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Nelson v. Ditech Financial LLC

United States District Court, W.D. Washington, Tacoma

April 27, 2018

BRIAN S. NELSON, on behalf of himself and all others similarly situated, Plaintiff,


          Ronald B. Leighton, United States District Judge.

         THIS MATTER is before the Court on Defendant Ditech Financial LLC's Motion to Dismiss [Dkt. #30]. Plaintiff Brian Nelson sued his loan servicer, Ditech, claiming it violated the Servicemembers Civil Relief Act (SCRA) when it refused to forgive excess interest collected on a home equity loan during Nelson's nearly ten years of active duty in the National Guard. See 50 U.S.C. § 3937. Ditech moves to dismiss, arguing that it is not liable for overcharges made by other loan servicers, prior to Ditech's purchase of Nelson's loan.

         I. BACKGROUND

         Nelson opened a $90, 000 adjustable rate Home Equity Line of Credit (HELOC) at Equity 1 Lenders Group in August 2005. On October 14, 2005, he was ordered to report for active military duty in two weeks. Sometime before he reported, he borrowed funds against the HELOC and informed Equity 1 that he would report for active duty on October 29, 2005. The initial interest rate on the borrowed funds was 11.75%.

         The SCRA[1] requires lenders to charge active duty borrowers no more than 6% interest on a variety of loans. Loans secured by the service member's home are limited to 6% during active duty and for one year thereafter. Any interest in excess of the limit “is forgiven.” 50 U.S.C. § 3937(a)(1)(A).

         Equity 1 was therefore obligated to reduce Nelson's interest rate to 6% while he was on active duty. It did not make this adjustment, and instead continued to charge him 11.75% (the initial rate), with periodic fluctuations tracking the prime rate. Nelson remained on active duty for nearly 10 years. During that time, his loan was sold to different loan servicers at least five times. All of the servicers, including the servicer at the time Nelson retired, Ditech, charged far more than 6%. Nelson retired from active duty on August 31, 2015.

         Nelson asked Ditech to forgive the excess interest he had paid during active duty. Ditech agreed that it would not charge him more than 6%, and forgave the excess from the date it purchased and began servicing the loan-October 2013-until one year after he retired. But Ditech refused to forgive the excess interest Nelson paid to prior loan servicers, claiming it was not responsible for its failure to comply with the SCRA.

         Nelson sued. He claims Ditech routinely violates the SCRA by denying service members' claims for reduced interest when the excess interest was charged before Ditech serviced the loan. He seeks to represent a class of similarly situated Ditech customers seeking Declaratory and Injunctive relief, reformation of contracts and damages.

         Ditech seeks dismissal with prejudice and without leave to amend. It argues that Nelson cannot plausibly allege that Ditech did anything to cause him to overpay interest from 2005 to 2013, and that the SCRA does not makes the successor servicer liable for the breaches of its “wholly unrelated” predecessors. It emphasizes that Nelson did not assert (and his complaint does not factually support) a breach of contract claim. It argues that he cannot effectively amend it to do so by arguing breach of contract in his responsive brief.

         Nelson argues that he as plausibly alleged facts supporting an SCRA claim. He emphasizes the SCRA's purpose-to protect active duty service members-and the fact that Courts uniformly hold that it is to be broadly and liberally construed to that end.


         Dismissal under Fed.R.Civ.P. 12(b)(6) may be based on either the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). A plaintiff's complaint must allege facts to state a claim for relief that is plausible on its face. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A claim has “facial plausibility” when the party seeking relief “pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Although the court must accept as true the Complaint's well-pled facts, conclusory allegations of law and unwarranted inferences will not defeat an otherwise proper 12(b)(6) motion to dismiss. Vazquez v. Los Angeles Cty., 487 F.3d 1246, 1249 (9th Cir. 2007); Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). “[A] plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations and footnotes omitted). This requires a plaintiff to plead “more than an unadorned, the-defendant-unlawfully-harmed-me-accusation.” Iqbal, 556 U.S. at 678 (citing id.).

         III. ANALYSIS

         The issue is whether the SCRA requires the borrower to chase down each lender or servicer that overcharged him, or whether he can recover the entire excess from his current servicer (which presumably ...

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