Heller and Grayheck (Count II) on the grounds that they fail to
comply with the prerequisites for a civil action under RICO.
Specifically, defendants contend that (1) neither count
adequately identifies the separate "person" and "enterprise"
required by 18 U.S.C. § 1962(c), and (2) neither count
sufficiently alleges that the plaintiffs suffered an injury "by
reason of a violation of section 1962," as required by 18 U.S.C. § 1964(c).
As the court's disposition of the second objection is
dispositive of the case, only that issue will be addressed.
The damages sought by the plaintiffs in their RICO counts are
three times (pursuant to 18 U.S.C. § 1964(c)) "the excessive
interest paid by plaintiffs and the class members." Thus, the
injury the plaintiffs suffered was the excessive interest they
paid by reason of the defendants' allegedly fraudulent
misrepresentation of their prime rate. Defendants contend that
such an injury is not compensable under 18 U.S.C. § 1964, which
provides relief only for injuries suffered "by reason of a
violation of section 1962 . . ." This is the so-called "RICO
injury" requirement, analogous to the "antitrust injury"
requirement enunciated by the Supreme Court in Brunswick Corp. v.
Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 97 S.Ct. 690, 50 L.Ed.2d
701 (1977). In that case, the Court held that, in order to
recover the enhanced remedy of treble damages provided in the
Clayton Act for injuries suffered "by reason of anything
forbidden in the antitrust laws," 15 U.S.C. § 15, "[p]laintiffs
must prove antitrust injury, which is to say injury of the type
the antitrust laws were intended to prevent and that flows from
that which makes defendants acts unlawful." Brunswick, 429 U.S.
at 489, 97 S.Ct. at 697 (emphasis in original). Thus, the mere
fact that a defendant had violated the antitrust laws and that a
plaintiff had suffered injury was insufficient for that plaintiff
to state a cause of action for treble damages against that
defendant; only a special kind of injury merited that degree of
Like the Clayton Act, RICO provides an enhanced remedy in the
form of treble damages for certain kinds of injuries. While
violations of other statutes (e.g., the mail fraud statute) may
form the predicate for a RICO violation, RICO damages are
available only (1) where the other requirements for a RICO
violation (e.g., "enterprise," "pattern of racketeering
activity," etc.) are present, and (2) for injuries suffered by
reason of the RICO violation, and not by reason of the predicate
violation. This "RICO injury" requirement, which is supported by
the plain language of the statute and by the Supreme Court's
gloss on the analogous language of the Clayton Act, has won wide
acceptance in the federal courts. See, e.g., Bankers Trust Co. v.
Feldesman, 566 F. Supp. 1235 at 1241 (S.D.N.Y. 1983) ("plaintiff's
injury to be cognizable under RICO must be caused by a RICO
violation and not simply by the commission of a predicate
offense, such as mail fraud . . ."); Richardson v.
Shearson/American Express Co., Inc., 573 F. Supp. 133 at 137
[Current] Fed.Sec.L. Rep. (CCH) ¶ 99,145, at p. 95,526 (S.D.N Y
1983). ("[T]he injuries plaintiffs claim to have sustained were
caused by the fraud allegedly practiced by defendants, and under
no circumstances, could the complaint be interpreted as alleging
injury from a violation of section 1962.") Moss v. Morgan
Stanley, Inc., 553 F. Supp. 1347 at 1361 [Current] Fed.Sec.L.Rep.
(CCH) ¶ 99,045, at p. 94,982 (S.D.N.Y. 1983) ("plaintiff's injury
to be cognizable under RICO must be caused by a RICO violation
and not simply by the commission of a predicate offense, such as
mail fraud . . ."); Erlbaum v. Erlbaum,  Fed.Sec.L.Rep.
(CCH) ¶ 98,772 at p. 93,922 (E.D.Pa. 1982) (plaintiff's injury
"stems solely from defendants' acts of mail fraud. Therefore, she
has not been injured `by reason of a violation of section
1962' . . ."); Johnsen v. Rogers, 551 F. Supp. 281, 284-285
(C.D.Cal. 1982) ("a plaintiff . . . must allege a `racketeering
enterprise injury' to recover treble damages under RICO. . . .
[T]he injury to which plaintiffs refer is merely the direct
injury caused by the predicate acts of securities fraud.");
Harper v. New Japan Securities International, Inc., 545 F. Supp. 1002,
1007 (C.D.Cal. 1982) ("plaintiff must allege not only injury from
the predicate offenses, but injury of the type the RICO statute
was intended to prevent"); Van Schaick v. Church of Scientology
of California, Inc., 535 F. Supp. 1125 (D.Mass. 1982) (RICO count
based on mail fraud dismissed for failure to allege RICO injury);
Salisbury v. Chapman, 527 F. Supp. 577, 580 n. 4 (N.D.Ill. 1981)
(mail fraud as "racketeering" element; "Section 1964(c) should be
read to require a nexus between the nature of the violation of
Section 1962 and the nature of the injury to the plaintiff.");
Landmark Savings & Loan v. Loeb Rhoades, Hornblower & Co.,
527 F. Supp. 206, 208-209 (E.D.Mich. 1981) ("something more or
different than injury from predicate acts is required for a
plaintiff to have standing to recover treble damages under the
RICO statute . . . [T]he plaintiff's fraud claims are simply that
the plaintiff suffered an injury by reason of fraud in which the
mails happened to be used.") But see Bennett v. Berg,
685 F.2d 1053 (8th Cir. 1982), and Windsor Associates, Inc. v. Greenfeld,
564 F. Supp. 273 (D.Md. 1983).
The Seventh Circuit has never addressed the question of the
"RICO injury" requirement. In its recent decision in Schacht v.
Brown, 711 F.2d 1343 (7th Cir. 1983), the court rejected the
so-called "competitive injury" requirement adopted by many of the
courts cited above as an additional precondition for section
1964(c) standing. The competitive injury requirement, also based
on analogies to the antitrust laws, limited private RICO recovery
to persons injured as competitors to those enterprises operated
through a pattern of racketeering activity. The Seventh Circuit
held that "the erection of a `competitive' or `indirect' injury
barrier to RICO recovery comports with neither the plain language
nor the central goal of the statute." Schacht, at 1358.
Even in rejecting the competitive injury requirement, the
Seventh Circuit recognized that the "RICO injury" (or, "by reason
of") requirement relied on by many of the same courts is a
separate and distinct requirement. Indeed, at least two of the
courts which adopted both requirements explicitly distinguished
the nature and rationale of the two. See Harper, supra, 545
F. Supp. at 1008, and Landmark, supra, 527 F. Supp. at 208-209
("Competitive injuries and racketeering enterprise injuries would
frequently overlap, but they are not necessarily the same."). The
Seventh Circuit in Schacht expressly declined to reach the issue
of the "RICO injury" requirement because it found that the
complaint in question did "allege an injury to [the plaintiff] by
reason of the operation of a separate enterprise . . . through a
pattern of racketeering activity." Schacht, at 1358.
The plaintiff in Schacht was the Acting Director of the
Illinois Department of Insurance ("the Director"), acting as the
Liquidator (and successor-in-interest) of Reserve Insurance
Company ("Reserve"). While the predicate offense in Schacht, as
here, involved fraud, the allegation was that "Reserve suffered
from the defrauding of the State Department of Insurance [by the
defendants]." Ibid. (emphasis added). The court emphasized that
"[t]he Director does not allege that the predicate fraudulent
acts were aimed directly at Reserve, as was the case with the
plaintiffs in Johnsen [, supra]; Bays v. Hunter Savings
Association, 539 F. Supp. 1020, 1024 (S.D.Ohio 1982); [Harper,
supra]; and Erlbaum[, supra] . . ." Ibid. Thus, those cases in
which the "RICO injury" requirement was found essential but
wanting were distinguished by the Seventh Circuit as cases in
which the predicate fraudulent acts had been directed at the
putative RICO plaintiff — as is precisely the situation here.
Accordingly, this court rejects the suggestion that the Schacht
decision stands as a barrier to this court adopting the
persuasive and nearly universal position that a plaintiff's
injury to be cognizable under RICO must be caused by a RICO
violation and not simply by the commission of predicate offenses,
such as acts of mail fraud. Accordingly, since the only injuries
the plaintiffs allege were direct consequences of instances of
mail fraud and were not produced "by reason of a violation
of section 1962," their RICO claims must be dismissed. As the
jurisdiction of this court over their remaining state claims is
founded exclusively on the pendent nature of those claims, the
state claims must fall as well.
For the reasons stated above, defendants' motion to dismiss is
granted, and this cause is ordered dismissed.