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Revisiting “Unconscionable Contracts”: California Usury Law

In general, usury laws forbid lenders from charging interest in excess of the rate listed in the applicable statute. California has a usury law that caps interest rates, but the law only applies to non-bank consumer loans that do not exceed $2,500. See Cal. Fin. Code, § 22303. Obviously, on its face, the law would not apply to the vast majority of loans like credit cards, auto, and house loans.

That being said, the California Supreme Court just held unanimously that the question of excessively high interest rates CAN be the basis of a claim that the loan contract is “unconscionable.” See De La Torre v. CashCALL, Inc., Case No. S241434 (Cal. Supreme Court August 13, 2018). Unconscionability is one of many defenses that can be used to defend against a lawsuit alleging breach of contract. This article provides an update on the legal principles and a discussion of the CashCALL case.

San Diego Corporate Law: Unconscionability Legal Principles

Under California law, the doctrine of unconscionability is intended to ensure that contracts do not impose terms that are “overly harsh” or “unduly oppressive'” or “so one-sided as to shock the conscience.” These are the various formulations that have been used by California courts over the years. Unconscionability has two components – procedure and substance. Procedural unconscionability refers to surprise or oppression caused by unequal bargaining power or pressure tactics relating to the signing of the contract. Substantive unconscionability refers to the terms of the contract itself where, as noted, the terms “shock the conscience.” Both components are needed, but there is a sliding scale where more of one kind of unconscionability lessens how much of the other kind is needed. Because unconscionability is a contract defense, the party asserting the defense bears the burden of proof. More than a “bad bargain” or “buyer’s remorse” is needed. The unconscionability doctrine is codified at Cal. Civil Code §1670.5.

San Diego Corporate Law: Facts of CashCALL

CashCALL, Inc., is a non-bank lender. According to the case description, “[o]ne of CashCall’s signature products was an unsecured $2,600 loan, payable over a 42-month period, and carrying an annual percentage rate (APR) of either 96 percent or … 135 percent.” Various consumers have challenged whether the CashCALL loan contracts were/are unconscionable. Procedurally, the case arrived at the California Supreme Court via the federal courts. The plaintiffs filed their class action in federal court claiming that CashCall violated California’s Unfair Competition Law (“UCL”) which, among other things, prohibits “unfair competition” defined as including “any unlawful, unfair or fraudulent business act or practice.” See Cal. Bus. & Prof. Code, § 17200.

Eventually, the federal Ninth Circuit Court of Appeals asked the California Supreme Court whether the unconscionability doctrine could apply to interest rates on consumer loans that exceeded the $2,500 limit in the California usury law? The court said: “The answer is yes. An interest rate on a loan is the price of that loan, and it is clear that the price term, like any other term in a contract, may be unconscionable.” In so holding, the California Supreme Court found that the California usury law did not limit the application of the unconscionability doctrine and the UCL could be the basis for a claim on unconscionability.

Note that the California Supreme Court did not actually decide whether the CashCALL loans were unconscionable, only that it was possible under California law. The court noted many factors that might be examined both procedural and substantive including:

Education level of consumers — sophistication of the parties
Language used in contract and by consumer
Writing-related issues such as pre-printed forms, fonts, boldfacing, etc.
Ability and actuality of negotiations
Presence of and opportunity to obtain legal counsel and other advice
Process of signing including high pressure tactics
Verbal statements (if any)
Similar loan products available in the marketplace
And more

Furthermore, the court expressed the view that the federal courts could fashion remedies that did not result in a blanket judge-made interest cap for these types of loans. The court noted — without ruling — that such options might be equitable remedies like ordering a change in advertising practices, imposing a “cool down” period before the loans may be dispensed, etc.

Contact San Diego Corporate Law Today

For more information, contact corporate attorney Michael Leonard, Esq., of San Diego Corporate Law. Most San Diego businesses are not lenders. Thus, the usury aspects of the CashCALL case are probably not too relevant to operating your business. The case provides further lessons on how to avoid having your business contracts deemed unenforceable under concepts of unconscionability. Contact Mr. Leonard via email or by calling (858) 483-9200. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal.