158 F. Supp. 3d 888
N.D. Cal.2015Background
- Washburn purchased a life insurance policy from Prudential in 1989; the policy included a clause stating interest on policy loans is charged daily and unpaid interest is added to the loan (i.e., compound interest). Plaintiff never signed the policy but later obtained a loan secured by the policy and Prudential charged compound interest.
- Plaintiff sued in state court as a putative class action alleging (1) declaratory relief, (2) UCL violation, (3) violation of the 1918 Initiative (Cal. Civ. Code § 1916-2) prohibiting compound interest absent a written signed agreement, and (4) unjust enrichment; defendant removed under CAFA.
- Prudential moved to dismiss under Fed. R. Civ. P. 12(b)(6) arguing it is an exempt class under Article XV § 1 of the California Constitution (and California Insurance Code § 1100.1) and thus not subject to the 1918 Initiative’s compound-interest disclosure/consent requirements.
- The court applied statutory-construction principles and legislative history to determine whether the constitutional exemption supersedes the 1918 Initiative’s compound-interest rule for exempt classes (including insurers).
- The court concluded the constitutional grant of authority to the Legislature to “in any manner fix, regulate or limit…other compensation” for exempt classes includes regulation of compound interest, so the constitutional provision conflicts with and supersedes § 1916-2 as to exempt classes.
- Because Prudential is an incorporated admitted insurer and therefore an exempt class, the court dismissed all claims premised on violation of § 1916-2 (claims 1–4). Claim Three (direct § 1916-2 violation) dismissed without leave to amend; remaining claims also dismissed without leave to amend. Plaintiff given leave to file a second amended complaint by a date in the order.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the 1918 Initiative’s prohibition on compounding without a written signed agreement (Cal. Civ. Code § 1916-2) applies to incorporated admitted insurers | § 1916-2’s plain language applies and the constitutional exemption’s phrase “none of the above restrictions” does not include the 1918 Initiative’s disclosure/consent requirement | Article XV § 1 and Insurance Code § 1100.1 exempt incorporated insurers; the constitutional grant to the Legislature over exempt classes encompasses regulation of compound interest | Article XV § 1’s grant to the Legislature conflicts with § 1916-2 as to exempt classes; insurers are exempt, so § 1916-2 does not apply to Prudential (claim dismissed) |
| Whether the constitutional amendment merely changed rate caps or also displaced other 1918 Initiative provisions (like compound-interest consent) | Penziner and related precedent show the 1918 Initiative survives except where in conflict; plaintiff contends consent rule survives for exempt classes | Legislative history and Carter indicate the amendment freed the Legislature to regulate exempt classes entirely until it acted, implying displacement of conflicting 1918 provisions for exempt classes | Court interprets Carter and legislative history to mean the Legislature’s authority over exempt classes displaces the 1918 Initiative’s compound-interest rule for exempt classes |
| Whether Thomason and other authority support applying § 1916-2 to exempt lenders | Plaintiff argued court should follow holdings that preserve § 1916-2’s consent requirement | Defendant noted Thomason supports exemption and legislative authority; Thomason (though depublished) aligns with this interpretation | Court found Thomason persuasive; it supports that exempt classes are governed by legislative authority, not § 1916-2 |
| Whether remaining claims (declaratory relief, UCL, unjust enrichment) survive absent a viable § 1916-2 claim | Those claims are predicated on unlawful compounding under § 1916-2, so they should survive if § 1916-2 applies | If § 1916-2 does not apply to Prudential, those derivative claims fail | Because § 1916-2 does not apply to Prudential, the UCL, declaratory, and unjust enrichment claims fail and were dismissed |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (plausibility and treatment of conclusory allegations)
- Penziner v. W. Am. Finance Co., 10 Cal.2d 160 (California Supreme Court on effect of 1934 constitutional amendment on 1918 Initiative)
- Carter v. Seaboard Finance Co., 33 Cal.2d 564 (interpretation that Legislature has control to regulate exempt classes until it acts)
- McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 21 Cal.3d 365 (treatment of compound-interest claims in context of usury-related litigation)
- McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 33 Cal.3d 816 (further treatment of compound-interest agreement sufficiency)
- Thomason v. Bateman Eichler, Hill Richards, Inc., 199 Cal.App.3d 1100 (court holding exempt lenders not bound by 1918 Initiative compound-interest requirement)
- Ghirardo v. Antonioli, 8 Cal.4th 791 (on survival of 1918 Initiative to the extent not in conflict with the Constitution)