Arbitration Clause Unenforceable Based on Authenticity and Credibility Concerns

Both the North Carolina Uniform Arbitration Act and the Federal Arbitration Act are stacked in favor of the enforcement of arbitration provisions.  That does not mean that a defendant's motion to compel arbitration is a foregone conclusion, as a Business Court decision from Tuesday reminded us.

In Capps v. Blondeau, the Plaintiff inherited a significant estate from her aunt and used the estate to establish two trusts.  At some point over the next several years, she began to suffer from dementia, and her broker allegedly took advantage of the situation.  Plaintiff's guardian sued her broker and his brokerage firm, among others, alleging claims including breach of fiduciary duty, constructive fraud, constructive trust, RICO, and Chapter 75 violations.

At issue as a threshold matter was whether a valid arbitration agreement existed between Plaintiff and the brokerage firm.  (The Court permitted a limited discovery period confined to the validity of the arbitration provision).  This was more than a perfunctory challenge by the Plaintiff for several reasons:

  • There was conflicting testimony concerning whether the purported signature was, in fact, Plaintiff's.  Although Plaintiff testified that the signatures were hers, her testimony overall exhibited aspects of dementia, and she testified that she had never seen the forms before.
  • The brokerage firm was unable to produce the original forms bearing Plaintiff's signature.  It produced electronic copies, but probably did not help its authenticity argument by tendering "specimen" copies of the forms at issue that differed in format and in language with the forms purportedly bearing the Plaintiff's signature.
  • The brokerage firm's document retention procedures (or lack thereof) violated applicable SEC and FINRA regulations.
  • The two affidavits of the broker were rejected by the Court as largely speculative.  In addition, the broker's concurrent federal indictment and guilty plea to investment advisory fraud ruined his credibility and constituted an admission of a party opponent that he lied to and defrauded the Plaintiff.

The Court determined that securities brokerage agreements implicated interstate commerce and therefore triggered the application of the FAA.  Although the FAA requires doubts to be resolved in favor of arbitration, the existence of an agreement to arbitrate is governed by state common law contract formation principles.  

Judge Jolly held that the moving Defendants failed to meet their burden of proving that the parties agreed to arbitrate disputes between them.  The best evidence rule permits the use of electronic scans or specimens to prove the contents of a writing, but "if a party wishes to rely upon
such evidence, it must do better than what has been presented here."  Because the brokerage firm's "record keeping with regard to . . . the contended client agreement[] was sloppy and fragmented at best . . . the documentary evidence submitted by the moving Defendants was so problematic as to be inconclusive."  The only two witnesses with the potential to testify that the Plaintiff signed the agreement were the (mentally incompetent) Plaintiff and the (feloniously incredible) broker, neither of whom the Court was willing to rely upon.

Full Order