Company's Counterclaims Against Minority Members and Former Executives Dismissed

On October 13, 2020, Justice Vito M. DeStefano of the Commercial Division of the Supreme Court of the State of New York, Nassau County, issued a decision in Stanco and Toomey v. Rallye Motors Holding, LLC, Index No. 612155/2017, dismissing almost all of the counterclaims asserted by the defendant, a holding company for several automobile dealerships (“Rallye”) against its minority members and former senior executives Joseph Stanco and Nicholas Toomey, who are suing the company for violations of their employment agreements as well as the company’s operating agreement. The counterclaims were dismissed on various legal grounds, as follows.

First, Rallye asserted that its former executives received unauthorized bonuses during the period of their employment. The Court dismissed Rallye’s counterclaim for return of such alleged excessive bonuses, explaining: “In the absence of a special agreement, an employer may not recover back wages or equivalent drawings paid during a period of completed employment.” (Order at 4, citing authorities.)

Second, Rallye alleged that, in the past, Messrs. Stanco and Toomey also received excessive distributions as members of the company. The Court dismissed this claim as untimely, relying on Rallye’s own accounting chart as documentary evidence that the overpayments had allegedly occurred over 7 years before the lawsuit was filed. (Order at 5.)

Third, Rallye asserted a breach of fiduciary duty claim alleging that, during their employment with the company, the two former executives improperly facilitated payments of another former executive’s medical bills. The Court dismissed this claim for lack of particularity required by CPLR 3016(b), emphasizing that “a claim involving multiple defendants must make specific and separate allegations for each defendant.” (Order at 6-7, citing authorities.)

Fourth, Rallye alleged that Mr. Toomey usurped a corporate opportunity to open a new BMW dealership, while Mr. Stanco aided and abetted that breach. The Court held that, “granting Rallye the benefit of every possible favorable inference,” it sufficiently pleaded the cause of action for usurpation of corporate opportunity – but dismissed the claim against Mr. Stanco, pointing out that an aiding and abetting claim does not lie against a fiduciary. (Order at 8-9.)

Fifth, the Court dismissed Rallye’s counterclaim against Mr. Toomey for alleged breach or repudiation of his employment agreement, holding that the allegations are not “sufficiently particular to give the court and the parties notice of the transactions, occurrences, or series of transactions or occurrences, intended to be proved.” (Order at 10, quoting CPLR 3013.)

Sixth, Rallye asserted a counterclaim under the “faithless servant” doctrine based on the same factual allegations as its other counterclaims. The Court dismissed most constituent parts of this claim as duplicative of the other failed counterclaims. (Order at 10-12.)

NB: Schlam Stone & Dolan LLP represents Plaintiff Nicholas Toomey in this case.