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Court of Appeal, Fourth District, Division 3, California.

David THOMASON et al., Plaintiffs and Appellants, v. BATEMAN EICHLER, HILL RICHARDS, INC., Defendant and Respondent.

Daniel EVERLY et al., Plaintiffs and Appellants, v. BATEMAN EICHLER, HILL RICHARDS, INC., Defendant and Respondent.

Nos. G004512 and G004507.

Decided: March 25, 1988

Holden, Fergus & Celio, Donald E. Fergus, Jr., Anaheim, Macdonald, Halsted & Laybourne, Orville A. Armstrong and Joel Mark, Los Angeles, for plaintiffs and appellants. Patrick Lynch, Carmen R. Luege and O'Melveny & Myers, Los Angeles, for defendant and respondent.

Appellants in these consolidated appeals challenge summary judgments entered in favor of respondent Bateman Eichler, Hill Richards, Inc.   The trial court granted respondent's motion after finding the corporation, a licensed securities broker-dealer exempt from the usury provisions of the California Constitution (Corp.Code, § 25211.5), was also exempt from the compound interest provisions of section 2 of the Usury Law.   Appellants argue the court erred in making that finding and, accordingly, in granting the motion.   We conclude the court's action was proper;  thus, we need not address the merits of appellants' contention the denial of their motion for summary judgment constituted error.


Appellants, as margin account customers of respondent, borrowed from respondent portions of the purchase price for securities acquired for their accounts.   Respondent, in turn, charged interest on its loans and also charged interest on the interest as it came due.   Believing respondent's practice violated section 2 of the Usury Law 1 which precludes the charging of compound interest “unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith,” appellants filed suit.   Their complaint alleged causes of action for usury, declaratory relief and money had and received, and sought treble damages pursuant to section 3 of the Usury Law.

After the case was at issue, appellants moved for judgment on the pleadings, summary judgment or summary adjudication of issues on the ground there was no dispute respondent had engaged in the unlawful charging of compound interest.   They relied on McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1978) 21 Cal.3d 365, 146 Cal.Rptr. 371, 578 P.2d 1375 (McConnell I ) and McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1983) 33 Cal.3d 816, 191 Cal.Rptr. 458, 662 P.2d 916 (McConnell II ).   A week later, respondent brought its own motion for summary judgment, relying on Corporations Code section 25211.5.2  The trial court agreed with respondent,3 and summary judgment was entered in its favor.   This appeal followed.


Appellants contend section 25211.5 of the Corporations Code provides an exemption only from the interest rate restrictions of the California Constitution, not section 2 of the Usury Law.   They acknowledge the maximum interest rate restrictions previously regulated by section 1 of the Usury Law have been modified by constitutional amendments.   But they insist the provisions of sections 2 and 3 have not been repealed, amended or suspended, and that neither the 1934 nor the 1979 amendment to the California Constitution served to exempt any class of lender from the compound interest requirements of section 2.   Appellants further argue, to the extent section 25211.5 purports to amend the Usury Law or to create any exemption thereto, it is invalid.   They assert because the law was approved as an initiative measure, it may not be amended by statute but only by constitutional amendment or initiative measure.  (Beneficial Loan Society, Ltd. v. Haight (1932) 215 Cal. 506, 515, 11 P.2d 857.)

The Usury Law was enacted by initiative measure in 1918.  Section 1 established seven percent as the legal rate of interest except that twelve percent could be charged if agreed to in writing.   Section 2 provided the maximum interest on any contract could not exceed twelve percent simple interest, and further provided compound interest could be charged, but only where authorized by a clear written agreement.   Section 3 set forth appropriate civil and criminal penalties for violating sections 1 and 2, including recovery of treble damages.

In 1934, Article XX of the Constitution was added by constitutional amendment.   The first two paragraphs provided the legal rate of interest was seven percent but reduced to ten percent the permissible contract rate.   The third paragraph stated “none of the above restrictions shall apply” to any of certain enumerated classes of licensed or specialized lenders, such as pawn brokers, personal property brokers and small loan brokers.

In 1979, another constitutional amendment renumbered the interest rate restrictions of Article XX as Article XV, section 1.   The amendment provided, among other things, for the Legislature to create additional classes of specialized lenders which would be exempt from the “above restrictions,” i.e., restrictions on interest rates.

The effect of the 1934 Amendment on the Usury Law of 1918 was addressed on numerous occasions by the California Supreme Court.   In Penziner v. West American Finance Co. (1937) 10 Cal.2d 160, 74 P.2d 252, for example, the court held “there is nothing in the constitutional amendment indicating an intent that the provision was intended as a revision of the entire subject covered in the usury act, nor are the provisions of the two acts so inconsistent or repugnant that the later repealed the earlier by implication․  All that the constitutional amendment does is to reduce the maximum permissible rate from 12 per cent to 10 per cent per annum;  to exempt certain enumerated classes of lenders from certain of its provisions;  and to place in the legislature a certain degree of control over the fixing of charges made by the exempted groups.   In its own sphere of operation, and in so far as it establishes different rules from those found in the usury law, the constitutional provision is supreme—but that is the extent of its operation.”  (Id., at pp. 176–177, 74 P.2d 252.)

And in Wolf v. Pacific Southwest etc. Corp. (1937) 10 Cal.2d 183, 74 P.2d 263, filed the same day as Penziner, the court stated:  “While the adoption of [Article XX, section 22] of the Constitution did not repeal the usury law of the state [citation], it did cause some radical changes to be made in that statute, and particularly respecting those organizations or individuals doing business as personal property brokers.   The third paragraph of said section of the Constitution designated certain organizations and individuals which are exempt from the general provisions of the usury law, and the legislature was given power to prescribe the maximum rate of interest to be charged in connection with loans made by them.   Personal property brokers were included in the exempted classes.   While the legislature has acted under this constitutional grant of power as to certain of these exempted classes, it has taken no action respecting the interest charges which may be made by a personal property broker.   Therefore, since the adoption of said section of the Constitution in 1934, there has been no provision of law, either statutory or constitutional, limiting the amount of interest or profit which a personal property broker may exact for a loan made by him.  [Citation.]”  (Id., at p. 184, 74 P.2d 263.)

Twelve years later, in Carter v. Seaboard Finance Co. (1949) 33 Cal.2d 564, 203 P.2d 758, the court observed:  “[T]he purpose of the constitutional amendment of 1934 [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.   Those who voted for the 1934 amendment had reason to expect that the exempt classes would not remain unregulated indefinitely.   But 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., at p. 582, 203 P.2d 758.)

Our high court's most recent pronouncement came in West Pico Furniture Co. v. Pacific Finance Loans (1970) 2 Cal.3d 594, 86 Cal.Rptr. 793, 469 P.2d 665, where the court noted:  “It has been for some time the settled law of this state, as set forth in a number of decisions of this court, that section 22 of article XX by exempting from its restrictions certain enumerated classes of persons, including personal property brokers, ‘operates to exempt those classes from the restrictions in the Usury Law․’  [Citations.]  As to these exempt classes, there are no restrictions on the rates of interest charged unless the Legislature so provides.  [¶] It must necessarily follow that the exemption of the enumerated classes from the restrictions of the Usury Law has at the same time made them immune to actions grounded upon common law remedies existing prior to the Usury Law.   Any other result would frustrate the constitutional amendment which was designed to place in the hands of the Legislature the control of the charges to be made by the exempted groups.  [Citation.]”  (Id., at pp. 614–615, 86 Cal.Rptr. 793, 469 P.2d 665, emphasis added.)

Respondent argues, and we agree, the foregoing indicates it was the court's position the exemption established by Article XX essentially superseded, in its entirety, the 1918 Usury Law insofar as it applied to exempt lenders.   Appellants have chosen to ignore the import of these cases and rely instead on the following language from In re Fuller (1940) 15 Cal.2d 425, 102 P.2d 321:  “The effect of the constitutional amendment of 1934 upon the Usury Law was to reduce the maximum permissible interest rate from 12 per cent to 10 per cent, but not to otherwise affect its requirements as to those classes of lenders which were specifically exempted from that regulation.  [Citation.]”  (Id., at p. 434, 102 P.2d 321, emphasis added.)   They assert that based on this language, the 1934 Amendment “freed the enumerated classes of lenders to charge interest at any rate they desired [but] did not free any lenders from the compound interest and damage provisions of Sections 2 and 3 of the Usury Law.”

Respondent offers a logical explanation for any confusion engendered by the Fuller quote:  It maintains an error was made in printing the opinion, and the word “not” was intended to appear before the word “specifically.”   Indeed, the sentence immediately following the one quoted states:  “As to the exempted groups, the legislature was reinvested with the same control over them as it had prior to the enactment of the Usury Law.”  (Ibid.)  Read in context, the former sentence could only have referred to nonexempt groups, and the latter to exempt groups.   Moreover, “the objective of the [1934] amendment was 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 Finance Co., supra, 33 Cal.2d at p. 579, 203 P.2d 758, emphasis added.)   Thus, as respondent points out, if the Legislature was intended to have unlimited authority to regulate exempt lenders, a total exemption from the Usury Law was required.

This conclusion is buttressed by the following language from Penziner v. West American Finance Co., supra, 10 Cal.2d at p. 177, 74 P.2d 252, a case cited by the Fuller court:  “[T]he placing in the hands of the legislature the control of the charges to be made by the exempted groups is inconsistent with the usury law over which the legislature has no power․  [¶] Moreover, the power granted to the legislature by the constitutional amendment [of 1934] is expressly limited in its scope to the regulation and control of the charges of the exempted classes of lenders.   As to the nonexempt classes of lenders, the legislature possesses no such power.   The usury law applied to all lenders.   That has been changed to permit the legislature to regulate the charges made by certain lenders, but except as to reduction of the maximum interest rate, there is nothing to indicate that the constitutional amendment was intended to affect the nonexempt lenders at all.”

Finally, Article XV, section 1 of the Constitution gives the Legislature full authority “from time to time [to] 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.”  (Emphasis added.)   A conclusion that respondent was bound by the Usury Law's compound interest requirements would be inconsistent with the Legislature's authority to regulate “in any manner” the interest charged by exempt lenders.


Nor is there merit to appellants' contention their position finds support in the McConnell decisions.   In McConnell I, the California Supreme Court concluded the defendant's customer's agreement did not authorize the defendant's charging of compound interest.   The opinion did not address the issue raised here.   In McConnell II, the court ruled extrinsic evidence was inadmissible to explain the meaning of a written agreement which did not, on its face, clearly provide for the compounding of interest.

Appellants inform us the defendant in the McConnell case also claimed it was exempt from the compound interest provisions of section 2 of the Usury Law.   And they advise us the trial judge, after remand, redefined the composition of the class to include claims made subsequent to September 26, 1973, the date on which defendant obtained exempt status.4  They further advise us the same trial judge made a “preliminary determination” holding “[d]efendant's licensure since September 26, 1973 under the California Personal Property Broker Law does not exempt defendant from compliance with the compound interest provisions of Section 2 of the California Usury Law,” and that a petition for writ of mandate with respect to that ruling was denied by the Second District Court of Appeal.5

But both McConnell opinions, on their face, speak only to a class of customers who maintained margin accounts prior to the date the defendant obtained exempt status.   In McConnell I, “[p]laintiffs filed suit individually and on behalf of a class of all California customers who maintained margin accounts with defendant from November 26, 1971, to September 26, 1973, and who were charged unlawful interest.”  (21 Cal.3d at p. 370, 146 Cal.Rptr. 371, 578 P.2d 1375.)   In McConnell II, the court reiterated:  “Plaintiffs filed suit individually and on behalf of a class of customers in California who maintained margin accounts with defendant between November 26, 1971, and September 26, 1973.”  (33 Cal.3d at p. 818, 191 Cal.Rptr. 458, 622 P.2d 916.)  McConnell II 's only reference to the trial judge's “preliminary determinations” was the following:  “He certified the action as a class action, defined the composition of the class, and ordered that notices of pendency of the action be sent to potential class members.”   (Id., at p. 819, 191 Cal.Rptr. 458, 622 P.2d 916.)   But the court did not address the issue of exemption;  thus, we are not satisfied the trial judge's determination is conclusive.   In light of the foregoing, we construe McConnell I and McConnell II as impliedly holding section 2 of the Usury Law applies to nonexempt lenders only.

Judgments affirmed.   Respondent to receive costs.


1.   That section provides:  “No person, company, association or corporation shall directly or indirectly take or receive in money, goods or things in action, or in any other manner whatsoever, any greater sum or any greater value for the loan or forbearance of money, goods or things in action than at the rate of twelve dollars upon one hundred dollars for one year;  and in the computation of interest upon any bond, note, or other instrument or agreement, interest shall not be compounded, nor shall the interest thereon be construed to bear interest unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith.   Any agreement or contract of any nature in conflict with the provisions of this section shall be null and void as to any agreement or stipulation therein contained to pay interest and no action at law to recover interest in any sum shall be maintained and the debt can not be declared due until the full period of time it was contracted for has elapsed.”  (10 West's Ann.Civ.Code (1985 ed.) foll. § 1916.12 at p. 173.)

2.   Corporations Code section 25211.5 provides:  “A broker-dealer acting pursuant to a certificate which is then in effect and which is issued pursuant to Section 25211, shall be exempt from the usury provisions of the State Constitution.   This section creates and authorizes a class of persons pursuant to Section 1 of Article XV of the Constitution.”   (Added by Stats.1983, c. 859, § 2, urgency eff. Sept. 16, 1983.)

3.   The trial court found “[defendant] has shown by uncontradicted admissible evidence that under California Corporations Code Section 25211.5 and Section 1, Article XV of the California Constitution, [defendant] is exempt from the restrictions on compounding contained in Section 2 of the Usury Law of 1918, that there is no triable issue of material fact with respect thereto, that this exemption provides a complete defense to plaintiffs' complaint, and therefore that [defendant] is entitled to judgment as a matter of law.”The court further found “plaintiffs' alternative motion for summary judgment, summary adjudication of issues or judgment on the pleadings cannot be granted because the above-cited exemption from Section 2 of the Usury Law of 1918 provides a complete defense to plaintiffs' complaint.   Because this Court finds that [defendant] is an exempt lender, this Court need not consider the other issues raised by plaintiffs' alternative motion.”

4.   In a footnote in McConnell I, after quoting a portion of section 22 of Article XX, the court commented:  “Section 22 went on to provide that ‘However, none of the above restrictions shall apply’ to corporations licensed under various laws, including corporations licensed as personal property brokers.   Defendant first obtained such a license on September 26, 1973.”  (McConnell v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 21 Cal.3d at p. 369, fn. 1, 146 Cal.Rptr. 371, 578 P.2d 1375.)

5.   Counsel for appellants are privy to this information, of course, because they represented the defendant in McConnell.

SONENSHINE, Acting Presiding Justice.

CROSBY and WALLIN, JJ., concur.

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