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MADIGAN, INCORPORATED v. GOODMAN

March 28, 1973

MADIGAN, INCORPORATED ET AL., PLAINTIFFS,
v.
GILBERT GOODMAN ET AL., DEFENDANTS.



The opinion of the court was delivered by: Bauer, District Judge.

MEMORANDUM OPINION AND ORDER

This cause comes on defendants' (Gilbert Goodman, Edward Hollander and Sidney L. Morris) motion to dismiss the complaint or alternatively for summary judgment.

This action was brought to recover damages for alleged fraudulent misrepresentations in the sale of a security in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule 10B-5, 17 C.F.R. § 240.10b-5 promulgated thereunder and Illinois common law fraud. The plaintiffs are a group of corporations and individuals including Madigan, Incorporated (hereinafter jointly referred to as the Madigan Group) who purchased Fidelity General Insurance Company ("Fidelity") stock. The defendants are Gilbert Goodman and Clyde L. Korman, who are officers, directors and shareholders of Fidelity; Samuel Jastromb, Samuel Bernstein, Edward Hollander and Sidney L. Morris, who are directors and shareholders of Fidelity; Fred H. Pearson, who is a shareholder of Fidelity; and Tom I. McFarling, who is the Receiver of Dealers National Insurance Company and Liberty Universal Insurance Company and presently has title to 1,071,650 shares of the common stock of Fidelity. These defendants have allegedly made false representations concerning the financial condition of Fidelity to the detriment of the Madigan Group.

The following facts are relevant to the proper disposition of the instant motion. On December 20, 1968, Mading-Dugan Drug Company (the predecessor to Madigan, Inc.) purchased 51% of the common stock of Fidelity from the defendants and other shareholders for the sum of $1,750,895 in cash. At the same time, Mading-Dugan contracted to make a tender offer for the remaining Fidelity shares before June 30, 1969.*fn1

On or about May 13, 1969, Mading-Dugan sold the Fidelity stock it had purchased from defendants to Contran Corporation ("Contran") for 250,000 shares of Contran common stock, the value of which was approximately $1,750,895.*fn2

On or about September 19, 1969, Contran sold all of the Fidelity General stock that it had acquired from Mading-Dugan to Texas Consumer Finance Corp. for $1,750,895 in cash.*fn3

At the time that Contran purchased Fidelity stock, Contran agreed to assume Mading-Dugan's obligation to make the tender offer for the remaining Fidelity shares.*fn4 Contran subsequently assigned the obligation to make the tender offer to Texas Consumer Finance Corp. Between June and August, 1969, Texas Consumer Finance Corp. purchased 502,845 shares of Fidelity from shareholders other than defendants.

Plaintiffs allege that the defendants' false and misleading representations concerning Fidelity's financial condition caused the following damages:

  1.  Plaintiffs have lost the amount paid for
      Fidelity stock (Complaint paragraphs 18(a)
      and 41(a)).
  2.  Plaintiffs have lost additional capital
      contributed to prevent the insolvency of
      Fidelity and the profits and other benefits
      that they reasonably could have expected to
      receive from the purchase of Fidelity stock
      had its financial condition been what the
      defendants represented it to be (Complaint
      paragraphs 18(b) and 41(b)).
  3.  Plaintiffs have incurred and will continue to
      incur substantial expenses in defending
      lawsuits (Complaint paragraphs 18(c) and
      41(c)).
  4.  Plaintiffs have been unable to plan and
      conduct their financial affairs as a result
      of such litigation (Complaint paragraphs
      18(d) and 41(d)).

The defendants Gilbert Goodman, Edward Hollander and Sidney L. Morris, in support of their motion contend:

  1.  Plaintiffs have suffered no damage
      attributable, as a matter of law, to any of
      the acts allegedly performed by defendants.
  2.  Certain plaintiffs do not have standing to
      assert a claim under Section 10(b) of the
      Securities Exchange Act of 1934 and the ...

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