1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 SOUTHERN DISTRICT OF CALIFORNIA 9 10 PARTNERS ALLIANCE Case No.: 3:24-cv-01222-H-DDL CORPORATION, a California 11 Corporation, and PORTFOLIO ORDER GRANTING DEFENDANTS’ 12 SERVICES LIMITED, INC., a Texas MOTION TO DISMISS WITH Corporation, LEAVE TO AMEND 13

Plaintiffs, 14 [Doc. No. 11] v. 15 ALLY BANK, a Utah Corporation; 16

CAPITAL ONE FINANCIAL

17 CORPORATION, a Delaware Corporation; CITIZENS BANK, NA, a 18 Delaware Corporation; FIFTH THIRD 19 BANK, NA, an Ohio Corporation;

FLAGSHIP CREDIT ACCEPTANCE

20 LLC, a Delaware Limited Liability 21 Company; KINECTA FEDERAL CREDIT UNION, a federally chartered 22 credit union; WELLS FARGO & 23 COMPANY, a Delaware Corporation; and Does 1 through 20, 24 Defendants. 25

26 On August 21, 2024, Defendants Ally Bank, Capital One Financial Corporation, 27 Fifth Third Bank, N.A., Citizens Bank, N.A., Flagship Credit Acceptance LLC, Kinecta 28 1 “Defendants”) filed a motion to dismiss (“MTD”) Plaintiffs Partners Alliance Corporation 2 (“PAC”) and Portfolio Services Limited, Inc.’s (“Portfolio”) (collectively, “Plaintiffs”) 3 complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. 4 (Doc. No. 11.) On September 18, 2024, Plaintiffs filed a response in opposition (“Opp.”) 5 to Defendants’ motion to dismiss. (Doc. No. 13.)1 On September 30, 2024, the Court took 6 the matter under submission. (Doc. No. 14.) Defendants filed a reply on October 9, 2024. 7 (Doc. No. 16.) For the reasons below, the Court grants Defendants’ motion to dismiss with 8 leave to amend. 9 BACKGROUND 10 Plaintiffs are administrators of a consumer product called a guaranteed asset 11 protection (“GAP”) waiver, also known as a GAP addendum or GAP agreement, that 12 automobile dealers sell to borrowers financing vehicle purchases. (Compl., Doc. No. 1-2 13 ¶ 16; GAP Addendum, Doc. No. 1-2 at 29-31.) A GAP waiver amends a vehicle financing 14 contract to provide that in the event the purchased vehicle suffers a total loss, the creditor 15 will waive any remaining unpaid balance on the financing contract. (Id.) 16 Plaintiffs enter into “Dealer Agreements” with dealerships, which authorize the 17 dealerships to sell GAP waivers to borrowers. (Compl., Doc. No. 1-2 ¶ 16; Dealer 18 Agreement, Doc. No. 1-2 at 26-27.) In a typical vehicle finance transaction, a borrower 19 enters into a financing contract with a dealership. (Compl., Doc. No. 1-2 ¶ 18.) The 20 borrower may choose to amend their financing contract by adding a GAP waiver, signed 21 by the borrower and the dealership. (Compl., Doc. No. 1-2 ¶ 16; GAP Addendum, Doc. 22 No. 1-2.) The dealership then assigns the financing contract and GAP waiver to a creditor, 23 through a separate agreement with the creditor. (Compl., Doc. No. 1-2 ¶ 18.) Defendants 24 are creditors to whom financing contracts and GAP waivers were assigned. (Id.) 25

26 1 Plaintiffs request that the Court take judicial notice of various exhibits relating to 27 the legislative history of California AB 2311. (Doc. No. 13-1.) The Court denies Plaintiffs’ request for judicial notice as moot as the Court does not reference or cite to the 28 1 Plaintiffs’ GAP waiver provides that borrowers have “the unconditional right to 2 cancel” the addendum “for a refund/credit of the unearned portion of the charge” for the 3 addendum “at any time[.]” (GAP Addendum, Doc. No. 1-2 at 29.) The waiver states that 4 a borrower who cancels the GAP waiver within 30 days of purchase will receive a full 5 refund of the addendum cost. (Id.) After 30 days, the borrower will receive a full refund 6 “less a $50.00 cancellation fee, where such cancellation fee is permitted by law.” (Id.) 7 On January 1, 2023, California AB 2311 went into effect, which states: “A 8 cancellation fee, termination fee, or similar fee shall not be assessed in connection with the 9 termination of a guaranteed asset protection waiver.” (Compl., Doc. No. 1-2 ¶ 15.) After 10 AB 2311 went into effect, Defendants stopped deducting cancellation fees from refunds 11 they issued to borrowers who cancelled their GAP waivers after 30 days. (Id. ¶ 21.) 12 Plaintiffs allege that as a result, Defendants then overcharged dealerships for the refunds 13 of the unearned GAP fees. (Id. ¶ 20.) Plaintiffs further allege that numerous dealerships 14 have turned around to Plaintiffs and demanded reimbursement for the amount Defendants 15 overcharged them. (Id. ¶ 21.) Plaintiffs allege that Defendants’ application of AB 2311 to 16 GAP waivers from before January 1, 2023 is improper and unconstitutional. (Id. ¶¶ 19, 17 21.) Based on these allegations, Plaintiffs assert claims for breach of contract (Id. ¶¶ 22- 18 52) and seek compensatory damages, declaratory relief, and injunctive relief. 19 On June 10, 2024, Plaintiffs filed a complaint against Defendants in the Superior 20 Court of California, County of San Diego. (Doc. No. 1-2.) On July 16, 2024, Defendants 21 removed the matter to this Court. (Doc. No. 1.) By the present motion, Defendants move 22 pursuant to Federal Rule of Civil Procedure 12(b)(6) to dismiss Plaintiffs’ complaint in its 23 entirety with prejudice for failure to state a claim upon which relief can be granted. (Doc. 24 No. 11.) 25 DISCUSSION 26 I. Legal Standard for a Rule 12(b)(6) Motion to Dismiss 27 A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal 28 sufficiency of the pleadings and allows a court to dismiss a complaint if the plaintiff has 1 failed to state a claim upon which relief can be granted. See Conservation Force v. Salazar, 2 646 F.3d 1240, 1241 (9th Cir. 2011) (citing Navarro v. Block, 250 F.3d 729, 732 (9th 3 Cir. 2001)). Federal Rule of Civil Procedure 8(a)(2) requires that a pleading that states a 4 claim for relief contain “a short and plain statement of the claim showing that the pleader 5 is entitled to relief.” The function of this pleading requirement is to “‘give the defendant 6 fair notice of what the . . . claim is and the grounds upon which it rests.’” Bell Atl. Corp. 7 v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). 8 A complaint will survive a Rule 12(b)(6) motion to dismiss if it contains “enough 9 facts to state a claim to relief that is plausible on its face.” Id. at 570. “A claim has facial 10 plausibility when the plaintiff pleads factual content that allows the court to draw the 11 reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. 12 Iqbal, 556 U.S. 662, 678 (2009). “A pleading that offers ‘labels and conclusions’ or ‘a 13 formulaic recitation of the elements of a cause of action will not do.’” Id. (quoting 14 Twombly, 550 U.S. at 555). “Threadbare recitals of the elements of a cause of action, 15 supported by mere conclusory statements, do not suffice.” Id. “While legal conclusions 16 can provide the framework of a complaint, they must be supported by factual allegations.” 17 Id. at 679. Accordingly, dismissal for failure to state a claim is proper where the claim 18 “lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.” 19 Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008); see L.A. 20 Lakers, Inc. v. Fed. Ins. Co., 869 F.3d 795, 800 (9th Cir. 2017). 21 In reviewing a Rule 12(b)(6) motion to dismiss, a district court must “accept the 22 factual allegations of the complaint as true and construe them in the light most favorable 23 to the plaintiff.” L.A. Lakers, 869 F.3d at 800 (quoting AE ex rel. Hernandez v. Cnty. of 24 Tulare, 666 F.3d 631, 636 (9th Cir. 2012)). But a court need not accept “legal conclusions” 25 as true. Iqbal, 556 U.S. at 678. “Further, it is improper for a court to assume the claimant 26 “can prove facts which it has not alleged or that the defendants have violated the . . . laws 27 in ways that have not been alleged.” Associated Gen. Contractors of Cal., Inc. v. Cal. State 28 Council of Carpenters, 459 U.S. 519, 526 (1983). In addition, a court may consider 1 documents incorporated into the complaint by reference and items that are proper subjects 2 of judicial notice. See Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010). 3 If the court dismisses a complaint for failure to state a claim, it must then determine whether 4 to grant leave to amend. See Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995). “A 5 district court should grant leave to amend . . . unless it determines that the pleading could 6 not possibly be cured by the allegation of other facts.” Id. (citation omitted). 7 II. Analysis 8 Plaintiffs’ complaint states that it “arises from [Defendants’] unconstitutional 9 interpretation and application of California AB 2311 to apply retroactively to GAP 10 Addendum contracts entered into before [AB 2311 was enacted,] thus failing to pay 11 contractual cancellation fees to [Plaintiffs.]” (Compl., Doc. No. 1-2 ¶ 1.) Based on the 12 allegations in the complaint, Plaintiffs bring claims against Defendants for breach of 13 contract. (Id. ¶¶ 22-52.) 14 Under California law, the elements of a breach of contract claim are (1) the existence 15 of a contract between the parties; (2) plaintiff’s performance or excuse for non- 16 performance; (3) defendant’s breach; and (4) the resulting damage to plaintiff. D’Arrigo 17 Bros. of Cal. v. United Farmworkers of Am., 224 Cal. App. 4th 790, 800 (2014). Here, at 18 a minimum, the complaint fails to sufficiently allege the first and third elements of a breach 19 of contract claim. 20 A. The Complaint Does Not Sufficiently Allege the Existence of a Contract 21 Between Plaintiffs and Defendants 22 1. The Complaint Does Not Sufficiently Allege that Plaintiffs are 23 Parties to the GAP Agreements 24 The parties dispute whether Plaintiffs have sufficiently alleged the existence of a 25 contract between them. Plaintiffs argue the GAP waivers constitute a contract between 26 Plaintiffs and Defendants. (Compl., Doc. No. 1-2 ¶¶ 28, 45; Opp., Doc. No. 13 at 15-17.) 27 Defendants argue the GAP waivers are contracts not between Plaintiffs and Defendants, 28 but rather between borrowers and automobile dealerships, and after assignment, between 1 borrowers and creditors such as Defendants. (MTD, Doc. No. 11 at 9.) Accordingly, 2 Defendants argue, Plaintiffs lack privity of contract with Defendants and cannot state a 3 claim for breach of the GAP waivers. (Id.) 4 In order for a contract to exist between parties there must be (1) parties capable of 5 contracting; (2) their consent; (3) a lawful object; and (4) a sufficient cause or 6 consideration. Cal. Civ. Code § 1550. In order for consent to be mutual, the parties must 7 all agree upon the same thing in the same sense. Cal. Civ. Code § 1580. “[O]nly parties 8 to a contract, hence those in privity to it, have rights or liabilities under the contract.” 9 McCormick v. US Bank, N.A., 2012 WL 12869274, at *4 (S.D. Cal. Oct. 30, 2012) (citing 10 U.S. Trust Co. v. Wabash W. Ry. Co., 150 U.S. 287, 308 (1893)); see also Hatchwell v. 11 Blue Shield of Cal., 198 Cal. App. 3d 1027, 1034 (1988) (“Someone who is not a party to 12 the contract has no standing to enforce the contract or to recover extra-contract damages 13 for wrongful withholding of benefits to the contracting party.”). 14 Plaintiffs first argue this element is met because they “have alleged that they are a 15 party to the GAP Addendums and do so based on the factual allegations summarized 16 above.” (Opp., Doc. No. 13 at 15.) But the Court need not accept Plaintiffs’ legal 17 conclusions as true. Iqbal, 556 U.S. at 678. And as Defendants note, the express language 18 of the GAP waiver states that the agreement is between the borrower and the creditor, 19 which indicates that Plaintiffs are not party to the waivers. (MTD, Doc. No. 11 at 9-10.) 20 Plaintiffs argue that the Court need not address the contractual language of the GAP waiver 21 because the waiver is not subject to judicial notice. (Opp., Doc. No. 13 at 15-16.) But a 22 court may consider documents incorporated into the complaint by reference. See Coto 23 Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010). Plaintiffs filed the sample 24 GAP waiver here as an exhibit to their complaint. (Compl., Doc. No. 1-2 ¶ 17; id. at 23- 25 24, 29-31.) Accordingly, the Court may consider the GAP waiver in reviewing 26 Defendants’ motion to dismiss. 27 Plaintiffs argue that to the extent the Court considers the language in the GAP 28 waiver, that language shows that Plaintiffs are in fact named as parties to the contract. 1 (Opp., Doc. No. 13 at 16.) Plaintiffs point specifically to the following from the paragraph 2 about the borrower’s right to cancel: “In order to receive any refund due in the event of the 3 early termination of the finance agreement, You . . . must provide a written request to 4 cancel to the Dealer/Creditor, Administrator, or other such party[.]” (GAP Addendum, 5 Doc. No. 1-2 at 29.) The waiver mentions “the Administrator” several other times in the 6 contract, particularly to inform borrowers whom they must contact in the event of a 7 qualifying loss. (See id.) The sample waiver provided here identifies Plaintiff PAC as the 8 dealer’s administrator. (Id.) But these references to Plaintiffs, even to Plaintiffs as 9 “parties” in the general sense of the word, do not necessarily mean Plaintiffs are themselves 10 parties with rights and liabilities under the contract. To the contrary, the first line of the 11 GAP waiver clearly states: “The Addendum is between the Customer/Borrower (You or 12 Your) and the Dealer/Creditor (We, Us, or Our) or if the Financing Contract is assigned 13 with the assignee.” (Id.) Moreover, the contract contains signature lines for 14 “customer/borrower” and “dealer/creditor,” but none for an administrator. (Id.) Plaintiffs 15 note that signing a written contract is not the exclusive method for demonstrating assent to 16 an agreement, but do not allege other facts to show what part they had in the formation of 17 the contract embodied by the GAP agreement.2 18 Overall, the Court agrees with Defendants that the complaint fails to sufficiently 19 allege that the GAP waiver constitutes a contract between Plaintiffs and Defendants such 20 that Plaintiffs may sue Defendants for its breach. Should Plaintiffs wish to allege any 21 additional facts showing that Plaintiffs and Defendants mutually assented to an agreement 22 embodied by the GAP waiver, they may do so in an amended complaint. 23

24 2 Plaintiffs also suggest in their opposition that an implied contract exists between 25 Plaintiffs and Defendants. (Opp., Doc. No. 13 at 17.) But the GAP agreement is not an implied contract; it is an express contract formed through explicit agreement in writing. 26 And as Defendants note, the complaint does not allege the existence of any other 27 agreements between Plaintiffs and Defendants. (MTD, Doc. No. 11 at 10.) Should Plaintiffs wish to allege additional facts to support their theory of implied contract, they 28 1 2. The Complaint Does Not Sufficiently Allege that Plaintiffs Are 2 Third-Party Beneficiaries 3 In their opposition, Plaintiffs argue that even if the Court determines they were not 4 parties to the GAP agreements, they may nonetheless sue for breach of the agreements as 5 third-party beneficiaries. (Opp., Doc. No. 13 at 17-18.) Although Plaintiffs did not clearly 6 assert their breach of contract claims under a third-party beneficiary theory in the 7 complaint, the Court nonetheless discusses this argument below because it grants Plaintiffs 8 leave to amend. 9 “A third party beneficiary may enforce a contract made for its benefit.” Hess v. Ford 10 Motor Co., 27 Cal. 4th 516, 524 (2002); see Cal. Civ. Code § 1559. But “[t]he standard to 11 achieve third party beneficiary status is a high one.” Stasi v. Inmediata Health Grp. Corp., 12 501 F. Supp. 3d 898, 920 (S.D. Cal. Nov. 19, 2020). “To sue as a third-party beneficiary 13 of a contract, the third party must show that the contract reflects the express or implied 14 intention of the parties to the contract to benefit the third party.” Comer v. Micor, Inc., 436 15 F.3d 1098, 1102 (9th Cir. 2006) (quoting Klamath Water Users Protective Ass’n v. 16 Patterson, 204 F.3d 1206, 1211 (9th Cir. 2000)). 17 To determine whether a contract was made for a third party’s benefit, courts 18 “carefully examine[] the express provisions of the contract at issue” and “all of the relevant 19 circumstances under which the contract was agreed to.” Goonewardene v. ADP, LLC, 6 20 Cal. 5th 817, 829-30 (2019). Ultimately, the court must determine “not only (1) whether 21 the third party would in fact benefit from the contract, but also (2) whether a motivating 22 purpose of the contracting parties was to provide a benefit to the third party, and 23 (3) whether permitting a third party to bring its own breach of contract action against a 24 contracting party is consistent with the objectives of the contract and the reasonable 25 expectations of the contracting parties.” Id. All three elements must be satisfied to permit 26 the third-party action to go forward. Id. “Although disputes regarding purported third- 27 party beneficiaries may in some circumstances be questions of fact, dismissal at the 28 pleading stage is appropriate where it is clear from the terms of the contract and the 1 circumstances alleged in the complaint that the plaintiff was not a third-party beneficiary.” 2 City of Oakland v. Oakland Raiders, 2019 WL 3344624, at *14 (N.D. Cal. July 25, 2019) 3 (citations omitted). 4 Here, the express provisions of the GAP waiver do not suggest that a motivating 5 purpose of the agreement was to benefit Plaintiffs. Although the waiver mentions 6 Plaintiffs’ role as administrators, it does not specify that Plaintiffs would receive the 7 cancellation fees paid by borrowers, nor does it seem to identify any other benefit Plaintiffs 8 would receive as a result of the GAP waivers. Rather, the express terms provide that in 9 exchange for additional payment from a borrower, a creditor will waive any remaining 10 unpaid balance on the borrower’s automobile financing contract in the event of a total loss 11 of the vehicle. 12 Further, Plaintiffs have not sufficiently alleged any circumstances to show the GAP 13 agreements were formed for Plaintiffs’ benefit. The complaint alleges that Defendants 14 “had a duty . . . to withhold the approximate $50.00 cancellation fee for the benefit of 15 [Plaintiffs,]” and that by “not giving credit for cancellation fees, [Defendants] depriv[ed] 16 the parties of the benefits they built into the GAP waivers.” (Compl., Doc. No. 1-2 ¶¶ 20, 17 26, 43.) The complaint also explains how Plaintiffs benefit generally from the overall 18 “GAP program,” i.e., by entering into Dealer Agreements that authorize dealerships to sell 19 borrowers GAP waivers in exchange for payment. (Compl., Doc. No. 1-2 ¶¶ 16; id. at 23- 20 24, 26-27.) At most, these allegations establish that Plaintiffs benefit from authorizing the 21 sale of GAP agreements, and that before Defendants ceased withholding cancellation fees 22 from borrowers, Plaintiffs benefited from the performance of those agreements. But 23 “[u]nder the intent test, ‘it is not enough that the third party would incidentally have 24 benefited from performance.’” Spinks v. Equity Residential Briarwood Apartments, 171 25 Cal. App. 4th 1004, 1022 (2009) (quoting Souza v. Westlands Water Dist., 135 Cal. App. 26 4th 879, 891 (2006)). Rather, Plaintiffs must allege facts showing that a motivating 27 purpose of the GAP agreements was to benefit Plaintiffs. 28 In sum, Plaintiffs have alleged their own intent to benefit from the performance of 1 the GAP waivers. But Plaintiffs have not sufficiently alleged that the GAP agreements 2 reflect an express or implied intention of the parties to benefit Plaintiffs. Accordingly, the 3 complaint does not state a breach of contract claim on a third-party beneficiary theory. 4 Should Plaintiffs wish to allege any additional facts in support of their argument that they 5 may sue for breach of the GAP waivers as third-party beneficiaries, they may do so in an 6 amended complaint. 7 B. The Complaint Does Not Sufficiently Allege Defendants’ Breach 8 Even assuming Plaintiffs can sufficiently allege the existence of a contract between 9 Plaintiffs and Defendants, they must also allege facts to show Defendants breached that 10 contract. Plaintiffs’ complaint fails to plausibly allege that Defendants breached the GAP 11 waivers. 12 “In an action for breach of a written contract, a plaintiff must allege the specific 13 provisions in the contract creating the obligation the defendant is said to have breached.” 14 Young v. Facebook, Inc., 790 F. Supp. 2d 1110, 1117 (N.D. Cal. 2011); see also Miron v. 15 Herbalife Int’l, Inc., 11 Fed. App’x 927, 929 (9th Cir. 2001) (“The district court’s dismissal 16 of the Mirons’ breach of contract claims was proper because the Mirons failed to allege 17 any provision of the contract which supports their claim.”). The language of the contract 18 governs a court’s interpretation of the parties’ obligations when the language is clear and 19 explicit. Vons Cos., Inc. v. U.S. Fire Ins. Co., 78 Cal. App. 4th 52, 58 (2000) (citing Gen. 20 Star Indem. Co. v. Sup. Ct., 47 Cal. App. 4th 1586, 1592 (1996)). 21 Plaintiffs generally allege that Defendants breached the GAP waivers by ceasing to 22 withhold cancellation fees from certain refunds they issued to borrowers. Specifically, 23 Plaintiffs allege that the GAP waivers required Defendants “to deliver to each consumer a 24 partial refund of GAP fees in the event of the early payoff of the associated loan or lease, 25 less a cancellation fee in favor of [Plaintiffs.]” (Compl., Doc. No. 1-2 ¶¶ 24, 41.) They 26 further allege that Defendants breached their “duty to apply the cancellation fee when 27 calculating a refund due from a dealer to the consumer.” (Id. ¶¶ 28, 45.) They allege that 28 “[p]ursuant to the terms of the GAP Addendum upon early cancellation of the GAP 1 Addendum, PAC or Portfolio would calculate the partial refund, and for its services was in 2 part entitled to receive an administrative cancellation fee of $50.00.” (Id.) 3 Plaintiffs’ allegations are not supported by the express terms of the GAP waiver. 4 The language in the GAP waiver that pertains to cancellation fees reads, in relevant part, 5 as follows: 6 YOUR RIGHT TO CANCEL: You have the unconditional right to cancel this optional Addendum for a refund/credit of the unearned portion of the charge 7 for this Addendum at any time . . . If you cancel within 30 days of the 8 Addendum purchase, you will receive a full refund/credit of the Addendum cost, provided no loss has occurred. After 30 days, you will receive a 9 refund/credit of the Addendum cost calculated by the Pro Rata refund method 10 . . . less a $50.00 cancellation fee, where such cancellation fee is permitted by law . . . Any refund/credit due you will first be issued to the Dealer/Creditor 11 and applied to any amount owed still owed [sic] to the Dealer/Creditor under 12 the finance agreement. If the refund/credit is not received within 60 days of notice of cancellation, contact the Administrator shown below. 13

14 (GAP Addendum, Doc. No. 1-2 at 29.) 15 These terms provide that borrowers who cancel a GAP waiver after 30 days are 16 entitled to a pro-rated refund, minus a $50 cancellation fee. But contrary to Plaintiffs’ 17 allegations, the terms do not clearly state that Defendants had a “duty to apply the 18 cancellation fee when calculating a refund due from a dealer to the consumer,” nor do they 19 state that Plaintiffs “for [their] services [were] in part entitled to receive an administrative 20 cancellation fee of $50.00.” (Compl., Doc. No. 1-2 ¶¶ 24, 28, 41, 45.) To the contrary, the 21 terms of the GAP waiver are rather vague about who precisely will give borrowers their 22 refunds, and the terms are silent as to who will ultimately receive any cancellation fees 23 withheld. Although the terms state that borrowers who cancel after 30 days “will” receive 24 a refund less a cancellation fee, they do not explicitly state that it is the dealer/creditor who 25 is obligated to issue borrowers that refund, nor that it is the dealer/creditor who is obligated 26 to deduct a cancellation fee first. In fact, a plausible reading of the agreements’ terms 27 seems to contemplate that by the time the dealer or creditor is issued the refund due to the 28 borrower, a cancellation fee will have already been deducted, as the waiver’s terms state 1 that “[a]ny refund/credit due” to the borrower “will first be issued to the Dealer/Creditor[.]” 2 (GAP Addendum, Doc. No. 1-2 at 29.) In any event, it is not clear that the express terms 3 of the contract support Plaintiffs’ allegation that Defendants had a “duty to apply the 4 cancellation fee when calculating a refund due from a dealer to the consumer.” (Compl., 5 Doc. No. 1-2 ¶¶ 28, 45.) 6 Plaintiffs’ own statements regarding the processes by which borrowers received their 7 refunds suggest that those processes varied, which reflects the ambiguity discussed above 8 in the GAP waiver’s terms. The allegations in Plaintiffs’ complaint are based on the idea 9 that when a borrower cancels their GAP waiver, Defendants issue the borrower a refund 10 directly and then seek to reimburse their own costs. Indeed, Plaintiffs state in their 11 opposition that “[o]n many occasions, for business reasons, more often these days than not, 12 the lender will pay the buyer for the entire amount due for the cancellation and will bill the 13 dealer for that amount and the dealerships then reimburse the lender for the bill amount.” 14 (Opp., Doc. No. 13 at 5.) But by Plaintiffs’ own account, this is not always how refunds 15 are issued. They further suggest that on other occasions, when a borrower cancels a GAP 16 waiver, “Plaintiffs as administrators will calculate the amount of the GAP Addendums’ 17 purchase price that has not been earned and will then issue a refund to the dealer less a 18 cancellation fee[,]” at which point the dealer will “reimburse its unearned profits” with the 19 amount it receives from Plaintiffs, “and will [then] pay the appropriate amount” to the 20 borrower or lender. (Id.) This latter description seems to align with the language in the 21 GAP waiver suggesting that any applicable cancellation fee will have already been 22 deducted from the amount due to the borrower before that amount is first issued to the 23 dealer, which would mean that it is not Defendants’ responsibility to withhold applicable 24 cancellation fees. In any event, even accepting as true Plaintiffs’ claim that lenders 25 frequently issue refunds to borrowers out of pocket and then request reimbursement from 26 dealers, it is still not clear that the express terms of the GAP waiver require them to do so. 27 Overall, Plaintiffs have not alleged facts sufficient to show that Defendants breached 28 any duty under the GAP waivers “to apply the cancellation fee when calculating a refund 1 due from a dealer to the consumer,” as Plaintiffs allege. (Compl., Doc. No. 1-2 ¶¶ 28, 45.) 2 Accordingly, they have not alleged facts sufficient to show that Defendants breached the 3 GAP waivers. Should Plaintiffs wish to allege any additional facts showing Defendants 4 breached the GAP waivers, they may do so in an amended complaint. 5 C. Because the Complaint Fails to State any Breach of Contract Claim, the 6 Court Does Not Reach Plaintiffs’ Arguments Regarding Defendants’ 7 Application of AB 2311 8 The primary argument motivating Plaintiffs’ complaint is that they have been 9 harmed by Defendants’ erroneous interpretation and application of AB 2311. (Compl., 10 Doc. No. 1-2 ¶ 21; see also Opp., Doc. No. 13 at 6-11). They specifically argue that 11 Defendants’ interpretation of AB 2311 is inconsistent with the Contracts Clause of the 12 California and U.S. Constitutions. (Compl., Doc. No. 1-2 ¶¶ 29, 46, 54; Opp., Doc. No. 13 13 at 6-15).3 In their own words, “[a]ll that the Plaintiffs are requesting in their Complaint 14 and in response to this motion, is that the Court review [AB 2311, codified at] California 15 Civil Code § 2982.12(a) and its legislative history and determine that it was not intended 16 to apply retroactively to contracts that existed prior to its effective date.” (Opp., Doc. No. 17 13 at 12.) But Plaintiffs’ only claims against Defendants are for breach of contract, and as 18 explained above, the complaint fails to state any breach of contract claim. Accordingly, 19 Plaintiffs’ arguments regarding the constitutionality of AB 2311 are unnecessary to the 20 determination of this motion. 21 22

23 3 Plaintiffs’ complaint explicitly alleges that Defendants’ interpretation of AB 2311 24 conflicts with the Contracts Clause of the California Constitution. (Compl., Doc. No. 1-2 25 ¶¶ 29, 46, 54.) But as Defendants note in their notice of removal, the complaint cites U.S. Supreme Court and Ninth Circuit cases dealing with the Contracts Clause of the 26 U.S. Constitution. See Compl., Doc. No. 1-2 ¶¶ 29-30 (citing Gen. Motors Corp. v. 27 Romein, 503 U.S. 181, 186; Northwestern Nat’l Life Ins. Co. v. Tahoe Regional Planning Agency, 632 F.2d 104, 106 (9th Cir. 1980); and Sveen v. Melin, 584 U.S. 811, 819 28 1 CONCLUSION 2 For the reasons above, the Court grants Defendants’ motion to dismiss and dismisses 3 || Plaintiffs’ complaint with leave to amend. See Doe v. United States, 58 F.3d at 497 (“A 4 || district court should grant leave to amend . . . unless it determines that the pleading could 5 possibly be cured by the allegation of other facts.”). Plaintiffs may file an amended 6 ||complaint within thirty (30) days from the date of this order to cure the deficiencies in 7 || their complaint if they can do so. 8 9 IT IS SO ORDERED. - 10 || DATED: October 28, 2024 | baal gn | . thle 1] MARILYN L. HUFF, District Jtd

UNITED STATES DISTRICT COURT

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