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Cecil & Denise Dunn v. Gmac Mortgage

March 25, 2011



This matter comes before the Court on Defendant GMAC Mortgage, LLC's ("Defendant") Motion to Dismiss (Doc. #5) the Complaint (Doc. #1) filed by Plaintiffs Cecil and Denise Dunn ("Plaintiffs"). Plaintiffs oppose the motion.*fn1


In October 2006, Plaintiffs received an option arm loan from Residential Mortgage Capital, a California corporation. Unlike a home loan that requires monthly repayment of principal and interest at a current interest rate, these loans permit borrowers to make a "Minimum Payment." Plaintiffs allege that the Minimum Payment is generally insufficient to cover the "interest due" each month under the Note resulting in negative amortization. Plaintiffs allege that the effects of negative amortization are that (1) it increases the borrower's indebtedness to the lender and (2) it increases the borrower's interest payment each month as the interest due is based upon the increased loan balance.

Under the Deed of Trust ("DOT") used by Plaintiffs' lender and subsequent loan servicers such as GMAC, Plaintiffs are required to make a monthly payment. Plaintiffs allege that these loan documents are on industry standard forms lenders require borrowers to use. Plaintiffs allege that industry practice does not allow borrowers an opportunity to make changes to these documents -- they are presented on a "take it or leave it" basis.

Plaintiffs allege that Section 2 of the DOT provides how the payments will be applied in the order of priority:

(a) interest due under the Note; (b) principal due under the Note; and (c) amounts due under Section 3. Section 3 of the DOT requires an escrow account. Plaintiffs allege that the minimum monthly amount due under the loan documents was the minimum payment under the Note plus the additional amount for escrow.

Plaintiffs allege that contrary to the explicit terms of the Security Instrument, Defendant applied portions of the payments to the escrow account before satisfying the interest due under the Note. As a result of the alleged breach of the Security Instrument, the remaining unpaid monthly interest due on the Note was added to the principal balance, resulting in 2 increased negative amortization. This negative amortization 3 caused an increase in principal balances and interest payments 4 for the remaining payment periods. Plaintiffs allege that 5 despite the consistent increase in principal and interest costs, 6 the escrow account remained paid in full at all times if the 7 borrower made minimum payments. Plaintiffs allege that by this 8 breach of the Note, Defendant improperly charged them interest. 9

Plaintiffs allege that Defendant cannot negatively amortize the loan for unpaid interest until it first applies all of the payment it receives to the interest due. Plaintiffs argue that if there is a shortfall to the escrow account, the servicer must follow the procedures set forth in the Real Estate Settlement Procedures Act to recover the shortfall.

Plaintiffs filed this action as a class action, pursuant to California Code of Civil Procedure § 382, in the Superior Court in the County of Solano. The Complaint alleges four causes of action: (1) Breach of Contract; (2) Violation of California Business & Professions Code ("UCL") § 17200; (3) Violation of the Consumer Legal Remedies Act ("CLRA"), California Civil Code § 1750; and (4) Unjust Enrichment. The case was removed to this Court pursuant to 28 U.S.C. § 1453(b) on November 29, 2010.


A. Legal Standard

1. Motion to Dismiss

A party may move to dismiss an action for failure to state a claim upon which relief can be granted pursuant to Federal Rules of Civil Procedure section 12(b)(6). In considering a motion to dismiss, the court must accept the allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1975), overruled on other grounds by Davis v. Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322 (1972). Assertions that are mere "legal conclusions," however, are not entitled to the assumption of truth. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009), citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). To survive a motion to dismiss, a plaintiff needs to plead "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. Dismissal is appropriate where the plaintiff fails to state a claim supportable by a cognizable legal theory. Balistreri v. Pacifica Police Department, 901 F.2d 696, 699 (9th Cir. 1990).

Upon granting a motion to dismiss for failure to state a claim, the court has discretion to allow leave to amend the complaint pursuant to Federal Rules of Civil Procedure ยง 15(a). "Dismissal with prejudice and without leave to amend is not appropriate unless it is clear . . . that the complaint could not be saved by ...

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