This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
Rallye Motors Holding, LLC cannot use Delaware’s McWanedoctrine to force its ex-CEO to move his books-and-records action to New York, where a fellow member and ex-employee of that limited liability company is litigating related claims including records inspection demands, the Chancery Court has ruled in Stanco v. Rallye Motors Holding, LLC, No. 2019-0751-SG (Del. Ch. Dec. 23, 2019).
Vice Chancellor Sam Glasscock’s Dec. 23 memorandum opinion declined to dismiss Joseph Stanco’s records inspection suit filed under Delaware LLC Act Section 18-305 – the LLC analog of Section 220 of the Delaware General Corporation Law – after rejecting two novel Rallye arguments of interest to alternate entity counsel.
- First, the Court found that the LLC agreement did not clearly require Stanco to waive his right to file his records action in Delaware, where Rallye is chartered, because he was a managingmember as well as an officer.
- Second, the vice chancellor said Rallye cannot use the seminal forum non conveniens decision in McWane v. McDowell-Wellman to force Stanco to combine his records action with a related suit by a third party because McWane: “should not be employed to defeat a plaintiff’s choice of forum.” McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 2821 (Del. 1970).
Stanco says he had worked for Rallye, a holding company for five Long Island automobile dealerships, since 1980 and had acquired a 5.5 percent member ownership, a seat on Rallye’s board of members and an appointment as managing member when he was fired without cause in 2017.
Two years later, he demanded inspection of Rallye’s books and records to value his ownership interest, evaluate Rallye’s financial condition, the performance of its management, the reason for its failure to continue making distributions to shareholders and the propriety of company disclosures.
No ‘clear expression’
Two weeks after he filed his inspection complaint on Sept. 19, Rallye moved to dismiss it from Chancery Court, but the vice chancellor found that, “Generally, except as limited by contractual waiver, the members of a Delaware LLC have the right to vindicate proper books and records demands in this court” and waivers of those rights must include “the clear expression of the intent to relinquish the right.”
Vice Chancellor Glasscock ruled that Stanco “could not have intended to waive his rights to a books and records as a manager,” because in his capacity as a managing member he would have had access to the company’s books and records.
The McWane argument fails because Rallye cannot demonstrate “a high degree of hardship” should the litigation go forward in Delaware, and does not even attempt to make such a showing, he said.
Under McWane, “this court’s discretion is to be freely exercised in favor of a stay or dismissal where there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and issues,” but that’s not the case here, the Court noted.
In whose interest?
The action that Rallye wants Stanco to join in the interest of efficiency is a books and records suit filed by Nicholas Toomey, a member and ex-employee of the LLC. Toomey v. Rallye Motors Holding LLC et al., Index No. 613005/2019 (N.Y. Sup. Ct.).
According to Rallye, Toomey was Stanco’s “cohort” who was fired along with him for cause in 2017 and the two are co-plaintiffs in a related New York state court breach of contract action. Stanco and Toomey v. Rallye Motors Holding LLC, Index No. 612155/2017 (N.Y. Sup. Ct.).
Rallye argues that the two New York suits have “a common nucleus of operative fact” and “share the same issues” for purposes of a McWane analysis, but the vice chancellor found the connection to be “insufficient to support my exercise of discretion under McWane.”
Although it might be efficient for Rallye to address both records inspection actions together, McWane“seeks to promote efficient litigation by vindicating a plaintiff’s choice of forum” and there is no overlap in the parties aside from the common defendant nor are the issues the same, he said.
“McWane is not – and should not be – that flexible,” Vice Chancellor Glasscock said in denying Rallye’s motion to dismiss.