The opinion of the court was delivered by: Bucklo, District Judge.
MEMORANDUM OPINION AND ORDER
Check `N Go of Illinois made "payday loans" — short term loans
at high annual interest rates of over 500% — to impecunious
borrowers, and took as "security" postdated checks due on the
debtors' next payday. The plaintiffs sued for statutory damages
under the Truth in Lending Act, 15 U.S.C. § 1601, et seq.
("TILA") and Regulation Z, 12 C.F.R. § 226.17-18
(count I) and several individual TILA claims (count II), among
other counts that are not relevant here. I certified the class of
all Illinois debtors of the defendants who signed one of four
consumer loan agreements after November 10, 1998, with respect to
count 1, and declined to dismiss counts I or II. The parties now
make cross motions for summary judgment on those two counts. The
issue in the case is whether the defendants make the required
TILA disclosures of the existence of a "security" in the
postdated checks. Having determined that they have not adequately
disclosed this "security," I grant the plaintiffs' motion and
deny the defendants' motion, because I hold either that there is
a security interest in the postdated checks or, if it is not a
"security interest," that TILA requires a lender to disclose the
"security" for such a loan.
TILA requires a lender to provide "[w]here the credit is
secured, a statement that a security interest has been taken in .
. . property not purchased as part of the credit transaction
identified by item or type." 15 U.S.C. § 1638(a)(9); see also
12 C.F.R. § 226.18(m) ("Security interest [disclosure]. The fact
that the creditor has . . . acquire[d] a security interest . . .
in other property identified by item or type."). All disclosures
required by federal law must be grouped together and
"conspicuously segregated" from other information.
15 U.S.C. § 1638(b)(1).
I denied the defendants' motion to dismiss the plaintiffs' TILA
claims because I found that they had violated § 1638(a)(9) by
failing to disclose that postdated checks secured the loans. See
Van Jackson v. Check `N Go, 193 F.R.D. 544 (N.D.Ill. 2000) (more
detailed discussion of the matter, including quotations from the
purported disclosures). As I explained there, the defendants did
not make the required disclosure and that the law did not bar
statutory damages when "a required disclosure is hidden in the
fine print at the end of an indigestible chunk of legalistic
boilerplate, and outside the federal box, set apart from the
defendants' own statement in that box about `Our Disclosures to
You.'" Id. at 549 (citing Leathers v. Peoria Toyota-Volvo,
824 F. Supp. 155, 158 (N.D.Ill. 1993)) (Where "[t]he actual
reference to the [collateral was] outside the `Federal Box' [it]
cannot be considered to be part of the required disclosures.").
Understandably, the plaintiffs now ask for summary judgment on
the TILA counts. I concluded in my previous opinion that the
defendants were liable under § 1638(a)(9), and unless they have
an argument that I was wrong, I will grant that motion. They now
argue that they were not required to disclose that the postdated
checks secured the loans because, they say, the Seventh Circuit
has held that a postdated check is a "security" for a loan, not a
"security interest" for a loan. See Smith v. Cash Store
Management, 195 F.3d 325, 331 (7th Cir. 1999). Indeed, the
defendants say that it would be illegal to disclose a "security
interest" that does not exist. See Basham v. Finance America
Corp., 583 F.2d 918, 924 (7th Cir. 1978) (overbroad statement of
security interest violated TILA); Tinsman v. Moline Beneficial
Finance Co., 531 F.2d 815, 818 (7th Cir. 1976) (same).
This is a bold and striking argument.*fn1 The defendants turn
around a Seventh Circuit holding that the disclosure requirement
is satisfied by saying that a postdated check is a "security,"
rather than a "security interest," and argue that because the
Seventh Circuit says that the postdated check is merely a
security, and therefore, by implication, not a security interest,
the fact that it secures the loan need not, and perhaps may not,
be disclosed at all. One has to admire this display of lawyerly
technical virtuosity. However, I am not persuaded.
First, Smith does not actually hold that a postdated check in
a payday loan context is not a security interest. It holds,
rather, that a payday lender did not violate TILA's § 1638(a)(9)
by stating that the postdated check was a "security" rather than
a "security interest." Indeed, Smith plainly does not decide
whether a postdated check taken as a "security" by a payday
lender is a security interest or not. The Smith court stated
that for an instrument to be "collateral" or "collateral
security" under Illinois law, the collateral must have "some
value beyond the promise to pay contained in the loan agreement
itself." Smith, 195 F.3d at 330. Some additional value "is
created by the [Illinois] bad check statute and other legal
provisions governing instruments." Id. at 331. The reasoning is
that, because the lender has remedies available to him under the
bad check statute, 810 ILCS 5/3-806, the check has value beyond
the paper on which it is written. The postdated check, then, is
clearly collateral security.
The Seventh Circuit carefully says that "[t]his is not to say
that by putting up a check as collateral, a lender . . .
necessarily takes a security interest in the amount printed on
the face of the instrument." 195 F.3d at 330 (emphasis in
original). This extremely precise and qualified statement does
not deny that a postdated check might well be a security
interest, or even that a lender might indeed take a security
interest in the amount printed on the face of the instrument
(although that is not the issue presented here). The partial
dissent in that case noted as much, stating that in its view, on
the contrary, "possessing a post-dated check does not create a
security interest.'" Id. (Manion, J., dissenting in part and
concurring in the judgment). This view, however, was not adopted
by the panel majority, which did not find it necessary to reach
the question, but confined itself to whether it was a TILA
violation to list the check as a "security." In a subsequent per
curiam opinion, the court refused to expand on this holding or to
rule that a postdated check was not a security interest. See
Hahn v. McKenzie Check Advance, 202 F.3d 998 (7th Cir. 2000).
Regulation Z defines a "`security interest' as `an 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). In this context, the postdated checks secure the
performance of the borrowers' obligations to repay the payday
loans, and that interest is recognized by state law in the form
of the bad check statute and by federal case law in the form of
Smith. These checks are therefore security interests within the
meaning of § 1638(a)(9). That the lender uses the term "security"
and not "security interest" makes no difference. The Official
Staff Interpretation to Regulation Z does not insist on any magic
words: "No specified terminology is required in disclosing a
security interest. Although the disclosure may, at the creditor's
option, use the term `security interest,' the creditor may
designate its interest by using, for example, `pledge,' `lien,'
or `mortgage.'" 12 C.F.R. pt. 226, Supp. I ¶¶ 18(m) & 6(c).
Moreover, I agree with the many federal courts in Illinois
that, in this context, have found that "as a matter of law, there
is no meaningful distinction between the term `security interest'
and `security' in this context." Hahn v. McKenzie Check
Advance, 61 F. Supp.2d 813, 815 (C.D.Ill. 1999) (Mills, J.),
aff'd on other grounds by 202 F.3d 998 (7th Cir. 2000).*fn2
Indeed, it would make no sense to treat the taking of the
postdated check as anything but a security interest in the sense
of § 1638(a)(9). The payday lender in this case takes the
postdated check with the intention of using the state bad check
law to secure otherwise questionable collateral — a possibly bad
check from someone who probably could not get conventional
credit, or he would not be using a service that charged over 500%
interest. That is, the lender uses the postdating and the state
bad check law to create the functional equivalent of a security
interest, something that will secure its loan by providing
collateral. The defendants invoke the formalistic fact that the
statute requires disclosure of a "security interest," but the
lender has only used the term "security," with the imprimatur of
the Seventh Circuit, which has said that it is not a violation to
use that term. Legal presumptions that "rest on formalistic
distinctions rather than actual market realities are generally
disfavored. . . ." Eastman Kodak Co. v. Image Technical
Services, Inc., 504 U.S. 451, 466, 112 S.Ct. 2072, 119 L.Ed.2d
265 (1992) (antitrust context). The market reality is that the
postdated check is taken precisely to create what amounts to ...