Tanzer v. MyWebGrocer, Inc.

• Decision Date: 30 November 2018
• Docket Number: No. 2017-193,2017-193
• Parties: David TANZER v. MYWEBGROCER, INC., Richard E. Tarrant, Jr. and Jeremiah F. Tarrant
• Court: Vermont Supreme Court

203 A.3d 1186

David TANZER

v.MYWEBGROCER, INC., Richard E. Tarrant, Jr. and Jeremiah F. Tarrant

No. 2017-193

Supreme Court of Vermont.

March Term, 2018

November 30, 2018

Reargument Denied January 4, 2019

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 withholding 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....