A Tribe of...
The Milquetoast Clan might be a reference to a particular tribe or "ethnic group." If this were the case, destroying the clan could be quite a feat, as their units might be spread out over several sides. However, the implication from the name suggests that this is not the case, as "milquetoast" refers to an excessively weak or timid person.
A Side of Men
Milquetoast units were probably the base standard unit of Men, with no particular strengths or weaknesses, and the basis from which all other units of that type could be measured. Their garrison probably consisted of Piker, Stabber, and Archer Class infantry, with few or no special unit types. Milquetoast politics and strategy probably featured no alliances, no attacks, and only moderate defense, allowing units to pop slowly and gain few levels, thus making them an easy target for Stanley.
Stanley may have destroyed the Milquetoast Clan because he erroneously believed that they might secretly possess an Arkentool, which they were too cowardly to actually use. Alternately, the Milquetoast may have spread the rumor that they had an Arkentool, in order to deter attacks or they may have indeed possessed an unidentified fourth Arkentool and somehow managed to keep it out of Stanley's hands despite their destruction. The Milquetoast did survive until Stanley came along, which suggests they weren't totally helpless. At the very least, the cost of destroying them probably exceeded whatever profits would be gained by sacking their city or cities.
A Clan of Elves
"... he hit the elves, wiped out the milquetoast clan" could refer to a single action, not two. Milquetoast fits in nicely with the sillier elf brand names, that they're called a "clan". Just as the Superfluous elves' only role is to not be used, and the tardy elves' role is to not show up, the milquetoast elves only existed to be wiped out.