PATHOS ETHOS, INC. v. BRAINTAP INC., 2024 NCBC 80

STATE OF NORTH CAROLINA
DURHAM COUNTY
IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
24CVS001535-310
PATHOS ETHOS, INC.,
Plaintiff,
v.
BRAINTAP INC. d/b/a BRAINTAP
TECHNOLOGIES, Defendant,
and
BRAINTAP INC. d/b/a BRAINTAP
TECHNOLOGIES, Third-Party
Plaintiff,
v.
NICHOLAS ZALDASTANI,
Third-Party
Defendant.
ORDER AND OPINION ON MOTIONS
TO DISMISS
THIS MATTER is before the Court on Plaintiff Pathos Ethos, Inc.’s (“Pathos”)
Motion to Dismiss Pursuant to Rules 12(b)(1) and 12(b)(6) (“Pathos’s Motion to
Dismiss,” ECF No. 22) and Third-Party Defendant Nicholas Zaldastani’s Rule
12(b)(1) Motion to Dismiss for Lack of Subject Matter Jurisdiction (“Zaldastani’s
Motion to Dismiss,” ECF No. 24, and together with Pathos’s Motion to Dismiss,
“Motions to Dismiss”). 	Both Motions to Dismiss are directed to claims asserted by
Defendant 	Braintap 	Inc. 	d/b/a 	Braintap 	Technologies 	(“Braintap”) 	in 	its
Counterclaims and Third-Party Complaint (“Countercls.,” ECF No. 12).
THE COURT, having considered the Motions to Dismiss, the parties’ briefs,
the arguments of counsel, the applicable law, and all appropriate matters of record,
Pathos Ethos, Inc. v. Braintap Inc., 2024 NCBC 80.

CONCLUDES that Pathos’s Motion to Dismiss should be GRANTED in part and
DENIED in part and that Zaldastani’s Motion to Dismiss should be DENIED.
J.C. White Law Group PLLC, by James C. White and Gregory P.
McGuire, for Plaintiff Pathos Ethos, Inc.
Ward and Smith, P.A., by Christopher S. Edwards and Payton C.
Bullard, for Defendant Braintap Inc. d/b/a Braintap Technologies.
Blue LLP, by Dhamian A. Blue, for Third-Party Defendant Nicholas
Zaldastani.
Davis, Judge.
INTRODUCTION
1. 	Braintap, a company that provides subscription services through its
mobile application, and Pathos, a software developer, had a business relationship for
several years that ultimately went sour. 	Pathos initiated this lawsuit against
Braintap based upon its contention that Braintap had failed to pay various sums due
under the parties’ contracts. Braintap, in turn, has asserted claims of its own against
both Pathos and Braintap’s former chief executive officer (“CEO”), Zaldastani,
alleging, among other things, that Pathos and Zaldastani colluded to covertly confer
upon themselves equity interests in Braintap. 	In the present Motions to Dismiss,
Pathos and Zaldastani seek the dismissal of several of Braintap’s claims.
FACTUAL AND PROCEDURAL BACKGROUND
2. 	The Court does not make findings of fact in connection with a motion to
dismiss under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure and
instead recites those facts contained in the complaint (or, as here, the counterclaims)
and in documents attached to, referred to, or incorporated by reference in the

complaint that are relevant to the Court’s determination of the motion. 	See, e.g.,
Window World of Baton Rouge, LLC v. Window World, Inc., 2017 NCBC LEXIS 60,
at *11 (N.C. Super. Ct. July 12, 2017).
3. 	Pathos is a North Carolina corporation that maintains its principal
place of business in Durham County, North Carolina. (Countercls. ¶ 2.) Pathos is in
the 	business 	of 	brand 	strategy 	development, 	digital 	marketing, 	and 	software
development. (Countercls. ¶ 14.)
4. 	Braintap is a Delaware corporation with its principal place of business
in Craven County, North Carolina. 	(Countercls. ¶ 1.) 	Braintap is a “brain fitness
startup,” which provides subscription services through its mobile application to
customers 	seeking 	to 	“improve 	[their] 	brain 	functions 	and 	neuroplasticity.”
(Countercls. ¶¶ 8–9.)
5. 	Zaldastani, a resident of Durham County, was hired by Braintap as its
CEO in 2018. (Countercls. ¶¶ 3, 10, 12.)
6. 	In 2019, Zaldastani began working with Pathos’s co-founders, Sam and
Isaac Park (the “Parks”), and introduced them to Braintap’s co-founders, Patrick and
Cynthia Porter (the “Porters”). (Countercls. ¶¶ 13–14.)
7. 	In December 2019, Zaldastani retained Pathos to perform “fractional
product management” relating to the development and maintenance of Braintap’s
mobile application, and on 12 December 2019, Braintap and Pathos entered into a
“product management” agreement. (Countercls. ¶¶ 21–22.)

8. 	Under this agreement, Braintap delegated to Pathos all responsibility
for developing and maintaining its mobile application, including analyzing customer
insights, product development, and prioritizing and implementing new features that
had been previously backlogged in development. 	(Countercls. ¶¶ 24–25.) 	In
exchange, Braintap promised to pay Pathos a flat fee of $3,000 per month, plus $250
per hour for approved out-of-scope work that would be billed on an ad-hoc basis.
(Countercls. ¶¶ 23, 26.)
9. 	On 25 October 2021, Zaldastani and the Parks represented to Braintap’s
executives and board members that Pathos intended to make a $100,000 capital
investment into Braintap via a cash transfer. 	(Countercls. ¶¶ 27–28.) 	However,
Pathos never made the promised cash transfer. (Countercls. ¶ 29.)
10. 	Instead, 	Pathos 	billed 	Braintap 	for 	$100,000 	in 	service 	fees.
(Countercls. ¶ 30.) 	By way of example, from October 2021 to January 2022, Pathos
billed Braintap $5,000 per month, in addition to the amounts called for under the
product management agreement, for work that it either failed to complete or for work
that Braintap had not authorized. (Countercls. ¶ 31.)
11. 	On 	25 	October 	2021, 	Zaldastani—without 	informing 	or 	obtaining
approval from Braintap’s board of directors—issued to Pathos 74,505 shares of series
A preferred stock in Braintap as satisfaction of the $100,000 bill for services rendered.
(Countercls. ¶¶ 32–34.)
12. 	Zaldastani and Pathos then allegedly undertook efforts to conceal the
stock issuance from Braintap’s board of directors. 	(Countercls. ¶ 35.) 	As a result,

Braintap continued to pay invoices sent by Pathos for work allegedly performed under
the product management agreement. (Countercls. ¶ 36.)
13. 	On 20 April 2022, Braintap and Pathos entered into a Master Services
Agreement (“MSA”). (Countercls. ¶ 56.) Under the terms of the MSA, Pathos would
provide specific services to Braintap that would be outlined in separate, individual
statements of work (“SOWs”). (Countercls. ¶¶ 57, 62, Ex. F.)
14. 	On 27 April 2022, Zaldastani and the Porters entered into SOW2 with
Pathos, which stated that Pathos would provide to Braintap “strategy, design, and
operation services[,]” including: strategic operations, “people management[,]” IT
systems, accounting and financial reporting, marketing, marketing operations, sales
and support, and “fulfillment” services. (Countercls. ¶¶ 62, 65, Ex. F.) In exchange,
as a “Recurring Retainer,” Braintap promised to pay Pathos $1,000,000 in four
quarterly installments of $250,000. (Countercls. Ex. F.)
15. 	On 27 May 2022, Zaldastani and Isaac Park negotiated and executed a
“simple agreement for future equity” (“SAFE”). (Countercls. ¶ 67, Ex. G.) Under the
terms of the SAFE, Pathos represented itself as an “investor” of Braintap’s and
promised to pay $250,000 in exchange for, among other things, the future “right to
certain shares of [Braintap] Capital Stock.” (Countercls. ¶ 68, Ex. G.)1
1 The execution of the SAFE had been previously contemplated by the parties when they
agreed in SOW2 that “[i]n the event that the SAFE is not granted to Pathos on the Effective
Date, then Brain[t]ap shall pay to Pathos a monthly fee of $83,333 for each month (or portion
of a month) that Pathos provides the Services prior to the grant of the SAFE.” (Countercls.
Ex. F.)

16. 	However, Pathos never actually paid Braintap the $250,000 “payment
amount” called for in the SAFE. (Countercls. ¶ 70, Ex. G.) Instead, Pathos accepted
the SAFE as satisfaction for one of the SOW2’s quarterly installment payments.
(Countercls. ¶ 71.)
17. 	Zaldastani and Pathos undertook efforts to conceal the SAFE from
Braintap’s board of directors. (Countercls. ¶ 72.) As a result, Braintap continued to
pay invoices sent by Pathos for work done under SOW2. (Countercls. ¶ 74.)
18. 	Zaldastani subsequently entered into various additional SOWs with
Pathos, which stated that Pathos would provide Braintap with various support
services, including: “director of engineering services[;]” “iOS software engineering
services[;]” “Android software engineering services[;]” “cloud software engineering
services[;]” and “product management services[.]” (Countercls. ¶¶ 85, 87, 92, 97, 102,
107, Ex. I.)
19. 	Although Pathos never actually performed the services provided for in
those SOWs within the time periods specified therein, Pathos nevertheless billed
for—and Braintap paid for—those unperformed services. (Countercls. ¶¶ 86, 88–90,
95, 100, 103–05, 106–07, 109–10.)
20. 	Zaldastani and Pathos’s executives intentionally caused Braintap to be
overbilled for duplicative services and for services under the MSA that Pathos never
actually provided. (Countercls. ¶¶ 136–37.)
21. 	In August 2021, Zaldastani made a backdated entry in Braintap’s
accounting system for December 2020, reflecting that he had received a twenty

percent ownership interest in Braintap’s predecessor entity, Excel Management, LLC
(“Excel”). 	(Countercls. ¶¶ 43–44.) However, this entry was false in that Zaldastani
had never provided consideration to Excel, served as a member of Excel, or actually
owned an economic interest in Excel. (Countercls. ¶¶ 45–46.)
22. 	In March 2021, Zaldastani converted his purported ownership interest
in Excel into common stock of Braintap and issued equivalent shares to himself
without 	informing 	or 	obtaining 	approval 	from 	Braintap’s 	board 	of 	directors.
(Countercls. ¶¶ 48, 50.) 	Indeed, Zaldastani undertook efforts to conceal his actions
from Braintap’s board. (Countercls. ¶ 51.)
23. 	Zaldastani sought to redeem a convertible promissory note for 292,093
shares of series A preferred stock in Braintap in April 2021. (Countercls. ¶ 52.) Once
again, he not only failed to inform or obtain approval from Braintap’s board of
directors, but also made efforts to conceal what he had done. (Countercls. ¶¶ 53–54.)
24. 	Braintap eventually learned of the above-referenced acts by Zaldastani,
and in October 2022, it terminated Zaldastani from his position as CEO. (Countercls.
¶¶ 37, 75, 111, Ex. C.)
25. 	On 2 November 2022, Braintap terminated the MSA and all outstanding
SOWs with Pathos, effective 1 December 2022. (Countercls. ¶ 112.)
26. 	Braintap and Pathos entered into an escrow agreement on 9 December
2022, whereby Braintap agreed to place a final $200,000 payment in escrow,
transferrable to Pathos upon its providing Braintap with “certain assets associated

with Braintap’s mobile application, infrastructure, and technology.” (Countercls. ¶¶
114–17, Ex. J.)
27. 	However, Pathos failed to provide Braintap with—among other things—
the BrainTap-Server.pem file and the credentials required to modify and update
version two of the “BrainTap Pro Application” (“V2 Application”) as well as the
Braintap-gitlab-runner.pem file for version three of the “BrainTap Pro Application”
(“V3 Application”). (Countercls. ¶¶ 119–20, 132.)
28. 	On 	4 	January 	2023, 	the 	V2 	Application 	experienced 	catastrophic
failures, 	and without 	the 	necessary 	files, 	Braintap was 	unable to modify 	the
application’s code or restore service to its customers. 	(Countercls. ¶¶ 122–23.)
Therefore, Braintap “execute[d] an emergency and unplanned migration” to the V3
Application, which required “serious work to circumvent the challenges raised by not
having access to the [V3 Application] files.” (Countercls. ¶¶ 130, 134.)
29. 	To date, Braintap has been unable to access or recover important
information, 	including 	customer 	data, 	associated 	with 	the 	V2 	Application.
(Countercls. ¶¶ 121, 124–25.)
30. 	On 25 March 2024, Pathos initiated this lawsuit by filing a Complaint
in Durham County Superior Court naming Braintap and Ward & Smith, P.A. (“Ward
& Smith”), a law firm, as Defendants. 	(ECF No. 3.) 	In the Complaint, Pathos
asserted claims against Braintap for breach of the escrow agreement, breach of the
MSA and SOW2, and for unfair and deceptive trade practices (“UDTP”). Pathos also

asserted a claim for injunctive relief against Ward & Smith in its capacity as the
escrow agent.
31. 	This action was designated as a complex business case on 2 April 2024
and assigned to the undersigned. (ECF Nos. 1–2.)
32. 	On 16 April 2024, the Court entered an Order on Joint Motion to
Interplead Funds authorizing Ward & Smith to deposit the disputed escrowed funds
with the Durham County Clerk of Superior Court and dismissing the law firm as a
party to this action. (ECF No. 7.)
33. 	Braintap filed an Answer, Counterclaims, and Third-Party Complaint
on 28 May 2024 in which it asserted counterclaims against Pathos for declaratory
judgment, UDTP, breach of the escrow agreement, breach of the MSA, and unjust
enrichment. Braintap also brought third-party claims against Zaldastani for breach
of fiduciary duty and declaratory judgment.2
34. 	On 29 July 2024, Pathos filed its Motion to Dismiss pursuant to Rules
12(b)(1) and (6). 	Zaldastani, in turn, filed his Motion to Dismiss based on Rule
12(b)(1) on 7 August 2024.
35. 	On 26 November 2024, the Court held a hearing on the Motions to
Dismiss at which all parties were represented by counsel.
36. 	The Motions to Dismiss have been fully briefed and are now ripe for
resolution.
2 The Third-Party Complaint contains two separate breach of fiduciary claims against
Zaldastani.

LEGAL STANDARD
37. 	A motion brought under Rule 12(b)(1) challenges a court’s jurisdiction
over the subject matter of the claimant’s claims. 	N.C. R. Civ. P. 12(b)(1). 	“Subject
matter 	jurisdiction 	is 	the 	indispensable 	foundation 	upon 	which 	valid 	judicial
decisions rest,” In re T.R.P., 360 N.C. 588, 590 (2006), and has been defined as “a
court’s legal authority to adjudicate the kind of claim alleged.” In re McClatchy Co.,
LLC, 386 N.C. 77, 85 (2024) (cleaned up). 	“[T]he proceedings of a court without
jurisdiction of the subject matter are a nullity.” Burgess v. Gibbs, 262 N.C. 462, 465
(1964) (cleaned up).
38. 	In determining the existence of subject matter jurisdiction, the Court
may consider matters outside the pleadings. 	Emory v. Jackson Chapel First
Missionary Baptist Church, 165 N.C. App. 489, 491 (2004). 	However, “if the trial
court confines its evaluation to the pleadings, the court must accept as true the
[claimant]’s allegations and construe them in the light most favorable to the
[claimant].” Munger v. State, 202 N.C. App. 404, 410 (2010) (quoting Dep’t of Transp.
v. Blue, 147 N.C. App. 596, 603 (2001)).
39. 	In ruling on a motion to dismiss under Rule 12(b)(6), the Court may only
consider the complaint and “any exhibits attached to the complaint[,]” Krawiec v.
Manly, 370 N.C. 602, 606 (2018), in order to determine whether “as a matter of law,
the allegations of the complaint, treated as true, are sufficient to state a claim upon
which relief can be granted under some recognized legal theory,” Forsyth Mem’l
Hosp., Inc. v. Armstrong World Indus., Inc., 336 N.C. 438, 442 (1994) (cleaned up).

The Court must view the allegations in the complaint “in the light most favorable to
the non-moving party.” 	Christenbury Eye Ctr., P.A. v. Medflow, Inc., 370 N.C. 1, 5
(2017) (cleaned up).
40. 	“It is well established that dismissal pursuant to Rule 12(b)(6) is proper
when (1) the complaint on its face reveals that no law supports the [claimant’s] claim;
(2) the complaint on its face reveals the absence of facts sufficient to make a good
claim; or (3) the complaint discloses some fact that necessarily defeats the [claimant’s]
claim.” Corwin v. British Am. Tobacco PLC, 371 N.C. 605, 615 (2018) (cleaned up).
ANALYSIS
41. 	As a preliminary matter, the Court notes that the present Motions to
Dismiss only relate to certain counterclaims and third-party claims asserted by
Braintap.3 Pathos’s claims in the Complaint are unaffected.
42. 	As discussed in detail below, Pathos and Zaldastani contend that several
of the claims asserted by Braintap should be dismissed for lack of subject matter
jurisdiction under Rule 12(b)(1). The Court will address their respective arguments
on the jurisdictional issue together because they are identical. 	The Court will then
discuss Pathos’s Motion to Dismiss based on Rule 12(b)(6) in which it seeks dismissal
of Braintap’s counterclaim for UDTP for failure to state a valid claim for relief.
3 For clarity, Zaldastani’s Motion to Dismiss encompasses all of the third-party claims
asserted against him by Braintap (that is, a claim for declaratory judgment and two claims
for breach of fiduciary duty), and Pathos’s Motion to Dismiss is directed toward Braintap’s
counterclaims against it for declaratory judgment and UDTP. The remainder of Braintap’s
counterclaims against Pathos (which consist of claims for breach of the escrow agreement,
breach of the MSA, and unjust enrichment) are not affected by Pathos’s Motion to Dismiss.

A. 	Subject Matter Jurisdiction
43. 	Collectively, Zaldastani and Pathos 	contend that 	this 	Court 	lacks
subject matter jurisdiction as to (1) both of Braintap’s claims for declaratory judgment
(one of which is asserted against Pathos and the other against Zaldastani) and (2)
Braintap’s two claims for breach of fiduciary duty (both of which are asserted against
Zaldastani).
44. 	This is so, they assert, because Delaware’s Court of Chancery possesses
exclusive jurisdiction over such claims pursuant to Del. Code Ann. tit. 8, § 205.
45. 	Del. Code Ann. tit. 8, § 205(a) provides that:
[U]pon application by the corporation, any successor entity to the
corporation, any member of the board of directors, any record or
beneficial holder of valid stock or putative stock, any record or beneficial
holder of valid or putative stock as of the time of a defective corporate
act ratified pursuant to § 204 of this title, or any other person claiming
to be substantially and adversely affected by a ratification pursuant to
§ 204 of this title, the [Delaware] Court of Chancery may:
(1) Determine the validity and effectiveness of any defective
corporate act ratified pursuant to § 204 of this title;
(2) Determine the validity and effectiveness of the ratification of
any defective corporate act pursuant to § 204 of this title;
(3) Determine the validity and effectiveness of any defective
corporate act not ratified or not ratified effectively pursuant to
§ 204 of this title;
(4) Determine the validity of any corporate act or transaction and
any stock, rights or options to acquire stock; and
(5) Modify or waive any of the procedures set forth in § 204 of this
title to ratify a defective corporate act.
Del. Code Ann. tit. 8, § 205(a).

46. 	The portion of § 205 upon which the arguments of Pathos and Zaldastani
are specifically based is subpart (e), which states that “[t]he [Delaware] Court of
Chancery is hereby vested with exclusive jurisdiction to hear and determine all
actions brought under this section.” Del. Code Ann. tit. 8, § 205(e) (emphasis added).
47. 	Pathos and Zaldastani assert that each of the above-referenced claims
pled by Braintap are subject to § 205(e) because they require a judicial determination
as to the alleged invalidity of corporate acts by a Delaware corporation within the
scope of § 205(a).
48. 	Specifically, 	Pathos 	contends 	that 	the 	declaratory 	judgment 	claim
brought against it seeks a ruling as to whether it holds a valid ownership interest in
Braintap based on Zaldastani’s issuance of shares in the company to Pathos as well
as the execution of the SAFE agreement. 	This issue, Pathos asserts, is the precise
kind of claim described in § 205(a) over which Delaware’s Court of Chancery would
have exclusive jurisdiction based on § 205(e).
49. 	Similarly, 	Zaldastani 	argues 	that 	Braintap’s 	declaratory 	judgment
claim against him relates to the question of whether he actually owns any shares in
the company as a result of (1) his attempt to convert a membership interest in Excel
into ownership of Braintap’s common stock; and (2) his effort to redeem a convertible
promissory note into series A preferred stock in Braintap. 	Zaldastani further
contends that the two breach of fiduciary duty claims against him arise from these
same acts and—as a result—are likewise encompassed by § 205.
50. 	The Court rejects Zaldastani’s and Pathos’s argument for three reasons.

51. 	First, and most basically, subpart (e) of § 205—by its express language—
makes clear that it applies only to “actions brought under this section.” 	Del. Code
Ann. tit. 8, § 205(e) (emphasis added). Here, none of Braintap’s claims at issue give
any indication that they have been brought under Delaware law at all—much less
under § 205. As a result, on that ground alone, subpart (e) is inapplicable.
52. 	Second, their argument also fails as a matter of statutory interpretation.
The logical meaning of § 205(e)’s “exclusive jurisdiction” provision is that if a claim
invoking one of the subjects discussed in § 205(a) is brought in the courts of Delaware,
then the Delaware Court of Chancery is the appropriate forum within that state’s
court system.
53. 	This interpretation has been adopted by this Court, by Delaware courts,
and by courts in other jurisdictions in response to similar arguments made by
litigants based on analogous provisions of Delaware statutes. See, e.g., Futures Grp.
v. Brosnan, 2023 NCBC LEXIS 7, at *9 (N.C. Super. Ct. Jan. 19, 2023) (interpreting
a similar Delaware statutory provision as simply meaning that “the Court of
Chancery would be the proper court in which to pursue this claim if the case were
pending 	in 	Delaware” 	(emphasis 	added)); 	City 	of 	Providence 	v. 	First 	Citizens
Bancshares, Inc., 99 A.3d 229, 236 (Del. Ch. 2014) (noting that “a grant by the General
Assembly of ‘exclusive’ jurisdiction to [the Court of Chancery] for claims arising under
a particular statute does not preclude a party from asserting a claim arising under
that statute in a different jurisdiction”); In re Kloiber, 98 A.3d 924, 939 (Del. Ch. 2014)
(holding that “[w]hen a Delaware state statute assigns exclusive jurisdiction to a

particular Delaware court, the statute is allocating jurisdiction among the Delaware
courts” and that “[t]he state is not making a claim against the world that no court
outside of Delaware can exercise jurisdiction over that type of case”), vacated on other
grounds, 2014 Del. Ch. LEXIS 190 (Sept. 3, 2014); Owen v. Array US, Inc., 2023 N.Y.
Misc. LEXIS 5329, at *1–2 (N.Y. Supr. Ct. Sept. 5, 2023) (denying a motion to dismiss
for lack of subject matter jurisdiction and holding that Del. Code Ann. tit. 8, § 205(e)
“does not divest New York of its interest in adjudicating th[e] matter” or “mandate
that th[e] claim be tried in Delaware”).
54. 	Third, even if it was, in fact, the intent of the Delaware legislature to
deprive courts in all other states of jurisdiction to hear claims that could have been
brought under § 205, it is hard to conceive of how such a mandate would pass
constitutional muster.
55. 	In rejecting arguments similar to those being made by Pathos and
Zaldastani here, a Delaware court has expressly noted the constitutional problems
that would exist under that scenario. See In re Kloiber, 98 A.3d at 939 (stating that
a state statute purporting to grant sole jurisdiction to a Delaware court over certain
types of claims to the exclusion of courts in other states would violate the Full Faith
and Credit Clause because “Delaware . . . cannot unilaterally preclude a sister state
from hearing claims under its law” and that any attempt to do so would “not be giving
constitutional respect to the judicial proceedings of [its] sister state[s]”).
56. 	Therefore, Pathos’s and Zaldastani’s Motions to Dismiss based on lack
of subject matter jurisdiction are DENIED.

B. 	UDTP
57. 	Braintap premises its UDTP claim on three specifically identified
categories of acts attributable to Pathos: (1) “charging for services it did not provide;”
(2) “overbilling or duplicative billing for services it did provide;” and (3) “making []
false representations concerning capital investments made in Braintap in order to
induce issuance purported [sic] equity in Braintap.” (Countercls. ¶ 155.)
58. 	“To prevail on a claim of unfair and deceptive trade practice a [claimant]
must show (1) an unfair or deceptive act or practice, or an unfair method of
competition, (2) in or affecting commerce, (3) which proximately caused actual injury
to the [claimant] or to his business.” Spartan Leasing Inc. v. Pollard, 101 N.C. App.
450, 460–61 (1991).
59. 	Pathos seeks dismissal of Braintap’s UDTP claim on two grounds.
60. 	First, Pathos contends that the claim fails to the extent it is premised
on “false representations regarding capital investments in Braintap” because such
misrepresentations relate to securities transactions, which are not “in or affecting
commerce” for purposes of a UDTP claim.
61. 	Under 	the 	Unfair 	and 	Deceptive 	Trade 	Practices 	Act 	(“UDTPA”),
commerce 	generally 	“includes 	all 	business 	activities, 	however denominated[.]”4
N.C.G.S. § 75-1.1(b). North Carolina courts have broadly defined “business activity”
as the “regular, day-to-day activities, or affairs, such as the purchase and sale of
goods, or whatever other activities the business regularly engages in and for which it
4 Although not relevant here, professional services rendered by a member of a learned
profession are excluded from the definition of “commerce.” N.C.G.S. § 75-1.1(b).

is organized.” HAJMM Co. v. House of Raeford Farms, Inc., 328 N.C. 578, 579 (1991).
Although the “in or affecting commerce” element of a UDTP claim is broad, it does
not encompass “all wrongs” committed between businesses. Sterner v. Penn, 159 N.C.
App. 626, 632–33 (2003). “Certain events . . . are deemed to be extraordinary events
outside 	of 	the 	regular, 	day-to-day 	activities 	or 	affairs 	of 	a 	business. 	Such
extraordinary events are, therefore, not deemed ‘business activities’ and are not ‘in
or affecting commerce.’” DeGorter v. Capitol Bancorp Ltd., 2011 NCBC LEXIS 29, at
*10 (N.C. Super. Ct. July 29, 2011) (cleaned up).
62. 	Our Supreme Court has held that transactions involving securities are
“extraordinary event[s] . . . [u]nlike [the] regular purchase and sale of goods, or
whatever else the enterprise was organized to do[,]” such that “they are not . . . ‘in or
affecting commerce,’ even under a reasonably broad interpretation of the legislative
intent underlying [the UDTPA].” HAJMM Co., 328 N.C. at 594.
63. 	This Court has previously summarized the development of the so-called
“Securities Exemption” to the UDTPA as follows:
[The Securities Exemption to the UDTPA] ha[s] [its] genesis in the
North Carolina Supreme Court’s decision in Skinner v. E. F. Hutton &
Co., Inc., 314 N.C. 267 (1985). 	There, the Court held that “securities
transactions are beyond the scope of N.C.G.S. § 75-1.1” in part because
securities transactions are “‘already subject to pervasive and intricate
regulation’” under the North Carolina Securities Act and the federal
securities laws. 	Id. at 275 (quoting Lindner v. Durham Hosiery Mills,
Inc., 761 F.2d 162, 167–68 (4th Cir. 1985)).
In HAJMM, the North Carolina Supreme Court expanded the securities
exception to include “the trade, issuance and redemption of corporate
securities or similar financial instruments . . . .” 328 N.C. at 594.
In Oberlin, our Court of Appeals expanded the reach of the UDTPA
securities exception. 	Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52

(2001). 	In that case, plaintiff Oberlin Capital, L.P. agreed to provide
working capital for an automotive parts corporation. Id. at 54.
. . .
Our Court of Appeals held that “[b]ecause the loan agreement at issue
here, which also granted Oberlin the right to purchase stock in [the
debtor corporation] in the future, was primarily a capital raising device,
it was not ‘in or affecting commerce’ for the purposes of Chapter 75.” Id.
at 62.
Latigo Invs. II, LLC v. Waddell & Reed Fin., Inc., 2007 NCBC LEXIS 17, at *7–10
(N.C. Super. Ct. June 11, 2007).
64. 	Thus, given the expansive scope with which our appellate courts have
interpreted the Securities Exemption to the UDTPA, “[t]he only relevant question is
whether securities were involved in the transaction.” DeGorter, 2011 NCBC LEXIS
29, at *15; see Aym Techs., LLC v. Scopia Capital Mgmt. LP, 2021 NCBC LEXIS 29,
at *30 (N.C. Super Ct. Mar. 31, 2021) (dismissing a claim for UDTP based on
misrepresentations 	made 	during 	the 	course 	of 	equity 	purchase 	negotiations
“[b]ecause our courts have repeatedly held that the only question for the [c]ourt under
[the Securities Exemption to the UDTPA] is whether the basis for the transaction
involved securities” (cleaned up)); see also White v. Consol. Planning, Inc., 166 N.C.
App. 283, 304 (2004) (noting that “the question is whether the transactions at issue
involved securities or other financial instruments involved in raising capital”).5
5 Braintap cites our Supreme Court’s 2021 decision in Nobel v. Foxmoor Grp., LLC, 380 N.C.
116 (2021), for the proposition that the Supreme Court has recently taken a more restrictive
approach on the applicability of the Securities Exemption. 	Although it is true that the
Supreme Court in Nobel addressed the applicability of the exemption in that case based on
the reasoning originally articulated in HAJMM, it did not purport to overrule any of the cases
from North Carolina’s lower courts since HAJMM was decided. Nor did it contain language
expressly cautioning against a more expansive interpretation of the Securities Exemption.

65. 	Here, it cannot be disputed that with regard to key occurrences forming
the basis for Braintap’s UDTP claim, “securities were involved in the transaction.”
Clearly, the issuance of 74,505 shares of series A preferred stock and the issuance of
the SAFE relate to securities. Specifically, Braintap’s counterclaims allege that:
On or about October 25, 2021, Zaldastani and Pathos executives Sam
and Isaac Parks represented to Braintap executives and board members
that Pathos intended to make a $100,000 capital investment into
Braintap.
Zaldastani, Sam, and Isaac represented that Pathos’ investment would
be made through cash [sic] transfer to Braintap.
. . .
Upon information and belief, on October 25, 2021, Zaldastani purported
to cause Braintap to issue 74,505 shares of series A preferred stock in
Braintap to Pathos as satisfaction for the $100,000 of wrongfully billed
charges.
. . .
Upon 	information 	and 	belief, 	after 	Zaldastani 	purported 	to 	cause
Braintap to issue 74,505 shares of series A preferred stock to Pathos,
Zaldastani and Pathos concealed the issuance of these shares from
Braintap board members and executives.
. . .
In May 2022, Pathos purportedly acquired a simple agreement for
equity (“SAFE”) from Braintap.
. . .
The SAFE was negotiated among Zaldastani and Pathos. It purports to
grant Pathos equity in Braintap’s [sic] in exchange for a $250,000
payment from Pathos.
. . .
Absent clear direction from the Supreme Court to the contrary, this Court must follow the
cases decided since HAJMM that have expanded the scope of the exemption.

Pathos never provided Braintap with the $250,000 payment called for
in the SAFE.
. . .
Upon information and belief, Zaldastani and Pathos concealed the
purported issuance of the SAFE from Braintap board members and
executives.
(Countercls. ¶¶ 27–30, 32, 35, 67–68, 70–72, 74.)
66. 	Such transactions unquestionably involve securities and are at the heart
of Braintap’s UDTP allegation that Pathos made “false representations concerning
capital investments made in Braintap in order to induce issuance purported [sic]
equity in Braintap.” (Countercls. ¶ 155.)
67. 	Indeed, the Court notes that Braintap’s declaratory judgment claim
against Pathos is expressly based on the issue of whether the securities allegedly
issued to Pathos conferred upon it a legally valid ownership interest in Braintap. (See
Countercls. ¶¶ 138–43.) 	Therefore it can hardly be said that the role played by
securities in Braintap’s counterclaims is a minor one.
68. 	Accordingly, the portions of Braintap’s UDTP claim based upon the
alleged issuance to Pathos of shares or equity in Braintap fail as a matter of law based
on the Securities Exemption.
69. 	Second, 	Pathos 	contends 	that 	Braintap’s 	remaining 	allegations 	in
support of its UDTP claim—even when read in the light most favorable to Braintap—
allege only intentional breaches of contract, which are insufficient to support a UDTP
claim.

70. 	North Carolina courts have repeatedly held that “[a]ctions for [UDTP]
are distinct from actions for breach of contract, and a mere breach of contract, even if
intentional, is not sufficiently unfair or deceptive to sustain an action under N.C.G.S.
§ 75-1.1.” 	McDonald v. Bank of N.Y. Mellon Tr. Co., 259 N.C. App. 582, 589 (2018)
(cleaned up). 	“When a [claimant] alleges a UDTP violation based upon a breach of
contract, the [claimant] must show substantial aggravating circumstances attending
the breach[.]” Dan King Plumbing Heating & Air Conditioning, LLC v. Harrison, 281
N.C. App. 312, 320 (2022) (cleaned up). 	“As a general proposition, unfairness or
deception either in the formation of the contract or in the circumstances of its breach
may establish the existence of substantial aggravating circumstances[.]” 	SciGrip,
Inc. v. Osae, 373 N.C. 409, 426 (2020) (cleaned up). 	However, “[i]t is not enough to
allege [the] aggravating or egregious results of a breach. If that were the case, then
any contract dispute that results in serious losses could present a valid UDTPA claim,
a result North Carolina courts have repeatedly rejected.” 	Edwards v. Genex Coop.,
Inc., 777 Fed. Appx. 613, 623 (4th Cir. 2019), cert. denied, 140 S. Ct. 853 (2020)
(cleaned up).
71. 	Deceptive representations made during contract formation and inducing
a party to enter into a contract “while having no intention of keeping the promises
made” are “classic example[s] of [] aggravating circumstance[s].” 	Pee Dee Elec.
Membership Corp. v. King, 2018 NCBC LEXIS 22, at *18–19 (N.C. Super. Ct. Mar.
15, 2018) (cleaned up).

72. 	However, as this Court has observed:
It is far more difficult to allege and prove egregious circumstances after
the formation of the contract. 	One reason for this is that disputes
concerning the circumstances of the breach are often bound up with one
party’s exercise of perceived rights and remedies under the contract.
Even where the exercise of contractual rights is “allegedly contrary to
the 	terms 	of 	the 	agreement,” 	the 	legal 	question 	concerns 	the
interpretation and application of the agreement—that is, whether the
contract has been breached. Taylor v. United States, 89 F. Supp. 3d 766,
773 (E.D.N.C. 2014) (cleaned up). 	These claims are “best resolved by
simply 	determining 	whether 	the 	parties 	properly 	fulfilled 	their
contractual duties.” 	Heron Bary Acquisition, LLC v. United Metal
Finishing, Inc., 245 N.C. App. 378, 383 (2016) (cleaned up).
Thus, the North Carolina Court of Appeals has repeatedly stressed that
a section 75-1.1 violation “is unlikely to occur during the course of
contractual performance.” Id.
Post v. Avita Drugs, LLC, 2017 NCBC LEXIS 95, at *5 (N.C. Super. Ct. Oct. 11, 2017).
73. 	Substantial 	aggravating 	circumstances 	after 	contract 	formation
typically require: (1) the forgery or destruction of documents; (2) concealment of a
breach coupled with conduct designed to deter investigation into the breach; or (3)
intentional deception designed to allow the defendant to receive the benefits of the
contract. 	In re Randolph Hosp., Inc., 2024 Bankr. LEXIS 206, at *93 (Bankr.
M.D.N.C. Jan. 29, 2024) (cleaned up); see, e.g., Garlock v. Henson, 112 N.C. App. 243,
245–46 (1993) (finding substantial aggravating circumstances where the defendant
“forged a bill of sale in an attempt to extinguish plaintiff’s ownership interest”); Foley
v. L & L Int’l, Inc., 88 N.C. App. 710, 714 (1988) (sufficient aggravating circumstances
existed where the defendant “ke[pt] a customer’s down payment on a car for seven
months without even attempting to get the car it had promised to obtain, while falsely
claiming that the car had been obtained and would be delivered shortly”).

74. 	The 	remainder 	of 	Braintap’s 	allegations 	pled 	with 	any 	degree 	of
specificity concern Pathos’s performance of its various contracts with Braintap and
essentially amount to claims of overbilling and intentional breaches of contract.
However, claims for UDTP require more. 	See W&W Partners, Inc. v. Ferrell Land
Co., LLC, 2019 NCBC LEXIS 104, at *15 (N.C. Super. Ct. Dec. 6, 2019) (cleaned up)
(holding that “defendant’s knowing and intentional overbilling of the plaintiff . . .
during 	the 	performance 	of 	the 	contract 	[was] 	not 	substantial 	aggravating
circumstances”).
75. 	For these reasons, Pathos’s Motion to Dismiss Braintap’s UDTP claim
is GRANTED, and that claim is DISMISSED with prejudice.
CONCLUSION
THEREFORE, IT IS ORDERED as follows:
1. 	Zaldastani’s Motion to Dismiss is DENIED.
2. 	Pathos’s Motion to Dismiss is GRANTED as to Braintap’s claim for
UDTP, and that claim is DISMISSED with prejudice.
3. 	In all other respects, Pathos’s Motion to Dismiss is DENIED.
SO ORDERED, this the 9th day of December, 2024.
/s/ Mark A. Davis
Mark A. Davis
Special Superior Court Judge
for Complex Business Cases