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DONNKENNY, INC. v. NADLER

August 3, 1982

DONNKENNY, INC., Plaintiff,
v.
MURRAY NADLER, CUMMINGS & CARROLL, P.C., H. B. CARROLL, GLENN O. THORNHILL, GALAX APPAREL CORPORATION and D.K. INVESTORS, INC., Defendants



The opinion of the court was delivered by: POLLACK

MILTON POLLACK, District Judge.

 Plaintiff Donnkenny has moved pursuant to Rule 12(f) Fed. R. Civ. P. for a) an order striking the Fifth Defense interposed by the defendant Thornhill which alleges that this action is barred as against defendant Thornhill by virtue of the compulsory counterclaim requirement in Rule 13(a); and b) staying defendant Thornhill's action against Donnkenny now pending in the United States District Court for the Western District of Virginia (Civ. No. 81-0354) insofar as that action seeks to have determined whether defendant Thornhill's employment contract with Donnkenny was breached by Donnkenny.

 Defendant Thornhill cross-moves for an order pursuant to Rule 13 dismissing the claims herein against him for failure to assert them in the said Virginia lawsuit or alternatively staying this action until final disposition of that Virginia action or until such time as this Court can make appropriate res judicata or collateral estoppel rulings based on the outcome of the Virginia suit which is presently scheduled for trial on November 15, 1982.

 For the reasons appearing hereafter, the plaintiff Donnkenny's motions will be denied and the defendant Thornhill's motions will be granted to the extent that all claims herein against defendant Thornhill are stayed until final disposition of the Virginia suit which will determine whether Donnkenny or Thornhill breached Thornhill's employment arrangements and contract with Donnkenny.

 The background of the litigations*

 Donnkenny owns and operates several sewing plants in the State of Virginia staffed with hundreds of employees. Thornhill, a Virginia resident, was employed under written contract made in 1978 to serve as Treasurer of Donnkenny for a term of five years. He was placed in charge and handled the day to day operations of Donnkenny's wholly-owned subsidiaries that operated manufacturing plants in Virginia. This arrangement grew out of the following corporate transaction.

 In August 1978 Messrs. Oppenheimer & Co. arranged to purchase substantially all of the assets of Donnkenny ("Old Donkenny"), a publicly held company engaged in the manufacture and sale of women's apparel. The purchase was consummated in November 1978. At the time of the acquisition, the defendants Thornhill and Nadler, together with members of their families, owned about 60 percent of the stock of Old Donnkenny. They were serving Old Donnkenny as Treasurer and President respectively and were directors as well. The acquisition of Old Donnkenny's assets took the form of a leveraged buy-out. The acquiring company, the plaintiff in this action, took over the Donnkenny name. The selling company, Old Donnkenny, became a closed-end investment company and changed its name to D.K. Investors, Inc., named as a defendant herein. The acquiring company, (now named Donnkenny, the plaintiff herein) continued the business and operations of Old Donnkenny. As part of the acquisition, it was agreed that the management of Old Donnkenny would continue to manage the day to day business of Donnkenny. Mr. Nadler was also given a separate five year employment agreement with Donnkenny and additional perquisites and was named President and handled from New York City, particularly, the company's sales on a day to day basis.

 Donnkenny's business apparently met financial reverses during the past few years of the economic downturn and by 1981 was in severe financial difficulty and began to seek new management to try to turn the company around. In August 1981 Mr. Nadler resigned as President and became a consultant to Donnkenny. One Al Paris, who had no prior connection with Donnkenny, was elected as the new President.

 On August 31, 1981 Mr. Paris visited Donnkenny's Virginia facilities and met with Mr. Thornhill. That meeting precipitated the skein of lawsuits now pending. During that meeting Paris fired Thornhill for alleged insubordination, negligence and breach of fiduciary duties. Thornhill called the general counsel of Donnkenny in New York, apparently to get some word as to the authority of Paris or some other matter in connection with his dismissal. He was told that it would be looked into but by the second day thereafter no answer having been forthcoming Mr. Thornhill sued Donnkenny and named Paris as a co-defendant for breach of his employment contract and the inducement thereof. The contract had another two years to run involving salary remuneration of $240,000 plus other benefits. The suit was instituted in the state court of Virginia. Mr. Thornhill charged Donnkenny and Paris personally with "wilful and wrongful termination" of Mr. Thornhill in an "abusive, arrogant and insulting manner" and sought punitive damages against them based on Virginia's "insulting words" statute. (§ 8.01-45 Code of Virginia).

 This coercive thrust was met within a month by a counter-thrust.

 Donnkenny, claiming to have investigated Thornhill's stewardship after receiving notice of the Virginia lawsuit, responded with two legal steps about a month later. It planned simultaneously, to remove Thornhill's Virginia suit to the federal court on grounds of diversity and to commence this suit. However, this New York suit was timed to be filed one day earlier than the filing of the removal petition in Virginia. Thornhill was charged in this New York suit with breach of his employment duties and negligence in the management of Donnkenny and failure to disclose to the 1978 purchasers of Donnkenny's, assets alleged personal dealings of Thornhill during his employment with a family company which did subcontracting work for Donnkenny. The former management of Donnkenny was charged with aiding and abetting Thornhill and acting in conspiracy with him against the interest of Donnkenny. All were charged with violating the civil sections of the racketeering laws (RICO) [Section 1964(c) of Title 18 U.S.C. commonly known as the Racketeer Influenced and Corrupt Organization Act, 84 Stat. 941]. The coercive effect of that section may be seen in the fact that successful plaintiffs are entitled to treble damages and attorney's fees. Donnkenny's complaint alleges that defendants committed various state law breaches of fiduciary duty, waste of corporate assets, diversion of corporate opportunities and common-law fraud which give rise to RICO claims with the use of the mails and telephones. The damages claimed against Mr. Thornhill and the others assumed generous proportions, in the millions.

 Meanwhile, the Virginia suit has been moving well along. There has been large scale documentary discovery, some twenty pretrial depositions, interrogatories that were answered and a trial date of November 15th has been set by the Virginia judge.

 To add to the litigation fuel, on February 24, 1982 Donnkenny brought suit in the Federal Court for the Western District of Virginia against Thornhill and others for enticing ...


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