitration agreement exists by mutual agreement of both parties.”

Bergenstock, 2015 NCBC LEXIS 66, at *9 (citing Slaughter v. Swicegood, 162 N.C.

App. 457, 461, 591 S.E.2d 577, 580 (2004)).

48. Where, as here, “the opposing party denies the existence of an agreement to

arbitrate, the court must summarily decide the issue of the existence of an agreement

to arbitrate[.]” Bluffs, Inc. v. Wysocki, 68 N.C. App. 284, 285, 314 S.E.2d 291, 292

(1984); see also Burke v. Wilkins, 131 N.C. App. 687, 689, 507 S.E.2d 913, 914 (1998)

(“[W]hen a party disputes the existence of a valid arbitration agreement, [North

Carolina law] expressly requires the trial judge ‘to summarily determine whether, as

a matter of law, a valid arbitration agreement exists,’ and failure to comply with this

mandate is reversible error.” (quoting Routh v. Snap-On Tools Corp., 101 N.C. App.

703, 706, 400 S.E.2d 755, 757 (1991))).
49. The Court thus turns to this summary determination, which distilled,

focuses on whether the Supreme Court of North Carolina’s decision in King renders

the IMAs at issue invalid and unenforceable. The IMA Plaintiffs contend it does,

arguing that King shows that the Corporate Defendants had a fiduciary duty to the

IMA Plaintiffs that required them to disclose material information about the

arbitration agreements before the IMA Plaintiffs signed them. This, the IMA

Plaintiffs contend, the Corporate Defendants failed to do. (Pls.’ Br. Opp’n 21–27.) In

response, the Corporate Defendants argue that King involved very different facts and

relationships and has no application to the facts of this case. (FFI & RWA’s Reply

Br. Supp. Mot. Dismiss or, Alternative, Stay & Compel Arb’n 5–11 [hereinafter “Reply

Br.”], ECF No. 37.)

50. Our Supreme Court recognized in King that when an “arbitration agreement

[is] obtained as the result of a breach of fiduciary duty from which defendants

benefitted[, it] is, for that reason, unenforceable.” 369 N.C. at 469, 795 S.E.2d at 352.

The Supreme Court also stated that

we would have reached the same result on these facts with respect to
any agreement that substantially affected Mr. King’s substantive legal
rights, such as an agreement absolving defendants from the necessity
for compliance with otherwise applicable confidentiality requirements,
providing for the transfer of items of real or personal property from Mr.
King to defendants, or waiving any tort or contract-based claims that
Mr. King might have had against either or both defendants.

Id. at 468, 795 S.E.2d at 351. Therefore, the Court must now determine whether

there was a breach of fiduciary duty by the Corporate Defendants that renders the

arbitration provisions in the IMAs unenforceable against the IMA Plaintiffs.
D. Breach of Fiduciary Duty

51. “For a breach of fiduciary duty to exist, there must first be a fiduciary

relationship between the parties.” Dalton v. Camp, 353 N.C. 647, 651, 548 S.E.2d

704, 707 (2001). “North Carolina recognizes two types of fiduciary relationships: de

jure, or those imposed by operation of law, and de facto, or those arising from the

particular facts and circumstances constituting and surrounding the relationship.”

Hager v. Smithfield E. Health Holdings, LLC, 826 S.E.2d 567, 571 (N.C. Ct. App.

2019), disc. review denied, 373 N.C. 253 (2019).

52. “A number of relationships have been held to be inherently fiduciary,

including the relationships between spouses, attorney and client, trustee and

beneficiary, members of a partnership, and physician and patient.” King, 369 N.C.

at 464, 795 S.E.2d at 349 (citations omitted); see also Dallaire v. Bank of Am., N.A.,

367 N.C. 363, 367, 760 S.E.2d 263, 266 (2014) (“Common to all these relationships is

a heightened level of trust and the duty of the fiduciary to act in the best interests of

the other party.”). “The list of relationships that [the Supreme Court of North

Carolina] ha[s] held to be fiduciary in their very nature is a limited one[.]”

CommScope Credit Union v. Butler & Burke, LLP, 369 N.C. 48, 52, 790 S.E.2d 657,

660 (2016).

53. The IMA Plaintiffs argue that they had a de jure fiduciary relationship with

the Corporate Defendants based on certain provisions of the North Carolina

Investment Advisers Act. (IMA Pls.’ Suppl. Initial Br. Opposing FFI & RWA’s Mot.
Compel Arb’n 5–14, ECF No. 73). In particular, the IMA Plaintiffs focus on N.C.G.S.

§ 78C-8(a), which provides:

It is unlawful for any person who receives, directly or indirectly, any
consideration from another person for advising the other person as to
the value of securities or their purchase or sale, . . . [t]o engage in any
act, practice, or course of business which operates or would operate as a
fraud or deceit upon the other person[.]”

54. Although the IMA Plaintiffs engage in a lengthy analysis of various statutes

and cases to argue that investment advisors have a de jure fiduciary relationship with

their clients, the IMA Plaintiffs fail to confront this Court’s prior decisions to the

contrary. See, e.g., Edwards v. Mutter, 2019 NCBC LEXIS 111, at *10 (N.C. Super.

Ct. Dec. 17, 2019) (“North Carolina law has not recognized an investment advisor-

client relationship as a de jure fiduciary relationship.”); Silverdeer, LLC v. Berton,

2013 NCBC LEXIS 21, at *27 (N.C. Super. Ct. Apr. 24, 2013) (holding that “[t]he mere

assertion of an investment advisor-client relationship or reliance upon [N.C.]G.S. 78C

et seq. does not give rise to a de jure fiduciary relationship”). And our appellate courts

have made clear that “to create a de jure fiduciary relationship on the basis of special

knowledge and skill alone would greatly expand the ‘limited’ list that our Supreme

Court has ‘not add[ed] to . . . lightly.’ ” Hager, 826 S.E.2d at 572 (quoting CommScope,

369 N.C. at 52, 790 S.E.2d at 660). In light of this persuasive precedent, the Court

declines to find a de jure fiduciary relationship between the IMA Plaintiffs and the

Corporate Defendants under North Carolina law, particularly before the IMA

Plaintiffs entered into the IMAs and entrusted their funds to Defendants, and does
not believe the Supreme Court of North Carolina would conclude to the contrary if

the issue were before it for decision.

55. The Court next turns to whether these parties were in a de facto fiduciary

relationship prior to their entry into the IMAs and entrustment of funds to Heafner.

Our courts have recognized that “[a] confidential or fiduciary relation can exist under

a variety of circumstances and is not limited to those persons who also stand in some

recognized legal relationship to each other[.]” Stilwell v. Walden, 70 N.C. App. 543,

546, 320 S.E.2d 329, 331 (1984); see also Austin v. Regal Inv. Advisors, LLC, 2018

NCBC LEXIS 3, at *18 (N.C. Super. Ct. Jan. 8, 2018) (“[F]iduciary relationships ‘can

arise in a variety of circumstances, and may stem from varied and unpredictable

facts.’ ” (quoting HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 588, 403

S.E.2d 483, 489 (1991))). “Generally, the existence of a [de facto fiduciary

relationship] is determined by specific facts and circumstances[.]” Hewitt v. Hewitt,

252 N.C. App. 437, 443, 798 S.E.2d 796, 800 (2017) (quoting Stamm v. Salomon, 144

N.C. App. 672, 680, 551 S.E.2d 152, 158 (2001)); see also Highland Paving Co. v. First

Bank, 227 N.C. App. 36, 42, 742 S.E.2d 287, 292 (2013) (“Determining whether a

fiduciary relationship exists requires looking at the particular facts and

circumstances of a given case.” (quoting Crumley & Assocs., P.C. v. Charles Peed &

Assocs., P.A., 219 N.C. App. 615, 621, 730 S.E.2d 763, 767 (2012))).

56. Our Supreme Court has long held that “a fiduciary relation is said to exist

[w]herever confidence on one side results in superiority and influence on the other

side; where a special confidence is reposed in one who in equity and good conscience
is bound to act in good faith and with due regard to the interests of the one reposing

the confidence.” Vail v. Vail, 233 N.C. 109, 114, 63 S.E.2d 202, 206 (1951) (citation

and internal quotation marks omitted). “Only when one party figuratively holds all

the cards—all the financial power or technical information, for example—have North

Carolina courts found that the special circumstance of a fiduciary relationship has

arisen.” Lockerman v. S. River Elec. Mbrshp. Corp., 250 N.C. App. 631, 636, 794

S.E.2d 346, 352 (2016) (emphasis added) (quoting S.N.R. Mgmt. Corp. v. Danube

Partners 141, LLC, 189 N.C. App. 601, 613, 659 S.E.2d 442, 451 (2008)).

57. “Liability for breach of fiduciary duty ‘is based on [the taking advantage of]

a confidential relationship rather than a specific misrepresentation.’ ” King, 369 N.C.

at 465, 795 S.E.2d at 349 (quoting Barger v. McCoy Hillard Parks, 346 N.C. 650, 666,

488 S.E.2d 215, 224 (1997)); see also Priddy v. Kernersville Lumber Co., 258 N.C. 653,

658, 129 S.E.2d 256, 261 (1963) (holding liability for a breach of fiduciary duty “may

exist without any fraudulent intent”). “Where a relation of trust and confidence exists

between the parties, there is a duty to disclose all material facts, and failure to do so

constitutes [a breach of that duty].” Vail, 233 N.C. at 114, 63 S.E.2d at 206 (citation

and internal quotation marks omitted).

58. The parties have identified, and the Court’s research has revealed, only two

North Carolina cases that have addressed a breach of fiduciary duty defense to the

enforcement of an arbitration agreement: the Supreme Court’s decision in King and

the Court of Appeals’ decision in Hager. Both are relevant to the Court’s review of

the delegation clause at issue here and will be addressed in turn.
59. In King, the plaintiff, King, was referred to a surgeon by his primary care

physician, with whom King had a de jure fiduciary relationship, to treat an acute

medical condition. 369 N.C. at 455–56, 795 S.E.2d at 344. Before meeting with the

surgeon, King was asked to provide confidential medical information and sign several

documents, including a “poorly drafted, confusing, and nonsensical” arbitration

agreement. Id. at 456, 795 S.E.2d at 344. King signed the arbitration agreement

without understanding the consequences, in part due to the fact he did not have a

post-high school education and had limited exposure to legal documents. Id. at 453,

455, 795 S.E.2d at 343–44. The arbitration agreement did not explain what

arbitration was or state that the patient was waiving constitutional rights to a jury

trial. Id. at 456, 795 S.E.2d at 344. There was no evidence that anyone disclosed to

King “that the [a]greement sought to foreclose his access to the judicial process in the

event that any dispute arose out of or related to the surgery to be performed by

Defendant[.]” Id. Finally, the agreement was presented with other documents, as if

it was being obscured. Id. at 458, 795 S.E.2d at 345.

60. In light of this evidence, the Supreme Court held that “[i]t is difficult for us

to see how one could reach any conclusion other than that Mr. King reposed trust and

confidence in [the surgeon], to whom he had been referred by his family physician for

the purpose of receiving surgical treatment[,]” and “that a fiduciary relationship

existed between Mr. King and [the surgeon] at the time that Mr. King signed the

arbitration agreement.” Id. at 466, 795 S.E.2d at 350. The Supreme Court also held

the defendants breached the fiduciary duty they owed to King:
Instead of specifically bringing this agreement, which substantially
affected his legal rights in the event that an untoward event occurred
during the course of the treatment that he received from defendants, to
Mr. King’s attention and explaining it to him, defendants presented Mr.
King with the arbitration agreement, which, at a minimum, could have
been worded more clearly, in a collection of documents, thereby creating
the understandable impression that the arbitration agreement was
simply another routine document that Mr. King needed to sign in order
to become a patient.

Id.

61. In contrast, in Hager, the plaintiff, Hager, was referred to a nursing home

facility by her chiropractor’s office because her father needed such services. 826

S.E.2d at 569. The chiropractor had never treated her father and had no personal

knowledge of his condition, so he did not owe Hager’s father a fiduciary duty. Id. at

573–74. Before signing the arbitration agreement presented by the nursing home,

Hager was allowed to tour the facility and ask questions about the kind of care that

would be provided. Id. at 573. Additionally, Hager was able to assess the facility

with a friend “who also had the opportunity to offer her independent thoughts

concerning the facility” before Hager signed any documents on behalf of her father.

Id.

62. On these facts, the Court of Appeals concluded that Hager’s provision of

confidential information to the defendant nursing home and her lack of legal

expertise were insufficient, taken together, to create a de facto fiduciary duty between

the facility and Hager’s father. Id. at 574. The Court reasoned that not only did

Hager have the opportunity to perform due diligence on the facility before providing

any confidential information, but the arbitration agreement she signed, unlike the
agreement in King, “outlined the nature of arbitration, identified the rights [Hager’s

father] was relinquishing, and encouraged Ms. Hager to seek the advice of legal

counsel before signing.” Id. On this record, the Court of Appeals held that a fiduciary

relationship did not exist between Hager’s father and the nursing home prior to

signing the arbitration agreement. Id.

63. The IMA Plaintiffs argue here that Defendants, including the Corporate

Defendants, had a fiduciary relationship with the IMA Plaintiffs prior to the

execution of the IMAs and the commitment of investor funds because (i) the IMA

Plaintiffs reposed special trust and confidence in each Defendant even before entering

the IMAs, (ii) Heafner and the Corporate Defendants separately made public

announcements that they acted as fiduciaries, and (iii) the IMA Plaintiffs provided

confidential life and financial information to the Corporate Defendants in seeking the

Corporate Defendants’ assistance prior to entering the IMAs and investing their

funds based on Heafner’s recommendations. (Pls.’ Br. Opp’n 24.)

64. The Corporate Defendants argue in opposition that at the point the IMA

Plaintiffs signed the arbitration agreements, no fiduciary relationship existed

between the IMA Plaintiffs and either Corporate Defendant. (Reply Br. 5–11.) They

contend instead that the parties were only “potentially contracting parties” prior to

any IMA Plaintiffs’ actual investment of money, (Reply Br. 6), and that Heafner (and

in turn, the Corporate Defendants) did not “figuratively hold all the cards” in the

incipient relationship with each IMA Plaintiff, (Reply Br. 7–9). As a result, the

Corporate Defendants argue that this case more closely resembles Hager, not King,
and that the factors found to create a fiduciary duty in King are not present here.

(Reply Br. 9–10.)

65. While asserting an investment advisor-client relationship, without more,

does not create a fiduciary duty between the parties, Silverdeer, 2013 NCBC LEXIS

21, at *27, North Carolina courts have found that the relationship between an

unsophisticated investor and a financial advisor can be a fiduciary one depending on

the circumstances, see, e.g., Beam v. Sunset Fin. Servs., Inc., 2019 NCBC LEXIS 56,

at *11 (N.C. Super. Ct. Sept. 3, 2019) (finding de facto fiduciary relationship where

plaintiffs “were an elderly couple who lacked financial sophistication and who not

only came to trust [defendant] as their investment adviser, but also ‘involved

[defendant] in virtually every aspect of their lives’ ” (citations omitted)); Edwards,

2018 NCBC LEXIS 237, at *20–21 (finding de facto fiduciary relationship where

plaintiff “relied upon [defendant’s] ‘reputation as a safe, secure investment

company[,]’ that [defendant] ‘knew or should have known that [p]laintiff was placing

his trust and confidence in [defendant] to look out for the best interests of [p]laintiff[,]’

and that [defendant’s] very name, ‘including the words “fiduciary” and “trust” . . .

create[d] a reasonable belief on the part of [p]laintiff that [defendant] stands in a

fiduciary relationship with [p]laintiff[.]’ ” (citations omitted)); Austin, 2018 NCBC

LEXIS 3, at *20–21 (finding de facto fiduciary relationship where plaintiffs were

unsophisticated investors who “relied on [defendants] for their financial expertise to

manage their investment accounts”).
66. None of these cases, however, involved, as here, a fiduciary relationship that

is alleged to have formed before the investor signed account documents and entrusted

funds to the advisor for investment. Indeed, the parties have not offered, and the

Court’s research has not revealed, any North Carolina decision that does.

67. Turning then to King, the Supreme Court held there that a fiduciary

relationship was formed between a patient and his surgeon before any services were

provided. 369 N.C. at 466, 795 S.E.2d at 350. As summarized in Hager:

the patient: (1) was referred to the surgeon by his primary care
physician, who already had a de jure fiduciary duty to the patient; (2)
sought out the surgeon for his specialized skill and knowledge; (3)
provided the surgeon with confidential medical information on arrival
and prior to being seen; and (4) “had received a limited education and
had little to no experience interpreting legal documents.”

826 S.E.2d at 573 (quoting King, 369 N.C. at 466, 796 S.E.2d at 350). Similarly here,

the IMA Plaintiffs offer evidence that each (i) sought out Heafner because of his

specialized skill and knowledge as an investment advisor, particularly for retirees,

(ii) provided confidential information about the IMA Plaintiff’s life and financial

situation to Heafner prior to receiving his investment advice, and (iii) had limited

experience with legal documents at the time the IMA Plaintiff signed the IMA.

68. Other facts of record, however, are very different from those in King and

weigh heavily against finding a fiduciary relationship between the IMA Plaintiffs and

the Corporate Defendants prior to the IMA Plaintiffs’ individual decisions to contract

and invest funds with Heafner and the Corporate Defendants.

69. First, in King, the Supreme Court found the referral to the surgeon by

plaintiff’s trusted family physician highly significant: “[I]t is difficult for us to see how
one could reach any conclusion other than that Mr. King reposed trust and confidence

in [the surgeon], to whom he had been referred by his family physician for the purpose

of receiving surgical treatment.” 369 N.C. at 466, 795 S.E.2d at 350. In contrast to

the plaintiff in King, the IMA Plaintiffs sought Heafner out on their own initiative;

they were not referred to Heafner by anyone, much less by someone who owed them

a fiduciary duty as in King. And unlike the plaintiff in King, who felt little freedom

in selecting a surgeon other than the one referred by his trusted family physician,

each IMA Plaintiff had complete freedom to investigate and select the advisor of his

or her own choice. Indeed, each reached out to Heafner of their own volition to obtain

and assess his investment recommendations, which they were able to compare and

contrast to any they may have chosen to receive from other advisors and to accept or

reject as each saw fit.

70. Second, the Supreme Court in King was appropriately concerned that King

was unknowledgeable about medical matters and had limited education. Here, most

of the IMA Plaintiffs have post-high school education and the two who do not, Shrader

and Wright, were an 18-year bank employee who “helped customers with their bank

accounts” and a 42-year Duke Energy “director,” respectively. (Aff. Wiggins ¶ 1; Aff.

Wright ¶ 2.) While the IMA Plaintiffs offer evidence that they are unsophisticated

investors, they have not shown that they were not able to comprehend the

straightforward language of the delegation clause and do not contend that the

arbitration provision was, as in King, “poorly drafted, confusing, and nonsensical.”

369 N.C. at 456, 795 S.E.2d at 344. And while they have also suggested that they
may have been hurried or pressed to execute the IMA and related documents without

substantive review, they have not shown that they were unable to request and receive

more time to consider the paperwork had they chosen to do so, ask questions about

the IMAs’ various provisions prior to signing, or hold back their signatures until any

concerns were satisfied.

71. Third, unlike in King, where the arbitration agreement at issue was silent

as to the arbitration process and the investor’s waiver of his or her right to a jury

trial, id. at 456, 795 S.E.2d at 344, the IMAs here expressly addressed these points.

Indeed, in stark contrast to the arbitration agreement in King, the IMA that each

IMA Plaintiff signed advised in clear and unambiguous language that, among other

things, (i) arbitration was “final and binding,” (ii) the IMA Plaintiff was “[waiving

[the] right to seek remedies in court, including the right to a jury trial[,]” (iii) “[p]re-

arbitration discovery [was] limited,” (iv) the “right to appeal [was] strictly limited[,]”

and (v) the arbitration panel may include arbitrators “affiliated with the securities

industry.” (Aff. Braun Ex. A ¶ 14(a); Ex. B ¶ 14(a); Ex. C ¶ 14(a); Ex. D ¶ 19(a); Ex.

E ¶ 14(a); Ex. F ¶ 19(a); Ex. G ¶ 19(a); Ex. H ¶ 14(a); Ex. I ¶ 14(a).)

72. The Court finds this case much more like Hager than King. Like the

plaintiff in Hager, each IMA Plaintiff had the opportunity to conduct substantial due

diligence before retaining Defendants’ services. Each IMA Plaintiff met with Heafner

(many on multiple occasions), learned about his service offerings, and reviewed his

specific proposed investment recommendations before signing an IMA and

committing investment funds to his care. (See Aff. Howell ¶¶ 4–5, 10; Aff. Kea
Hrvatin ¶¶ 5–7, 10; Aff. Scott Hrvatin ¶¶ 4–6, 9; Aff. Rapp ¶¶ 5–6, 8, 12–13, 17; Aff.

Shrader ¶¶ 7–8, 10, 12, 18; Aff. Turner ¶¶ 5–6, 8–9; Aff. Wiggins ¶¶ 6, 9–10; Aff.

Wright ¶¶ 3–5, 8; Aff. Goldman ¶¶ 5, 8, 12; Aff. ODell ¶¶ 6, 8.) Unlike the plaintiff

in King, who needed timely surgery, no IMA Plaintiff has offered evidence that the

Plaintiff was required to have an investment advisor or under time pressure to select

one. To the contrary, the evidence suggests that each IMA Plaintiff had ample

opportunity to ask questions of Heafner and to explore other investment advisor

alternatives before electing to entrust Heafner with their savings.

73. Also, the fact that the IMA Plaintiffs provided Heafner confidential financial

and other information in these circumstances does not create a fiduciary duty. As

the Court of Appeals observed in Hager:

While it is true that the provision of confidential information places
confidence in the recipient, that alone does not create a fiduciary duty;
for example, people seeking home financing are often required to provide
confidential information to lenders, yet those transactions “are
considered arm’s length and do not typically give rise to fiduciary
duties.”

826 S.E.2d at 574 (quoting Dallaire, 367 N.C. at 368, 760 S.E.2d at 266). The evidence

advanced here shows only that the IMA Plaintiffs gave Heafner confidential

information so that Heafner could make investment recommendations for their

review. The IMA Plaintiffs were free to accept or reject these recommendations and

to compare them to any recommendations they were free to obtain from other advisor

candidates. There is nothing about the IMA Plaintiffs’ interactions that suggest or

show that the IMA Plaintiffs engaged in something other than an arm’s length

transaction with Heafner or that Heafner in any way “held all the cards” in his
incipient relationships with them. Indeed, until the IMA Plaintiffs entrusted their

funds to Heafner, they were under no obligation to engage his services and were free

to walk away without consequence. Heafner cannot be seen to have exercised

domination and influence over them at this stage of the parties’ relationship. See

Dalton, 353 N.C. at 652, 548 S.E.2d at 708 (“No evidence suggests that [the

defendant’s] position . . . resulted in ‘domination and influence on the other [Dalton],’

an essential component of any fiduciary relationship.” (emphasis added)).

74. Finally, the IMA Plaintiffs’ lack of legal knowledge does not give rise to a

fiduciary relationship either. As in Hager, the “lack of legal knowledge does not

suffice to show the fiduciary relationship present in King, particularly when the”

arbitration agreements “outlined the nature of arbitration[ and] identified the rights

[being] relinquish[ed.]” Hager, 826 S.E.2d at 574. As noted, the IMA Plaintiffs do

not contend they could not read or understand the agreements; rather they complain

only that no one at Heafner’s office told them what the IMAs said about arbitration.

See, e.g., Biesecker v. Biesecker, 62 N.C. App. 282, 285, 302 S.E.2d 826, 828–29 (1983)

(“[A] person signing a written instrument is under a duty to read it for his own

protection, and ordinarily is charged with knowledge of its contents. Nor may he

predicate an action for fraud on his ignorance of the legal effect of its terms.” (citation

omitted)).

75. Based on the above, the Court concludes that a de facto fiduciary

relationship did not exist between the IMA Plaintiffs and the Corporate Defendants

before the IMA Plaintiffs signed the IMAs and entrusted their funds to Defendants.
The Court therefore concludes that the IMA Plaintiffs’ challenge to the enforceability

of the delegation provision must necessarily fail. Having so concluded, the Court

shall deny the Motion to Dismiss and order the IMA Plaintiffs’ claims against the

Corporate Defendants to arbitration. See, e.g., Heidbreder v. Epic Games, Inc., 438

F. Supp. 3d 591, 598 (E.D.N.C. 2020) (“In accordance with the delegation clause,

whether the specific claims brought by plaintiff are covered by the scope of the

agreement is a question for the arbitrator.”).

E. The Stay

76. “By statute, the Court must stay proceedings involving one or more claims

subject to arbitration. See N.C.[G.S.] § 1-569.7(g). If an arbitrable claim is severable

from other, non-arbitrable claims in the same action, the Court retains the discretion

to limit the stay to the arbitrable claims.” Charlotte Student Hous. DST v. Choate

Constr. Co., 2019 NCBC LEXIS 21, at *14 (N.C. Super. Ct. Mar. 26, 2019). The Court

nonetheless has the authority to stay all claims to “promote judicial economy and

reduce the potential for inconsistent outcomes.” Id.

77. The Court is confronted here with both arbitrable claims (the IMA Plaintiffs’

claims against the Corporate Defendants) and non-arbitrable claims (the IMA

Plaintiffs’ claims against Heafner, who filed an Answer and did not join in the Motion

to Dismiss, and the claims of the Non-IMA Plaintiffs, who did not enter into IMAs

with Defendants). It is clear to the Court that Plaintiffs’ claims, including those by

the Non-IMA Plaintiffs, against Defendants arise from the same alleged

misconduct—i.e., Heafner’s recommendation to each Plaintiff to invest in 1 Global
MOIs. Because litigating this issue both in arbitration and in this action would be

unnecessarily duplicative and risk inconsistent determinations, the Court concludes,

in the exercise of its discretion, that this action should be stayed pending the outcome

of the arbitration between the IMA Plaintiffs and the Corporate Defendants. See,

e.g., id. (holding that “[a]llowing litigation to proceed . . . while the same disputes are

being arbitrated would be duplicative and present a real and substantial risk of

inconsistent outcomes”); see also Apex Tool Grp., LLC v. Ingersoll-Rand Co., 2013

NCBC LEXIS 24, at *13–14 (N.C. Super. Ct. May 14, 2013) (“A stay pending

arbitration in this action will reduce the likelihood that the arbitration panel and

trial court will reach inconsistent determinations[.]”).

IV.

MOTION TO STRIKE

78. The Motion to Strike seeks as alternative relief the opportunity for the IMA

Plaintiffs to file a sur-reply to the Motion to Dismiss. The Court permitted both the

IMA Plaintiffs and the Corporate Defendants the opportunity to file supplemental

briefs and supplemental reply briefs on the Motions without restriction as to topic,

(ECF Nos. 65, 73–75), and both chose to file the permitted briefs. As a result, the

Court finds that the relief sought by the IMA Plaintiffs in their Motion to Strike has

been obtained and thus the Motion to Strike should be denied as moot. See, e.g., In

re Hamilton, 220 N.C. App. 350, 353, 725 S.E.2d 393, 396 (2012) (noting that an issue

is moot whenever “the relief sought has been granted or that the questions originally
in controversy between the parties are no longer at issue” (quoting In re Peoples, 296

N.C. 109, 147, 250 S.E.2d 890, 912 (1978))).

V.

CONCLUSION

79. WHEREFORE, the Court hereby ORDERS as follows:

a. The Motion to Strike is hereby DENIED.

b. The Motion to Dismiss is hereby DENIED.

c. The claims of the IMA Plaintiffs against the Corporate Defendants are

hereby ORDERED to arbitration.

d. In the exercise of the Court’s discretion, the litigation of all claims in

this civil action is hereby STAYED pending the outcome of the

arbitration proceedings between the IMA Plaintiffs and the Corporate

Defendants.

e. The IMA Plaintiffs and the Corporate Defendants shall submit to the

Court a copy of the arbitrator’s decision within seven (7) days after the

arbitrator has issued his or her decision.

f. Plaintiffs and Defendants shall meet, confer, and submit a joint status

report to the Court reflecting their recommendations concerning further

proceedings in this action within fourteen (14) days after the arbitrator

has issued his or her decision.
SO ORDERED, this the 11th day of September, 2020.

/s/ Louis A. Bledsoe, III
Louis A. Bledsoe, III
Chief Business Court Judge