Title: Bank of the Commonwealth v. Hudspeth
Citation: N/A
Docket Number: 101120
State: Virginia
Issuer: Virginia Supreme Court
Date: September 16, 2011

Present:  Kinser, C.J., Lemons, Goodwyn, Millette, and Mims, 
JJ. 
 
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, 
 
2 
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. 
 
3 
"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 
 
4 
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.  The circuit court observed 
                     
 
3 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." 
 
5 
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 appeal5 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). 
 
6 
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.' "  
 
7 
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 
 
8 
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. "  Warrior & Gulf, 363 
U.S. at 584-85.  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 
 
9 
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 
 
10 
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 at 
http://finra.complinet.com (last visited June 23, 2011). 
 
7 See FINRA Manual: Rule 4210, available at 
http://finra.complinet.com (last visited June 23, 2011). 
 
11 
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 NASD-
member 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). 
 
12 
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 
 
13 
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.  Fleet Boston, 264 
F.3d at 772.  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 
 
14 
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).  No such showing has been 
 
15 
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.