Is there something I could be missing config wise on the DVS when it receives an unknown vlan tag that is starts blocking all traffic?
No, there's nothing like that and no option for it. I've never heard of the incident you've reported, so it has to be something at the physical infra layer and not vSphere.
I did not think there was but needed a sanity check. I will work with the VMware person, they have very little experience with the network layer, and ensure the DVS is set up correctly and continue to look at my switch setup.