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Hallinan v. Republic Bank & Trust Co.

January 8, 2007


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


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 ...

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