179 F. Supp. 3d 948
N.D. Cal.2016Background
- Plaintiffs Martin and Giordano hold whole-life policies from MetLife that permit policy loans; interest may be compounded and unpaid loan principal reduces death benefit or surrender value.
- Plaintiffs signed only the insurance applications; the issued policies (attached to the applications) expressly disclosed that unpaid interest would be added to the loan and bear interest (i.e., compounding).
- Plaintiffs sued alleging MetLife violated a 1918 voter initiative (Cal. Civ. Code §§ 1916-1 to -4) that bars compounding unless a written, signed agreement expressly permits it, seeking declaratory relief, UCL relief, violation of the initiative, and unjust enrichment.
- MetLife moved to dismiss, arguing it is exempt from the initiative’s compound-interest consent requirement under a 1934 constitutional amendment (Art. XV, §1) that empowers the Legislature to regulate fees/compensation for exempt classes (including insurers), and alternatively that it obtained written consent because the application and policy form the contract.
- The district court found (1) the 1934 amendment and subsequent legislative action exempt insurers and give the Legislature authority “in any manner” to regulate fees/compensation (including compound interest), which conflicts with and supersedes the initiative’s consent requirement as to exempt entities; and (2) in any event MetLife’s policies (with applications attached) clearly disclosed compounding and thus plaintiffs gave written consent.
- All four claims were dismissed without leave to amend for lack of viable legal theory supporting liability.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether insurers are exempt from the 1918 initiative’s requirement that compound interest be expressly agreed to in writing | Initiative’s consent requirement remains applicable to all lenders; 1934 amendment only allows the Legislature to set rates and regulate fees, not to eliminate the written-consent rule | The 1934 constitutional amendment empowers the Legislature to regulate “in any manner” fees/compensation (including compound interest) for exempt classes; insurers (by statute) are an exempt class and thus not subject to the initiative’s consent rule | Court held insurers are exempt: the amendment’s grant of authority to the Legislature to regulate fees/compensation supersedes the initiative’s compound-interest consent requirement as to exempt entities |
| Whether the constitutional amendment repeals the initiative by implication (presumption against repeal) | The initiative should remain in force absent clear repeal; ambiguities favor preserving the initiative’s consent rule | The amendment and its history show irreconcilable conflict as to exempt classes; presumption against repeal inapplicable where provisions cannot concurrently operate | Court held the provisions are irreconcilable for exempt classes and the amendment governs; presumption against repeal does not prevent this result |
| Whether MetLife in any event obtained the required written consent | Plaintiffs: they only signed applications; the compounding disclosure was in the policy, not in the signed application, so no clear written agreement was signed by them | MetLife: the application and policy are part of the same contract under Cal. Ins. Code § 10113 and the policies’ loan provisions plainly disclosed compounding; plaintiffs do not dispute disclosure adequacy | Court held MetLife complied: the application and policy are contractually joined and the policies clearly disclosed compounding, satisfying the initiative’s written-consent requirement |
| Remedy and pleading posture: whether claims survive 12(b)(6) | Plaintiffs sought treble damages and other relief under the initiative and related statutory/regulatory theories | MetLife sought dismissal arguing no cognizable claim because of exemption and/or compliance | Court dismissed all claims without leave to amend because exemption and alternate compliance disposed of plaintiffs’ theory of liability |
Key Cases Cited
- Penziner v. Western Am. Fin. Co., 10 Cal.2d 160 (Cal. 1937) (construing scope of 1934 amendment vis-à-vis the 1918 usury initiative)
- Carter v. Seaboard Finance Co., 33 Cal.2d 564 (Cal. 1949) (reading amendment to free exempt classes broadly and place regulation of their charges in the Legislature)
- McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 33 Cal.3d 816 (Cal. 1983) (initiative requires compound-interest disclosure to be clear on the face of the writing; parol evidence not allowed to supply it)
- Ghirardo v. Antonioli, 8 Cal.4th 791 (Cal. 1994) (noting initiatives remain in force except where in conflict with the Constitution)
- New England Mut. Life Ins. Co. v. Lauffer, 215 F. Supp. 91 (S.D. Cal. 1963) (applications attached to policies are construed together as one contract)