SANFORD J. WISHNEV, Plaintiff and Respondent,
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, Defendant and Appellant.
Circuit 16-16037 Northern District of California
Drinker Biddle & Reath, Stephen C. Baker, Timothy J.
O'Driscoll, Michael J. Stortz, Alan J. Lazarus, Matthew
J. Adler and Marshall L. Baker for Defendant and Appellant.
& Bird, Reed Smith, Thomas A. Evans; and Lisa Tate for
The American Council of Life Insurers as Amicus Curiae on
behalf of Defendant and Appellant.
Austin, Carol Lynn Thompson and Lisa E. Schwartz for
Metropolitan Life Insurance Company as Amicus Curiae on
behalf of Defendant and Appellant.
Wenger; Dentons US, Laura L. Geist and Andrew S. Azarmi for
Association of California Life and Health Insurance Companies
as Amicus Curiae on behalf of Defendant and Appellant.
Bramson, Plutzik, Mahler & Birkhaeuser, Robert M. Bramson
and Jennifer S. Rosenberg for Plaintiff and Respondent.
Justice Corrigan authored the opinion of the Court, in which
Chief Justice Cantil-Sakauye and Justices Chin, Liu,
Cuéllar, Kruger, and Groban concurred.
body of California law prohibiting usury derives from a
variety of sources, including a constitutional amendment.
(Cal Const.,  art. XV, § 1.) The amendment sets
the maximum interest rates lenders may charge but exempts
specified classes of lenders from those rate restrictions.
The amendment also authorizes the Legislature to regulate
“in any manner” the compensation these exempt
lenders may receive. (Ibid.)
accepted a request from the United States Court of Appeals
for the Ninth Circuit to determine whether exempt lenders
must comply with a voter-approved limitation that was in
place before the amendment was enacted in 1934. The precise
question we agreed to consider is set forth in the footnote
below. Simply stated, the question is: Are
exempt lenders like The Northwestern Mutual Life Insurance
Company (Northwestern Mutual) required to obtain a
borrower's signed agreement in order to charge compound
interest on a loan? We conclude the lenders are not so
Mutual offers a life insurance product referred to as
“permanent” life insurance. It pays a benefit
upon death and accumulates a cash value during the
insured's lifetime. The policy also pays an annual
dividend to the policyholder, who may take out loans secured
by the cash value of the policy.
1967 and 1976, Northwestern Mutual issued four permanent life
policies to Sanford J. Wishnev, who completed and signed an
application for each. None of the applications disclosed that
Northwestern Mutual would charge compound interest. After
Wishnev submitted each signed application, Northwestern
Mutual sent him the requested policy. Each states that
“[t]his policy and the application, a copy of which is
attached when issued, constitute the entire contract.”
The policies do explain that loan interest is compounded
annually, but Wishnev was not required to sign and return any
point after 1980, Wishnev took out four loans secured by his
four policies. Northwestern Mutual assessed compound interest
on the loan balances.
filed a putative class action suit in state court alleging
Northwestern Mutual's assessment of compound interest was
barred because he never signed an agreement to that effect.
He claims damages because the loan balances, increased by
compound interest, reduced the amount he received in annual
dividends. Wishnev seeks to certify a class of all persons
who were charged similar compound interest in the previous
four years. On behalf of the class, he requests actual
damages along with treble the amount of all interest
paid within one year of the filing of the complaint.
Mutual removed the action to federal district court and moved
to dismiss. It argued that, as an exempt lender, it was not
required to obtain a borrower's signed consent to charge
compound interest. The court denied the dismissal motion,
holding that Northwestern Mutual was required to get signed
consent and failed to do so. (Wishnev v. Northwestern
Mut. Life Ins. Co. (N.D.Cal. 2016) 162 F.Supp.3d 930,
947, 949, 953 (Wishnev I).)
district court in Wishnev I stands alone in its
determination that exempt lenders must obtain a
borrower's signed consent to impose compound interest.
(Wishnev v. Northwestern Mut. Life Ins. Co. (9th
Cir. 2018) 880 F.3d 493, 501-502 (Wishnev II).)
Three other district courts in the Ninth Circuit have
concluded to the contrary. (Ibid.; see Martin v.
Metro. Life Ins. Co. (N.D.Cal. 2016) 179 F.Supp.3d 948,
954-955; Washburn v. Prudential Ins. Co. of Am.
(N.D.Cal. 2015) 158 F.Supp.3d 888, 896; Lujan v. New York
Life Ins. Co. (N.D.Cal., Aug. 9, 2016, No.
16-CV-00913-JSW) 2016 WL 4483870, p. *5.)
usury laws, which regulate the charging of interest, are far
from a model of clarity. Their sources include (1) an
uncodified, voter-approved initiative (9C West's Ann.
Civ. Code (2010 ed.) foll. § 1916.12, pp. 187-238), (2)
voter-approved constitutional provisions currently found in
article XV, and (3) statutes scattered throughout various
codes regulating lenders considered exempt under article XV.
(See Rabin & Brownlie, Usury Law in California: A
Guide Through the Maze (1987) 20 U.C. Davis L.Rev. 397,
398.) Administrative provisions, federal law, and state
common law also play a role. (Id. at p. 397.) The
interplay among these sources continues to generate
confusion. We begin with a brief history of California's
usury laws to put the relevant authorities into perspective.
California's Usury Laws
early years of California's statehood, the Legislature
declined to set maximum interest rates for loans and instead
enacted a law generally allowing parties to agree in writing
for “ ‘any rate of interest whatever on money
due....' ” (Carter v. Seaboard Finance Co.
(1949) 33 Cal.2d 564, 575 (Carter).) Over time, the
Legislature enacted usury statutes governing maximum interest
chargeable by lenders that typically make small loans, such
as pawnbrokers and personal property brokers. (Id.
at pp. 575-576.)
1918, California voters approved an initiative measure that
took a uniform approach to usury (hereafter the
“initiative” or “1918
initiative”). (§§ 1916-1-1916-5;
Carter, supra, 33 Cal.2d at p. 576.) The
initiative repealed statutory schemes covering various
classes of lenders and replaced them with a maximum allowable
interest rate applicable to all loans and lenders.
(§ 1916-4; Carter, at p. 576.) No loans or
lenders were exempted from the sweep of the 1918 initiative.
Because the initiative does not authorize legislative
amendment, voters alone have the power to amend or repeal
it. (Art. II, § 10, subd. (c);
Penziner v. West American Finance Co. (1937) 10
Cal.2d 160, 171 (Penziner).)
addition to setting the allowable interest rate, the 1918
initiative provides that interest may not be compounded
“unless an agreement to that effect is clearly
expressed in writing and signed by the party to be charged
therewith.” (§ 1916-2.) We refer to this
requirement as the compound interest limitation. Ultimately,
the question here turns on whether subsequent changes
impliedly repealed the compound interest limitation as to
the 1918 initiative, a lender that charges interest above the
rate cap or violates the compound interest limitation is
subject to stringent statutory penalties. Such a lender
forfeits the right to collect any interest. (§
1916-2.) Further, the principal debt is not due until the
full term of the loan has expired. (Ibid.) The
effect of these provisions is to confer upon the borrower the
free use of the lender's money for the duration of the
loan period. In addition, if a borrower pays a lender more
than is authorized by the 1918 initiative, the borrower is
entitled to recover treble the amount paid if the action is
brought within one year of payment. (§ 1916-3, subd.
1918 initiative contains five sections, the first three of
which limit interest rates and set penalties for violating
its restrictions. The first section sets a presumptive
annual interest rate of 7 percent but allows parties to
contract in writing for an annual rate of up to 12 percent.
(§ 1916-1.) This rate-setting provision establishes what
contracting parties are legally authorized to do in setting
second section sets out what parties cannot do. It prohibits
any person or entity from receiving, “directly or
indirectly, ” more than 12 percent annual interest on
any “loan or forbearance of money, goods or things in
action....” (§ 1916-2.) The sentence containing
that prohibition concludes with the compound interest
limitation: “and... interest shall not be compounded,
nor shall the interest thereon be construed to bear interest
unless an agreement to that effect is clearly expressed in
writing and signed by the party to be charged
therewith.” (Ibid.) Any contract that violates
the second section is “null ...