SUSAN ILLSTON, United States District Judge.
Defendant Prudential Insurance Company of America moves to dismiss plaintiff Gina Washburn's complaint for failure to state a claim. On November 20, 2015, the Court heard arguments on defendant's motion. For the reasons set forth below, the Court GRANTS defendant's motion to dismiss plaintiff's complaint. Plaintiff is given leave to file an amended complaint by
The following allegations are taken from plaintiff's first amended complaint ("FAC"):
Plaintiff Gina Washburn submitted a signed application for life insurance to defendant Prudential Life Insurance Company. Dkt. No. 13, FAC ¶ 12. Plaintiff alleges that "the application did not authorize Prudential to charge compound interest on the balances due on policy and/or premium loans, nor did it even disclose that Prudential might do so." Id.
On November 13, 1989, defendant issued a life insurance policy (the "Policy") to plaintiff. Id. Plaintiff never signed the Policy. Id. ¶ 13. The Policy contains a provision regarding policy and premium loans which states,
Id.
Sometime after the issuance of the Policy, defendant provided plaintiff "a loan secured by the cash value and death benefit value of the Policy." Id. ¶ 14. Defendant charged compound interest on this loan. Id. ¶ 15. Plaintiff alleges that she "never signed any agreement authorizing Prudential to charge her compound interest." Id.
Plaintiff originally filed this lawsuit in state court as a putative class action. Defendant
Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This "facial plausibility" standard requires the plaintiff to allege facts that add up to "more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). While courts do not require "heightened fact pleading of specifics," a plaintiff must allege facts sufficient to "raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 570, 127 S.Ct. 1955.
In deciding whether a plaintiff has stated a claim upon which relief can be granted, the court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the plaintiff's favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). However, the court is not required to "accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir.2008).
If the Court dismisses the complaint, it must then decide whether to grant leave to amend. The Ninth Circuit has "repeatedly held that a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir.2000) (citations and internal quotation marks omitted).
Plaintiff alleges that defendant violated Initiative Measure, Stats. 1919, p. lxxxiii (the "1918 Initiative"), which is codified in California Civil Code § 1916-1 through § 1916-5. In particular, plaintiff claims that defendant violated the prohibition on charging compound interest "unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith." Cal. Civ. Code § 1916-2. Defendant argues that, as an incorporated admitted insurer, it is exempt from entirety of the Usury Law
When interpreting statutes, a court should "aim `to ascertain the intent of the enacting legislative body so that [it] may adopt the construction that best effectuates the purpose of the law.'" Klein v. United States, 50 Cal.4th 68, 77, 112 Cal.Rptr.3d 722, 235 P.3d 42 (Cal.2010) (quoting Hassan v. Mercy Am. River Hosp., 31 Cal.4th 709, 715, 3 Cal.Rptr.3d 623, 74 P.3d 726 (Cal.2003)). The first step of statutory interpretation is to look "to the words of the statute `because the statutory language is generally the most reliable indicator of legislative intent.'" Id. (quoting Hassan, 31 Cal.4th at 715, 3 Cal.Rptr.3d 623, 74 P.3d 726). If the statutory language is ambiguous or does not demonstrate its intended meaning, courts then look to the "statute's legislative history and the historical circumstances behind its enactment." Id. Lastly, courts "may consider the likely effects of a proposed interpretation because where uncertainty exists consideration should be given to the consequences that will flow from a particular interpretation." Id. (internal quotation marks and citation omitted). It is important to apply these rules of statutory construction in order. Mt. Hawley Ins. Co. v. Lopez, 215 Cal.App.4th 1385, 1396, 156 Cal.Rptr.3d 771 (Cal.Ct.App.2013). Also, the canons of statutory interpretation "apply equally to constitutional provisions." Indep. Energy Producers Ass'n, Inc. v. State Bd. of Equalization, 125 Cal.App.4th 425, 437, 22 Cal.Rptr.3d 562 (Cal.Ct.App.2004).
The 1918 Initiative regulates interest rates and the requirements for charging compound interest and interest on interest. In full, it states:
Cal. Civ. Code § 1916-2 (emphasis added).
Article XV § 1
Cal. Const., art. XV, § 1 (emphasis added).
The language of Article XV provides that it supersedes the 1918 Initiative when the provisions conflict, such as the interest rate limits. However, the 1918 Initiative "remains in full force to the extent it does not conflict with the Constitution." Ghirardo v. Antonioli, 8 Cal.4th 791, 799 n. 2, 35 Cal.Rptr.2d 418, 883 P.2d 960 (Cal.1994) (en banc).
Plaintiff argues that the plain meaning of the words "none of the above restrictions" is unambiguous and supports her position that the exemption does not apply to the 1918 Initiative's disclosure and consent requirement with respect to the
However, even though Article XV does not include a provision regarding compound interest, it does grant authority to the California Legislature to "in any manner fix, regulate or limit, the fees, bonuses, commissions, discounts or other compensation" that exempt classes may charge "a borrower in connection with any loan." The language is, therefore, ambiguous as to whether the authority given to the California Legislature over exempt classes conflicts with the 1918 Initiative's disclosure and consent requirement for compound interest as it applies to exempt classes. If the provisions do conflict, then the Court must find that the California Legislature has the sole authority to regulate the charging of compound interest by exempt classes. If the provisions do not conflict, then even exempt classes are subject to the 1918 Initiative's disclosure and consent requirement. Because the language is ambiguous, the Court must look to the provisions' legislative history.
In 1918, California adopted by voter initiative a measure regulating interest rates and authorizing remedies for violations of its provisions. Initiative Measure, Stats. 1919, p. lxxxiii. The 1918 Initiative capped interest rates for any loan at twelve percent. Cal. Civ. Code § 1916-2. It also prohibited the charging of compound interest or interest on interest "unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith." Id. A person or entity which was charged and paid a sum greater than the maximum authorized interest rate could bring suit for treble damages within one year after payment. Cal. Civ. Code § 1916-3(a). The public policy embodied in the 1918 Initiative, and the Usury Law in general, "is to protect the necessitous, impecunious borrower who is unable to acquire credit from the usual sources and is forced by his economic circumstances to resort to excessively costly funds to meet his financial needs." Roes v. Wong, 69 Cal.App.4th 375, 381, 81 Cal.Rptr.2d 596 (Cal. Ct.App.1999) (McDonald, J. concurring) (citing 4 Miller & Starr, California Real Estate (2d ed. 1989), § 10:4).
In 1934, the ratification of California Constitution Article XX § 22 [now Article XV § 1] amended the 1918 Initiative.
In 1976, Article XX § 22 was renumbered to Article XV § 1. In 1979, Article XV was amended to its present form, extending the exempt classes to, inter alia, those "authorized by statute." The language describing the California Legislature's authority to regulate the exempt classes did not change in any significant way.
In 1981, the California Insurance Code was amended to "create[] and authorize[] incorporated insurers as an exempt class of persons pursuant to Section 1 of Article XV of the Constitution." Cal. Ins. Code § 1100.1. In 1982, the California Legislature enacted Insurance Code § 1239, which provides that "[n]o other provision of law shall apply to policy loan interest rates unless made specifically applicable to these rates."
Evaluating the effect of the 1934 constitutional amendment on the 1918 Initiative, the California Supreme Court stated, "Except as to the reduction of interest ... [the first] paragraph is substantially similar to the first part of section 2 of the [1918 Initiative]. The many other provisions of section 2 ... find no counterpart in the constitutional amendment." Penziner, 10 Cal.2d at 172, 74 P.2d 252. Additionally, Penziner found that, apart from the reduction of the interest rate cap, "there is nothing in the constitutional provision to indicate that it was intended thereby to affect the applicability of the [1918 Initiative] provisions at least in so far as they apply to the nonexempt classes of lenders[.]" Id. at 173, 74 P.2d 252 (emphasis added). Holding that the 1934 amendment did not repeal the entire 1918 Initiative, the court stated,
Id. at 177, 74 P.2d 252 (emphasis added).
The California Supreme Court further addressed the 1934 constitutional amendment in Carter v. Seaboard Finance Co., 33 Cal.2d 564, 203 P.2d 758 (1949). Looking to the ballot statement and an Assembly report, the court found that the purpose of the amendment was "to free the Legislature from the restraints imposed by inflexible usury provisions so that interest and charges more appropriate to business conditions peculiar to each of the exempted classes could be established." Carter, 33 Cal.2d at 582, 203 P.2d 758. Further, the court held that "until the Legislature exercises the power granted to it by the amendment to regulate the business of lenders in a manner appropriate to each exempted class, the class not so governed by legislation is subject to no restriction on interest rates or charges." Id. Accordingly, the court noted that "the regulation of the business of [exempt classes], including their interest and charges, is entirely within the control of the Legislature." Id.
Plaintiff relies heavily on Penziner to argue that the 1918 Initiative's disclosure
Plaintiff also relies on McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 21 Cal.3d 365, 146 Cal.Rptr. 371, 578 P.2d 1375 (Cal.1978) (McConnell I) and McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 33 Cal.3d 816, 191 Cal.Rptr. 458, 662 P.2d 916 (Cal.1983) (McConnell II). In McConnell I, the plaintiffs brought a class action for two claims: (1) unlawful charge of compound interest without a clear agreement, and (2) charge of an interest rate above the ten percent maximum before defendant became exempt under the Usury Law. 21 Cal.3d at 368-69, 146 Cal.Rptr. 371, 578 P.2d 1375. It is unclear from the decision whether the plaintiffs' claim regarding compound interest arose during and was limited to the time period before the defendant became exempt. However, neither party appeared to dispute that the defendant was subject to the compound interest provision. In McConnell II, the claim for usurious interest had been dismissed and the court evaluated the sufficiency of the agreement for compound interest, but the court never discussed the exemption to the Usury Law. 33 Cal.3d 816, 191 Cal.Rptr. 458, 662 P.2d 916. The Court finds that McConnell I and McConnell II are not probative of the question before this Court because it appears that the McConnell defendant was not exempt during the time period covered by the complaint.
The Carter decision sheds more light on the intent behind the grant of authority over the exempt classes to the California Legislature. Carter found that the regulation of exempt classes' businesses is "entirely within the control of the Legislature," which means that the authority granted to the California Legislature to "in any manner fix, regulate or limit, the fees, bonuses, commissions, discounts or other compensation" charged by exempt classes includes the ability to charge compound interest. See Carter, 33 Cal.2d at 582, 203 P.2d 758; Cal. Const., art. XV, § 1. Thus, the 1918 Initiative's disclosure and consent requirement conflicts with the California Constitution and the California Constitution supersedes, and the exemption applies to the 1918 Initiative Measure's disclosure and consent requirement for compound interest.
This finding is consistent with the only California court decision addressing the issue of whether the exemption applies to the 1918 Initiative's compound interest provision. See Thomason v. Bateman Eichler, Hill Richards, Inc., 199 Cal.App.3d 1100,245 Cal.Rptr. 319 (1988) (depublished opinion).
Although not binding on this Court, the Thomason holding is a reasonable interpretation of the exemption. The authority vested in the California Legislature includes the regulation of "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[.]" Cal. Const., art. XV, § 1. In light of the legislative history provided in Carter, the phrase "in any manner fix, regulate or limit ... other compensation" reasonably includes the regulation of compound interest. Thus, the California Constitution vests in the California Legislature the sole authority to regulate the charging of compound interest by exempt classes. The exemption, therefore, applies to the entirety of California Civil Code § 1916-2.
The California Insurance Code provides that "incorporated admitted insurers" are exempt under Article XV § 1. Cal. Ins. Code § 1100.1. Defendant is an incorporated admitted insurer and, therefore, is exempt. See Defendant's Request for Judicial Notice, Dkt. No. 18-1, Ex. A.
Plaintiff's three remaining claims are premised on defendant's alleged violation of California's Usury Law. Claim One seeks a declaration that the policy and loans made by prudential are subject to the 1918 Initiative's compound interest provision. Claim Two alleges a violation of California's Unfair Competition Law because the charging of compound interest constitutes an "unlawful" business act or practice. See Cal. Bus. & Prof. Code § 17200 et seq. Claim Four alleges that defendant is unjustly enriched by unlawfully receiving compound interest. However, because defendant is exempt from the entirety of California Civil Code § 1916-2, plaintiff's remaining claims also fail to state a claim upon which relief may be
For the foregoing reasons and for good cause shown, the Court hereby GRANTS defendant's motion to dismiss the claims alleged in the FAC without leave to amend. If plaintiff wishes to allege different claims based on the same facts, plaintiff may do so by filing a second amended complaint no later than
Although the Court is concerned that, as a factual matter plaintiff may have agreed to the compound interest provision, the Court cannot resolve factual disputes at the pleadings stage.
