Friday, November 15, 2019
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California Supreme Court:
Usury-Exempt Insurers Not Bound by Compound Interest Law
Justices Tell Ninth Circuit That Written Assent to Compound Interest Being Charged Was Not Required Where Loans Were Taken Out Secured by Life Insurance Policies
By a MetNews Staff Writer
A lender that is exempt from California’s usury laws need not obtain a borrower’s consent in writing to interest being compounded annually, the California Supreme Court declared yesterday, in response to an inquiry from the Ninth U.S. Circuit Court of Appeals.
Justice Carol Corrigan wrote the opinion in Wishnev v. The Northwestern Mutual Life Insurance Company, 2019 S.O.S. 3542.
The insurer, in making life insurance policy loans, is exempted from usury laws under Art. XV, §1 of the California Constitution. The issue was whether it is also exempt from Civil Code §1916–2 of the California Civil Code which provides that “interest shall not be compounded…unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith.”
Plaintiff Sanford J. Wishnev contends that Northwestern’s life insurance policy applications which he signed do not reveal that it would charge compounded interest on loans made against the cash value of the policies and that he should be allowed to maintain a class action, seeking treble damages.
Wishnez had taken out loans against each of his four policies.
District Court Ruling
District Court Judge Edward M. Chen of the Northern District of California on Feb. 9, 2016 held that California voters, in enacting exemptions from usury laws for some insurers through a 1934 constitutional amendment, did not vitiate the requirement, erected by a 1918 initiative, that compound interest be charged only if agreed to by the borrower, in writing. In so ruling, Chen differed with the conclusion reached by three other district courts.
The Ninth Circuit certified to the California Supreme Court the question of whether insurers that are exempt from usury laws are also exempt from §1916–2; the state high court accepted the request; it yesterday answered in the affirmative.
Corrigan said the 1934 amendment, now contained in Art. XV, does not expressly repeal §1916-2 as it applies to exempt insurers. However, she declared, it does so impliedly.
Art. XV
She said a “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.”
The jurist reasoned:
“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. Civil Code section 1915 defines interest as ‘the compensation allowed by law or fixed by the parties for the use, or forbearance, or detention of money.” (Italics added.) That section of the Civil Code existed long before the enactment of the 1934 amendment. Because voters are presumed to be aware of existing laws at the time a constitutional amendment is enacted…, the voters who enacted the 1934 amendment presumably intended the term ‘compensation’ to include interest as defined in the Civil Code.”
Part of Question
Corrigan went on to say:
“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.”
She observed:
“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.”
Summing up, Corrigan wrote:
“[W]e 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. It simply means they are not subject to statutory liability and penalties otherwise imposed by the 1918 initiative on nonexempt lenders.”
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