UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
January 8, 2007
CHARLES M. HALLINAN, PLAINTIFF,
REPUBLIC BANK & TRUST COMPANY, DEFENDANT.
The opinion of the court was delivered by: Harold Baer, Jr., District Judge
OPINION AND ORDER
Plaintiff Charles Hallinan ("Plaintiff" or "Hallinan") has brought this action against Republic Bank & Trust Company ("Defendant" or "Republic"), his remaining claims being breach of contract, fraud, constructive fraud, and negligent misrepresentation arising out of a November 2001 contract between Hallinan, Republic, and the corporation Benefits Express, LLC ("Benefits").
Republic now moves for summary judgment against Hallinan primarily on the grounds that res judicata and collateral estoppel bar Hallinan's claims, as Benefits litigated similar claims in its prior arbitration against Republic. Republic also moves to dismiss Hallinan's fraud, constructive fraud, and negligent misrepresentation claims for Hallinan's failure to state a claim as a matter of law.
Because Republic has not met its burden to prove that res judicata or collateral estoppel bars Hallinan's instant claims, I must deny Republic's motion for summary judgment which sought to dismiss all of Hallinan's instant claims on those grounds. However, because Hallinan's fraud, constructive fraud, and negligent misrepresentation claims fail as a matter of law, Republic's motion is granted as to those claims.*fn1
The following facts are undisputed, except where otherwise noted.
a. Relationship between Benefits, Republic, and Hallinan
Hallinan's complaint, at heart, alleges that Republic fraudulently induced him to invest approximately $350,000 in Benefits Express, L.L.C. and that Republic's actions resulted in the loss of his investment. See Plaintiff's Complaint, January 11, 2006 ("Pl. Complaint").
Benefits Express provided services to "underserved" individuals who lacked conventional checking accounts. Defendant's Statement of Undisputed Material Facts, ¶ 2 ("Def. Facts"). In 1998, Benefits Express contracted with Republic to participate in Benefits' Direct Deposit Plus program, which provided direct deposit services to Benefits' customers receiving government benefits checks. Def. Facts ¶ 1. Benefits and Republic split certain fees that the program earned on services provided. Plaintiff's Response to Defendant's Rule 56.1 Statement, ¶ 3 ("Pl. Facts"). Prior to November 2001, Republic paid Benefits 42% of the overdraft fees Republic collected minus a corresponding share of projected writeoffs for accounts that Republic identified as likely to become delinquent. Def. Facts ¶ 3. However, this division of overdraft fees was not formally stated in the 1998 agreement. Pl. Facts ¶ 3, citing Declaration of Glenn Cohen, October 16, 2006, Ex. A ("Cohen Decl.").
In 2001, Benefits realized a shortfall of approximately $160,000 in its overdraft account with Republic. Def. Facts ¶ 6. Benefits' President, Barry Kessler ("Kessler"), approached Hallinan to cover the shortfall by investing in Benefits' business. Def. Facts ¶ 9, Pl. Facts ¶ 9. Hallinan discussed his potential investment with Benefits and Republic principals, as well as the future operation of the overdraft program. Def. Facts ¶ 10, Pl. Facts ¶ 10.
Hallinan agreed to loan Benefits nearly $160,000, which was paid directly to Republic. Def. Facts ¶ 11, 14; Pl. Facts ¶ 11, 14; Cohen Decl. Ex. C. The parties memorialized their agreement in a signed contract dated November 15, 2001 (the "Overdraft Contract").*fn2 Cohen Decl. Ex. C. In the contract, Hallinan also agreed to provide Benefits with "adequate capital as needed in Hallinan's judgment to ensure [Benefits'] continued operation and growth." Cohen Decl. Ex. C. In return, Republic agreed to provide Benefits with 90% of gross overdraft fees collected. Cohen Decl. Ex. C. Benefits also agreed to establish a reserve account at Republic Bank to protect Republic from additional risk. Cohen Decl. Ex. C; Def. Facts ¶ 14, Pl. Facts ¶ 14.*fn3
Republic agreed to set aside in that reserve account 20% of the overdraft fees due to Benefits to cover losses from delinquent accounts.
The Overdraft Contract, on its face, refers to Hallinan as a "shareholder."*fn4 Cohen Decl. Ex. C. Republic thus alleges that "Hallinan signed the November 2001 Agreement as a shareholder of Benefits Express." Def. Facts ¶ 15. Hallinan avers that he was "never a shareholder of Benefits and never acted as such." Pl. Facts ¶ 15, citing, e.g., Deposition of Charles Hallinan, August 8, 2006, p. 89-90, at Stutzman Decl., Ex. A-1 (".I was. not a shareholder and never was a shareholder.").
Concurrently, however, on November 15, 2001, Hallinan entered into a separate agreement (the "Capitalization Contract") with Benefits' principals, Kessler and Steven Cusamano ("Cusamano"). Cohen Decl., Ex. B. In that written agreement, the parties agreed that "Hallinan shall receive a sixty (60%) percent interest in [Benefits] in consideration for the satisfaction by Hallinan of certain outstanding obligations of [Benefits] to [Republic] and future unspecified capital contributions to be provided by Hallinan to [Benefits] as may be needed." Cohen Decl., Ex. B. Hallinan characterizes that agreement as providing him with an "option" to acquire a 60% interest in Benefits in return for his loan. Hallinan further avers that he never exercised that option. Pl. Facts ¶ 16, citing Deposition of Charles M. Hallinan, August 8, 2006, at Stutzman Decl., Ex. A-1, p. 90 ("I had the option. to become a 60 percent shareholder if I exercised that option, but I never did.") Hallinan alternatively and concurrently characterizes himself as a "creditor" of Benefits.*fn5 The Capitalization Contract states on its face that the amounts paid by Hallinan to Benefits in satisfaction of Benefits' obligations "shall be treated as a loan." Cohen Decl., Ex. B.
Ultimately, Hallinan, by his own account, invested approximately $350,000 in Benefits Express. Pl. Complaint, ¶ 40.
In early 2003, Benefits and Republic began discussing Republic's acquisition of Benefits' business. Def. Facts ¶ 24-25, Pl. Facts ¶ 24-25.*fn6 Republic's principals communicated an offer of $200,000 to Benefits' principals (i.e. Kessler and Cusamano), as well as Hallinan. Def. Facts ¶ 26, Pl. Facts ¶ 26.*fn7 As later found by an arbitrator, the parties reached agreement that Republic would purchase Benefits' assets for two hundred thousand dollars, subject to offset by any overdrafts, fees or expenses. Def. Facts ¶ 26; see also Award of Arbitrator, March 24, 2006, at Cohen Decl. Ex. K. As later found by the arbitrator, the parties memorialized the terms of their agreement in a draft asset purchase agreement dated May 9, 2003 (the "2003 Agreement"), although that agreement was never signed. Def. Facts ¶ 26-30; Award of Arbitrator, March 24, 2006, at Cohen Decl. Ex. K.
b. Benefits Commences Against Republic
On July 10, 2003, instead of completing the sale, Benefits Express brought suit against Republic in the Southern District of New York. Def. Facts ¶ 33, citing Cohen Decl. Ex. E (Benefits' complaint); see also Benefits Express v. Republic Bank, No. 03-cv-5138 (S.D.N.Y. 2003) (SAS). The parties subsequently stipulated to arbitration. Def. Facts ¶ 34. Benefits brought three claims in arbitration. First, Benefits alleged that Republic breached the 2001 Overdraft Contract by not immediately paying Benefits 90% of overdraft fees, and instead taking the position that the "90/10 split" only started upon Benefits' establishment of the reserve account. Demand of Arbitration, December 7, 2004, at Cohen Decl., Ex. F.*fn8 Secondly, Benefits claimed that Republic breached their 2003 Agreement by failing to negotiate in good faith and pay fair value for the purchase of Benefits' business. Id.*fn9 Lastly, Benefits claimed that Republic breached the 1998 Agreement between Benefits and Republic by "unfairly causing the takeover of [Benefits'] business." Id.*fn10
On June 14, 2004, Hallinan Capital Corp. made out a check to Feureisen's law firm for $14,494, with the memo line "Benefits Express / 64300M," apparently signed personally by Hallinan. Cohen Decl., Ex. Y.
In September 2004, Benefits and Republic attempted to mediate their claims.
Def. Facts ¶ 43; Pl. Facts ¶ 43, citing Supplemental Affidavit of David Feureisen, April 7, 2006, at Stutzman Decl. Ex. E, ¶ 4 et. seq. The parties reached a settlement agreement providing for Republic to pay Benefits $250,000, which was memorialized in writing and signed by principals and counsel for Benefits and Republic. Def. Facts ¶ 43; see also Settlement Memorandum Agreement, at Cohen Decl. Ex. M. The agreement expressly stipulated that it was subject to Hallinan waiving any claim to the settlement funds and any claims against Benefits or Kessler generally. Settlement Memorandum Agreement, at Cohen Decl. Ex. M, ¶ 1.*fn11 Hallinan refused to waive his claims, and the settlement was not completed. Def. Facts ¶ 44, Pl. Facts ¶ 44.
On December 30, 2004, Hallinan Capital Corp. wrote a check to Feureisen's law firm for $7,118.57, with the memo line "Client 64300M," apparently signed personally by Hallinan. Cohen Decl., Ex. Y.
c. Prior Arbitration by Benefits Against Republic
Benefits' claim against Republic proceeded to arbitration on November 10 through November 17, 2005. Def. Facts ¶ 45. Hallinan's involvement in the arbitration as a testifying witness is undisputed. Def. Facts ¶ 45. The extent and nature of Hallinan's additional involvement in the arbitration proceedings is, however, disputed.
Prior to the arbitration, Hallinan met with Benefits representatives, who subsequently kept him abreast of certain developments in the litigation. In July 2005, Kessler and Benefits' counsel, David Feureisen ("Feureisen"), met with Hallinan in Philadelphia to discuss Benefits' case against Republic.*fn12 Def. Facts ¶ 37. Hallinan avers that the purpose of this meeting was to prepare Hallinan in his role as a witness for his testimony. Pl. Facts ¶ 37.*fn13 Feureisen wrote Hallinan after the meeting, on July 15, 2005, stating, "I have enclosed your files and a copy of our mediation memo."*fn14 Letter of David Feureisen, July 15, 2005, at Cohen Decl., Ex. N. The "mediation memo" was Benefits' confidential statement that it submitted at the 2004 mediation, setting forth a statement of facts, relevant law, an analysis of Benefits' positions, and potential obstacles to settlement. Benefits Express, LLC's Mediation Statement, at Cohen Decl., Ex. N. Regarding Feureisen's reference to "enclos[ing] files," Hallinan avers that Feureisen returned Hallinan's files to Hallinan, which Hallinan had loaned to Feureisen for the meeting. Pl. Facts ¶ 38.*fn15
On August 8, 2005, Feureisen faxed Hallinan a copy of Feureisen's August 5, 2005 letter to the arbitrator that a) requested permission to amend Benefits' complaint against Republic to add an additional claim and seek additional damages; b) requested an extension of the case schedule; and c) stated Benefits' position regarding a discovery dispute. Def. Facts ¶ 40, Pl. Facts ¶ 40; Cohen Decl., Ex. R.*fn16
On August 26, 2005, Feureisen faxed Hallinan additional recent correspondence "as an update." Def. Facts ¶ 41, Pl. Facts ¶ 41; Cohen Decl., Ex. Q; see also Cohen Decl., Exs. O, P. Feureisen included a copy of Republic's motion to bifurcate the arbitration, as well as a letter from himself to the arbitrator's case manager opposing Republic's motion to bifurcate the arbitration. Pl. Facts ¶ 39; Cohen Decl., Ex. P. Feureisen included a copy of an affidavit provided by one of Benefits' customers. Cohen Decl., Ex. P. Feureisen also included a copy of a July 27, 2005 letter that Ronald DeSoiza, an accountant hired by Benefits as an expert witness, sent to Feureisen, discussing the issue of the valuation of Benefits' business. Cohen Decl., Ex. O.*fn17
On August 31, 2005, Feureisen faxed Hallinan a copy of the arbitrator's interim ruling of August 29, faxed to Feureisen on August 31. Def. Facts ¶ 41, Pl. Facts ¶ 41; Cohen Decl., Ex. S. The interim ruling, inter alia, allowed Benefits to add the additional cause of action and seek additional damages, resolved the discovery dispute between the parties, bifurcated the arbitration, and set dates for the initial hearings. Cohen Decl., Ex. S.
Over the entire course of Benefits' litigation against Republic, Hallinan, according to his own admission, paid $83,195.45 of Benefits' litigation costs.*fn18 The exact amount, timing, and nature of Hallinan's payments are unclear.*fn19 However, it is undisputed that the frequency and amount of Hallinan's payments increased after the arbitrator's interim ruling of August 29 allowing Benefits to add an additional cause of action.
On September 8, 2005, Hallinan wrote Kessler a check for $10,000 with the memo line "arbitration expense." Deposition of Charles M. Hallinan, August 8, 2006, p. 7, at Stutzman Decl., Ex. A-1. On October 13, 2005, Hallinan Capital Corp. wrote a check to Feureisen's law firm for $15,236.12, signed personally by Hallinan. Cohen Decl., Ex. Y. On October 24, 2005, Hallinan wrote a check to the American Arbitration Association ("AAA") for $13,500. Deposition of Charles M. Hallinan, August 8, 2006, p. 8-9, at Cohen Decl., Ex. X. Republic alleges that this payment was for the purpose of paying the AAA's additional fee required to amend Benefits' petition. Def. Facts ¶ 42.*fn20
Hallinan avers that it was unknown to him whether Benefits was required to pay an additional fee. Pl. Facts ¶ 42. On January 27, 2006, Hallinan Capital Corp. wrote a check to Feureisen's law firm for $31,340.76. Cohen Decl., Ex. Y.
On March 24, 2006, the arbitrator issued an award in favor of Benefits Express in the amount of $374,314 (excluding interest). Cohen Decl., Ex. K. The arbitrator held, inter alia, that Republic had breached the 2001 fee-splitting agreement by failing to immediately implement the 90%/10% fee split. Id. The arbitrator rejected Republic's argument that the implementation of the 90/10 split was conditioned on Benefits' establishment of a reserve account. Id. The arbitrator held that Republic owed Benefits $275,624 for that breach. Id. The arbitrator also held that Republic and Benefits reached an agreement to sell Benefits' assets in 2003, that the sale was completed, that the sale was not the product of duress, and that Republic correspondingly owed Benefits an additional $98,690, comprising the net remaining owed amount of the purchase price. Id. The award stated that it was "in full settlement of all claims and counterclaims submitted in this arbitration." Id.
At some undetermined time after the issuance of the award, Kessler called Hallinan to discuss the result.*fn21 Def. Facts ¶ 47.
On September 20, 2006, Judge Scheindlin confirmed the arbitration award. See Benefits Express, LLC v. Republic Bank & Trust Co., 2006 U.S. Dist. LEXIS 67911 (S.D.N.Y. 2006)
d. Hallinan's Instant Action
Hallinan brought the instant suit on January 11, 2006 (before the arbitrator had issued his award). Hallinan's claims, as characterized by Hallinan's counsel, essentially boil down to this: First, "Hallinan seeks recovery for Republic's breach of the 2001 agreement."*fn22 Pl. Opposition, at 2. Hallinan, in his breach of contract claim, incorporates by reference allegations describing the events relating to the 1998 Benefits and Republic contract, the 2001 Overdraft Contract between Hallinan, Republic, and Benefits, the 2001 Capitalization Contract between Hallinan and Benefits, Hallinan's investments in Benefits, Republic's subsequent breaches of its agreement to pay overdraft fees, Republic's use of the reserve account, and Republic's 2003 purchase of Benefits. See generally Pl. Complaint.
Secondly, Hallinan seeks recovery "for the fraudulent statements (and omissions)" that led him to sign the 2001 Overdraft Contract and "to continue investing after November 2001." Pl. Opposition, at 2. This category of claims includes Hallinan's fraud, constructive fraud, and negligent misrepresentation claims. As summarized by Hallinan's counsel, Hallinan alleges that Republic, when it signed the November 2001 contract, 1) represented that it would "pay Benefits immediately" "the overdraft fees to which [Benefits] was entitled" (i.e. 90%); 2) made "generalized assurances. that it would work towards [Benefits'] continued success; 3) "fail[ed] to disclose that it would impose a 100% reserve for all Benefits Express overdrafts"; and 4) "omitted. that it planned to purchase [Benefits] and. intended to strong-arm Kessler. to force such a sale." Pl. Opposition, at 19-20. These misrepresentations and omissions, Hallinan alleges, induced him to invest $160,000 at the time of the 2001 Overdraft Contract, as well as an additional $200,000 over the ensuing years. Pl. Opposition, at 21-22.
I denied Republic's initial motion to dismiss Hallinan's suit as barred by res judicata given Benefits' prior arbitration against Republic. Hallinan v. Republic Bank & Trust Co., 2006 U.S. Dist. LEXIS 34875 (S.D.N.Y. 2006) ("Hallinan I"). Regarding the issue of claim preclusion, I held that on the record as it stood, "the fact that Hallinan defrayed some portion of Benefits' expenses is not sufficient to create privity between Hallinan and Benefits." Hallinan I, 2006 U.S. Dist. LEXIS 34875, at *12. In addition, I held that the record at that time did not support the contention that Hallinan exercised control over Benefits so much so that he used Benefits as his "alter ego." Id. I left open the possibility that issue preclusion might apply to issues decided by the arbitrator, and that additional discovery might show the extent to which Benefits represented Hallinan's interests. Id. at *13-14.*fn23 I also dismissed Hallinan's tortious interference claim. Id. at *14-16.
II. STANDARD OF REVIEW
A court will not grant a motion for summary judgment unless it determines that there is no genuine issue of material fact and the undisputed facts are sufficient to warrant judgment as a matter of law. Fed. R. Civ. P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250 (1986). The moving party bears the burden of demonstrating the absence of a material factual question. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247. In determining whether there is a genuine issue of material fact, the Court must resolve all ambiguities, and draw all inferences, against the moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam); Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir. 1987). However, a disputed issue of material fact alone is insufficient to deny a motion for summary judgment; the disputed issue must be "material to the outcome of the litigation," Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), and must be backed by evidence that would allow "a rational trier of fact to find for the non-moving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); see also Aldrich v. Randolph Cent. Sch. Dist., 963 F.2d 520, 523 (2d Cir. 1992).
Republic argues that Hallinan's instant claims are barred by res judicata or collateral estoppel. I will address each argument in turn.
A. Res Judicata (Claim Preclusion)
Res judicata, sometimes referred to as "claim preclusion," holds that "a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action." Monahan v. New York City Dep't of Corrections, 214 F.3d 275, 284 (2d Cir. 2000).*fn24 Thus, claim preclusion could serve to bar all of Hallinan's instant claims. The burden is on the party seeking to invoke claim preclusion to prove that the doctrine is applicable. Computer Assocs. Int'l. Inc. v. Altai, Inc., 126 F.3d 365, 369 (2d Cir. 1997). Claim preclusion doctrine applies with equal force to arbitral determinations. See Pike v. Freeman, 266 F.3d 78, 90 (2d Cir. 2001).
Whether privity existed between Hallinan and Benefits at the time of Benefits' prior arbitration is the key inquiry here. The doctrine of privity, in the context of claim preclusion, is shaped by fundamental notions of due process that mandate that "a person cannot be bound by a judgment without notice of a claim and an opportunity to be heard." See Stichting ter behartiging van de belangen van oudaandeelhouders in het kapitaal van Saybolt Int'l B.V. v. Schreiber, 327 F.3d 173, 184 (2d Cir. 2003) ("Stichting"), citing Expert Electric, Inc. v. Levine, 554 F.2d 1227, 1233 (2d Cir. 1977). In general, a prior adjudication has preclusive effect on a nonparty to that adjudication only if that nonparty was represented in the prior proceeding by another "vested with the authority of representation," or if the nonparty exercised "some degree of actual control" over the presentation of the party's case in the proceeding. Stichting at 184-85; see also Ruiz v. Commissioner of Dep't of Transp., 858 F.2d 898, 903 (2d Cir. 1988) (under New York law, privity encompasses "those who control an action although not formal parties to it [and] those whose interests are represented by a party to the action."), citing Watts v. Swiss Bank Corp., 265 N.E.2d 739, 743 (N.Y. 1970). Republic argues both that Hallinan was "represented" by Benefits and exercised "control" over Benefits at the prior arbitration, thus establishing privity and barring his instant claims.
Before addressing each ground for privity in turn, I note that the question of privity is a fact-based determination of "substance, not mere form." Stichting at 186, citing Expert Electric, Inc. v. Levine, 554 F.2d 1227, 1233; see also Ruiz v. Commissioner of Dep't of Transp., 858 F.2d 898, 903 (noting that under New York law, "the concept of privity does not have a technical and well-defined meaning."), citing Watts v. Swiss Bank Corp., 265 N.E.2d 739, 743. ".[T]he relevant inquiry is the closeness of the relationship at the time of the prior proceeding." Stichting at 186.
i. Hallinan's "Representation" At Prior Arbitration
Republic's first argument is that Hallinan was "represented" by Benefits at the prior arbitration and therefore Hallinan's instant claims are barred. The Second Circuit has found privity based on "representation" to exist where a party to a previous suit was, at the time of the litigation, acting as either a "fiduciary or organizational agent" of the person against whom preclusion is asserted.*fn25 Stichting at 185; see also Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573, 593 ("collateral estoppel can be applied to nonparties where the litigating party acted in a fiduciary capacity in protecting the nonparties' interest."), rehearing denied, 415 U.S. 986 (1974).*fn26 However, there is "no bright line rule as to whether or not shareholders are in privity with their corporation for res judicata purposes." Amalgamated Sugar Co. v. NL Industries, Inc., 825 F.2d 634, 640 (2d Cir. 1987) ("Rather, a finding of privity between a shareholder and the corporation depends on whether, under the circumstances, the interests of the nonparty were adequately represented.")
The key inquiry here is whether Hallinan's interests were "adequately represented" by Benefits at the prior arbitration. On the evidence before me on summary judgment, it is a close call. Essentially, it comes down to whether Hallinan had some independent interest in the outcome of the Benefits litigation that was not represented by virtue of his interest in the company. The extent of his interest in the company, however, is disputed.
The 2001 Overdraft Contract explicitly refers to Hallinan as a "shareholder" of Benefits. If Hallinan signed the 2001 Overdraft Contract as a "shareholder," his interests in recovering for breach of that contract are in all likelihood encompassed by his status as a "shareholder."*fn27 Benefits, pursuant to its fiduciary duty to its majority shareholder, pursued its litigation against Republic; Hallinan's interests as a shareholder would have been represented by Benefits in that prior litigation; and presumably, as majority shareholder, Hallinan would have realized some recovery as part of Benefits' recovery.*fn28
However, Hallinan avers that he was merely a "creditor" of Benefits, and that he was never a "shareholder." Although Benefits management owes a fiduciary duty to its shareholders, it does not owe the same fiduciary duty to creditors. See United States v. Moskowitz, 215 F.3d 265, 272 (2d Cir. 2000), citing United States v. Jolly, 102 F.3d 46, 48 (2d Cir. 1996) (distinguishing between duties owed to shareholder and creditors, noting, "[b]orrower-lender relationships are typically at arm's-length, and a firm's obligations to creditors are generally regarded solely as contractual.")*fn29 If Hallinan signed the 2001 Overdraft Contract as a creditor of Benefits and was thus not owed a fiduciary duty by Benefits, it is less likely that Benefits wholly represented Hallinan's interests in the prior litigation and more likely that Hallinan may have some independent interest in the 2001 Overdraft Contract.
Republic argues, correctly, that ascertaining Hallinan's exact legal status vis-à-vis Benefits -- shareholder, creditor, or equitable owner*fn30 -- is not necessary to find Hallinan in privity with Benefits. See Monahan v. New York City Dep't of Corrections, 214 F.3d 275, 285 (privity "is a functional inquiry in which the formalities of legal relationships provide clues but not solutions."). Indeed, regardless of Hallinan's exact legal status, Hallinan freely admitted his financial interest in the Benefits arbitration. When referring to the Benefits arbitration, Hallinan stated that he "would have hoped to have recovered most if not all of [his] investment in the company," and that he "had $359,000 worth of dogs in that fight." See Deposition of Charles M. Hallinan, August 8, 2006, p. 63-64, at Cohen Decl., Ex. X; Deposition of Charles M. Hallinan, June 6, 2005, p. 100, at Cohen Decl., Ex. W. Still, there exists a distinction between a financial interest in prior litigation and being "represented" at prior litigation. See Algie v. RCA Global Comm., Inc., 891 F. Supp. 839, 853-54 ("virtual representation requires either some form of agreement by the non-party to permit the litigant in the first suit to represent him, or else a relationship between them that demonstrates that the litigant was authorized to represent and was in fact representing the legal interest of the non-party.").
On the record before me, resolving all ambiguities against the party moving for summary judgment, and despite some nagging doubts of my own, I am unable to conclude that Hallinan was a "shareholder" of Benefits as opposed to a creditor at the time of the prior litigation. Given the explicit language of the 2001 Overdraft Contract referring to Hallinan as a "shareholder," Hallinan's blanket denials of "shareholder" status produce some of those doubts. Nonetheless, the fact is that Republic has provided no evidence that refutes Hallinan's denials beyond a genuine issue of material fact. Genuine issues of material fact remain as to the extent of Hallinan's interests in Benefits, including the effect of the 2001 Overdraft Contract and the 2001 Capitalization Contract, the intentions of the parties upon signing those contracts, and the effect of Hallinan's subsequent investments beyond his original $160,000 on his ownership interests in Benefits.
Thus, on the record before me, resolving all ambiguities against the party moving for summary judgment, I cannot conclude that Hallinan's interests were "represented" by Benefits at the prior arbitration to an extent sufficient to constitute privity and bar Hallinan from raising the instant claims.
ii. "Some Degree of Actual Control" of Prior Arbitration
Republic's second argument in support of privity is that Hallinan exercised "some degree of actual control" over the presentation of Benefits' case at the prior Benefits proceeding, and thus his instant claims are barred. See Stichting at 184-85, citing Cent. Hudson Gas & Elec. Corp. v. Empresa Naviera Santa S.A., 56 F.3d 359, 368-369 (2d Cir. 1995) (preclusion applies against person who serves in representative capacity to direct prior litigation); Ruiz v. Comm'r of Dep't of Transp., 858 F.2d 898, 903 (preclusion applies against person who "formulated an overarching strategy for the two actions"); see also Algie, 891 F. Supp. at 852 ("a purported controlling non-party must, at least, be able to decide what legal theories and evidence should be advanced in the first action and whether an appeal should be taken from an adverse decision.").
It is undisputed that the 2004 proposed settlement between Republic and Benefits was explicitly conditioned on Hallinan waiving his future claims, but he refused to waive those claims, thus sending the parties to arbitration. It is undisputed that Hallinan paid for much, if not all, of Benefits' litigation costs from June 14, 2004 onward through the time of the arbitration. It is undisputed that Hallinan was sent correspondence relating to the arbitration on several occasions, including analyses of facts, legal arguments, and claims before the arbitrator. It is also undisputed that Hallinan testified as a witness at the prior arbitration.
However, there is no evidence, beyond a genuine issue of material fact, that Hallinan ever exercised a degree of "actual control" over the presentation of Benefits' case during the prior litigation. There is no evidence that Hallinan directed Benefits or Benefits' counsel to pursue or not pursue certain of the claims being litigated. There is no evidence that Hallinan participated in Benefits' decision to hire an expert. There is no evidence that correspondence was sent to Hallinan for review or comment, as opposed to keeping him abreast of the litigation, in a sense preparing him as a witness and interested party. Hallinan and Benefits' counsel have submitted affidavits denying any allegations to the contrary, and Republic has put forth no evidence directly contradicting their denials beyond a genuine issue of material fact.
Republic's best argument in support of privity based on "actual control" is that Hallinan paid for a large majority of Benefits' litigation costs. However, Hallinan's payment of Benefits' litigation costs does not, in and of itself, establish an attorney-client relationship between Hallinan and Benefits' counsel sufficient to establish privity. See Moran v. Hurst, 32 A.D.3d 909, 911-12 (N.Y. App. Div. 2006) (attorney not liable for malpractice to third-party who paid attorney's fee on theory of privity). The dispositive inquiry is Hallinan's "actual control" of the Benefits litigation, of which no undisputed evidence exists at this point in time.
It is certainly plausible that Hallinan may have substantively directed the Benefits litigation. If such evidence were to emerge at trial, nothing prevents Republic from moving at the close of all the evidence for judgment based on res judicata grounds. However, on the record before me, resolving all ambiguities against the party moving for summary judgment, I cannot conclude that Hallinan exercised "some degree of actual control" over the prior Benefits litigation to an extent sufficient to constitute privity and bar Hallinan from raising all his instant claims.
B. Collateral Estoppel (Issue Preclusion)
Collateral estoppel, sometimes referred to as "issue preclusion," holds that a "judgment in a prior proceeding bars a party and its privies from relitigating an issue if.
(1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and actually decided, (3) there was full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits." Stichting, 327 F.3d 173, 180 n.2. Collateral estoppel, like claim preclusion, applies with equal force to arbitral proceedings. See Beatus v. Gebbia, 4 F.Supp.2d 256, 260 (S.D.N.Y. 1998).
Republic argues that issue preclusion bars Hallinan from relitigating the issues that were actually litigated and decided in the Benefits arbitration in Republic's favor, namely that Republic and Benefits reached an agreement to sell Benefits' assets in 2003, that the sale was completed, and that the sale was not the product of duress. Conversely, Republic admits that issue preclusion would apply against it regarding the issues that were actually litigated and decided in the Benefits arbitration in Benefits' favor, namely, that Republic had breached the 2001 Overdraft Contract by failing to immediately implement the 90%/10% fee split. See Defendant's Memorandum In Support of Motion for Summary Judgment, p. 15.
Privity between Hallinan and Benefits is, as with claim preclusion, the key inquiry as to whether issue preclusion bars Hallinan's claims. Because, as explained above, I cannot conclude on the present record that Hallinan and Benefits were in privity at the time of the Benefits litigation, I cannot conclude on summary judgment that issue preclusion bars Hallinan's claims regarding the 2003 sale of Benefits' business.
However, this determination is irrelevant to Hallinan's instant claims. Hallinan brings his breach of contract claim pursuant only to the 2001 Overdraft Contract, and not, as Benefits did, pursuant to either the 2003 Agreement between Republic and Benefits providing for the sale of Benefits, or the 1998 Agreement establishing the relationship between Republic and Benefits. (Hallinan was not a party to either of the latter two Agreements.) There is no language in the 2001 Overdraft Contract appearing to provide Hallinan grounds to proceed against Republic on his breach of contract claim for its actions regarding the 2003 sale, nor does Hallinan, in his complaint, cast his allegations regarding the 2003 sale as breaches of the 2001 Overdraft Contract.*fn31
Issue preclusion does apply, however, against Republic regarding Hallinan's claim against Republic for breach of the 2001 Overdraft Contract for failing to immediately implement the 90%/10% fee split. As Republic acknowledges, the issues are identical, the arbitrator actually decided the issues, in a manner necessary to support the judgment, and Republic clearly had a full and fair opportunity to litigate the issues at the prior arbitration. Thus, Republic is estopped from arguing that it did not breach the 2001 Overdraft Contract between it, Benefits, and Hallinan.
Because Hallinan's claim for breach of the 2001 Overdraft Contract is all that remains in this litigation, see Section C., infra, and the issue of Republic's breach of that contract is settled, this case will now move forward to a trial solely on the damages Republic owes to Hallinan as a result of its breach of the 2001 Overdraft Contract. At that trial, it will be determined what Hallinan is owed separately as a result of Republic's breach, as distinct from what Benefits recovered in its prior litigation. To resolve that issue, it will undoubtedly be necessary to ascertain what Hallinan may already have recovered from Benefits' recovery from Republic, due to Hallinan's shareholder's or creditor's interest in Benefits -- and ultimately, the exact nature of Hallinan's interest itself.
I note that on December 22, 2006, I granted Republic's motion to amend its answer for the purpose of interpleading Benefits into this case, pursuant to Fed. R. Civ. P. 22. Undoubtedly, Benefits' presence in this litigation will help to resolve the issue of what Republic owes Hallinan, as distinct from Benefits, as a consequence of its breach of the 2001 Overdraft Contract, and help to avoid any issues of "double recovery" against Republic or for Hallinan.
C. Fraud Claims and Related Claims
Hallinan additionally brings fraud, constructive fraud, and negligent misrepresentation claims, based on Republic's alleged "fraudulent statements (and omissions)" that led Hallinan to sign the 2001 Overdraft Contract and to continue investing thereafter. Republic argues in essence that Hallinan's fraud and misrepresentation claims are merely restatements of his contract claims and thus fatally defective as a matter of law. I agree.
"The well accepted rule is that a cause of action for fraud does not arise when alleged fraud relates to a breach of contract." Crabtree v. Tristar Automotive Group, Inc., 776 F. Supp. 155, 162 (S.D.N.Y. 1991). However, "a cause of action for fraud in the inducement will lie when 'a contractual promise [is] made with the undisclosed intention not to perform it.'" Carruthers v. Flaum,450 F. Supp. 2d 288, 2006 U.S. Dist. LEXIS 64684, at *69 (S.D.N.Y. Sept. 6, 2006), citing Sabo v. Delman, 143 N.E.2d 906 (N.Y. 1957). The distinction turns on whether the allegedly fraudulent promisewas "collateral" to the contract -- i.e., a "promise to do something other than what is expressly required by the contract." See Frontier-Kempier Constructors Inc. v. Am. Rock Salt Co., 224 F. Supp. 2d 520, 528 (W.D.N.Y. 2002). "[A] representation that performance will be made, even if only implied through the negotiation process, is not distinct from the contract." Crabtree v. Tristar Automotive Group, Inc., 776 F. Supp. 155, 163. However, "an exception to this rule exists if the promise made was a representation of present fact, not of future intent." Id.
Hallinan's fraud allegations, as he characterizes them, are representations of future intent to perform the 2001 Overdraft Contract, rather than misrepresentations of present fact collateral to the contract. Hallinan, as summarized by his counsel, first alleges that Republic, when it signed the November 2001 contract, represented that it would "pay Benefits immediately" "the overdraft fees to which [Benefits] was entitled" (i.e. 90%). Secondly, Hallinan alleges that Republic made "generalized assurances. that it would work towards [Benefits'] continued success. Pl. Opposition, at 19-20. Hallinan characterizes these misrepresentations as "collateral" to the contract. However, both these alleged misrepresentations fit squarely within the category of promises of future intent to perform the contract, rather than misrepresentations of collateral present fact. See Crabtree v. Tristar Automotive Group, Inc., 776 F. Supp. 155, 162-63 (defendants' representations at contracting that they would honor their obligations under stock purchase agreement, e.g. to pay for plaintiff's stock at agreed-upon price and to operate plaintiff's businesses profitably, do not support separate fraud claim).
Hallinan also alleges that Republic "fail[ed] to disclose that it would impose a 100% reserve for all Benefits Express overdrafts" and "omitted. that it planned to purchase [Benefits] and. intended to strong-arm Kessler. to force such a sale." Pl. Opposition, at 19-20. Hallinan characterizes these nondisclosures as "collateral" to the contract. However, the first alleged nondisclosure is more accurately an alleged failure to perform Republic's explicit contractual duties regarding the Benefits reserve. The second alleged nondisclosure is at best an alleged failure to perform Republic's generalized duty to "work towards Benefits' continued success." Neither alleges a misrepresentation of collateral present fact.*fn32 See Vista Co. v. Columbia Pictures Indus., Inc., 725 F. Supp. 1286, 1294 (S.D.N.Y. 1989) (conduct allegedly breaching contract does not support separate fraud claim).
Hallinan further alleges that because he invested an additional $200,000 over the ensuing years, as well as the original $160,000 at the time of the 2001 Overdraft Contract, that his additional investment supports an additional claim of fraud. Pl. Opposition, at 21-22. However, the 2001 Overdraft Contract between Benefits, Republic, and Hallinan explicitly provides that "Hallinan shall fund the company with adequate capital as needed in Hallinan's judgment to ensure its continued operation and growth." Cohen Decl. Ex. C. Hallinan's additional investment appears to be squarely within the subject matter of the contract, and thus Hallinan's avenue for recovery of those monies lies in contract. Further, Hallinan does not state any additional specific misrepresentations, apart from the alleged misrepresentations and nondisclosures at contracting, to support additional fraud claims. Even if he did, subsequent assurances of performance implicit in contracting do not support a separate fraud claim distinct from a breach of contract claim. See Metropolitan Transp. Authority v. Triumph Advertising Productions, Inc., 116 A.D.2d 526, 528 (N.Y. App. Div. 1986); see also Vista Co. v. Columbia Pictures Indus., Inc., 725 F. Supp. 1286, 1294 (alleged concealment which took place after execution of contract is conduct breaching contract and does not support separate fraud claim).
Hallinan's constructive fraud and negligent misrepresentation claims suffer from the same defect as his fraud claim. The elements of constructive fraud in New York are the same as those of fraud, except that the element of scienter is replaced by the element of a fiduciary relationship between the parties. Petrello v. White, 412 F. Supp. 2d 215, 229 (S.D.N.Y. 2006); see also Sudul v. Computer Outsourcing Servs., 868 F. Supp. 59, 63 (S.D.N.Y. 1994). The elements of negligent misrepresentation in New York are the same as those of fraud, except that the element of scienter is missing. See Mackinder v. Schawk, Inc., 2005 U.S. Dist. LEXIS 15880, at *34-35 (S.D.N.Y. 2005).*fn33 There is no reason why Hallinan's allegations should support a constructive fraud claim or negligent misrepresentation claim when they do not support a fraud claim.*fn34 See Vista Co. v. Columbia Pictures Indus., Inc., 725 F. Supp. 1286, 1294 (dismissing both constructive fraud claim and fraud claim as restatements of contract claim); Telecom Int'l Am., Ltd. v. AT&T Corp., 280 F.3d 175, 195-96 (2d Cir. 2001) (dismissing both negligent misrepresentation claim and fraud claim as restatements of contract claim).
In short, because Hallinan's fraud, constructive fraud, and negligent misrepresentation claims are essentially breach of contract claims in disguise, I am dismissing all three claims.
I am dismissing Hallinan's claims for fraud, constructive fraud, and negligent misrepresentation. Hallinan's remaining claim for breach of the 2001 Overdraft Contract will proceed to trial, on the issue of damages only, consistent with the above reasoning of this Opinion.
The Clerk of the Court is instructed to close this motion and remove it from my docket.