District Court (Cal.) Reverses Itself in CashCall Unconscionability Claim; Says UCL Can Not Be Used to Regulate Economic Policy

We previously reported that Judge Maria Elena James denied CashCall’s summary judgment motion on the issue of whether CashCall’s loans were unconscionable. (http://www.calautofinance.com/?p=5208) CashCall filed a Motion for Reconsideration, arguing that to deny summary judgment on the Unconscionability Claim was incorrect because the UCL cannot be used as a basis for Plaintiffs’ Unconscionability Claim because ruling on that claim would impermissibly require the Court to regulate economic policy. Judge James agreed, and granted summary judgment to CashCall.   De La Torre v. CashCall, Inc., — F.Supp.3d —-, 2014 WL 5390259 (N.D.Cal. 2014)

 Plaintiffs’ Unconscionability Claim alleges that CashCall violated the UCL by making loans on unconscionable terms. Am. Compl. ¶¶ 68–89. Plaintiffs allege that CashCall’s loans were unconscionable, in violation of California Financial Code section 22302, and California Civil Code section 1670.5 . Id. ¶¶ 84–85. Through the Unconscionability Claim, Plaintiffs seek to enjoin CashCall from the practice of making unconscionable loans, and to obtain restitution. Id. ¶89 California Civil Code section 1670.5 codifies the unconscionability doctrine and “provides that a court may refuse to enforce an unconscionable contract.” Koehl v. Verio, Inc., 142 Cal.App. 4th 1313, 1338 (2006) (citation and internal quotation marks omitted). However, “that statute does not in itself create an affirmative cause of action,” id., rather, it “codifies the defense of unconscionability,” California Grocers Ass’n v. Bank of Am., 22 Cal.App. 4th 205, 217 (1994); see also Nava v. VirtualBank, 2008 W L 2873406, at * 10 (E.D.Cal. July 16, 2008) (noting that section 1670.5 merely codifies the defense of unconscionability, and holding that “plaintiff’s allegation that defendants breached the Note because the Note was unconscionable does not create a recognized claim under California law”). Claims under the UCL provide limited remedies; plaintiffs may only seek injunctive relief and restitution. Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1147, 1152 (2003). “[I]n the context of the UCL, ‘restitution’ is limited to the return of property or funds in which the plaintiff has an ownership interest (or is claiming through someone with an ownership interest).” Madrid v. Perot Sys. Corp., 130 Cal.App. 4th 440, 453 (2005). If a party cannot state a viable claim for restitution or injunctive relief, then that party’s UCL claim is likewise not viable. Id. at 467 (stating, in the context of affirming demurrers, that “[s]ince plaintiff failed to present a viable claim for restitution or injunctive relief … plaintiff’s complaint failed to state a viable UCL claim”). In other words, if a party is not entitled to the remedies it seeks, then its underlying claim must fail. Only one California court has ever found a challenged interest rate unconscionable. See Carboni v. Arrospide, 2 Cal.App. 4th 76 (1991). In Carboni, the defendant had signed a $4,000 note in favor of the plaintiff, at a 200% interest rate, secured by a deed of trust. Id. at 80. When the defendant failed to make payments, the plaintiff filed a complaint for judicial foreclosure. Id. The defendant asserted unconscionability as a defense to the enforcement of the note with its 200% interest rate. The trial court found that the 200% interest rate was unconscionable, and permitted interest on the principal sum at a rate of 24% per annum, up to that date. Id. The court of appeal affirmed. Id. at 87. Thus, Carboni presented the classic situation in which a party asserted unconscionability as a defense to the enforcement of a contract and the court was therefore able to fashion a remedy avoiding the unconscionable provision. More commonly, California courts have held that the judicial alteration of interest rates constitutes impermissible economic policy-making. See, e.g., California Grocers, 22 Cal.App. 4th at 217. In California Grocers, the trial court had found that a bank’s check-processing fee was unconscionable and issued an injunction that prospectively slashed that fee nearly in half for a period of ten years. Id. The court of appeal held that such an injunction was “an inappropriate exercise of judicial authority.” Id. The court first noted that unconscionability is traditionally only available as a defense, and not an affirmative cause of action. Id. Although the court did not decide whether unconscionability could be used affirmatively under the UCL, the court noted that the legislature could have – but did not – expressly authorize its affirmative use in the UCL, in contrast to other consumer protection statutes. Id. The appellate court then held that judicial oversight of bank fees was not the proper method of ensuring that such fees were reasonable. Id. at 218. The court noted that the case squarely implicated economic policy – that is, whether the bank’s fees were too high – and stated that “[i]t is primarily a legislative and not a judicial function to determine economic policy.” Id. (citation and internal quotation marks omitted). Thus, the court of appeal reversed the trial court’s grant of the injunction. Id. at 221.   The holding in California Grocers is consistent with the general principle that courts should not intrude in matters of economic policy. As the California Supreme Court has stated: “If the Legislature has permitted certain conduct or considered a situation and concluded no action should lie, courts may not override that determination.” Cel–Tech Commc’ns v. Los Angeles Cellular Tel. Co., 20 Cal.4th 163, 182 (1999). California courts have repeatedly held that courts should not intrude upon matters that are properly the province of the legislative branch. See, e.g., Harris v. Capital Growth Inv., 52 Cal.3d 1142, 1166 (1991) (stating that judicial interference in economic policy matters would lead to myriad trials “with no prospect of certainty or stability in the respective rights and duties of the parties”); Lazzareschi Inc. Co. v. San Francisco Fed. Sav. & Loan Ass’n, 22 Cal.App.3d 303, 311 (1971) (stating that “institutions which lend vast sums of money should be informed, not by judgments after the fact on a case-by-case basis, but by laws or regulations which are in existence in advance of the undertaking to execute loans”). With these guiding principles in mind, the Court finds that Plaintiffs’ Unconscionability Claim fails as a matter of law. Even if Plaintiffs were able to prove that the challenged loans were unconscionable, the Court could provide no remedy without impermissibly intruding upon the legislature’s province. The Court could not fashion a restitution award without deciding the point at which CashCall’s interest rates crossed the line into unconscionability. The California Legislature long ago made the policy decision not to cap interest rates on loans exceeding $2,500. It is not the function of this Court to second-guess that decision and provide an interest rate cap where the legislative branch expressly chose not to. See CelTech Commc’ns, 20 Cal.4th at 182. The only other possible remedy under the UCL – an injunction – suffers from the same flaw. The Court would need to decide what interest rate is permissible, where the Legislature expressly determined that this matter is better left to market forces. A less detailed injunction, for example, enjoining CashCall from charging unconscionable interest rates, would be impermissibly vague. See McCormack v. Hiedeman, 694 F.3d 1004, 1019 (9th Cir.2012) (“A district court abuses its discretion by issuing an overbroad injunction.”) (citation and internal quotation marks omitted). Because the Court cannot provide a remedy without overstepping the bounds of judicial authority, Plaintiffs’ Unconscionability Claim is not viable as a matter of law. Plaintiffs concede that the Court lacks the power to set after-the fact interest rates, but argue that the Court need not do so to award restitution. Opp’n at 12–17. Plaintiffs contend that the Court can simply consider equitable factors and award the amount of restitution it deems fair, even up to returning to Plaintiffs the entire interest paid. Id. at 14. However, any consideration of what a “fair” result would be in this case would require the Court to decide what it believes the appropriate interest rate would have been, even down to no interest at all. As set forth above, this decision is better left to the legislative branch. The Court finds that Plaintiffs’ Unconscionability Claim is not viable as a matter of law, and therefore GRANTS CashCall’s Motion for Reconsideration.