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Hallinan v. Republic Bank & Trust Co.

June 1, 2006


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge


Plaintiff Charles M. Hallinan ("Hallinan") brought this action for, inter alia, breach of contract, fraud, negligent misrepresentation and tortious interference with contractual relations against defendant Republic Bank & Trust Co. ("Republic"). Republic now moves to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6). For the foregoing reasons, Republic's motion to dismiss is granted in part.


Hallinan alleges that Republic fraudulently induced him to invest approximately $350,000 in Benefits Express, L.L.C. ("Benefits Express" or "Benefits") and that Republic's actions resulted in the loss of Hallinan's investment. Benefits Express provided banking services to "underserved" individuals who lacked conventional checking accounts. (Comp. ¶ 5). Benefits Express began operations in 1995, and created a program known as Direct Deposit Plus ("DDP") which provided direct deposit services to customers for use with government benefits checks so that the funds would become immediately available to the payees. (Id. ¶¶ 5, 7-8).

In 1998, Benefits Express contracted with Republic to participate in the DDP program. (Id. ¶ 13). In 2000, Benefits Express initiated a debit card program with an optional overdraft feature. (Id. ¶¶ 14-15). This product allowed customers to withdraw funds at ATM machines, including up to $200 more than the balance in each customer's account. (Id.) If the customer overdrew his or her account, that customer would incur overdraft fees. (Id. ¶ 15). Hallinan alleges that, prior to November 2001, Benefits Express and Republic had no agreement in place regarding the operation of the overdraft program or the division of overdraft fees. (Id. ¶ 16). However, in practice Republic paid Benefits 42% of overdraft fees collected minus a corresponding share of projected writeoffs for accounts that Republic identified as likely to become delinquent. (Id. ¶¶ 17-19).

In 2001, Benefits realized a shortfall of approximately $160,000 in its overdraft account with Republic. (Id. ¶ 20). Benefits' principals approached the plaintiff to cover the shortfall by investing in their business. (Id. ¶¶ 22-23). Hallinan then attended several meetings with representatives of Benefits and Republic to discuss the operation of the overdraft program. (Id. ¶ 24). As a result of these discussions, Republic agreed to provide Benefits with 90% of future overdraft fees collected and to pass the fees on to Benefits in a "timely manner." (Id. ¶¶ 28-29). The parties memorialized their agreement in a writing (hereinafter referred to as the "Overdraft Contract"), which was executed on or about November 15, 2001. (Id. ¶ 32, Ex. A).

The Overdraft Contract provided, in addition, that Hallinan would pay Republic $159,577.31 on behalf of Benefits Express to cover the current shortfall in Benefits' overdraft account. (Id. ¶ 34, Ex. A). The agreement also provided for Hallinan to provide Benefits with "adequate capital as needed in Hallinan's judgment to ensure [Benefits'] continued operation and growth." (Id. ¶ 35, Ex. A). Republic would retain 20% of the fees due to Benefits to cover losses from delinquent accounts. (Id., Ex. A).

Also on November 15, 2001, Hallinan entered into a separate agreement (hereinafter referred to as the "Capitalization Contract") with Benefits' principals, Barry Kessler ("Kessler") and Steven Cusamano ("Cusamano"). (Id. ¶ 41, Ex. B). That agreement provided for Hallinan to receive a 60% interest in Benefits Express*fn1 in consideration for Hallinan's satisfaction of "certain outstanding obligations" to Republic as well as for "future unspecified capital contributions" to be provided by Hallinan "as . . . needed." (Id., Ex. B). The Capitalization Contract also stated that amounts paid by Hallinan to Republic in satisfaction of outstanding obligations "shall be treated as a loan" from Hallinan to Benefits Express. (Id., Ex. B). Ultimately, Hallinan invested approximately $350,000 in Benefits Express. (Id. ¶ 40).

Hallinan alleges that Republic refused to pay Benefits 90% of the overdraft fees collected, as had been agreed, but rather continued to pay Benefits 42%. (Id. ¶ 47). Hallinan further alleges that Republic did not pass along Benefits' share of the fees in a timely manner, and that Republic "continued to withhold excessive projected chargeoffs . . ." (Id. ¶ 48) Hallinan also asserts that, in 2003, after Benefits experienced another cash shortfall, Republic attempted to "strong-arm" Kessler into selling Benefits to Republic for a below-market price. (Id. ¶¶ 54-57). Hallinan alleges that Republic ultimately appropriated Benefits' customer list and recruited Cusamano to assist it in providing services that directly competed with those provided by Benefits Express. (Id. ¶¶ 50-51, 58-62).

On July 10, 2003, Benefits Express filed an action against Republic in this District alleging claims for, inter alia, breach of contract and unjust enrichment. (Declaration of Andrew J. Defalco, dated February 17, 2006, Ex. D). That action was dismissed in favor of arbitration. The arbitration between Benefits and Republic was pending when Hallinan filed this action. On March 24, 2006, after Republic's motion to dismiss this suit was briefed (but before the parties appeared for oral argument) the arbitrator issued an award in favor of Benefits Express in the amount of $374,314 (excluding interest).


Republic argues that: 1) Hallinan's claims are res judicata as a result of the prior arbitration between Benefits and Republic; and 2) Republic could not have tortiously interfered with the Capitalization Contract because the Capitalization and Overdraft Contracts constituted a single agreement.

A. The Res Judicata Argument

Res judicata "will preclude relitigation of a claim where the earlier decision was a final judgment on the merits rendered by a court of competent jurisdiction, in a case involving the same parties or their privies . . ." Amalgamated Sugar Co. v. NL Industries, Inc., 825 F.2d 634, 639 (2d Cir. 1987). This doctrine applies with equal force to determinations made in arbitral proceedings. See Pike v. Freeman, 266 F.3d 78, 90 (2d Cir. 2001). "The burden is on the party seeking to invoke res judicata to prove that the doctrine" is applicable. Computer Assocs. Int'l. Inc. v. Altai, Inc., 126 F.3d 365, 369 (2d Cir. 1997). A motion to dismiss on the basis of res judicata should only be granted "when it is clear, from the complaint and from matters ...

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