Justia.com Opinion Summary: After Roger Hudspeth's employment with the Bank of the Commonwealth was terminated, Hudspeth filed a complaint against the Bank, alleging the Bank failed to pay him compensation owed for his employment. The Bank filed a motion to stay and compel arbitration before the Financial Industry Regulatory Authority (FINRA), arguing (1) the Bank was a "customer" as defined by the FINRA Code of Arbitration Procedure for Customer Disputes (Customer Code), (2) Hudspeth was an associated person of a "member," and (3) because the dispute was between a customer and an associated person of a member, arbitration was mandatory under the Customer Code. The circuit court denied the Bank's motion, concluding that the Bank was not a customer under the Customer Code. The Supreme Court reversed, holding (1) the Customer Code was susceptible to an interpretation under which the Bank could be considered a customer, and (2) because under the Federal Arbitration Act any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, the circuit court erred when it denied the Bank's motion in this case. Remanded.
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Present:
JJ.
Kinser, C.J., Lemons, Goodwyn, Millette, and Mims,
BANK OF THE COMMONWEALTH
v.
Record No. 101120
OPINION BY JUSTICE DONALD W. LEMONS
September 16, 2011
ROGER O. HUDSPETH
FROM THE CIRCUIT COURT OF THE CITY OF NORFOLK
Norman A. Thomas, Judge
In this appeal, we consider whether the Circuit Court of
the City of Norfolk (the "circuit court") erred when it refused
to stay the suit of Roger O. Hudspeth ("Hudspeth") against the
Bank of the Commonwealth ("the Bank") and compel Hudspeth to
submit his claim against the Bank to arbitration before the
Financial Industry Regulatory Authority ("FINRA") because it
found that the Bank was not a "customer" as defined by the
FINRA Code of Arbitration Procedure for Customer Disputes
("Customer Code").
I. Facts and Proceedings Below
In November 2005, the Bank hired Hudspeth to serve as Vice
President – Investments and as sales manager of its affiliated
limited liability corporation, Commonwealth Financial Advisors,
LLC ("CFA").
Hudspeth's employment with the Bank was
subsequently terminated in February 2008.
Thereafter, Hudspeth
filed a complaint against the Bank in October 2008, alleging
that the Bank failed to pay compensation of $225,000 to which he
was entitled for his employment.
The Bank filed a demurrer,
arguing that any agreement Hudspeth may have had was with CFA
and not the Bank.
The circuit court overruled the demurrer in
February 2009.
In March 2009, the Bank filed a motion to stay and to
compel arbitration, arguing that it was entitled, as a member
firm under FINRA's Customer Code, 1 which governs disputes
between members, to compel arbitration of Hudspeth's claim.
FINRA is the successor to the National Association of Securities
Dealers ("NASD") and is responsible for regulating FINRA members
and enforcing arbitration under the Customer Code.
See Karsner
v. Lothian, 532 F.3d 876, 879 (D.C. Cir. 2008).
Under Customer Code Rule 12200, a dispute must be
arbitrated if "[t]he dispute arises in connection with the
business activities of [a] member or [an] associated person [of
a member]," is between "a customer and a member or associated
person of a member," and is "[r]equested by the customer." 2
The
Bank argued that, as a subsidiary of Commonwealth Bank Shares,
Inc., the Bank was a "member" firm under the Customer Code, and
Hudspeth, as a securities broker registered with FINRA, was an
1
See Financial Industry Regulatory Authority, Code of
Arbitration Procedure for Customer Disputes, FINRA Manual: Rule
12000 et seq., available at http://finra.complinet.com (last
visited June 23, 2011) (hereinafter "Customer Code").
2
The terms "associated person," "associated person of a
member," "customer," "dispute," "member," and "person
associated with a member" are defined in Rule 12100 of the
Customer Code.
2
"associated person of a member" under the Customer Code.
Therefore, the dispute was between a member and an associated
person, and the Bank was entitled to compel arbitration under
the Customer Code.
In July 2009, the Bank filed a supplemental motion to stay
and to compel arbitration, asserting, in the alternative, that
the circuit court should compel arbitration because the Bank is
a "customer" under the Customer Code.
In support of its motion,
the Bank argued that the Customer Code defines "customer"
broadly, excluding only a broker or dealer, which the Bank is
not.
Moreover, the Bank asserted that at the time of Hudspeth’s
employment, the Bank was a customer of BI Investments, L.L.C.
("BI Investments"), a broker-dealer of securities and a member
of FINRA with which the Bank had entered into a brokerage
agreement to provide investment products, through CFA, to the
Bank's patrons.
The Bank further asserted that because Hudspeth
was registered as a securities broker with FINRA through BI
Investments at all relevant times, Hudspeth was an associated
person of a member, BI Investments.
Therefore, because the
dispute was between a customer (the Bank) and an associated
person of a member (Hudspeth), arbitration was mandatory under
the Customer Code.
In response, Hudspeth argued that there must be an express
agreement between Hudspeth and the Bank to compel him to submit
3
to arbitration.
Because there was no such agreement, Hudspeth
argued, the circuit court must deny the Bank’s motion to compel
arbitration.
Hudspeth also asserted that the Bank is neither a
"member" firm nor a "customer" under the Customer Code. 3
According to Hudspeth, the Bank is not a "member" merely because
it is a subsidiary of Commonwealth Bank Shares, Inc., and it is
not a "customer" because the Bank does not "receive investment
and brokerage services from a securities licensee."
The circuit court denied the Bank’s motion to stay and
compel arbitration, concluding that, although Hudspeth was an
"associated person of a member" with respect to BI Investments,
the Bank was not a "customer" of BI Investments and therefore
was not entitled to compel arbitration. 4
The circuit court
found that there was no evidence of an express arbitration
agreement between the parties, but explained that this finding
"d[id] not end the inquiry" because arbitration may be imposed
in the absence of an express agreement if the Bank was a
"customer" under the Customer Code.
3
The circuit court observed
Hudspeth does not dispute that he is an "associated
person of a member" under the Customer Code. See Customer Code
Rule 12100(a).
4
The circuit court also held that the evidence did not
support the existence of a Dual Employment Agreement that
allegedly contained a mandatory arbitration clause, and it held
that the Bank was not a "member" under the Customer Code by
virtue of its subsidiary position to Commonwealth Bank Shares,
Inc. The Bank did not assign error to these rulings. There
has been no contention that the Bank is an "associated person."
4
that determining whether the Bank was a "customer" for purposes
of the Customer Code does not end at the conclusion that the
Bank is not a dealer or broker, as the Bank asserted.
Rather,
the circuit court stated it would adopt a more "holistic point
of view," finding that the "definition [of customer] within the
[Customer] Code is a contextual one, and it must be fleshed out
in individual cases with regard to the factual assertions being
made in the individual case and the position of the parties in
the case."
The circuit court determined that the Bank was not a
member of the "investing public," and held that it was not a
"customer" for purposes of the Customer Code because the
brokerage agreement established between BI Investments and the
Bank established independent roles for each entity.
Therefore,
the circuit court denied the Bank’s motions to stay and to
compel arbitration.
The Bank timely filed its notice of appeal 5 and we granted
an appeal on the following assignment of error:
1.
The [Circuit] court erred in refusing to stay the case
and compel Plaintiff to submit his claim against Bank
of the Commonwealth to arbitration before the
Financial Industry Regulatory Authority ("FINRA")
because Bank of the Commonwealth was a customer of BI
Investments, LLC and entitled, pursuant to FINRA
Customer Code Rule 12200, to demand arbitration of its
dispute against Plaintiff, who is a member of FINRA
and an associated person of a member of FINRA.
5
Denial of a motion to compel arbitration is an appealable
order under the provisions of Code § 8.01-581.016(1).
5
II. Analysis
A. Standard of Review
Well-settled principles of appellate review guide our
analysis in this case.
[A]n issue of statutory interpretation is a pure
question of law which an appellate court reviews
de novo. When the language of a statute is
unambiguous, the appellate court is bound by the
plain meaning of that language. . . . If a
statute is subject to more than one
interpretation, we must apply the interpretation
that will carry out the legislative intent
behind the statute.
Conyers v. Martial Arts World of Richmond, Inc., 273 Va. 96,
104, 639 S.E.2d 174, 178 (2007) (citations omitted).
Additionally, "[t]he plain, obvious, and rational meaning of a
statute is to be preferred over any curious, narrow, or
strained construction, and a statute should never be construed
in a way that leads to absurd results."
Meeks v. Commonwealth,
274 Va. 798, 802, 651 S.E.2d 637, 639 (2007) (citations and
internal quotation marks omitted).
B. Customer Code Rules 12100 & 12200
The first duty of a court asked to compel arbitration of a
dispute is to "determine whether the parties agreed to
arbitrate that dispute," and when the arbitration agreement is
within the coverage of the Federal Arbitration Act, as is
conceded here, the court "is to make this determination by
applying the 'federal substantive law of arbitrability.' "
6
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. 614, 626 (1985).
In this case, the circuit court found,
and the parties have not appealed from the ruling, that the
parties have not entered into "an actual [arbitration]
agreement."
However, the United States Court of Appeals for
the Fourth Circuit has recognized that "[t]he obligation and
entitlement to arbitrate does not attach only to one who has
personally signed the written arbitration provision.
Rather,
well-established common law principles dictate that in an
appropriate case a nonsignatory can enforce, or be bound by, an
arbitration provision within a contract executed by other
parties."
Washington Square Sec., Inc. v. Aune, 385 F.3d 432,
435 (4th Cir. 2004) (internal quotation marks and citations
omitted).
Additionally, the United States Supreme Court has stated
that, "in applying general state law principles of contract
interpretation to the interpretation of an arbitration
agreement within the scope of the [Federal Arbitration] Act,
due regard must be given to the federal policy favoring
arbitration."
Volt Info. Sciences, Inc. v. Bd. of Trs. of
Leland Stanford, Jr. Univ., 489 U.S. 468, 475-76 (1989)
(citation omitted).
Furthermore,
there is a presumption of arbitrability in the
sense that "[an] order to arbitrate the
particular grievance should not be denied unless
7
it may be said with positive assurance that the
arbitration clause is not susceptible of an
interpretation that covers the asserted dispute.
Doubts should be resolved in favor of coverage."
AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S.
643, 650 (1986) (quoting United Steelworkers v. Warrior & Gulf
Navigation Co., 363 U.S. 574, 582-83 (1960)).
Significantly, the United States Supreme Court has stated
that, "[i]n the absence of any express provision excluding a
particular grievance from arbitration, . . . only the most
forceful evidence of a purpose to exclude the claim from
arbitration can prevail, particularly where, . . . the
arbitration clause [is] quite broad. "
U.S. at 584-85.
Warrior & Gulf, 363
See Washington Square Sec., 385 F.3d at 436.
Rule 12200 of the Customer Code provides that parties must
arbitrate a dispute if "[a]rbitration under the Code is either:
(1) Required by a written agreement, or (2) Requested by the
customer; [t]he dispute is between a customer and a member or
associated person of a member; and [t]he dispute arises in
connection with the business activities of the member or the
associated person."
Significantly, the Customer Code
"constitutes an 'agreement in writing' under the Federal
Arbitration Act," see Kidder, Peabody & Co. v. Zinsmeyer Trusts
P'ship, 41 F.3d 861, 863-64 (2nd Cir. 1994), which binds
Hudspeth to submit an eligible dispute to arbitration upon a
8
customer's demand because the circuit court held, and Hudspeth
did not dispute, that Hudspeth is an associated person of a
member, BI Investments.
Customer Code Rule 12200.
See also
Customer Code Rule 12100(a) (defining "associated person of a
member").
This arbitration agreement binds Hudspeth if the demand to
arbitrate is made by a "customer."
The trial court held that
the dispute arises in connection with a business activity of an
associated person and this holding is not challenged on appeal.
The remaining issue is whether the Bank qualifies as a
"customer" under the Customer Code.
Construction of the term
"customer" under the Customer Code is a question of first
impression before this Court.
The Customer Code does not
provide a comprehensive definition of the term "customer,"
stating only that "[a] customer shall not include a broker or
dealer."
Customer Code Rule 12100(i).
Notably, the Approval
Order for the amendments made to the Customer Code effective
after April 16, 2007, notes that "commenters suggested defining
the term 'customer' to help clarify jurisdictional and standing
issues related to arbitration."
Order Approving Proposed Rule
Change and Amendments to NASD Arbitration Rules for Customer
Disputes, 72 Fed. Reg. 4574, 4577 (Jan. 31, 2007).
However,
the NASD declined to follow such suggestions, and specifically
noted that the Customer Code "would define a 'customer' as not
9
including a broker or a dealer. . . . the same [definition] as
that [previously] found in the general definitions for NASD
rules."
Id.
FINRA has adopted two other rules that, while not
contained in the Customer Code, define the term "customer."
Specifically, FINRA Rule 2261(c) defines a "customer" as "any
person who, in the regular course of such member's business,
has cash or securities in the possession of such member," 6 and
FINRA Rule 4210(a)(3) defines a "customer" as
any person for whom securities are purchased or
sold or to whom securities are purchased or sold
. . . . It will also include any person for
whom securities are held or carried and to or
for whom a member extends, arranges or maintains
any credit. The term will not include . . . a
broker or dealer from whom a security has been
purchased or to whom a security has been sold
for the account of the member or its customers. 7
However, these definitions are inapplicable in this case
because they are expressly limited in application to these
particular FINRA Rules.
See FINRA Rule 2261(c); FINRA Rule
4210(a).
The vast majority of cases dealing with the question of
whether a particular party qualifies as a "customer" under the
Customer Code involve aggrieved investors who had been provided
6
See FINRA Manual: Rule 2261, available
http://finra.complinet.com (last visited June
7
See FINRA Manual: Rule 4210, available
http://finra.complinet.com (last visited June
10
at
23, 2011).
at
23, 2011).
investment services by a member or the associated person of a
member. 8
Arguing along these lines, Hudspeth relies upon the
United States Court of Appeals for the Eighth Circuit's
decision in Fleet Boston Robertson Stephens, Inc. v. Innovex,
Inc., 264 F.3d 770, 772 (8th Cir. 2001), for the propositions
that: (1) the FINRA Rules support "a general definition of
'customer' as one who receives investment and brokerage
services;" and (2) the Customer Code supports the proposition
that the term "customer" "refers to one involved in a business
8
See, e.g., Washington Square Sec., 385 F.3d at 436-37
(holding that investors who sustained losses due to allegedly
fraudulent investments could initiate arbitration proceedings
with the securities firm with which the broker was associated);
Multi-Financial Sec. Corp. v. King, 386 F.3d 1364, 1367-70
(11th Cir. 2004) (holding that an investor who made an
investment on the advice of a broker associated with an NASDmember securities firm was a "customer" of that firm); WMA
Sec., Inc. v. Wynn, 32 Fed. Appx. 726, 728-29 (6th Cir. 2002)
(holding that investors who purchased a particular company's
securities based on the recommendation of a brokerage firm's
registered representative qualified as "customers" of the firm
because the broker was an "associated person" who advised and
made the sales for the firm); John Hancock Life Ins. Co. v.
Wilson, 254 F.3d 48, 58-59 (2d Cir. 2001) (holding that
investors who were clients of a broker who qualified as an
"associated person" but did not have accounts or investments
with the broker's firm itself could compel arbitration against
the firm notwithstanding the lack of a direct transactional
relationship); Miller v. Flume, 139 F.3d 1130, 1135-37 (7th
Cir. 1998) (holding that investors of a firm were "customers,"
for purposes of compelling arbitration, of the brokers who were
principals in the firm and took its assets after the firm was
dissolved); Oppenheimer & Co. v. Neidhardt, 56 F.3d 352, 357-58
(2d Cir. 1995) (holding that investors who had been defrauded
by a representative of an NASD firm were customers of that firm
under the NASD Code, despite the fact that they never opened
formal accounts with the firm).
11
relationship with [a FINRA] member that is related directly to
investment or brokerage services."
However, while "[i]t is
well established that an investor is a customer of a financial
firm that acts as its broker," J.P. Morgan Sec. Inc. v.
Louisiana Citizens Prop. Ins. Corp., 712 F. Supp. 2d 70, 78
(S.D.N.Y. 2010), nothing in the Customer Code compels the
conclusion that "the broker/investor relationship is the only
relationship sufficient to satisfy Rule 12200.
The rule that
an investor is a customer of its broker is a rule of inclusion,
not exclusion."
Id.
See also Customer Code Rule 12100(i)
(defining "customer").
Other jurisdictions have interpreted the negative
definition in the Customer Code to mean simply that, because
nothing in the Customer Code requires more, an entity is a
customer if it is not a broker or dealer.
See, e.g., Multi-
Fin. Sec. Corp. v. King, 386 F.3d 1364, 1368 (11th Cir. 2004)
("[The defendant] is a customer as long as she is not a broker
or dealer . . . .
Enforcing the limitation [the plaintiff]
seeks would be tantamount to reading language into the
[Customer] Code that is conspicuously absent"); California Fina
Group, Inc. v. Herrin, 379 F.3d 311, 317 (5th Cir. 2004)
(noting that "the [Customer] Code defines 'customer' broadly,
excluding only 'a broker or dealer'"); O.N. Equity Sales Co. v.
Emmertz, 526 F. Supp. 2d 523, 529-30 (E.D. Pa. 2007) (holding
12
that the defendant was a customer "because he was not a broker
or dealer"); First Montauk Sec. Corp. v. Four Mile Ranch Dev.
Co., 65 F. Supp. 2d 1371, 1381 (S.D. Fla. 1999) (stating that
"[the Customer Code] contain[s] no limitations other than
exclusion of brokers and dealers from invoking rules relating
to customers").
Turning to the language of the Customer Code, we conclude
that Rule 12100(i), in defining the term "customer" by stating
only that "[a] customer shall not include a broker or dealer,"
is ambiguous and susceptible to a meaning which covers the
parties and dispute in this case.
The Customer Code certainly
supports the conclusion that "one who receives investment and
brokerage services" is properly considered a "customer" who may
demand arbitration under the Customer Code.
F.3d at 772.
Fleet Boston, 264
See also Customer Code Rules 12100(i) and 12200.
However, because it is also susceptible to an interpretation
under which the Bank may be considered a "customer" merely
because it is not "a broker or dealer," we must construe this
clause in favor of arbitration.
The United States Supreme Court has stated that the
Federal Arbitration Act "establishes that, as a matter of
federal law, any doubts concerning the scope of arbitrable
issues should be resolved in favor of arbitration, whether the
problem at hand is the construction of the contract language
13
itself or an allegation of waiver, delay, or a like defense to
arbitrability."
Moses H. Cone Mem'l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 24-25 (1983).
Relying on this direction, we
have previously stated that "[t]his strong presumption of
arbitrability mandates that a court must require the parties to
submit to arbitration if the scope of an arbitration clause
subject to the federal act is open to question."
Amchem
Products, Inc. v. Newport News Circuit Court Asbestos Cases
Plaintiffs, 264 Va. 89, 97, 563 S.E.2d 739, 743 (2002).
While
it may be unfortunate that a more comprehensive and precise
definition of "customer" has not been provided by the Customer
Code, nevertheless, we agree with the Fourth Circuit's
straightforward application of governing United States Supreme
Court precedent such as Volt, 489 U.S. at 476, that "any
ambiguities as to the scope of the arbitration clause itself
must be resolved in favor of arbitration."
Washington Square
Sec., 385 F.3d at 436 (internal quotation marks omitted).
III. Conclusion
We hold that the circuit court erred when it denied the
Bank's motion to stay and compel arbitration in this case.
Only "the most forceful evidence" showing the intent by FINRA
"to exclude the claim from arbitration" can overcome the
presumption of arbitrability.
Id. at 438 (quoting and applying
Warrior & Gulf, 363 U.S. at 584-85).
14
No such showing has been
made in this case.
Accordingly, we will reverse the judgment
of the circuit court and remand for further proceedings
consistent with this opinion.
Reversed and remanded.
15
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