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Supreme Court: 1934 Amendment Repeals 1918 Limitation On Compound Interest

The same year that the Great War ended, the voters of California approved an initiative measure governing allowable interest rates.  This initiative remains uncodified but West Publisher designates these statutes as Civil Code Sections 1916-1 to 1916-5.  Among other things, the 1918 initiative prohibits compounding of interest "unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith".  In 1934, the voters amended the California Constitution to address interest rates and for first time exempt certain lenders from usury restrictions.  This amendment, Art. XX, § 22, was later amended and reenacted as Article XV, § 1.  

Specified lenders are now exempt from interest rate limitations under Article XV.  For example, the legislature has exempted "incorporated admitted insurers".  Cal. Ins. Code § 1001.1.  Did this mean that exempt lenders were also exempt from the 1918 initiative's requirement regarding compound interest?

Yesterday, the California Supreme Court in an opinion by Justice Carol A. Corrigan held:

"[T]he 1934 amendment impliedly repealed the compound interest limitation as to exempt lenders".

Wishnev. v. The Northwestern Mutual Life Ins. Co.,  Supreme Ct. Case No. S2465641 (Nov. 14, 2019).The Court cautioned, however, that its conclusion "does not mean exempt lenders may charge compound interest without a contractual or legal basis to do so" (footnote omitted).

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IX, Number 319


About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...