Leon v. Washington Mut. Bank, F.A.

• Decision Date: 02 October 2001
• Docket Number: No. 01 C 1645.,01 C 1645.
• Citation: 164 F.Supp.2d 1034
• Parties: Teofilo LEON, Sr., Plaintiff, v. WASHINGTON MUTUAL BANK, F.A., Defendant.
• Court: U.S. District Court — Northern District of Illinois

164 F.Supp.2d 1034

Teofilo LEON, Sr., Plaintiff, v. WASHINGTON MUTUAL BANK, F.A., Defendant.

No. 01 C 1645.

United States District Court, N.D. Illinois, Eastern Division.

October 2, 2001.

Daniel A. Edelman, Cathleen M. Combs, James O. Latturner, Keith J. Keogh, Edelman, Combs & Latturner, Chicago, IL, for Plaintiff.

Matthew M. Neumeier, Shelley Malinowski, Richard A. Duffin, Jenner & Block, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

ALESIA, District Judge.

Currently before the court is defendant's motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) ("Rule 12(c)"). For the following reasons, the court denies defendant's motion.

I. BACKGROUND

On November 7, 2000, Teofilo Leon ("Leon") borrowed money from Washington Mutual Bank ("Washington Mutual") to finance the purchase of his home. In connection with this transaction, Leon signed and received: a note, a mortgage, a 1-4 Family Rider/Assignment of Rents ("Rider"), a Truth in Lending Statement ("TILA Disclosure"), a HUD-1 Settlement Statement, and an Owner Occupancy Agreement. Leon brings this action alleging that Washington Mutual violated the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601 et seq. and Federal Reserve Board Regulation Z, 12 C.F.R. § 226, because the TILA Disclosure does not accurately disclose the property interest that Washington Mutual acquired by the terms of the Rider.

The TILA Disclosure states that Leon gave Washington Mutual a security interest in "the goods or property being purchased." Leon claims the Disclosure was inadequate because it fails to reflect an extensive security interest that the Rider creates in Leon's personal property. The Rider states:

A. ADDITIONAL PROPERTY SUBJECT TO THE SECURITY INSTRUMENT. In addition to the Property described in the Security Instrument, the following items are added to the Property description, and shall also constitute the Property covered by the Security Instrument: building materials, appliances and goods of every nature whatsoever now or hereafter located in, on, or used, or intended to be used in connection with the Property, including, but not limited to, those for the purposes of supplying or distributing heating, cooling, electricity, gas, water, air and light, fire prevention and extinguishing apparatus, security and access control apparatus, plumbing, bath tubs, water heaters, water closets, sinks, ranges, stoves, refrigerators, dishwashers, disposals, washers, dryers, awnings, storm windows, storm doors, screens, blinds, shades, curtains and curtain rods, attached mirrors, cabinets, paneling and attached floor coverings now or hereafter attached to the property, all of which, including replacements and additions thereto, shall be deemed to be and remain a part of the Property covered by the Security Instrument.

(Compl., Ex. C at 1.)

Washington Mutual is now moving for judgment on the pleadings, claiming: (1) the TILA Disclosure's description of the security interest taken in the transaction was adequate as a matter of law because the Rider creates only incidental interests to the property, which are prohibited from disclosure under TILA; (2) Washington Mutual acted in good faith reliance upon Regulation Z; and (3) Washington Mutual's use of model forms protects it from liability under TILA.

II. DISCUSSION

A. Judgment on the Pleadings Standard

A motion for judgment on the pleadings pursuant to Rule 12(c) is subject to the same standard as a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6). Hentosh v. Herman M. Finch Univ. of Health Sci./The Chicago Med. Sch., 167 F.3d 1170, 1173 n. 2 (7th Cir. 1999). Therefore, a court should not grant a motion for judgment on the pleadings unless "it appears beyond doubt that the plaintiff cannot prove any facts that would support his claim for relief." Craigs, Inc. v. Gen. Elec. Capital Corp., 12 F.3d 686, 688 (7th Cir.1993). The court must accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Midwest Grinding Co. v. Spitz, 976 F.2d 1016, 1019 (7th Cir.1992).

Also, according to Federal Rule of Civil Procedure 10(c), "A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes." FED. R. CIV. P. 10(c). The Seventh Circuit has extended the term "written instrument" under Rule 10(c) to loan documentation. See N. Ind. Gun & Outdoor Shows v. City of South Bend, 163 F.3d 449, 453 (7th Cir.1998). Accordingly, in ruling on defendant's motion for judgment on the pleadings, it is proper for the court to consider the relevant mortgage documents, which Leon attached to his complaint. See Id. at 453 (approving the district court's consideration of correspondence between the parties in granting judgment on the pleadings).

B. TILA Disclosure Requirements

1. Security Interests and Incidental Interests Under TILA

TILA, Regulation Z, and the Federal Reserve commentary to Regulation Z distinguish between security interests and incidental interests.¹ This distinction between security interests and incidental interests is central to this case because TILA requires the disclosure of security interests on a TILA disclosure statement but prohibits the disclosure of incidental interests.

Regulation Z defines "security interest," for the purposes of TILA disclosures, as: "[A]n interest in property that secures performance of a consumer credit obligation and that is recognized by state or federal law." 12 C.F.R. § 226.2(a)(25). TILA and Regulation Z require that, in a consumer credit transaction, when a creditor acquires a security interest the creditor must include in the TILA Disclosure: "the fact that the creditor has or will acquire a security interest in the property purchased as part of the transaction, or in other property identified by item or type." 12 C.F.R. § 226.18(m). See also 15 U.S.C. § 1638(a)(9) (stating the same). In purchase money transactions such as this,² section 226.18(m) of Regulation Z allows the creditor to comply with the disclosure requirement by disclosing the security interest taken in general terms such as "the property purchased in this transaction." 12 C.F.R. Pt. 226, Supp. I § 226.18(m) ¶ 1.

Regulation Z expressly excludes incidental interests from its definition of security interests. Incidental interests include: "[i]nterests in proceeds, accessions, additions, fixtures, insurance proceeds ..., premium rebates, or interests in after-acquired property." 12 C.F.R. § 226.2(a)(25). The Official Commentary to Regulation Z explains that TILA prohibits the disclosure of incidental interests. 12 C.F.R. Pt. 226, Supp. I § 226 .2(a)(25) ¶ 2.

The central question in this case, therefore, is whether the language of the Rider creates a security interest or an incidental interest, as defined by TILA and Regulation Z. If the Rider created security interests, TILA required disclosure of those additional security interests and the TILA Disclosure is inadequate. If, however, the Rider created incidental interests, TILA prohibited disclosure of those interests and the TILA Disclosure is adequate.

2. Washington Mutual's TILA Disclosure

The Rider states:

A. ADDITIONAL PROPERTY SUBJECT TO THE SECURITY INSTRUMENT. In addition to the Property described in the Security Instrument, the following items are added to the Property description, and shall also constitute the Property covered by the Security Instrument: building materials, appliances and goods of every nature whatsoever now or hereafter located in, on, or used, or intended to be used in connection with the Property, including, but not limited to, those for the purposes of supplying or distributing heating, cooling, electricity, gas, water, air and light, fire prevention and extinguishing apparatus, security and access control apparatus, plumbing, bath tubs, water heaters, water closets, sinks, ranges, stoves, refrigerators, dishwashers, disposals, washers, dryers, awnings, storm windows, storm doors, screens, blinds, shades, curtains and curtain rods, attached mirrors, cabinets, paneling and attached floor coverings now or hereafter attached to the property, all of which, including replacements and additions thereto, shall be deemed to be and remain a part of the Property covered by the Security Instrument.

(Compl. Ex. C at 1) (emphasis added). Washington Mutual contends that it is entitled to judgment as a matter of law because the Rider creates mere incidental interests to the property and that, as such, TILA prohibits their disclosure. Leon argues that the language creates a security interest beyond the real property and its fixtures. Therefore, he argues, the TILA Disclosure was inadequate because "the goods or property being purchased" failed to disclose the security interest created by the Rider. He argues further that the phrase "now or hereafter attached to the Property" modifies only certain items from the list of examples and that, as a consequence, Washington Mutual acquired a security interest in virtually all Leon's personal property, including, for example, any automobiles garaged at his house, all his furnishings, and all his household goods. Under TILA, such a security interest would have had to be disclosed. The court disagrees with Washington Mutual.

Although neither TILA nor Regulation Z defines "fixture," Regulation Z provides that any term not defined by the regulations should be construed in accordance with state law or the contract. 12 C.F.R. 226.2(b)(3). Because, in this case, the contract does not define "fixture," the court looks to Illinois law to define "fixture." According to Illinois law, fixtures are defined as "goods that have become so related to particular real property that an interest in them arises under real property law." 810 ILCS 5/9-102(a)(41).³ Illinois courts use three factors in determining whether an item is a fixture: (1) the actual annexation of that...