The Supreme Court of California, in response to a question certified by the U.S. Court of Appeals for the Ninth Circuit, has ruled that insurance companies are not required under an amendment to the state's constitution to obtain a borrower's signed agreement to be able to charge compound interest on a loan.
The Case
Between 1967 and 1976, Northwestern Mutual Life Insurance Company issued four permanent life policies to Sanford J. Wishnev, who completed and signed an application for each. The applications did not disclose that Northwestern Mutual would charge compound interest.
After Mr. Wishnev submitted each signed application, Northwestern Mutual sent him the requested policy. Each stated that "[t]his policy and the application, a copy of which is attached when issued, constitute the entire contract." The policies explained that loan interest was compounded annually, but Northwestern Mutual did not require Mr. Wishnev to sign and return any copy.
At some point after 1980, Mr. Wishnev took out four loans secured by his four policies. Northwestern Mutual assessed compound interest on the loan balances.
Thereafter, Mr. Wishnev filed a putative class action suit alleging that Northwestern Mutual's assessment of compound interest was barred because he had never signed an agreement to that effect. He claimed damages because the loan balances, increased by compound interest, reduced the amount he had received in annual dividends.
Mr. Wishnev sought to certify a class of all persons who were charged similar compound interest in the previous four years. On behalf of the class, he requested actual damages along with treble the amount of all interest paid within one year of the filing of his complaint.
Northwestern Mutual moved to dismiss. It argued that, as an exempt lender under Cal Const. Art. XV, § 1, it was not required to obtain a borrower's signed consent to charge compound interest.
The U.S. District Court for the Northern District of California denied Northwestern Mutual's motion, holding that Northwestern Mutual was required to get signed consent but had not done so.
The dispute reached the Ninth Circuit, which asked the California Supreme Court:
Are the lenders identified in Article XV of the California Constitution, see Cal. Const. art. XV, § 1, as being exempt from the restrictions otherwise imposed by that article, nevertheless subject to the requirement in [S]ection 1916-2 of the California Civil Code that a lender may not compound interest "unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith"?
The California Supreme Court's Decision
The court ruled that 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.
In its decision, the court explained that, in 1918, California voters approved an initiative measure that took a uniform approach to usury by replacing statutory schemes covering various classes of lenders with a maximum allowable interest rate applicable to all loans and lenders. In addition to setting the allowable interest rate, the 1918 initiative provided, in Section 1916-2, that interest could not be compounded "unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith."
The court pointed out that, in November 1934, voters amended the state constitution by, among other things, prohibiting charging annual interest rates greater than 10 percent. The 1934 amendment did not refer to the compounding of interest.
The court noted that the 1934 amendment exempted certain lenders from its restrictions. In 1981, "incorporated admitted insurers" were designated exempt; Northwestern Mutual is an exempt lender.
The court then held that the 1934 amendment, the substance of which now appears in Article XV, impliedly repealed the compound interest limitation as to exempt lenders.
The court said that its holding did not mean that exempt lenders could charge compound interest without a contractual or legal basis to do so, but that they were "not subject to statutory liability and penalties otherwise imposed by the 1918 initiative on nonexempt lenders."
The case is Wishnev v. The Northwestern Mutual Life Ins. Co., No. S246541 (Cal. Nov. 14, 2019). Attorneys involved include: 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.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].