The Eleventh Circuit recently ruled that fixture filings do not expose lenders to the enhanced disclosure requirements or remedies of the federal Truth in Lending Act (TILA), holding that a security interest in goods―even if the goods are deemed fixtures―does not extend to consumers’ homes.   

In Lankhorst v. Independent Savings Plan Co., 787 F.3d 1100 (11th Cir. 2015), a class of consumers purchased water treatment equipment for their homes. The defendant lender financed the purchase money transactions and took a security interest in the equipment, which was perfected through UCC fixture filings recorded in the counties where the consumers lived. The water treatment equipment was sold by an unaffiliated merchant, who installed the equipment outside the consumers’ homes but attached it to the main water supply. The class alleged that the lender violated TILA by failing to (1) make disclosures about the total cost of credit, and (2) prevent the seller from installing the goods before the  contract’s three-day right of rescission had expired. The class also asserted a third, state-law claim for deceptive and unfair trade practices based on the lender’s alleged conspiracy with the seller to frustrate the consumers’ rights to cancel the sale before the installation of the equipment.    

Importantly, TILA’s disclosure and right of rescission provisions only apply when the lender’s extension of credit is “secured by the consumer’s principal dwelling” – the potential loss of which, in the event of default, justifies the added disclosures and the remedy of rescission.  Based on this requirement, the Eleventh Circuit affirmed the district court’s entry of summary judgment in favor of the lender, reasoning that, as a matter of law, a UCC Article 9 security interest in consumer goods, additionally perfected through fixture filing (i.e., recording the financing statement in the public records where the consumers reside under UCC section 9-334), does not meet TILA’s requirement that the lender hold a security interest in the consumer’s “principal dwelling.” “Security interest,” for purposes of jurisdiction under TILA, is defined in Regulation Z (12 C.F.R. Part 1026) as “an interest in property that secures performance of a consumer credit obligation and that is recognized by State or Federal law.” Regulation Z § 1026.2(a)(25). The UCC similarly defines a “security interest” as “an interest in personal property or fixtures which secures payment or performance of an obligation . . .” UCC §  1-201(35). Significantly, the Regulation Z definition of “security interest” also includes interests arising “solely by operation of law” (e.g., judgment liens, construction liens, equitable liens, etc.) for purposes of rescission, but not for purposes of TILA’s disclosure requirements.   

In Lankhorst, the class creatively argued that a lien arose under the lender’s finance agreement and by virtue of its practice of fixture filing. This argument was based on the class members’ assertions that a borrower’s default could lead to the entry of a judgment that, if recorded, would cloud title. They also argued that the fixture filings clouded title since homeowners cannot refinance or sell their homes without the lender subordinating or satisfying the UCC fixture filing. Finally, the consumers argued that the lender could not fixture file unless the goods were in fact fixtures and that, as fixtures, the “lien” of the recorded UCC financing statement extended to the real property to which the collateral was attached.  

Neither the district court nor the Eleventh Circuit equated a potential judgment after default, or perfection through fixture filing, with an interest “arising solely by operation of law” under the Regulation Z.  Both courts also confirmed that the lender’s security interest in the goods did not, as a matter of law, constitute a lien on the consumers’ homes, regardless of whether the goods were fixtures, because the lender’s security interest in the goods could not extend to the homes.  

The district court noted that fixture filings are permissive and can be utilized by secured creditors for goods that “are or will become” fixtures, ultimately concluding that, regardless of the lender’s practice of fixture filing, the goods were not fixtures. Lankhorst v. Indep. Sav. Plan Co., 39 F. Supp. 3d 1359, 1364 (M.D. Fla. 2014) (citing § 679.334(4), Fla. Stat. and UCC Official Comment 3). It held, however, that even if the goods were fixtures, Regulation Z expressly excluded “fixtures” from the definition of “security interest.” Id. at 1365 (citing predecessor to Regulation Z § 1026.2(a)(25)). On appeal, the Eleventh Circuit was “skeptical” of the district court’s conclusion that the goods were not fixtures, but, for the sake of analysis, treated the goods as fixtures. Regardless, it concluded, consistent with the district court, that no legal authority exists to support the class members’ assertion that a security interest in a fixture constitutes a security interest in the real property on which the fixture is installed. 787 F.3d at 1102-03.  

However, in what appears to be an invitation to the Consumer Financial Protection Bureau (CFPB) (which controls TILA rulemaking and enforcement authority by virtue of the Dodd-Frank Act, previously vested in the Board of Governors of the Federal Reserve) to clarify or expand the TILA’s definition of security interest, the Eleventh Circuit “recognized that th[e] transaction between [the consumers, seller and lender] may be subject to the sort of abuse of consumers that Congress sought to prevent through TILA.” Id. at 1105. The Eleventh Circuit continued: “If so, rather than stretch the statutory language or the language of the written agreements entered into by the parties, the appropriate remedy is to refer the matter to the proper agency for study and to ascertain if modification of [the definition of security interest] is desirable.” Id.  

It remains to be seen whether or how the CFPB will respond to the Eleventh Circuit’s decision. Even so, one consolation to those engaging in the practice of fixture filing appears to be the requirement that any interest in property qualifying as a security interest must be recognized under state or federal law. Regulation Z § 1026.2(a)(25). Therefore, any expansion of the definition of security interest by the CFPB cannot be done in derogation of state law, which, in states following the UCC, should hew closely to the time-honored recognition that fixture filings are permissive for goods that are or may become fixtures, and that a fixture filing does not automatically convert the goods into fixtures.