O'Brien v. Shearson Hayden Stone, Inc., 44663

• Decision Date: 19 October 1978
• Docket Number: No. 44663,44663
• Citation: 90 Wn.2d 680,586 P.2d 830
• Parties: Joseph E. O'BRIEN and Joyce B. O'Brien, on behalf of themselves and all other persons having similar claims, Appellants, v. SHEARSON HAYDEN STONE, INC., a Delaware Corporation, Respondent.
• Court: Washington Supreme Court

Page 680

90 Wn.2d 680

586 P.2d 830

Joseph E. O'BRIEN and Joyce B. O'Brien, on behalf of themselves and all other persons having similar claims, Appellants, v. SHEARSON HAYDEN STONE, INC., a Delaware Corporation, Respondent.

No. 44663.

Supreme Court of Washington, En Banc.

Oct. 19, 1978.

Karr, Tuttle, Koch, Campbell, Mawer & Morrow, Carl G. Koch, Terence P. Lukens, Seattle, for appellants.

Schweppe, Doolittle, Krug, Tausend & Beezer, Fredric C. Tausend, Rex B. Stratton, Seattle, for respondent.

DOLLIVER, Justice.

Plaintiffs O'Brien appeal from the dismissal by summary judgment of their class action suit against the defendant brokerage firm. The material facts are not in dispute. Plaintiffs allege Washington residents who maintained margin accounts with defendant were charged usurious interest rates on those accounts between April 1974 and January 1975. A margin account is a separate portion of a customer's general account in which a customer purchases securities financed through credit extended by a broker in the form of a demand loan.

The first trial judge certified the class of plaintiffs as all Washington residents who had margin agreements with defendant or one of its corporate predecessors during the period from January 31, 1972 through January 31, 1975. Shearson Hayden Stone has maintained a branch office in Seattle since the merger of Shearson, Hammill and Company and Hayden Stone, Inc., in September 1974. Shearson opened that office originally in February of 1969. While most members of the class dealt with the Seattle office, class representatives O'Brien contracted in Los Angeles with that branch and maintained their account there at all times, even subsequent to their moving to Washington in 1969.

Each member of the class signed a margin agreement with defendant providing "This agreement . . . shall be governed by the laws of the State of New York." New York law authorizes security brokers and dealers registered pursuant to the Securities Exchange Act of 1934, 48 Stat. 881, to charge interest at rates up to 25 percent per annum on customers' secured debit balances. Defendant is so registered.

The defendant charges interest on margin accounts at fluctuating rates based on (1) the rate it must pay to commercial banks on money borrowed by it to facilitate the loans to its customers (called the "broker's call money rate" a rate higher than, but generally paralleling, the prime rate), and (2) the flat increment of between one-half to 2 percent (depending on the outstanding balance), assessed against the customer's account as its commission for providing the loan. Shearson borrows the necessary money in New York.

Interest rates are recomputed and interest is calculated on the 16th of each month with the exception of December and January. These operations are done by computers and are automatic. Any interest charge that is unpaid during any interest period is added to that month's debit balance; interest during the next month is then charged on the sum of the unpaid loan amount plus the unpaid interest of the preceding month or months. The computation of interest is based on a 360-day year.

In early 1974, the broker's call money rates escalated sharply so that beginning in April some of Shearson's customers were charged interest on their margin accounts which exceeded 12 percent per annum. Subsequently, Shearson reprogrammed its computers to limit interest charged to residents of Washington and two other states to 12 percent. Later in 1974, after Shearson, Hammill and Company merged with Hayden Stone, Inc., all accounts of the two entities were integrated into one computer system. Defendant alleges that system could not practically be programmed to extend different rates of interest to Washington residents. Thereafter, Washington residents were again charged interest at monthly rates which exceeded 12 percent per annum until a declining broker's call money rate brought the rate below the 12 percent level in January 1975.

After affirming the class certification of the first trial judge, the second trial judge granted defendant's motion for summary judgment holding New York usury law governed this case and under New York law the rates of interest charged were not usurious. Plaintiffs by letter requested the court to rule also on the issue of how the rates of interest were to be computed for purposes of applying the usury law. They maintained the interest rate could not exceed 12 percent during any month while the agreement was in effect. The court concluded the rate of interest is to be calculated by determining the total amount of interest charged the debtor during the entire time the debtor maintained a margin account with the defendant. That is, the average rate of interest over the life of the account was to be used rather than the rate applied to each monthly period.

Two questions come to us on appeal. The first concerns the applicable state law and the second the method used to compute interest on a margin account.

I

This is not a case in which the law chosen by the parties to govern their rights is in doubt. See Baffin Land Corp. v. Monticello Motor Inn, Inc., 70 Wash.2d 893, 899, 425 P.2d 623 (1967); Restatement (Second) Conflict of Laws § 188 (1971). The customer's margin agreement, signed by the O'Briens and other members of the class, provides that New York law shall govern. New York law has been chosen by the parties. In Baffin there was no express choice of law by the parties. In that case, when we adopted the "most significant relationship" choice of law rule for contract cases, we cited with favor the factors to be used to determine the most significant relationship as are contained in the Restatement (Second) Conflict of Laws § 188, Law Governing in Absence of Effective Choice by the Parties (1971) (at that time Tentative Draft No. 6, § 332, as modified in November (1960)). In this case, where the law of the state has been chosen by the parties, we believe the language of the Restatement (Second) Conflict of Laws § 187 (1971), as it relates to the law of the state chosen by the parties, to be useful in determining the law to be applied particularly in a case such as this which involves the question of usury. See Crawford v. Seattle, Renton & S. Ry. Co., 86 Wash. 628, 150 P. 1155 (1915). The provisions of § 187 are as follows:

§ 187. Law of the State Chosen by the Parties

(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.

In applying the tests contained in § 187 to this case, three questions are posed: (1) Is the permitted New York rate of 25 percent interest contrary to a fundamental policy of Washington? (2) Does Washington have a materially greater interest than New York in the determination of the usury issue? and (3) If there had been no choice of law by the parties, would Washington, under § 188, be the state of applicable law? We answer all three questions in the affirmative.

RCW 19.52 concerns interest rates and usury. RCW 19.52.020 provides that 12 percent is the maximum "for the loan or forbearance of any money". RCW 19.52.005 declares the policy of the state in enacting this chapter is:

to protect the residents of this state from debts bearing burdensome interest rates; and in order to better effect the policy of this state to use this state's policies and courts to govern the affairs of our residents and the state; and in recognition of the duty to protect our citizens from oppression generally.

This is a clear and unequivocal statement by the people of Washington through their elected representatives, and we hold it to be the declaration of the type of fundamental policy contemplated by § 187. See Restatement (Second) Conflict of Laws § 187, Comment g, at 567-69 (1971).

Next, does Washington have a materially greater interest than New York in the determination of the usury issue? The interest rates charged citizens of the State of Washington are involved here, and unquestionably the State of Washington has a materially greater interest in the welfare of its citizens and the impact the decision in this case will have upon them than does the State of New York. See Restatement, § 187, Comment g at 567-69.

Lastly, which state would be the state of applicable law under § 188? The test in § 188 is the state with "the most significant relationship to the transaction." See Baffin Land Corp. v. Monticello Motor Inn, Inc., supra. The determination of which state meets the test is made by evaluating five factors: (a) the place of contracting; (b) the place of negotiation of the contract; (c) the place of performance; (d) the location of the subject matter of the contract; (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. Restatement, § 188(2).

All Washington residents who had margin agreements with defendant compose the class certified....