Wishnev v. Nw. Mut. Life Ins. Co.

880 F.3d 493

Sanford J. WISHNEV, individually and on behalf of all others similarly situated, Plaintiff-Appellee,

v.The NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, Defendant-Appellant.

No. 16-16037

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 16, 2017, San Francisco, California

Filed January 18, 2018

Timothy J. O’Driscoll (argued) and Stephen C. Baker, Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania; Marshall L. Baker, Matthew J. Adler, Alan J. Lazarus, and Michael J. Stortz, Drinker Biddle & Reath LLP, San Francisco, California; for Defendant-Appellant.

Robert Bramson (argued) and Jennifer S. Rosenberg, Bramson Plutzik Mahler & Birkhaeuser LLP, Walnut Creek, California, for Plaintiff-Appellee.

Thomas A. Evans, Reed Smith LLP, San Francisco, California; Lisa Tate, Vice President, Litigation & Associate General Counsel, American Council of Life Insurers, Washington, D.C.; for Amicus Curiae American Council of Life Insurers.

Laura L. Geist and Andrew S. Azarmi, Dentons US LLP, San Francisco, California; Brad Wenger, Association of California Life and Health Insurance Companies, Sacramento, California; for Amicus Curiae Association of California Life and Health Insurance Companies.

Before: Sandra S. Ikuta and Andrew D. Hurwitz, Circuit Judges, and Donald W. Molloy,^* District Judge.

ORDER

We ask the California Supreme Court to resolve two open questions of state law that have significant effects on insurance companies and insureds in California.

An initiative measure enacted in 1918 (the Initiative), Cal. Civ. Code §§ 1916-1 – 5, limits the amount of interest lenders may charge, and provides that lenders may not compound interest "unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith" (hereafter, the "disclosure requirement"). Cal. Civ. Code § 1916-2. An amendment to the California constitution exempts certain lenders from some aspects of the Initiative. Cal. Const. art. XV, § 1. The state legislature has included insurance companies as an exempt lender. Cal. Ins. Code § 1100.1. It is not clear, however, whether the constitutional provision exempts lenders from the disclosure requirement, and courts considering this issue have reached different results.

Nor is it clear whether a lender that is an insurance company can satisfy the disclosure requirement of section 1916-2 by obtaining the borrower’s signature on an application for insurance, and then subsequently providing an insurance policy that includes a compound interest provision, even though the state legislature has provided that an insurance application and policy form a single contract. Cal. Ins. Code § 10113.

By addressing these open issues, the California Supreme Court will resolve the appeal before us. Sanford Wishnev, an insured who borrowed money from Northwestern Mutual Life Insurance Company and was assessed compound interest, is suing the insurance company on behalf of a putative class for a violation of the disclosure requirement in section 1916-2. Northwestern Mutual claims that it is exempt from complying with the disclosure requirement, and also claims that the application signed by Wishnev, which is attached to the insurance policy, satisfies the disclosure requirement. If Northwestern Mutual is correct on either of its claims, it is not liable to Wishnev or other members of the putative class for violating section 1916-2. If Northwestern Mutual is subject to section 1916-2's disclosure requirement, and did not fulfill its obligation under California law, then Northwestern Mutual is potentially liable to Wishnev and any class members who have been charged compound interest without the required disclosure.

Accordingly, we certify the following two questions to the California Supreme Court:

1. 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 section 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"?

2. Does an agreement meet the requirement of section 1916-2 if it is comprised of: (1) an application for insurance signed by the borrower, and (2) a policy of insurance containing an agreement for compound interest that is subsequently attached to the application, thus constituting the entire contract between the parties pursuant to section 10113 of the California Insurance Code ?

Our phrasing of the questions should not restrict the Court’s consideration of the issues involved. The Court may rephrase the questions as it sees fit in order to address the contentions of the parties. If the Court agrees to decide these questions, we agree to accept its decision. We recognize that the Court has a substantial caseload, and we submit these questions only because of their significance to the administration of insurance policy loans in the state of California, illustrated by the numerous cases involving these questions of state law.

I

The ambiguities before us today are a product of the development of California usury law. In 1918, the California voters approved the Initiative, which prevents lenders from charging usurious interest rates. See Cal. Civ. Code §§ 1916-1 – 5.¹ Section 1916-1 established that the interest rates for loans in California could not exceed 12 percent per year. Id. § 1916-1. Section 1916-2 prohibited lenders from compounding interest "unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith." Id. § 1916-2. Finally, the Initiative provided that every person "who for any loan or forbearance of money, goods or things in action shall have paid or delivered any greater sum or value than is allowed to be received under the preceding sections" may sue to recover "treble the amount of the money so paid or value delivered in violation of said sections, providing such action shall be brought within one year after such payment or delivery." Id. § 1916-3(a).

In 1934, the voters amended the California Constitution "to abolish the inflexible, inadequate and unworkable provisions of the usury law and to reestablish in the Legislature the power to enact laws affecting the business of lending money in this state." Carter v. Seaboard Fin. Co. , 33 Cal. 2d 564, 579, 203 P.2d 758 (1949).² The amendment, now Article XV,³ lowered the maximum interest rate that could be charged by covered lenders. Cal. Const. art. XV, § 1. Paragraph 1 of Article XV set a 10 percent maximum interest rate on loans for "personal, family or household purposes." Id. Paragraph 2 of Article XV set a different interest rate for loans that were not for personal use, such as for the "purchase, construction or improvement of real property."Id. In addition, paragraph 2 stated that "[n]o person ... shall by charging any fee, bonus, commission, discount or other compensation receive from a borrower more than the interest authorized by this section upon any loan or forbearance of any money, goods or things in action." Id.

Paragraph 2 of Article XV also gave the state legislature the desired flexibility to set interest rates for particular lenders. First, it exempted certain lenders from its prohibitions by providing that "none of the above restrictions shall apply to any obligations of, loans made by, or forbearances of, [list of exempt lenders] or any other class of persons authorized by statute." Id. Second, it gave the state legislature authority over these exempt lenders, by providing that:

The Legislature may from time to time prescribe the maximum rate per annum of, or provide for the supervision, or the filing of a schedule of, or in any manner fix, regulate or limit, the fees, bonuses, commissions, discounts or other compensation which all or any of the said exempted classes of persons may charge or receive from a borrower in connection with any loan or forbearance of any money, goods or things in action.

Id. The term "or other compensation" is not defined in the amendment. The amendment concludes that "[t]he provisions of this section shall supersede all provisions of this Constitution and laws enacted thereunder in conflict therewith." Id.

In 1981, the state legislature enacted section 1100.1 of the California Insurance Code, which provides that "the restrictions upon rates of interest contained in Section 1 of Article XV of the California Constitution shall not apply to any obligation of, loans made by, or forbearances of, any incorporated admitted insurer."

After the enactment of Article XV, the California Supreme Court decided several cases that addressed, either directly or indirectly, the extent to which the interest rate limitations in the Initiative and Article XV applied to exempt lenders. In Penziner v. Western American Finance Co. , a non-exempt lender claimed that after Article XV was adopted, the Initiative became a dead letter. 10 Cal. 2d 160, 174, 74 P.2d 252 (1937). The California Supreme Court disagreed. It explained that a constitutional amendment repeals or supersedes "only those portions of prior acts repugnant to the later act." Id. at 174–75, 74 P.2d 252 (approving the rule that a constitutional amendment "operates as an express limitation upon the extent to which it is intended that former acts shall cease to be operative, namely, only so far as they are actually inconsistent with the new act"). Accordingly, the portions of the Initiative that "are not repugnant to and inconsistent with the new act are to remain in force." Id. at 175, 74 P.2d 252 (citation omitted).

Penziner then differentiated between exempt and nonexempt lenders. According to Penziner , "the power granted to the legislature by the constitutional amendment is expressly limited in its scope to the regulation and control of the charges of the exempted...