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Wishnev v. Northwestern Mutual Life Insurance Co.

Supreme Court of California

November 14, 2019

Sanford J. WISHNEV, Plaintiff and Respondent,

         [451 P.3d 779] [254 Cal.Rptr.3d 640] Ninth Circuit, 16-16037, Northern District of California, 3:15-cv-3797-EMC

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         Drinker Biddle & Reath, Stephen C. Baker, Grass Valley, Timothy J. O’Driscoll, Michael J. Stortz, Alan J. Lazarus, Matthew J. Adler, San Francisco, and Marshall L. Baker, Los Angeles, for Defendant and Appellant.

         Alston & Bird, Reed Smith, Thomas A. Evans, San Francisco; and Lisa Tate for The American Council of Life Insurers as Amicus Curiae on behalf of Defendant and Appellant.

         Sidley Austin, Carol Lynn Thompson, San Francisco, and Lisa E. Schwartz for Metropolitan Life Insurance Company as Amicus Curiae on behalf of Defendant and Appellant.

         Brad Wenger; Dentons US, Laura L. Geist and Andrew S. Azarmi, San Francisco, 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, Walnut Creek, for Plaintiff and Respondent.


         Corrigan, J.

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          The body of California law prohibiting usury derives from a variety of sources, including a constitutional amendment. (Cal Const.,[1] 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. )

         We 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.[2] The precise [254 Cal.Rptr.3d 641] question we agreed to consider is set forth in the footnote below.[3] Simply stated, the question is: Are exempt lenders like

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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 obligated.

          I. BACKGROUND

         Northwestern Mutual offers a life insurance product referred to as "permanent" life insurance.[4] 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.[5]

          Between 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 [451 P.3d 780] 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 copy.

          At some point after 1980, Wishnev took out four loans secured by his four policies. Northwestern Mutual assessed compound interest on the loan balances.

          Wishnev 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.

         Northwestern Mutual removed the action to federal district court and moved to dismiss. It argued that, as an exempt lender, it was not required to

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obtain a borrower’s signed consent to charge compound interest.[6] The court denied the dismissal motion, holding that Northwestern Mutual was required to get signed consent and [254 Cal.Rptr.3d 642] 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 ).)

         The 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.)

          II. DISCUSSION

         California’s 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 ...

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