Miller v. Flegenheimer

• Decision Date: 09 December 2016
• Docket Number: No. 2015-448,2015-448
• Court: Vermont Supreme Court
• Parties: Kenneth W. Miller, II v. Eric Flegenheimer

2016 VT 125

Kenneth W. Miller, II v. Eric Flegenheimer

No. 2015-448

Supreme Court of Vermont

May Term, 2016

December 9, 2016

NOTICE: This opinion is subject to motions for reargument under V.R.A.P. 40 as well as formal revision before publication in the Vermont Reports. Readers are requested to notify the Reporter of Decisions by email at: JUD.Reporter@vermont.gov or by mail at: Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801, of any errors in order that corrections may be made before this opinion goes to press.

On Appeal from Superior Court, Chittenden Unit, Civil Division

Helen M. Toor, J.

Kevin M. Henry and Malory S. Lea of Primmer Piper Eggleston & Cramer PC, Burlington, for Plaintiff-Appellee/Cross-Appellant.

Andre D. Bouffard of Downs Rachlin Martin PLLC, Burlington, for Defendant-Appellant/Cross-Appellee.

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

¶ 1. REIBER, C.J. This is an appeal from the trial court's decision on the merits. The case requires us to determine whether a series of e-mails exchanged between two business partners who jointly own a document shredding company constituted an enforceable contract to sell one partner's interest in the company to the other partner. The defendant (seller) appeals the trial court's determination that the partners had an enforceable contract and that seller is obligated to negotiate the remaining terms of the deal in good faith. He argues that there were too many open terms to produce an enforceable contract and that the partners had no intent to be bound to a contract by their e-mails. The plaintiff (buyer) cross-appeals and argues that the e- mails do demonstrate intent to be bound and that we should enforce the contract. We reject buyer's argument that the parties had entered into a fully completed contract, agree with seller that there was no enforceable contract at all, and accordingly reverse and enter judgment for defendant.

¶ 2. Buyer and seller are joint owners and two of three cofounders of a document shredding company (the company). Each partner currently owns half of the stock in the company. The company has been successful. The same cannot be said of its partners' working relationship. By 2010, it had become apparent to the partners that they were not working well together, so they hired an outside CEO and put in place a three-person advisory board to resolve their disputes independently. They also considered selling the company to an interested outside purchaser but could not agree on the price. The following year, the outside CEO left and seller became CEO. Buyer withdrew from day-to-day operations for both business and personal reasons.

¶ 3. The partners then conducted months of negotiations in an attempt to include a buy-sell agreement in their shareholders' agreement. The buy-sell agreement would create a process for one partner to buy out the other. The partners engaged counsel and exchanged numerous drafts of the proposed agreement. They spent over $30,000 of company money on the effort. In the end, buyer refused to sign the final draft of the agreement, and negotiations fell apart on December 9, 2013.

¶ 4. The buy-sell agreement drafts had several features that mirrored seller's eventual offer to buyer. These included a "claw-back provision," which provided that if one partner bought out the other and then sold the company for a higher price within two years, the partner who was bought out would receive half of the difference between the value at which he sold the company and the value his partner received when he resold it. The buy-sell agreement drafts didnot name a fixed price for the company, and they did not include a non compete agreement or a non solicitation agreement.

¶ 5. On December 26, fifteen days after negotiations had broken down over the buy-sell agreement, seller sent buyer an e-mail offering terms of sale for his stock in the company. In the e-mail, seller offered to sell the company to buyer at a price reflecting the average of two appraisals they had previously commissioned and also with the claw-back provision in place:

Your decision not to sign the buy/sell agreement on the day of our last Board meeting on December 9, 2013, an agreement that the Board had endorsed and we had previously agreed to sign, has made me realize that our goals for the company are inconsistent and incompatible with each other.

Accordingly, I am offering you the option to purchase my share of [the company] for a price [which] . . . reflects the average of the 2 professional appraisals we had done in the fall of 2012. I extend this offer to you in a good faith attempt to allow you to purchase the entire company with 1 condition, namely, if you sell the company within 2 years of acquiring my shares, you will agree to equally split with me all proceeds in excess of [twice the price above]. This offer will remain open until Friday, January 10, 2014 at which point it will be withdrawn.

Likewise, I am prepared to purchase all of your shares on the same terms and conditions as outlined above.

¶ 6. Five days later, on December 31, buyer replied by e-mail that "I will accept" the offer, acknowledged the claw-back, and that seller should expect "definitive documents" with "customary provisions" within about two weeks:

Thank you for your e-mail of December 26, 2013. I will accept your offer to purchase your shares of [the company] for a price of [same as proposed]. I also agree that the definitive documents evidencing this sale will contain a claw-back in the event that I sell the company within two years of the closing in excess of [twice the price above] . . . You should expect to see drafts of the definitive documents containing customary provisions for transactions of this type prior to January 10^th.

¶ 7. On January 9, 2014, buyer sent a short e-mail to seller and attached a twelve-page Stock Purchase Agreement and a six-page Confidentiality, Non-Competition, and Non-Solicitation Agreement (Non-Compete Agreement). In the Non-Compete Agreement, seller would agree not to compete with the company or solicit employees or customers of the company for three years. The Non-Compete Agreement referred to itself as "a condition precedent" of the Stock Purchase Agreement. The agreements also lowered the price buyer offered seller for his shares by $50,000, assigning that consideration to the Non-Compete Agreement. Five days later, on January 14, seller responded that he had reviewed the Stock Purchase Agreement and Non-Compete Agreement and would be withdrawing his offer to sell his shares:

I am in receipt of the draft Stock Purchase Agreement and Non-compete. . . . After reviewing the documents with my counsel, and after further contemplation of the terms of the sale as well as my own personal investment in the company, I have determined that it is not in my best interest to move forward with the transaction at this time. Accordingly, I am withdrawing my offer to sell my shares.

In the same e-mail, seller also told buyer that he would be stepping away from the day-to-day operations of the company by March 31.

¶ 8. Buyer brought suit against seller, requesting specific performance of the contract. Seller moved for summary judgment. The court, in its ruling on the motion for summary judgment, adopted a framework from New York law in which there are two categories of preliminary agreements: Type I and Type II. See Teachers Ins. & Annuity Ass'n of Am. v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987). The court defined a Type I agreement as "essentially a done deal that merely needs follow-up documentation" and a Type II agreement as "a preliminary agreement that obligates the partners to negotiate further terms in good faith." The court later used the same framework in its ruling on the merits of the case. In its ruling on the merits, the court found that buyer and seller had entered into a Type II agreement byexchanging their December e-mails. It found that buyer's January 9 e-mail and draft documents constituted a proposal of additional terms that did not invalidate the original acceptance of the offer. Further, the court ordered that the partners were obligated to negotiate the remaining terms of the contract in good faith.

¶ 9. On appeal, seller argues that the court erred in its ruling on the merits when it found an enforceable contract to negotiate the remaining terms of the contract in good faith, specifically a Type II agreement. Buyer cross-appeals and argues that the court erred in not finding a Type I agreement. We conclude that there was no enforceable contract between buyer and seller and accordingly reverse the judgment for buyer.

¶ 10. We first address whether a series of e-mails exchanged between two business partners constitutes an enforceable contract, either for the terms of the contract or as a preliminary agreement to negotiate further terms in good faith. In doing so, we note that we have never adopted the New York Type I-Type II approach, and we decline to do so here. This approach would lead to courts enforcing agreements to agree, a practice we have historically approached with caution and that could lead to extensive follow-up litigation. See, e.g., Catamount Slate Prods., Inc. v. Sheldon, 2003 VT 112, 176 Vt. 158, 845 A.2d 324. When reviewing the court's analysis, we will determine whether the court considered all the factors appropriate for determining that an enforceable agreement exists under the precedent of this Court. However, we will use Type I-Type II labels when referring to the trial court's decision.

¶ 11. Our review is concerned with the "legal interpretation of whatever hazy agreement existed," namely whether there was an enforceable contract to negotiate the remaining terms in good faith, which is a question of law. Kellogg v. Shushereba, 2013 VT 76, ¶ 17, 194 Vt. 446, 82 A.3d 1121. We therefore review de novo whether there was an enforceable contract as a matter of law.

¶ 12....