between security interests and incidental interests.’ 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,” 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.

‘Congress authorized the Federal Reserve Board to issue regulations interpreting TILA.
These regulations, called Regulation Z, are considered an authoritative interpretation of TILA.
In re Dingledine, 916 F.2d 408, 411 (7th Cir. 1990). Also, the Board-published official staff
commentary to Regulation Z is dispositive in TILA cases unless the commentary is demonstrably
irrational. Clay v. Johnson, No. 00-12032001, WL 1008139, at *8 (7th Cir. Sept. 5, 2001).

7A “purchase money transaction” is a transaction in which the collateral is the item
purchased as part of, or with the proceeds of, the credit transaction. 12 C.F.R. Pt. 226, Supp. I
§ 226.18(m) J 1. In this case, Leon obtained the loan and used the proceeds to finance the
purchase of his residence. (Complaint { 8.) This case, therefore, involves a purchase money
transaction.


Whether the lender acted in good faith is a question of fact, which cannot be addressed
in a motion for judgment on the pleadings. See Craigs, Inc. v. Gen. Elec. Cap. Corp., 12 ¥.3d
686 at 692 (7th Cir. 1993) (vacating district court’s grant of plaintiff’s motion for judgment on
the pleadings because an ambiguous contract term constituted an unresolved question of fact);
see Smith v. No. 2 Galesburg Crown Fin. Corp., 615 F.2d 407, 413 (7th Cir. 1980), overruled
on other grounds by Pridegon v. Gates Credit Union, 683 F.2d 182 (7th Cir. 1982) (labeling as
a “factual determination” whether a creditor acted in good faith in a TILA case). Consequently,
the court cannot conclude as a matter of law that Washington Mutual complied with TILA in this
transaction.

D. Use of Model Forms under TILA

Washington Mutual also argues that, even if the court does not find that it complied with
TILA in this transaction, the court should deem its disclosures adequate because it used Federal
Reserve model forms for its TILA Disclosure and that the use of that form satisfies the
requirement that TILA-required disclosures be made “clearly and conspicuously.” See 15 U.S.C.

§ 1632 (stating in the section entitled “Form of disclosure” that “information required by this

sub-chapter shall be disclosed clearly and conspicuously”). Leon contends, however, that
Washington Mutual’s mere use of model forms does not constitute automatic compliance with
TILA. The court agrees with Leon.

On the TILA Disclosure, Washington Mutual disclosed the security interest in the
transaction by checking a box next to the phrase “the goods or property being purchased,” which,

in turn, was under the heading “SECURITY: You are giving a security interest in.” (Compl.


(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).? Hlinois courts use three factors in
determining whether an item is a fixture: (1) the actual annexation of that item to the realty; (2)

the application of the item to the use or purpose for which the land is appropriated; and (3) the

*In July 2001, the Illinois Commercial Code was amended by P.A. 91-893 § 5. The
amendments have relocated the provision that defines “fixture,” but have not substantively
changed the definition.


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.


transactions in real property. In each of these cases, the court concluded that the rider created
a security interest in the consumer’s personal property that extended beyond incidental interests
to the real property. Washington Mutual attempts to distinguish Romaker and Williams, arguing
that the two cases do not address the applicable fixture law and also that the two cases fail to
address the potential widespread consequences of finding this TILA Disclosure inadequate. The
court is not persuaded by Washington Mutual’s arguments.

The court is not persuaded by Washington Mutual’s arguments that the Rider creates
mere incidental interests to Leon’s real property and not security interests in Leon’s personal
property. Consequently, the court cannot conclude as a matter of law that Washington Mutual
complied with TILA in this transaction.

Cc. The TILA Good Faith Defense

Washington Mutual argues that, even if its disclosures did not comply with TILA, it is
entitled to TILA’s good faith defense because it relied upon Regulation Z and the Official
Commentary. See 15 U.S.C. § 1640(f) (protecting from liability “any act done or omitted in
good faith in conformity with any rule, regulation, or interpretation thereof by the Board”). Leon
argues that whether Washington Mutual acted in good faith is a question of fact, not appropriate

for discussion in a motion for judgment on the pleadings. The court agrees with Leon.

4(...continued)
recommendation, it has no precedential value. The court agrees with Washington Mutual.
Because the report and recommendation of the magistrate judge may or may not be accepted by
the district judge in Rhode Island, it has no precedential authority in this case.

8


é Minute Order Form (06/97)

United States District Court, Northern District of [linois

Name of Assigned i Sitting Judge if Oth
ange Magistrate Judge James H. Alesia ‘than Assigned Judge
CASE NUMBER 01 C 1645 DATE October 2, 2001
CASE Teofilo Leon, Sr. vs. Washington Mutual Bank, FA.
TITLE

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION: of the motion being presented.]

DOCKET ENTRY:

ag oa Filed motion of [ use listing in “Motion” box above.]

(2) O Brief in support of motion due

@) Oo Answer brief to motion due___._ Reply to answer brief due

(4) oO Ruling/Hearingon_____set for_____at.

(5) oO Status hearing[held/continued to] [set for/re-set for]on__setfor att

(6) oO Pretrial conference[held/continued to} [set for/re-set forjon____—s set for at_

(7) ao Trial[set for/re-set for] on at

(8) o (Bench/Jury trial] [Hearing] held/continued to__at

(9) im) This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) General Rule 21 CIFRCP41(a\(1) CJ FRCP41(a)(2).

ao =f [Other docket entry] Enter Memorandum Opinion and Order. The court denies defendant’s

motion for judgment on the pleadings [8-1].

a) ff [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required
umber of notices

[0 2320|

Notices mailed by judge’s staff.

Y | Notified counsel by telephone.

v | Docketing to mail notices. ci

i ‘
Mail AO 450 form. ®

Copy to judge/magistrate judge

courtroom date nuiled notice

cw deputy’s
initials

Date/time received in
central Clerk’s Office nailing deputy initials



It. CONCLUSION
For the foregoing reasons, the court denies defendant’s motion for judgment on the

pleadings.

James H. Alesia
United States District Judge

11


Ex. D at 1.) At issue in this case is not the clarity or conspicuousness of the security interest
disclosure on the TILA Disclosure. Rather, this case centers around whether that language was
sufficient when compared to the substantive terms of the Rider.

Although it is true that, under TILA, “a creditor or lessor shall be deemed to be in
compliance with the disclosure provisions of this sub-chapter with respect to other than
numerical disclosures if the creditor or lessor ... uses any appropriate model form or clause as
published by the board,” 15 U.S.C. § 1604(b), that protection does not extend to inadequate
content of the disclosure forms. Washington Mutual appears to be arguing that merely using a
model form for a TILA disclosure will, without regard for the content of the form or its
consistency with the other loan documents, bring a lender into compliance with TILA.
Washington Mutual, however, cites no authority, nor can the court find any, to support this
proposition. The court will not grant Washington Mutual immunity from TILA disclosure
violations simply by virtue of the fact that it used model forms. See Cirone-Shadow v. Union
Nissan, 955 F. Supp. 938, 944 (N.D. Ill. 1997) (barring consumer’s claims as to the form of the
contract in a TILA case due to lender’s compliance with the model form, but refusing to bar
consumer’s claims as to the substance of the contract).

Because Leon’s claims in this case go to the substance of the security interest disclosure
and its consistency with the Rider, and not to the mere form of the TILA Disclosure, the court
cannot conclude as a matter of law that Washington Mutual is protected from TILA liability.
Consequently, the court cannot conclude as a matter of law that Washington Mutual complied

with TILA in this transaction.

10


intention to make the item a permanent accession to realty. A &A Market, Inc. v. Pekin Ins. Co.,
713 N.E.2d 1199, 1202 (Ill. App. Ct. 1999) (citing Sword v. Low, 13 N.E. 826, 828 (Ill. 1887)).
Of the three factors, intent is the preeminent factor and the other two are primarily evidence of
intent. A & A Market, 713 N.E.2d at 1202. In this case, the Rider, read as a whole, disregards
the critical factor of intent upon which Ilinois fixture law is focused.

Setting the list of examples in the middle of the paragraph aside, the Rider reads:
“(BJuilding 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 ... now or hereafter
attached to the property.” This Rider language disregards the consumer’s intent to permanently
attach the building materials, appliances, and goods to the realty and, therefore, cannot be limited.
to fixtures. Because the Rider language is not limited to fixtures, the court cannot conclude that
the Rider creates merely incidental interests as defined by TILA and Regulation Z.
Consequently, the court cannot conclude as a matter of law that Washington Mutual complied
with TILA in this case.

Additionally, two district courts have addressed the issue of whether the exact same Rider
language at issue in this case created a security interest or an incidental interest. See Romaker
v. Crossland Mortgage Corp., No. 94 C 3328, 1996 WL 254299 (N.D. Ill. May 10, 1996) and

Williams v. Gelt Fin. Corp., 237 B.R. 590 (B.D. Pa. 1999).4 Both of these cases involved

‘Leon also draws the court’s attention to Hartshorn v. Ameriquest Mortgage Co., C.A.
01-131ML (D. R.L Sept. 7, 2001) (Report and Recommendation), because it addresses whether
the exact Rider language at issue in this case creates a security interest or an incidental interest.
Washington Mutual argues that the court should not consider this case because, as a report and

(continued...)


standard as a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6). Hentosh

y. 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


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


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION ,,
TEOFILO LEON, SR., )
Plaintiff, }
v. } Case No: 01 C 1645
WASHINGTON MUTUAL BANK, F.A., } Judge James H. Alesia
Defendant. }

MEMORANDUM OPINION AND ORDER

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 US.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

0,

Rider.