The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the entry of summary judgment against homeowners who sued under the federal Truth in Lending Act (TILA) for an alleged failure to disclose certain financing terms in connection with a water treatment system, holding that because the credit agreement did not create a security interest in the home and the system was not a fixture, the relevant TILA provisions were not violated because both depend on a security interest in the residence.

A copy of the opinion is available at: Link to Opinion.

The plaintiff homeowners signed an agreement to purchase a water treatment system for their home, that the salesman promised would be financed at a low interest rate. Twenty-four hours later, the system was installed.

The purchase agreement contained a three-day right to cancel, following which a credit agreement was delivered to the homeowners, who then realized the interest rate was actually close to 18 percent, but they eventually signed.

The plaintiff homeowners sued in district court, alleging that the transaction (a) violated TILA by failing to disclose the minimum payments and maximum repayment period in connection with an extension of open end credit secured by the consumer’s principal dwelling; and (b) violated TILA by not delaying installation of the system to allow the plaintiff borrowers three business days to rescind the contract.

The district court granted summary judgment in the defendant lender’s favor because the credit agreement did not create a security interest in the plaintiff borrowers’ home, and thus neither of the TILA provisions at issue was violated because both depended on the existence of such a security interest. The district court also concluded that the system was not a fixture, and even if it were, Regulation Z excludes fixtures from the definition of a “security interest.”

On appeal, the Eleventh Circuit began by questioning the district court’s conclusion that the water treatment system was not a fixture under Florida law, but assumed for purposes of its analysis that it was a fixture.

The Court then pointed out that, contrary to the plaintiff borrowers’ argument that a security interest in a fixture is also a security interest in the real property where the fixture is installed, section 679.604(3), Florida Statutes, instead “provides that a party holding a security interest in fixture may, after default, ‘remove the collateral from the real property,’ ” similar to removing a hot water heater.

Turning to whether the contract created a security interest in the plaintiff borrowers’ home, the Eleventh Circuit noted that under Florida law, the starting point is to examine the parties’ contract.

The credit agreement stated that the buyers granted to defendant “a purchase money security interest in any purchases” made on the account, and the Court reasoned that the “purchase” at issue “was the treatment system, not the residence.”

The Court rejected the plaintiff homeowners’ argument that a paragraph of the credit agreement created a security interest because it discussed remedies after default in terms that specifically mentioned a lien on the plaintiffs’ home, reasoning that “it is not the Credit Agreement or UCC financing statement itself, but the judgment against the debtor, that gives rise to the potential lien against the home.” The language in the agreement stating that the judgement resulting from any default would be a valid lien against the home, and would be paid in full if the home was sold or refinanced, added nothing that did not already exist under Florida law, which already makes every judgment a lien against real property if it is properly recorded.

The Eleventh Circuit further reasoned that at most, the language of the credit agreement created a security interest in the proceeds of any voluntary sale or refinancing of the home, but this did not help because Regulation Z, 12 C.F.R. § 1026.2(a)(1) and (a)(25) “excludes proceeds from the definition of ‘security interest’ in 15 U.S.C. §§ 1635 & 1637a.”

In concluding, the Court recognized that the transaction at issue “may be subject to the sort of abuse of consumers that Congress sought to prevent through TILA,” but the answer was to “refer the matter to the proper agency for study” and to determine if Regulation Z should be changed rather than “stretch the statutory language or the language of the written agreements entered into by the parties.”

Because there was no security interest created in the plaintiffs’ home, the provisions of TILA raised by the homeowners were not triggered, and the district court’s summary judgment was affirmed.