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January 25, 1993

WILLIAM SHEPERD, an individual, MARY JO SHEPERD, an individual, Plaintiffs,
AMERICAN HONDA MOTOR CO. INC, et al., Defendants.

The opinion of the court was delivered by: EUGENE F. LYNCH


 This suit involves two federal counts brought under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), as well as several pendent state law claims -- breach of covenant of good faith and fair dealing, fraud, negligent misrepresentation, intentional interference with prospective economic advantage, and negligent interference with prospective economic advantage. The case was removed by defendants to this Court from the Superior Court of Contra Costa County.

 Defendants in this case include American Honda Motor Company, Inc. ("American Honda"), Honda Motor Co. Ltd. of Japan, three Honda car dealerships situated in Northern California, and three individuals associated with American Honda. Defendants have filed motions to dismiss this case on several grounds. The Court, after considering the parties' briefs in this matter, announced its tentative inclination to grant defendants' motions to dismiss at a November 13, 1992 hearing. However, in an abundance of fairness to plaintiffs in this case, the Court requested further briefing on three issues pertaining to plaintiffs' RICO claims: (1) the requirement of standing as set forth in Imagineering, Inc. v. Kiewit Pacific Co., 976 F.2d 1303 (9th Cir. 1992); (2) the requirement that the RICO enterprise be distinct from the pattern of predicate acts; and (3) the requirement that defendants have managerial control of the RICO enterprise.

 Having carefully considered the parties' original and supplemental briefs in this matter, the Court will grant defendants' motion to dismiss with respect to plaintiffs' RICO claims and tentatively deny plaintiffs' request for leave to amend. And the Court will, in the discretionary exercise of its jurisdiction over pendent claims, remand this case to state court for the adjudication of the remaining state law claims.


 The allegations of plaintiffs' complaint are briefly summarized below. Plaintiffs have operated a dual Pontiac and Honda car dealership in Concord, California since 1973. From 1973 through the mid-1980s plaintiffs' Honda dealership was profitable. From 1973 through the present, American Honda and the other RICO defendants perpetrated a scheme ("the 'turn and earn' scheme") of false reporting of dealer sales. The scheme was aimed at increasing allocations of Honda vehicles to the United States and promoting one of Honda's cars, the Accord, as the number one selling nameplate.

 Dealers who went along with the unlawful false reporting practices of the RICO defendants were rewarded with a superior mix of highly popular vehicles. Those who were not cooperative, such as plaintiffs, were punished with lower allocations and allocations of more unpopular models. Beginning around January 1989, plaintiffs' dealership began receiving inferior allocations of cars because of plaintiffs' refusal to engage in false reporting in contravention of the Broker-Dealer Act. As a result of defendants' wrongful diversion of popular cars from plaintiffs' dealership to other dealerships, plaintiffs' dealership became unable to compete effectively with other dealerships, and its business suffered greatly. In March 1991 plaintiffs sold their dealership at a distressed price, which reflected the dealership's inability to compete effectively in light of defendants' ongoing misallocation of cars.

 A. Plaintiffs' RICO Standing

 The Court's discussion herein addresses the requirements for RICO standing -- proximate cause and concrete financial loss -- as set forth in two recent cases: (1) the Supreme Court's decision in Holmes v. Securities Investor Protection Corp., 117 L. Ed. 2d 532, 112 S. Ct. 1311 (1992); and (2) the Ninth Circuit's opinion in Imagineering Inc. v. Kiewit Pacific Co., 976 F.2d 1303 (1992).

 The supreme Court announced in Holmes that Congress, in its promulgation of 18 U.S.C. § 1964(c), intended to import a proximate cause requirement into the RICO statutory scheme. Holmes, 112 S. Ct. at 1318. The Supreme Court, referring to the many forms the principle of proximate cause had assumed at common law, found that the RICO proximate cause requirement embodied "a demand for some direct relation between the injury asserted and the injurious conduct alleged." Id. Quoting from Associated General Contractors of Cal., Inc. v. Carpenters, 459 U.S. 519, 534, 74 L. Ed. 2d 723, 103 S. Ct. 897 (1983), an earlier supreme Court decision which had quoted from Justice Holmes, the Court wrote, "'The general tendency of the law, in regard to damages at least, is not to go beyond the first step.'" Id. at 1319.

 In Holmes the Supreme Court reversed the Ninth Circuit's finding of proximate case in a factual context analogous to the context of the case at bar. The plaintiff in Holmes was the Securities Investor Protection Corporation ("SIPC"). It alleged that defendants had conspired in a stock manipulation scheme that had disabled two broker-dealers from meeting obligations to customers. The SIPC brought suit on behalf of customers of the disabled broker-dealers whom the SIPC had reimbursed for losses after the broker-dealers had become insolvent.

 Assuming, arguendo, that the SIPC could as a subrogee assert the rights of these customers of the disabled broker-dealers, the Court nevertheless found that the link between the alleged stock manipulation and the harm to the customers was too remote to be actionable under RICO since such harm was purely contingent on the harm suffered by the broker-dealers. According to the Court, insolvency of the broker-dealers was the harm caused by the defendants, and this insolvency in turn left the broker-dealers unable to pay the injured customers' claims. It was only the intervening insolvency of the broker-dealers that connected the defendants' acts to the losses suffered by the customers, but a ...

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