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Tanzer v. MywebGrocer, Inc.

Supreme Court of Vermont

November 30, 2018

David Tanzer
v.
MyWebGrocer, Inc., Richard E. Tarrant, Jr. and Jeremiah F. Tarrant

          On Appeal from Superior Court, Chittenden Unit, Civil Division Helen M. Toor, J. (summary judgment); Robert A. Mello, J. (final judgment)

          Karen McAndrew and Kendall Hoechst of Dinse, Knapp & McAndrew, P.C., Burlington, for Plaintiff-Appellee/Cross-Appellant.

          Bridget C. Asay of Stris & Maher LLP, Montpelier, and Jerome F. O'Neill of Gravel & Shea, PC, Burlington, for Defendant-Appellant/Cross-Appellee MyWebGrocer, Inc.

          PRESENT: Reiber, C.J., Skoglund, Robinson, Eaton and Carroll, JJ.

          CARROLL, J.

         ¶ 1. This case arises from a dispute between an employer, MyWebGrocer, and an employee, David Tanzer, regarding the payment of phantom shares MyWebGrocer promised in an agreement between the parties. MyWebGrocer appeals the trial court's decision on summary judgment finding that MyWebGrocer breached this agreement, a jury verdict finding that the company breached the covenant of good faith and fair dealing, the jury's damages awards, and a post-verdict order awarding Tanzer attorney's fees in connection with the litigation between the parties. Tanzer appeals the trial court's post-verdict decision on attorney's fees as well, arguing that the court erroneously limited the amount of fees that he could collect. Tanzer also appeals the trial court's decision on summary judgment that the amount he was due under the phantom share plan did not fall within the definition of wages for purposes of Vermont's wage statutes. We reverse the trial court's decision regarding whether MyWebGrocer breached the parties' agreement and vacate the jury's verdict and damages awards in connection with Tanzer's claim that MyWebGrocer breached the covenant of good faith and fair dealing. We also reverse the trial court's decision at summary judgment on Tanzer's statutory claim and conclude that the value of the phantom shares falls within the relevant statutory definition of wages. We need not address the court's post-verdict decision regarding whether Tanzer could collect attorney's fees.

         I. Factual and Procedural Background

         A. The Parties and the Phantom Share Plan

         ¶ 2. MyWebGrocer is a company that provides web-based e-commerce systems for grocery stores nationwide. Richard Tarrant and Jeremiah Tarrant are officers of the company. MyWebGrocer hired David Tanzer in 2000 and he served as the company's principal database architect until his employment was terminated in 2008. MyWebGrocer was organized as an LLC during the entirety of Tanzer's employment. As part of Tanzer's compensation package, he was given membership in the company's phantom share plan. Tanzer's phantom share agreement provided that his phantom shares would vest at a rate of 1/36 per month after successful completion of an initial post-employment probation period. He also received lump sum phantom share awards that vested over a specified period of years, and, for a period of his employment, also received vested phantom shares per pay period in lieu of a portion of his salary.

         ¶ 3. A phantom share plan gives employees a financial stake in the employing enterprise. In the context of a corporation, "[p]hantom stock is the grant of a right to the appreciation in the corporation's stock, with a fixed exercise date and method of calculation." 5A Fletcher Cyclopedia of the Law of Corporations § 2137.20 (2018). The same principle applies to a phantom share plan, with the distinction that the value of an interest in a phantom share plan is tied to a distributional interest in an LLC, rather than the value of stocks. In contrast to an options plan, neither phantom stock in a corporation, nor a phantom share in the distributional interest of an LLC, dilutes ownership of the business entity as a whole. Id.; 18B Am. Jur. 2d Corporations § 1692 (2018) ("A phantom stock plan is a bonus plan intended to give the management of a closely held corporation a financial interest in a company without giving them an equity interest in the corporation.").

         ¶ 4. Several versions of MyWebGrocer's phantom share plan were introduced in the trial court and are part of the record on appeal, including plans from 2000, 2001, 2005, 2008, and 2009. When Tanzer's employment with MyWebGrocer was terminated in 2008, he was told that he had 103, 576 vested shares in the plan. Tanzer was also given a summary of the phantom share plan from the year 2000 and a summary version of the plan dated February 21, 2008. While some of the plan language varied across iterations, each version of the plan included a provision stating that a change in the control of the company would trigger conversion of vested phantom shares into a distributional interest in the company. Each plan provided a formula by which such a distributional interest would be calculated; each plan after 2000 included a separate provision stating that the plan's administering committee had the authority to issue phantom shares but that the total phantom shares issued could not exceed ten percent of the company's overall distributional interest. Each version of the plan also included a provision stating that the plan would be amended if MyWebGrocer converted from an LLC to a corporation other than through holding an initial public offering (IPO), and provided a means for converting the distributional interest associated with vested phantom shares to shares of stock in the event of an IPO.

         ¶ 5. In 2009, in anticipation of a $13, 000, 000 investment, MyWebGrocer converted from an LLC to an entity incorporated under the laws of Delaware. At the time of the conversion, MyWebGrocer amended the phantom stock plan, changing the formula included in prior plans for calculating the value of the distributional interest of the phantom shares to a formula calculating the value of the phantom shares in terms of common stock ownership. The 2009 plan also capped the number of phantom shares at the number of vested shares at the time of corporate reorganization- a total of 2, 544, 160 vested phantom shares. When converted using the 2009 plan's formula, the phantom shares were equivalent to 254, 416 shares of common stock.[1] The former owners of MyWebGrocer, now shareholders in the newly formed corporation, held the remaining shares in the company, a total of 2, 250, 001 shares of common stock. Just after the corporate conversion, MyWebGrocer issued 785, 462 shares of preferred stock to the investor, thereby diluting the percentage of the company owned by common stockholders and members of the phantom share plan, although not diminishing the value of their respective stocks and shares.

         ¶ 6. MyWebGrocer entered a merger agreement in 2013, which triggered a cashout of the phantom shares. The value of the phantom shares was calculated using the 2009 plan's formula for valuation. MyWebGrocer offered Tanzer $538, 667.45 for the phantom shares he had accrued during his employment. He was also offered $50, 885.81 from a $16, 500, 000 escrow account that the parties to the merger had created by agreement and that would be paid out if certain conditions were met. Tanzer disputed MyWebGrocer's valuation of the phantom shares, arguing that the plan provided that phantom shareholders collectively would receive ten percent of the total merger consideration upon payout and that MyWebGrocer's valuation gave phantom shareholders between seven and eight percent of the merger consideration. After back and forth between the parties and the parties' attorneys, MyWebGrocer offered to settle the dispute with Tanzer. Tanzer did not accept the terms of the proposed settlement and instead filed a complaint in the superior court's civil division.

         B. The Trial Court Proceedings

         ¶ 7. Tanzer's initial complaint included four counts, each essentially premised on Tanzer's argument that MyWebGrocer had undervalued his phantom shares. To that end, Tanzer's complaint alleged that (1) MyWebGrocer breached its contractual obligations to Tanzer by failing to pay him the total due under the phantom share plan, (2) the company breached the covenant of good faith and fair dealing by "engaging in conduct intended to deny him the benefit of his bargain with" MyWebGrocer, (3) the company was unjustly enriched by its failure to pay Tanzer the total due for his phantom shares, and (4) MyWebGrocer violated Vermont's wage law by witholding Tanzer's "deferred compensation" in the form of the total value of his phantom shares and by requiring Tanzer to sign a release as a condition of receipt of the value of his phantom shares. In connection with these claims, Tanzer sought compensatory damages, statutory double damages for the alleged violation of Vermont's wage law, attorney's fees, punitive damages, costs and interest, and injunctive relief precluding MyWebGrocer from releasing escrowed funds pending resolution of the dispute with Tanzer.

         ¶ 8. MyWebGrocer's answer set forth several affirmative defenses and raised six counterclaims against Tanzer, including breach of contract, breach of the duty of loyalty, unfair competition, two allegations of unjust enrichment, and breach of the duty of good faith and fair dealing. Tanzer later amended his initial complaint to add a count based on promissory estoppel. He amended his complaint again to clarify the relief sought for his claims, seeking compensatory damages including attorney's fees, double statutory damages and attorney's fees for the alleged Vermont wage law violation, punitive damages, and costs and interest.

         ¶ 9. The parties filed cross motions for summary judgment. Tanzer sought summary judgment for breach of contract and for his claim that MyWebGrocer violated Vermont's wage and compensation law by withholding the total amount due to him for his phantom shares. MyWebGrocer sought summary judgment on all of its claims against Tanzer.

         ¶ 10. The court ruled in Tanzer's favor on his claim for breach of contract and on each of MyWebGrocer's counterclaims against him. The court ruled in MyWebGrocer's favor on Tanzer's statutory claim. Regarding Tanzer's contract claim, the court concluded that the 2008 phantom share plan given to Tanzer at the time of his termination was the controlling agreement between the parties regarding valuation of Tanzer's phantom shares. The court read the 2008 plan to set the total number of phantom shares awarded at ten percent of the company's value at the time of payout of the shares, regardless of the intervening corporate reorganization and the plan's provision permitting amendment of the plan upon reorganization. The court further concluded that post-incorporation issuance of new stock had diluted the ownership interests of all shareholders, including the phantom shareholders, such that the phantom shareholders' stake in the company was less than ten percent when the value of the phantom shares were paid out. Accordingly, the court concluded that MyWebGrocer had undervalued Tanzer's phantom shares and breached the phantom shares agreement between the parties.

         ¶ 11. Concluding that Tanzer's alternate claims against MyWebGrocer for unjust enrichment and promissory estoppel were premised on the same underlying facts as his contract claim, the court ruled that these two claims were moot. Regarding Tanzer's statutory claim for wages, the court concluded that the phantom shares "were more like a lottery ticket than a debt." The court understood the phantom shares to be essentially valueless unless a triggering event occurred, and thus not within the scope of Vermont's wage and compensation law. The court accordingly granted summary judgment for MyWebGrocer on this claim.

         ¶ 12. The court read MyWebGrocer's counterclaims against Tanzer as premised on the argument that Tanzer improperly used his special expertise to gain concessions from MyWebGrocer during his employment with the company. Concluding that as a matter of law such an argument could not support an action for breach of contract, breach of the duty of loyalty, unfair competition, unjust enrichment, or breach of the duty of good faith and fair dealing, the court granted summary judgment on each of these claims in Tanzer's favor. The court's decision on summary judgment left a single claim alive-Tanzer's claim against MyWebGrocer for breach of the covenant of good faith and fair dealing, the basis of which concerned not only MyWebGrocer's failure to pay him the amount he claimed was due, but also MyWebGrocer's conduct in connection with the payout and the dispute which followed.

         ¶ 13. Following discovery and several motions between the parties, a five-day jury trial on the covenant of good faith and fair dealing claim commenced on March 20, 2017. Before the trial began, MyWebGrocer filed a motion to exclude the use of or any reference to the court's summary judgment decision in Tanzer's favor on his breach of contract claim. Tanzer argued in response that he intended to rely on the substance of that decision to support his claim for breach of the covenant of good faith and fair dealing. The court concluded that it would "likely be necessary to reference previous court rulings to give the jury necessary background information and assist in the orderly presentation of evidence" but that prior rulings could not be used to influence the jury one way or another. The court ruled that it would instruct the jury at the start of trial that a breach of contract claim had already been decided in Tanzer's favor and stated that it would consider a limiting instruction regarding prior rulings.

         ¶ 14. The jury found in Tanzer's favor on his covenant of good faith and fair dealing claim. Tanzer was awarded $100 for emotional distress, $300, 000 in compensatory damages other than emotional distress, and $750, 000 in punitive damages. These awards were in addition to the amount awarded on Tanzer's breach of contract claim as a result of the court's decision on summary judgment.

         ¶ 15. After the trial concluded, Tanzer filed a motion requesting attorney's fees in addition to the awards he received in connection with the contract and covenant of good faith and fair dealing claims. The court ordered that Tanzer could collect attorney's fees in connection with some of MyWebGrocer's conduct during the course of the litigation, which the court found was dishonest and done in bad faith. Tanzer was not permitted, however, to collect attorney's fees in connection with MyWebGrocer's litigation positions, including fees expended in defense against MyWebGrocer's initial counterclaims. The court deferred determination of the actual amount of attorney's fees that could be collected until after an appeal to this Court.

         ¶ 16. Both parties now appeal. MyWebGrocer appeals the court's decision finding in Tanzer's favor on the contract claim, as well as the jury decision finding for Tanzer on the covenant of good faith and fair dealing claim, the jury's awards of compensatory and punitive damages, and the court's post-trial decision permitting Tanzer to recover attorney's fees. Tanzer appeals the trial court's decision on summary judgment in MyWebGrocer's favor on his claim that MyWebGrocer violated Vermont's wage and compensation law by withholding the amount Tanzer was due under the phantom share plan. Tanzer also appeals the court's post-trial decision permitting him to recover attorney's fees for some, but not all, of MyWebGrocer's litigation conduct. We address each of these issues in turn.

         II. The Breach of Contract Claim

         ¶ 17. This Court reviews summary judgment decisions de novo, and applies the same standard as the trial court. "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." V.R.C.P. 56(a). The question presented here relates solely to the meaning of MyWebGrocer's phantom share plan, and whether the plan promised members ten percent of the equity of the company at the time that phantom shares were paid out, regardless of the company's organization as an LLC or a corporation. We interpret contract provisions "to give effect to the intent of the parties as that intent is expressed in their writing." Hamelin v. Simpson Paper Co., 167 Vt. 17, 19, 702 A.2d 86, 88 (1997). "When the contract language is clear, the intent of the parties is taken to be what the agreement declares." Id. We conclude that there is no genuine dispute in this case: each pre-2009 version of MyWebGrocer's phantom share plan expressly contemplates the plan's amendment upon MyWebGrocer's reorganization into a corporation in a manner other than by holding an IPO; the pre-2009 plans' share valuation formula became essentially meaningless upon the company's reorganization as a corporation; and the 2009 plan amendment, undertaken when the company reorganized into a corporation, is consistent with the pre-2009 plans' conversion of phantom shares in the event of an IPO. Accordingly, we reverse the trial court's decision on this issue.

         ¶ 18. The trial court's decision began with consideration of which iteration of the phantom share plan applied to Tanzer, and concluded that the February 2008 plan MyWebGrocer gave Tanzer after his termination controlled. Tanzer argues on appeal that the court correctly concluded this was the applicable plan. MyWebGrocer, by contrast, argues that the result in this case is the same regardless of which plan applied. We agree with MyWebGrocer-whether the February 2008 plan was controlling at the time of Tanzer's termination does not control the eventual valuation of Tanzer's, or other employees', phantom shares in the company. Thus, we will assume, without deciding, that the February 2008 phantom share plan was effective at the time of Tanzer's termination. But as we explain more fully below, this does not translate into a valuation of Tanzer's phantom shares according to a formula in the 2008 plan or as a percentage valuation based on his proportional interest in ten percent of the value of MyWebGrocer as a whole at the time shares were paid out.

         ¶ 19. Four provisions of the February 2008 plan are relevant here:

4.2 Number of Shares Awarded. The maximum number of Phantom Shares that may be awarded under this Plan shall be determined by the Committee, provided, however, that the maximum number of Phantom Shares to be awarded under this Plan shall represent a ten percent (10%) Distributional Interest in the Company.
. . .
5.2 Change in Control of the Company. In the event of a Change in Control of the Company, each Phantom Share credited to the Phantom Share Account of a Participant shall immediately prior thereto or coincident therewith be converted into a ...

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