Telos Corp. v. Hamot (Ct. of Special Appeals, Unreported)

Filed: November 27, 2018

Opinion by: Judge Matthew Fader

Holding: Although there is evidence from which a trial court could infer damages from expert testimony with reasonable certainty despite a plaintiff's failure to offer such proof, it is not required to draw such inferences as it is the plaintiff's burden to carry.

Facts:  The defendants in this suit were two holders of preferred stock (the "Stockholders") of Telos Corporation ("Telos").  The terms of the preferred stock entitled holders to semi-annual dividends and, in 2005, redemption of the shares in five annual increments.  If Telos failed to pay the dividends three consecutive times, the holders of the preferred stock were entitled to elect two directors to the board.  The Stockholders were elected as such directors due to Telos' continued nonpayment of the dividends.  Telos claimed that it could not pay the dividends or redeem the preferred stock as anticipated because, per the terms of the preferred stock, Telos was required to satisfy other debt obligations designated as a higher priority.  Through their investment hedge fund, the Stockholders filed suit in Virginia against Telos’ auditor, Goodman & Company, LLC ("Goodman"), claiming that Telos' obligations to pay dividends and ultimately redeem the preferred stock should be treated as current liabilities of Telos; however, Telos and Goodman believed that these should not be treated as current liabilities given the terms of the preferred stock.  Given the litigation in Virginia and the Stockholders' recent election to Telos’ board of directors, Goodman resigned as Telos’ auditor.

Telos retained another auditor, The Reznick Group, P.C. ("Reznick").  Shortly thereafter, the Stockholders began copying Reznick on letters the Stockholders were sending to Telos and Goodman that contained multiple demands and accusations.  Ultimately, Reznick interpreted the communications as a threat of litigation if it did not adopt the Stockholders’ view regarding the financials.  Reznick believed this compromised its independence; therefore, although the 2007 audit was reportedly almost complete, Reznick resigned as Telos’ auditor effective April 2008.  Telos retained another auditor, BDO Seidman, LLP ("BDO").  BDO had to conduct its own audit, which had to be performed on a tight deadline; therefore, BDO had to use more resources than it ordinarily would and, as a result, the audit fees were higher. 

The Stockholders filed a lawsuit in Maryland against Telos seeking access to certain books and records.  Telos filed a countersuit for, among other things, tortious interference with Telos' relations with Goodman and Reznick.  The trial court found that the Stockholders had engaged in such tortious interference and awarded Telos damages equal to the amount of fees paid to Reznick for the 2007 audit, fees incurred by Telos in connection therewith, and fees Telos had to pay Goodman for reissuing earlier audit opinions.  The trial court refused to award damages for the difference between the amount Telos paid BDO for its 2007 and subsequent audits and what Telos would have paid if the Stockholders had not tortuously interfered with the contractual relationships.  

At trial, Telos presented expert testimony regarding the excess audit fees incurred because of the Stockholders' actions (i.e., the difference between the amount Telos normally would have paid for an audit and the amount Telos actually paid for the audits).  The court did not find the expert’s methodology to be a reliable proxy for what Goodman's audit fees may have been had Goodman finished the audit and therefore, although the court agreed there were damages for excess audit fees, the amount could not be determined.

Analysis: The Court of Special Appeals agreed with the trial court that Telos had not presented sufficient evidence to enable the trial court to calculate the excess audit fees.  Telos' argument focused almost exclusively on the expert's methodology for estimating what Goodman’s fees would have been compared to what BDO's fees actually were.  Although Telos argued at trial that excess audit fees could be determined using the Reznick fee instead of the projected Goodman fees, Telos did not present evidence for how the court should determine what Reznick's final fee would have been.  The Court of Special Appeals rejected Telos' argument that the trial court should have gone through the record and determined its own methodology because Telos, as plaintiff, had the burden of proving the damages with reasonable certainty, which it failed to do.  It distinguished this case from other cases Telos tried to use to support its claim because, in those cases, the trial court failed to consider or give proper credit to a party’s damage claim whereas in this case the trial court merely declined to develop its own methodology for calculating damages or determining what Reznick's final fee may have been.

This is an unreported opinion.  See Md. Rule 1-104.


Full text of the opinion available here.