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Wishnev v. Northwestern Mutual Life Insurance Co.

Supreme Court of California

November 14, 2019

SANFORD J. WISHNEV, Plaintiff and Respondent,

          Ninth Circuit 16-16037 Northern District of California 3:15-cv-3797-EMC

          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.

          Alston & 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.

          Sidley Austin, Carol Lynn Thompson 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 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.


          CORRIGAN, J.

         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 question we agreed to consider is set forth in the footnote below.[3] 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 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 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 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 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.)


         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 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.

         A. California's Usury Laws

         In the 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.)

         In 1918, California voters approved an initiative measure that took a uniform approach to usury (hereafter the “initiative” or “1918 initiative”).[7] (§§ 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.[8] (Art. II, § 10, subd. (c); Penziner v. West American Finance Co. (1937) 10 Cal.2d 160, 171 (Penziner).)

         In 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 exempt lenders.

         Under 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. (a).)

         The 1918 initiative contains five sections, the first three of which limit interest rates and set penalties for violating its restrictions.[9] 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 interest rates.

         The 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 ...

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