SANFORD J. WISHNEV, Plaintiff and Respondent, v. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, Defendant and Appellant.
S246541
IN THE SUPREME COURT OF CALIFORNIA
November 14, 2019
Ninth Circuit 16-16037; Northern District of California 3:15-cv-3797-EMC
S246541
Opinion of the Court by Corrigan, J.
The body of California law prohibiting usury derives from a variety of sources, including a constitutional amendment. (
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
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
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
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.
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 (
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.” (
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. (
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. (
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 . . . .” (
The 1918 initiative‘s “one-size-fits-all” approach proved to be unworkable in the marketplace. It lacked the flexibility needed to tailor regulations for particular types of loans and lenders. (See Carter, supra, 33 Cal.2d at p. 577.) “Numerous attempts were made to change the rates of interest and to prescribe rates and regulations different from or inconsistent with the provisions of the [1918 initiative].” (Ibid.) These attempted modifications were ruled improper to the extent they constituted revisions of the initiative without a vote of the electorate. In addition, the initiative‘s interest rate cap could be easily avoided. Lenders were able to circumvent interest rate limits by extracting various “charges” from borrowers. (Ibid.) Ultimately, the Legislature placed a proposed constitutional amendment on the statewide ballot to address the infirmities of the 1918 initiative. (Carter, at p. 577; see Ballot Pamp., Gen. Elec. (Nov. 6, 1934), argument in favor of Assem. Const. Amend. No. 79, p. 18 (Ballot Pamp.).)
In November 1934, voters approved the proposed amendment, which was added to the Constitution as former article XX, section 22 (hereafter “amendment” or “1934 amendment“). (Carter, supra, 33 Cal.2d at p. 577art. XX, § 22, 1st par. with § 1916–1.)
Importantly, the third paragraph of the 1934 amendment for the first time exempts certain lenders from its restrictions. (Former
There are two distinct components to the 1934 amendment governing exempt lenders. First, it declares that “none of the above restrictions” shall apply to exempt lenders.
The final paragraph of the 1934 amendment contains what this court has described as a “limited repealing clause” (Penziner, supra, 10 Cal.2d at p. 174): “The provisions of this section shall supersede all provisions of this Constitution and laws enacted thereunder in conflict therewith.” (Former
The 1934 amendment originally enacted as former article XX, section 22 subsequently was amended and reenacted in its current form as section 1 of article XV.12 (Bisno v. Kahn (2014) 225 Cal.App.4th 1087, 1100.) Article XV was again amended in
B. Applicability of Compound Interest Limitation to Exempt Lenders
Whether exempt lenders are subject to the compound interest limitation is a question of statutory construction: Did the 1934 amendment, the substance of which now appears in article XV, repeal the compound interest limitation as to exempt lenders?
Standard rules of statutory interpretation guide the analysis. (People v. Superior Court (Pearson) (2010) 48 Cal.4th 564, 571.) “We first consider the initiative‘s language, giving the words their ordinary meaning and construing this language in the context of the statute and initiative as a whole. If the language is not ambiguous, we presume the voters intended the meaning apparent from that language, and we may not add to the statute or rewrite it to conform to some assumed intent not apparent from that language. If the language is ambiguous,
Northwestern Mutual argues that the 1934 amendment expressly repealed the compound interest limitation. The language of the amendment does not support express repeal. Article XV declares that “none of the above restrictions” apply to exempt lenders. The “above restrictions” are those in the immediately preceding two paragraphs establishing permitted interest rates. (See Carter, supra, 33 Cal.2d at pp. 579–580.) Those restrictions say nothing about compound interest. The other component of article XV relating to exempt lenders is the grant of legislative authority to set the maximum annual interest rate and to “fix, regulate or limit, the fees, bonuses, commissions, discounts or other compensation” charged by exempt lenders. Again, the constitutional language does not mention compound interest. Accordingly, there is no express repeal.
The question of implied repeal remains. “Notwithstanding the ‘presumption against repeals by implication,’ repeal may be found where (1) ‘the two acts are so inconsistent that there is no possibility of concurrent operation,’ or (2) ‘the later provision gives undebatable evidence of an intent to supersede the earlier’ provision.” (Professional Engineers in California Government v. Kempton (2007) 40 Cal.4th 1016, 1038.) “Because ‘the doctrine of implied repeal provides that the most recently enacted statute expresses the will of the Legislature’ [citation], application of the doctrine is appropriate in those limited situations where it is necessary to effectuate the intent of drafters of the newly enacted statute. ’ “In order for
The question of whether the 1934 amendment repealed the provisions of the 1918 initiative in whole or in part was first addressed in Penziner, which held that the amendment did not completely repeal the initiative. (Penziner, supra, 10 Cal.2d at pp. 176–177.) Instead, the amendment repealed by implication only those provisions of the 1918 initiative that were so irreconcilable with the amendment that the two could not have concurrent operation. (Penziner, at pp. 176–177; accord, Nuckolls v. Bank of California (1937) 10 Cal.2d 266, 276–277.) The court reasoned that the language of the amendment‘s final paragraph reflected an “intent that non-conflicting prior statutes shall remain in force.” (Penziner, at p. 174.) Because Penziner involved a lender that was not exempted by the 1934 amendment, the court had no occasion to consider whether or to what extent the amendment impliedly repealed the 1918 initiative as to exempt lenders.
In assessing whether the compound interest limitation was impliedly repealed for exempt lenders, we consider whether the limitation is irreconcilable with the conferred authority under article XV to “fix, regulate or limit” an exempt lender‘s fees or “other compensation.”
The terms “fees, bonuses, commissions, [and] discounts” in article XV do not appear to embrace the assessment of compound interest. But the catchall term “other compensation” does.
Obviously, the more frequently interest is compounded, the greater a lender‘s compensation will be for the use of its money. This is so because a borrower is obligated to pay interest on both the principal amount borrowed and on any interest compounded and added to the principal. Lewis v. Pacific States Sav. & Loan Co. (1934) 1 Cal.2d 691, 695, explained that compounded interest is taken into account when determining whether a transaction violates the maximum annual interest allowed. Heald v. Friis-Hansen (1959) 52 Cal.2d 834, 840, confirmed that compounding the maximum allowable interest rate at intervals shorter than one year results in an effective annual rate that is usurious. These cases rest on the premise that compounded interest is part of the lender‘s compensation for the use of its money. Thus, the term “compensation” encompasses compound interest that effectively increases the lender‘s return.
Wishnev disputes this conclusion, arguing that the compounding of interest is a “method of calculating interest” and not a “charge” similar to the types of compensation listed in article XV. The federal district court in Wishnev I agreed, concluding that the terms “fees, bonuses, commissions, discounts or other compensation” in article XV “can reasonably be construed as reaching such things as loan fees and points, not
The district court‘s attempted distinction misses the mark. The use of the term “interest” in the second paragraph of article XV simply refers to the maximum interest rate allowed by law. The 1934 amendment sought to prevent lenders from exceeding the rate cap by disguising interest as fees or other types of charges. As explained in the argument in favor of the amendment: “[The] inadequacy [of the 1918 initiative] is blatantly apparent. Its purpose has not been fulfilled. The loan shark still prospers and collects interests grossly in excess of the specified legal rate. Interest disguised as ‘charges’ is currently exacted at rates that range as high as eighteen hundred per cent per annum.” (Ballot Pamp., supra, argument in favor of Assem. Const. Amend. No. 79, p. 18.) Properly construed, article XV treats “any fee, bonus, commission, discount or other compensation” as part of the interest received by a lender, not exclusive from it. Indeed, the long-standing general rule is “that the word ‘interest’ [is] broad enough to cover ‘bonus‘, ‘commission‘, or any other form of ‘compensation’ paid to the lender for the use of the money . . . .” (In re Fuller (1940) 15 Cal.2d 425, 434.)
Urging compound interest is excluded from “other compensation,” Wishnev invokes a rule of statutory construction known as ejusdem generis. This doctrine provides that “when a general word or phrase follows a list of specifics, the general word or phrase will be interpreted to include only items of the same class as those listed.”14 (Black‘s Law Dict. (10th ed. 2014) p. 631, col. 1.) Wishnev argues that “other compensation” must be interpreted narrowly to mean only items similar to the specific terms that precede the general term.
Wishnev claims the express terms that precede the general term “other compensation” are types of loan charges and discounts. He characterizes compound interest as merely a method of calculating interest and not a charge or discount like those enumerated in article XV. The claimed distinction fails. On a more general level of abstraction, compound interest is indistinguishable from loan charges. Both give the lender greater compensation for the use of its money. Ultimately, the application of ejusdem generis here depends upon how broadly or narrowly one defines the similarities among the enumerated items. But any such effort must honor the ultimate goal of effectuating voter intent.
Wishnev‘s narrow reading fails to honor the enactors’ intent in 1934. One stated purpose was to protect borrowers against “the oppressive burden of legally assessed charges” that
Determining that article XV confers legislative authority to regulate compound interest in some way does not fully answer the question of whether the particular compound interest limitation was impliedly repealed as to exempt lenders. We conclude that it was.
As explained, the ability to charge compound interest increases the amount of compensation a lender receives. The compound interest limitation regulates this extra compensation in a precisely defined way by limiting the circumstances under which a lender can compel its payment. However, the 1934 amendment confers upon the Legislature the power to regulate an exempt lender‘s compensation “in any manner.” This broad legislative authority necessarily conflicts with the more narrow compound interest limitation. For example, the Legislature could expressly allow an exempt lender to charge compound interest if that term is disclosed in an unsigned writing, rather than requiring signed consent to that particular term. But that approach to regulating lender compensation would be
Wishnev argues that the compound interest limitation can be harmonized with the legislative authority granted under article XV. He describes the compound interest limitation as simply imposing a “procedural threshold of disclosure and consent before a particular loan agreement will be deemed to allow compounding of interest . . . .” In effect, he portrays the compound interest limitation as a regulation of the agreement in which certain loan charges may be imposed instead of a regulation of the charges themselves.
Wishnev mischaracterizes the limitation. Whether considered procedural or substantive, the limitation bans compounding of interest in the absence of written notice and signed agreement. In other words, the 1918 initiative prohibits charging compound interest unless the limitation is satisfied. A lender that fails to comply with the limitation is not authorized to impose the compounding of interest at all and faces significant penalties if it does so. The compound interest limitation necessarily restricts legislative authority to specify when compounding is permitted.
Because of the irreconcilable conflict between the focused compound interest limitation and the broad authority granted to the Legislature under the 1934 amendment, one might conclude that the amendment now found in article XV impliedly repealed the limitation as to exempt lenders. Alternatively, it could be argued that no actual irreconcilable conflict arises until the Legislature exercises its authority in a manner that creates a conflict. A corollary of this argument is that the compound
Shortly after the 1934 amendment was enacted, the court considered a similar contention in construing other applications of the amendment unrelated to the compound interest limitation. In Matulich v. Marlo Investment Co. (1936) 7 Cal.2d 374, 376 (Matulich), the borrower argued that “until the legislature has acted under the authority given by [the 1934 amendment], no conflict exists between the [1918 initiative] and the Constitution, and therefore the [1918 initiative] is still applicable.” The argument was rejected: “We are not able to see the force of this contention. There is nothing in this section of the Constitution which would intimate that the general restrictions placed upon all lenders of money by the provisions of the [1918 initiative] were to remain in force until the legislature had acted under the power given in said section. . . . In order to accept appellant‘s construction of said section of the Constitution, it would be necessary for the court to read into the section a provision not to be found therein, and which it is quite evident the framers thereof never intended to include therein. The court has no such authority.” (Ibid.)
Matulich‘s holding has been consistently applied. Wolf v. Pacific Southwest Etc. Corp. (1937) 10 Cal.2d 183 addressed whether an exempt lender remained bound to comply with the 1918 initiative‘s interest rate cap until the Legislature exercised its authority over that class of lender under the 1934 amendment. The court concluded that, if the Legislature had not exercised its authority over a particular exempt lender, there was no statutory or constitutional law limiting the amount of interest the lender might receive. (Wolf v. Pacific Southwest
The analysis applies equally to the compound interest limitation, which is one of the “general restrictions” upon lenders contained in the 1918 initiative. (Matulich, supra, 7 Cal.2d at p. 376.) Moreover, because voters are presumed to be aware of existing laws and their judicial construction (In re Lance W., supra, 37 Cal.3d at p. 890, fn. 11), it must be presumed they were aware that, by amending the Constitution in 1979 to allow the Legislature to designate additional classes of exempt lenders, lenders so designated would be relieved of the restrictions contained in the 1918 initiative, including the compound interest limitation. The Legislature was likewise presumptively aware of this settled law in 1981, when it enacted
This conclusion is consistent with the argument presented to voters, which declared that the 1918 initiative‘s attempt to uniformly regulate all lenders “failed miserably.” (Ballot Pamp., supra, argument in favor of Assem. Const. Amend. No. 79, p. 19.) “[I]t was the purpose of the constitutional amendment of 1934 to free the Legislature from the restraints imposed by inflexible usury provisions so that interest and charges more
This court has repeatedly expressed in broad terms that designating lenders as exempt under the 1934 amendment also “operates to exempt those classes from the restrictions in the [1918 initiative].” (Heald v. Friis-Hansen, supra, 52 Cal.2d at p. 838; accord, Matulich, supra, 7 Cal.2d at pp. 376–377; Wolf v. Pacific Southwest Etc. Corp., supra, 10 Cal.2d at p. 184; Carter, supra, 33 Cal.2d at pp. 582–583; West Pico Furniture Co. v. Pacific Finance Loans, supra, 2 Cal.3d at p. 614.) Wishnev correctly points out that the compound interest limitation was not at issue in any of the cited cases. It is, of course, “axiomatic that a decision does not stand for a proposition not considered by the court.” (People v. Barker (2004) 34 Cal.4th 345, 354.) While the cited cases are not directly on point, their logical foundation assists in discerning electoral intent as to the compound interest limitation‘s continued application.
There is little reason to believe voters intended to declare exempt lenders free from all of the restrictions of the 1918 initiative except the compound interest limitation. Nevertheless, Wishnev claims that cases discussing the impact of the 1934 amendment support such an outcome. Like the court in Wishnev I, supra, 162 F.Supp.3d at page 945, he places particular reliance on the following passage in Penziner: “The amendment does, however, place in the hands of the legislature the power to control certain of the charges of certain designated classes of lenders.” (Penziner, supra, 10 Cal.2d at p. 173, italics
As an initial matter, the admonition that “a decision does not stand for a proposition not considered by the court” applies equally to the authority relied upon by Wishnev. (People v. Barker, supra, 34 Cal.4th at p. 354.) Penziner did not consider the compound interest limitation or even involve an exempt lender. Moreover, it is unremarkable that Penziner would characterize the 1934 amendment as conferring authority on the Legislature to regulate “certain” rather than “all” charges imposed by exempt lenders. By its plain terms, the legislative authority to regulate exempt lenders under article XV does not extend to all charges that may be loan-related. Instead, that authority is limited to “fees, bonuses, commissions, discounts or other compensation” that a lender may charge in connection with a loan. (
As long as a charge falls within one of the specifically enumerated categories or can be considered “other compensation,” the Legislature has power to regulate that charge in any manner. The reference in Penziner to the Legislature having authority to control “certain” charges imposed by exempt lenders does not necessarily suggest that compound interest falls outside of the scope of the Legislature‘s power.
Accordingly, we hold the 1934 amendment impliedly repealed the compound interest limitation as to exempt lenders. This conclusion does not mean exempt lenders may charge compound interest without a contractual or legal basis to do so.15 It simply means they are not subject to statutory liability and penalties otherwise imposed by the 1918 initiative on nonexempt lenders.
The Ninth Circuit asked whether the procedures employed by Northwestern Mutual satisfy the compound interest limitation.16 (Wishnev II, supra, 880 F.3d at p. 495.) As the Ninth Circuit recognized, this question only arises if it is first determined that exempt lenders are subject to the limitation.17 (Id. at p. 502.) Because the answer to the first question fully resolves the matter pending before the Ninth Circuit, its second question is rendered moot.
We answer the Ninth Circuit‘s first question as follows. The provision in section 1916–2 prohibiting lenders from assessing compound interest “unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith” does not apply to lenders exempt under article XV.
CORRIGAN, J.
We Concur:
CANTIL-SAKAUYE, C. J.
CHIN, J.
LIU, J.
CUÉLLAR, J.
KRUGER, J.
GROBAN, J.
Name of Opinion Wishnev v. The Northwestern Mutual Life Insurance Company
Unpublished Opinion
Original Appeal
Original Proceeding XXX on request pursuant to rule 8.548, Cal. Rules of Court
Review Granted
Rehearing Granted
Opinion No. S246541
Date Filed: November 14, 2019
Court:
County:
Judge:
Counsel:
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.
Timothy J. O‘Driscoll
Drinker Biddle & Reath
One Logan Square, Suite 2000
Philadelphia, PA 19103
(215) 988-2700
Robert M. Bramson
Bramson, Plutzik, Mahler & Birkhaeuser
2125 Oak Grove Road, Suite 125
Walnut Creek, CA 94598
(925) 945-0200