Thorson v. EDDW

309 A.3d 141

Jonathan THORSON and Grace Song

v.EDDW, LLC, BDDW Design, LLC, BDDW Studio, LLC, M. Crow, LLC and Tyler Hays and Jack Shelton, Garrett McGlothlin and Eric Anderson

Appeal of: EDDW, LLC, BDDW Design, LLC, BDDW Studio, LLC, M. Crow, LLC and Tyler Hays

No. 3059 EDA 2022

Superior Court of Pennsylvania.

Argued August 29, 2023

Filed January 16, 2024

Appeal from the Judgment Entered January 18, 2023, In the Court of Common Pleas of Philadelphia County, Civil Division, at No: 190301451, Vincent L. Johnson, J.

Stephen A. Miller, Philadelphia, for appellant.

Scot R. Withers, West Chester, for appellee.

BEFORE: BOWES, J., STABILE, J., and PELLEGRINI, J.^*

OPINION BY STABILE, J.:

This appeal involves an employment contract dispute in which EDDW, LLC; BDDW Design, LLC; BDDW Studio, LLC; M. Crow, LLC; and Tyler Hays (Appellants) seek review of a non-jury verdict, by the Court of Common Pleas of Philadelphia County (trial court) awarding monetary damages to Jonathan Thorson and Grace Song (Appellees). Appellants argue that they were given insufficient notice of the trial date, causing the unavailability of Hays, and as a result, the trial court improperly inferred that his testimony would have been unfavbrable to Appellants. They contend farther that the trial court erroneously determined Appellees’ damages by relying on an unqualified expert’s valuation of their business. We affirm.

BDDW is a luxury home famishing company founded by Hays in 1995. Since that time, BDDW has been owned and controlled by Hays; he also has been the lead designer of all its products. The corporate entities named as Appellants in this case are, in turn, wholly owned subsidiaries of BDDW, and Hays is the sole member of those entities. BDDW’s retail showroom is located in New York City, but it also has maintained offices and manufacturing centers in Philadelphia.

The company’s size and revenues increased substantially after 1995, and by 2009, Hays began asking his most valuable employees if they would make long-term commitments in exchange for equity in BDDW. There is no dispute that these offers of partnership were made to Appellees.

Song had worked for BDDW since 2005, and she was named president of [the company in 2012. In this role, Song managed BDDW’s finances and its human resources department. She also oversaw all its day-to-day operations, and her authority was second only to Hays himself. See N.T. Trial, 05/03/22, at 36, 57-60.

According to Song, Hays approached her in 2009 with an offer to make her a partner and give her 3% of the fair market value of BDDW if she would continue as president for another five years. See id., at 65-67. Song accepted the offer, but there were no witnesses to the agreement, and the terms were never reduced to writing. See id., at 113-14. Hays told her that he would hire a third party to ascertain the value of BDDW so that her 3% share could be determined from that amount.

Song’s, employment with BDDW ended in 2018. Hays alleged that she [had been intoxicated at several company events, including large gatherings attended by clients. After one such event, an auction, Hays placed Song on leave for 30 days and blocked her from accessing the company’s bank accounts and email, which Song had been managing for several years. But when the leave period ended and Song went back to work, Hays immediately terminated her employment. Hays insisted that Song’s termination for cause nullified the verbal employment contract and divested her of partnership equity. Song disputed that interpretation of her contract terms, as she did not recall ever being told that her stake in the company could be rescinded in that manner. See id., at 29-30, 149-50.

Thorson’s circumstances were similar to Song’s in several respects. He had been with the company since 2004, and Hays put him charge of BDDW’s sales and customer relations. The annual revenue of the company increased from hundreds of thousands to tens of millions during Thorson’s tenure. As with Song, there was no written employment agreement between Thorson and Hays.

Thorson had instead verbally agreed in 2009 that if he remained with the company for five more years, he would receive a vested interest in BDDW equivalent to 2% of its fair market value, which was to be later determined by a third-party valuation. Thorson understood that once his partnership vested, he would have the right to redeem all or part of his share as a cash withdrawal. This was an appealing option to Thorson because he viewed the accrual of equity in the company as a substitute for the security of a 401k retirement plan, which BDDW did not offer. Id., at 203-04.

In 2014, after Thorson’s interest had vested, he attempted to withdraw funds from BDDW so that he could diversify his assets and purchase a house in New York City for his growing family. Hays refused to disperse the funds. Id., at 206. Thorson, Song, and other partners broached the subject again with Hays in 2017, suggesting that their employment contracts should be put in writing. Hays refused. Id., at 210-11.

About a year after that, Thorson accepted a position with a different company and negotiated a starting date beginning three months later. When he informed Hays that he was leaving BDDW, Hays claimed that Thorson was not entitled to his partnership equity because he had failed to provide Hays with one full year of notice of his resignation date. Id., at 218. Thorson denied that giving a year of notice was ever a condition of his employment, much less that breaching such a condition would result in the loss of his equity in BDDW.

Appellees filed a complaint, and later an amended complaint, alleging that Hays, BDDW, and associated entities breached their verbal employment contracts by depriving them of their partnership equity. They also sought recovery of lost wages and a declaratory judgment recognizing the validity of their contacts.¹

To prove the value of BDDW, and by extension, their money damages flowing from the breach of their contracts, Appellees retained Eugene E. Urcan to serve as their valuation expert. At trial, Urcan discussed his professional background and qualifications in the fields of investment banking and valuation services. Although Urcan’s academic degrees were in biology and public policy, he held licenses concerning investment banking and the sale of corporate securities; he also had been approved by two state bars to teach valuation courses that would be eligible for CLE credit.

Urcan estimated that he had done about 100 valuations in the prior three years, and over 1,000 total valuations in his career. These valuations were exclusively of private companies, spanning a wide range of industries. About 30% of Urcan’s work related to valuations, and the other 70% related to mergers and acquisitions. See N.T. Trial, 05/06/2022, at 35-39.

Urcan testified at length about the methodology he applied for BDDW’s valuation. He began by focusing on the company’s tax returns and financial statements dating from 2013 to 2018. By adding together BDDW’s total revenue and cash on hand from 2017 and 2018, Urcan calculated its initial "enterprise value" to be $17,286,262. Id., at 37, 55.

The enterprise value was then used in a forward-looking "market multiple" approach to valuation; by that method, BDDW’s current value could be increased by a multiple determined from a comparative analysis of similar companies’ economic data and long-term outlooks. Id., at 55. BDDW’s status as a private company required Urcan to compare BDDW to public companies because the data for other private companies was unavailable. Id., at 53-60,73-75.

The list of comparable companies which Urcan gathered had valuations ranging from one to over six times their respective enterprise values. Urcan considered the high and low ends of the range to be outliers, and he believed a public company with a multiple of 4.19 (Muuto, a luxury furniture maker) was the most analogous to BDDW out of all those on the list. Id., at 59-60.

Urcan determined that it would be appropriate to calculate BDDW’s valuation by first applying multipliers of one to four, arriving at an "enterprise value range" of $17.2 million (multiple of one) and a maximum value of $ 67.6 million (multiple of four). Id., at 54-55. His final valuation of BDDW was taken from the average of those two numbers, $42.4 million. Id., at 56. This valuation was equivalent to a multiple of 2.47, or almost two and half times BDDW’s enterprise value.

Appellants challenged Urcan’s qualifications to be a valuation expert on the ground that he had no academic degrees in accounting, finance, or math; he had not been published in a peer review article; and he had not previously testified as a valuation expert in a civil trial. See id., at 33-34. The trial court nevertheless ruled that Urcan was qualified to be an expert because he had testified to having significant experience in the relevant fields, and there was no evidence refuting that testimony. See id., at 41.

After the trial had concluded, the trial court entered findings of fact and conclusions of law. Appellees and their expert were found to be fully credible. That is, the trial court accepted the testimony of Song and Thorson regarding their entitlement to a share in BDDW. Appellants’ stated reasons for rescinding their equity was rejected. The trial court also inferred from Hays’ absence and Appellants’ omission of his deposition from the evidence that Hays’ testimony would have not been helpful to Appellants’ case.

On July 6, 2022, a verdict was entered in Appellees’ favor, and the award of money damages was based on Urcan’s valuation figures for BDDW. However, rather than use the average of the minimum and maximum multiples suggested by Urcan, the trial court instead applied a lower multiple of two, doubling the enterprise value of $17.2 million for a final valuation of $34,572,524.00. See Trial Court Conclusions of Law, 7/6/2022, at para. 34.

Song was...