Restaurant Development, Inc. v. Cananwill, Inc.

• Decision Date: 11 December 2003
• Docket Number: No. 73298-1.,73298-1.
• Citation: 150 Wash.2d 674,80 P.3d 598
• Parties: RESTAURANT DEVELOPMENT, INC., a Washington corporation, individually and on behalf of all others similarly situated, Petitioner, v. CANANWILL, INC., a California corporation, Respondent.
• Court: Washington Supreme Court

80 P.3d 598

150 Wash.2d 674

RESTAURANT DEVELOPMENT, INC., a Washington corporation, individually and on behalf of all others similarly situated, Petitioner, v. CANANWILL, INC., a California corporation, Respondent.

No. 73298-1.

Supreme Court of Washington, En Banc.

Argued September 11, 2003.

Decided December 11, 2003.

Paul F. Norris, Bradford Avery Steiner, Seattle, for petitioner.

Nicholas Peter Gellert, Seattle, for respondent.

OWENS, J.

Cananwill, Inc., financed an insurance premium for Restaurant Development, Inc. (RDI) and charged an add-on interest rate calculated at the outset of the loan, which amounted to a 13 percent effective annual percentage rate (APR). RDI argues that the Insurance Premium Finance Company Act (IPFCA), chapter 48.56 RCW, allows insurance premium finance companies to charge no more than 10 percent actuarial (simple) interest calculated monthly on the declining principal of the loan. This amounts to a 10 percent effective APR. Based on its interpretation of IPFCA, RDI contends that Cananwill's 13 percent effective APR violated IPFCA and resulted in a Consumer Protection Act (CPA), chapter 19.86 RCW, violation. In light of the plain language and legislative history of the statute, we hold that Cananwill did not violate IPFCA and RDI's CPA claim is moot.

FACTS

RDI is a restaurant management company that was created to operate Moe's Mo-Roc-N Café, a nightclub. In 1996, RDI decided to purchase its insurance from Crusader Insurance Co. for a total of $19,747. Like many small businesses, RDI chose not to pay the annual premium with a single, lump sum payment. Instead RDI entered into an insurance premium finance agreement with Cananwill. Under this agreement, RDI made a down payment and financed the rest of the obligation through Cananwill. Cananwill paid the lump sum to Crusader and RDI agreed to repay Cananwill over the course of several months. RDI chose a specific payment plan, which included a precomputed, "add-on" interest rate. The add-on interest rate did not take into account the fact that the principal would decline as payments were made. RDI signed an insurance premium installment payment agreement, which set forth these terms and expressly stated that the effective APR under this payment plan would be 13 percent. Payments were completed according to the agreement.

In May 2000, RDI filed this class action lawsuit, claiming that Cananwill had violated the CPA by imposing service charges above the maximum rate set forth in IPFCA. Both parties moved for summary judgment in September 2001. The trial court read IPFCA in favor of Cananwill and granted summary judgment on Cananwill's motion, dismissing the claim. The Court of Appeals concluded that the statutory language of RCW 48.56.090(3), setting the maximum service charge at "ten dollars per one hundred dollars per year," allows insurance premium finance companies to charge add-on interest, rather than simple interest calculated on the declining principal. Rest. Dev., Inc. v. Cananwill, Inc., 114 Wash.App. 194, 198-99, 55 P.3d 680 (2002). The Court of Appeals noted that other state courts and industry publications have interpreted comparable language to refer to the add-on calculation. Id. at 199-200, 55 P.3d 680. Moreover, the circumstances surrounding IPFCA's enactment support this interpretation. Id. at 200, 55 P.3d 680.

The Court of Appeals also read RCW 48.56.120 to require a refund of both unearned premiums and unearned interest in the event of cancellation. Id. at 201-02, 55 P.3d 680. The simple interest method charges interest as it is earned based on the declining principal, resulting in no prepayment of interest. Id. at 202, 55 P.3d 680. Therefore, the court concluded that RCW 48.56.120's refund requirement must indicate that the statutory maximum service charge allowed add-on interest because otherwise the refund provision would be unnecessary. Id. at 203-04, 55 P.3d 680. Finally, because there was no violation of IPFCA, RDI's CPA claim was rendered moot. Id. at 204, 55 P.3d 680.

ISSUE

Should the maximum allowable service charge under IPFCA be calculated as an add-on interest rate or an actuarial (simple) interest rate?

ANALYSIS

A. Add-On Interest Versus Simple Interest

To inform our discussion, we begin our analysis with a brief summary of how simple interest and add-on interest work when applied to installment transactions. The simple interest method requires calculating the finance charge "by applying a periodic interest rate to the outstanding balance of the unpaid principal [upon] every repayment period for the term of the loan." KATHLEEN E. KEEST & ELIZABETH RENUART, NAT'L CONSUMER LAW CTR., THE COST OF CREDIT: REGULATION AND LEGAL CHALLENGES § 4.3.1.1, at 121 (2d ed.2000) (emphasis omitted). In order to arrive at a consistent monthly payment amount, complex calculations must be made to predict the interest due at each payment on the declining principal. See id. at 122-24. The end result is that, for every payment made, the accumulated finance charge for that payment period is paid first, and any remainder is subtracted from the outstanding balance of the debt. Id. at 122. Because interest is paid as it is earned, if the term of the loan is abbreviated by prepayment or other circumstances, there is rarely unearned interest that must be returned to the debtor. Id. § 5.5.1, at 182-83.

Before the widespread use of computers, add-on or precomputed interest was a common method used for installment transactions because it avoided the complex calculations necessary for simple interest. Id. § 4.3.2, at 127. In computing add-on interest, the interest charges are applied to the entire principal amount for the entire term, regardless of the declining principal. Id. Further, "many add-on interest rate statutes do not use the words `add-on' to describe the rates therein. They may, for example, use such terms as `$8.00 per $100 per annum' to describe an 8% add-on rate." Id. at 129. "Because add-on interest is precomputed, the note or contract should contain an agreement as to how unearned interest will be rebated in the event of prepayment." Id. at 127. Moreover, "most state laws governing consumer credit transactions have long required that unearned interest and other unearned charges be rebated when a precomputed contract is terminated early." Id. § 4.5.3, at 146.

B. The Refund Provision

As an initial matter, it is helpful to dispense with the significance of the refund provision, RCW 48.56.120, which was central to the Court of Appeals' resolution of this case. Rest. Dev., Inc.,114 Wash.App. at 201-04,55 P.3d 680. RCW 48.56.120 clearly states that, upon cancellation of the insurance contract, the insurance company must refund the unearned portion of the premium to the insurance premium finance company for the account of the insured. In turn, the premium finance company must refund any "surplus over the amount due" to the insured. RCW 48.56.120(2).

The Court of Appeals seems to have read the reference to "surplus over the amount due" to necessarily include unearned interest. Rest. Dev., Inc., 114 Wash.App. at 201-02, 55 P.3d 680. However, the language of RCW 48.56.120 does not plainly state that any refund will include unearned interest in the event of cancellation; it only specifically refers to a refund of unearned premiums. While this refund provision may contemplate a refund of both unearned premiums and interest, the provision does not do so clearly enough to end our inquiry.

In a related argument, RDI contends that the legislature clearly intended there to be no refund of service charges or acquisition charges. RDI bases its conclusion on language in RCW 48.56.090 which states:

The service charge shall be a maximum of ten dollars per one hundred dollars per year plus an acquisition charge of ten dollars per premium finance agreement which need not be refunded upon cancellation or prepayment.

RCW 48.56.090(3) (emphasis added). Conversely, Cananwill argues that only the acquisition charge "need not be refunded," indicating by negative implication that the service charge does need to be refunded upon cancellation or prepayment. Ultimately, it is unclear whether it is the entire service charge or only the acquisition charge that "need not be refunded." Because this clause does not rise to the level of clarity found in other states' refund provisions,¹ we instead rely on the language and legislative history of the statutory maximum clause.²

C. Statutory Interpretation of IPFCA

The central issue in this case is the interpretation of the IPFCA maximum service charge provision. The interpretation of a statute is a question of law, subject to de novo review. State v. J.P., 149 Wash.2d 444, 449, 69 P.3d 318 (2003). When called upon to interpret a statute, our primary obligation is to give effect to the legislature's intent. Lacey Nursing Ctr. v. Dep't of Revenue, 128 Wash.2d 40, 53, 905 P.2d 338 (1995). Our review always begins with the plain language of the statute. Id. In determining plain meaning, we may look to "`all that the Legislature has said in the statute and related statutes which disclose legislative intent about the provision in question.'" J.P., 149 Wash.2d at 450, 69 P.3d 318 (quoting Dep't of Ecology v. Campbell & Gwinn, L.L.C., 146 Wash.2d 1, 11, 43 P.3d 4 (2002)).

Further, a court must not add words where the legislature has chosen not to include them. A court also must construe statutes such that all of the language is given effect, and "`no portion [is] rendered meaningless or superfluous.'" Id. (quoting Davis v. Dep't of Licensing, 137 Wash.2d 957, 963, 977 P.2d 554 (1999)). If a statute is subject to more than one reasonable interpretation, this court may look to the legislative history of the statute and the circumstances surrounding its enactment to determine legislative intent. See Philip A. Talmadge, A New Approach to Statutory Interpretation in Washington, 25 SEATTLE...