United States District Court, Northern District of Illinois, E.D
November 15, 1974
NICHOLAS JANNES ET AL., PLAINTIFFS,
MICROWAVE COMMUNICATIONS, INC., ET AL., DEFENDANTS.
The opinion of the court was delivered by: Robson, Chief Judge.
MEMORANDUM AND ORDER
This matter is before the court on defendant Goeken's motion
for summary judgment.*fn1 For the reasons hereinafter stated,
this motion shall be granted only as to preclude Microwave
Communications of America, Inc. (MI-COM) from recovering as a
shareholder of Microwave Communications, Inc. (MCI) under Rule 56
of the Federal Rules of Civil Procedure.
This derivative securities fraud action was brought by a
shareholder of MCI on behalf of MCI against MI-COM, the
corporation that now owns a significant portion of the stock of
MCI. Also, the Chairman of MI-COM, William G. McGowan, and former
directors of MCI, including John D. Goeken, were named as
It is alleged that MCI was injured by the defendants through an
alleged scheme which violates section 10(b) of the Securities
Exchange Act of 1934 and through waste and mismanagement.
Defendant Goeken has moved for summary judgment on the ground
that MCI has no right to recover for the alleged acts because the
principal beneficiary of any recovery would be MI-COM, the owner
of more than 90% of the stock of MCI, and MI-COM did not become a
shareholder of MCI until after the occurrence of all the alleged
Defendant bases his motion on the recent United States Supreme
Court case of Bangor Punta Operations, Inc. v. Bangor & Aroostook
Railroad Company, 417 U.S. 703, 94 S.Ct. 2578, 41 L.Ed.2d 418
(1974). In Bangor Punta, Bangor Punta Corp., through its
subsidiary, acquired 98.3% of the outstanding stock of Bangor &
Aroostook Railroad Co. (BAR) in 1964 by purchasing all the assets
of BAR's holding company, Bangor & Aroostook Corp. (B&A). In
1969, Bangor Punta, again through its subsidiary, sold all its
BAR stock to Amoskeag Co. In 1971, BAR and its subsidiary filed
an action against Bangor Punta and its subsidiary, alleging
various acts of corporate mismanagement of BAR during the
1960-1967 period by Bangor Punta and B&A, and seeking damages for
violations of federal antitrust and securities laws, state
statutes and state common law. The Supreme Court held that
Amoskeag would be the principal beneficiary; however, Amoskeag
acquired its shares after the occurrence of the alleged wrongs
and therefore was not a contemporaneous owner. Amoskeag did not
have standing to maintain this action and would be unjustly
enriched since it alleged no fraud and was not injured. See,
e.g., Wool v. Solar Aircraft Company, 47 Ill. App.2d 84, 90-91,
197 N.E.2d 477, 481 (1st Dist. 1964).
The Bangor Punta case is remarkably similar to the case
before this court. Here, MI-COM, the present owner of more than
90% of the stock of MCI, did not acquire its holdings until after
the occurrence of the alleged wrongs. The plaintiffs contend that
there are sufficient differences between Bangor Punta and this
case to permit this court to distinguish between the two cases.
Noteworthy is plaintiffs' contention that, unlike Bangor
Punta where the principal beneficiary initiated the litigation,
here MI-COM is a defendant and the suit was commenced before
MI-COM purchased its stock in MCI. However, this argument flies
in the face of plaintiffs' position. If plaintiffs prevail, and
it is thereby determined that MI-COM is guilty of some
wrongdoing, the interests of equity would certainly demand that
the wrongdoer should not profit from his own wrong. The
commencement of the suit before MI-COM's purchase of MCI shares
is irrelevant since the principal beneficiary at the present time
was not a contemporaneous owner of shares at the time the suit
Also worthy of discussion is plaintiffs' contention that many
of the present MI-COM shareholders were in fact MCI shareholders
at the time of the alleged wrongs. These are the shareholders who
participated in the 1973 MI-COM exchange offer. Under this theory
these shareholders have suffered injury if plaintiffs'
allegations are true. However, a closer look at the percentage of
MI-COM shareholders (assuming these shareholders have not
disposed of their shares since the exchange offer) who previously
owned stock in MCI indicates that such percentage is not
significant enough to reduce MI-COM's status as a potential
Plaintiffs' contention that MI-COM would not be the principal
beneficiary if the court grants the relief requested by
plaintiffs is without merit since the court is not limited by
plaintiffs' demand for relief. Kizziar v. Dollar, 268 F.2d 914,
918 (10th Cir.), cert. denied, 361 U.S. 914, 80 S.Ct. 258, 4
L.Ed.2d 184 (1959). Moreover, since plaintiffs' prayer for relief
requests that the assets of MI-COM, including its MCI stock, be
transferred to MCI, a non-contemporaneous owner (MCI) would still
be reaping a windfall benefit to the extent of the precentage of
transferred MCI stock if such prayer were granted.
This court is of the opinion that defendants' motion for
summary judgment should be granted only as to preclude MI-COM
from recovering as a shareholder of MCI. However, this court
determines that equity demands that the remaining qualified
shareholders be permitted to recover in this derivative action in
their personal capacities. This court has the power to fashion
such a remedy for these shareholders. Perlman v. Feldmann,
219 F.2d 173, 178 (2d Cir.), cert. denied, 349 U.S. 952, 75 S.Ct.
880, 99 L.Ed. 1277 (1955); Johnson v. American General Insurance
Co., 296 F. Supp.
802, 809 (D.D.C. 1969); see also Bangor Punta, supra, 94 S.Ct.
at 2587, n. 15; Southern Pacific Co. v. Bogert, 250 U.S. 483, 39
S.Ct. 533, 63 L.Ed. 1099 (1919).
It is hereby ordered that defendants' motion for summary
judgment be granted only as to preclude MI-COM from recovering as
a shareholder of MCI.