In the
United States Court of Appeals
For the Seventh Circuit

No. 00-1224

SIEGFRIED LIFANDA,

Plaintiff-Appellant,

v.

ELMHURST DODGE, INCORPORATED,
UNITED SECURITY SYSTEMS, INCORPORATED
and WILLIAM C. NAZHA,

Defendants-Appellees.



Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 5830--William J. Hibbler, Judge.


Argued September 14, 2000--Decided January 12, 2001



  Before ROVNER, DIANE P. WOOD, and EVANS, Circuit
Judges.

  ROVNER, Circuit Judge. Siegfried Lifanda
purchased a 1999 Dodge Caravan from Elmhurst
Dodge on July 2, 1999, which he financed by
entering into a retail installment contract. As
part of the vehicle purchase, Elmhurst Dodge also
sold Lifanda "Auto Theft Registration" protection
(ATR), which was an anti-theft etching
identification program that promised to pay
Lifanda the lesser of $3000 or the amount paid by
his insurance company, if his vehicle was stolen
within three years from the date of purchase. The
ATR was issued by defendant United Security
Systems, Inc., for $389.52 and was underwritten
by an insurance company. Lifanda complains that
the ATR is a form of property insurance
protecting against theft of the vehicle, and that
the defendants violated the Truth in Lending Act
("TILA"), 15 U.S.C. sec. 1601 et seq., by failing
to include the ATR charge as part of the finance
charge.

  The district court granted Elmhurst Dodge’s
motion to dismiss the TILA claim, and declined to
exercise jurisdiction over the remaining state
law claims. The court noted that the TILA
requires lenders to clearly and accurately
disclose the finance charges that customers will
bear in credit transactions, citing 15 U.S.C.
sec. 1683(a)(3), and that TILA includes insurance
premiums in its definition of finance charges.
TILA provides that

charges or premiums for insurance, written in
connection with any consumer credit transaction,
against loss of or damage to property . . . shall
be included in the finance charge unless a clear
and specific statement in writing is furnished by
the creditor to the person to whom the credit is
extended, setting forth the cost of the insurance
if obtained from or through the creditor, and
stating that the person to whom the credit is
extended may choose the person through which the
insurance is to be obtained.

15 U.S.C. sec. 1605(c). The regulation
implementing that provision, referred to as
Regulation Z, largely tracks that language,
stating that premiums for insurance against loss
or damage may be excluded from the disclosure
requirements if the consumer is informed (1) that
the insurance coverage may be obtained from a
person of the consumer’s choice; and, for
insurance obtained through the creditor, the
consumer is notified of (2) the amount of the
premium, and (3) the term of the insurance. 12
C.F.R. sec. 226.4(d)(2). The district court held
that the disclosures made by the defendants
satisfied those requirements, and thus granted
the motion to dismiss.

  On appeal, Lifanda asserts that the court erred
in holding that the disclosures made by the
defendants satisfied the TILA requirements as a
matter of law. Specifically, Regulation Z
mandates that the TILA disclosures be made
"clearly and conspicuously," 12 C.F.R. sec.
226.17, and Lifanda argues that the court could
not properly find as a matter of law that the
alleged disclosures were clear and conspicuous
here. As an initial matter, we note that although
the motion in this case was brought pursuant to
Rule 12(b)(6), we have made it clear that Rule
12(b)(6) is not the appropriate vehicle for such
a dismissal. Smith v. Check-N-Go of Illinois,
Inc., 200 F.3d 511, 514 (7th Cir. 1999); Walker v.
National Recovery, Inc., 200 F.3d 500 (7th Cir.
1999). As in Check-N-Go, allegations that
disclosures are not "clear and conspicuous" state
a claim upon which relief may be granted. Id.
"The possibility that the allegation is false--
even that attachments to the complaint
demonstrate its falsity--does not mean that the
complaint fails to state a claim. Instead the
attachments authorize the district court to grant
judgment on the pleadings under Rule 12(c), or to
convert the motion to dismiss into a motion for
summary judgment and to grant that relief (a
possibility raised by Rule 12(b) itself)." Check-
N-Go, 200 F.3d at 514. Therefore, the motion
should have been converted into one for judgment
on the pleadings or for summary judgment. In any
event, we review the court’s decision de novo,
examining all facts alleged in the complaint and
any inferences reasonably drawn therefrom in the
light most favorable to the plaintiff. Flenner v.
Sheahan, 107 F.3d 459, 461 (7th Cir. 1997); Autry
v. Northwest Premium Services, Inc., 144 F.3d
1037, 1039 (7th Cir. 1998). We will uphold
dismissal of a complaint only if the plaintiff
can prove no set of facts in support of his claim
that would entitle him to relief. Id.

  We view the "’sufficiency of TILA-mandated
disclosures . . . from the standpoint of an
ordinary consumer, not the perspective of a
Federal Reserve Board member, federal judge, or
English professor.’" Smith v. Cash Store
Management, Inc., 195 F.3d 325, 327-28 (7th Cir.
1999), quoting Cemail v. Viking Dodge, 982 F.
Supp. 1296, 1302 (N.D. Ill. 1997). Therefore, our
task is to determine whether, taking the facts in
the light most favorable to Lifanda, the TILA
disclosures were clear and conspicuous to an
ordinary consumer as a matter of law. The
defendants in fact rely upon three different
documents to satisfy the TILA disclosures here,
which are reproduced in relevant part in the
appendix to this opinion./1 According to the
defendants, the retail installment contract
informed Lifanda that he could obtain ATR
insurance elsewhere, the purchase order revealed
the premium for the ATR protection, and the ATR
form set forth the term of the ATR protection.

  We turn first to the retail installment
contract, which provides in pertinent part:

Liability insurance coverage for bodily injury
and property damage caused to others is not
included in this contract. You may obtain vehicle
insurance from a person of your choice.

Credit life, credit disability, guaranteed
automotive protection coverage, and other
optional insurance are not required to obtain
credit and will not be provided unless you sign
and agree to pay the premium.

Immediately below those clauses, the contract
contains four boxes, with a space to be checked
if that box is applicable. Three of the boxes are
respectively labeled, "CREDIT LIFE," "CREDIT
DISABILITY," and "MECHANICAL BREAKDOWN ______,"
with the fourth being generically labeled "TYPE
______." Within each box, there are spaces for
the following information to be provided:(a)
"TERM," (b) "PREMIUM," and (c) "INSURER." Each
box also contains a line for the consumer to sign
if she wants to purchase that optional insurance.
None of the boxes are checked which indicates
that no insurance is being provided under the
contract, and next to each space ("premium,"
"insurer," etc.) is typed "N/A" for Not
Applicable.

  The defendants maintain that the above section
clearly and conspicuously informs Lifanda of his
right to obtain ATR insurance elsewhere. That
argument, however, is problematic on a number of
levels. First, the sentences must be read in
context rather than in isolation. The first
sentence of the initial 2-sentence paragraph
informs the purchaser that certain types of
insurance--bodily injury and property damage
caused to others--are not included in the
contract. Immediately following that sentence is
the statement that "you may obtain vehicle
insurance from a person of your choice." An
ordinary construction of that paragraph would
lead the reader to conclude that liability
coverage for bodily injury or property damage
caused to others is not included in the contract,
but may be obtained from other persons. It says
nothing about insurance that is provided in the
contract. We simply cannot conclude as a matter
of law that the statement provides clear and
conspicuous notice that ATR protection included
in the contract may be obtained elsewhere.

  Our concerns are magnified by another problem,
which is the failure of any document to identify
ATR protection as a form of insurance. In fact,
although they concede the point solely for the
purpose of the motion to dismiss, the defendants
otherwise maintain that ATR protection is not
insurance. Given that even the defendants are not
certain that ATR protection should be considered
insurance, and that the documents do not identify
it as such, it is particularly unconvincing for
the defendants to argue that a sentence informing
Lifanda of the right to obtain vehicle insurance
elsewhere is clear and conspicuous notice that he
can obtain ATR protection from others.

  Finally, this potential for confusion is further
heightened by the section that follows the one
quoted above. As is set forth above, the
subsequent text provides that credit life, credit
disability, guaranteed automotive protection, and
other optional insurance are not required and
will not be provided unless the buyer signs and
agrees to pay the premium. Four boxes following
that text set forth those categories, with the
last box generically labeled "Type _____,"
presumably to include the category of "other
optional insurance." Like the other boxes,
however, that box is not checked and is marked
"N/A" for not applicable. That indicates that no
optional insurance is being provided under the
contract, which would further negate any
implication that ATR protection was "vehicle
insurance" under the disclosure statement. In
other words, in the one section that would have
identified ATR protection as insurance, the
defendants failed to make that connection, and
instead created the opposite perception by
denying that any optional insurance was being
provided under the contract even though ATR
protection was being provided. That failure to
identify ATR protection as insurance further
decreases the likelihood that the buyer would
read the disclosure statement as including ATR
protection, and thus that the disclosure could be
considered clear and conspicuous as a matter of
law. In fact, a plain reading of the section
provides no clue that it relates to ATR
protection, or to any other insurance provided
under the contract, and thus it provides little,
if any, support for a finding that the TILA
disclosure requirement is met. In summary, we
cannot hold as a matter of law that the above
disclosure satisfied TILA where (1) the
disclosure was made in the context of a
discussion of insurance not provided in the
contract rather than insurance included in the
contract, (2) the ATR protection is never labeled
"insurance," and (3) parts of the contract imply
that it is not considered insurance at all.

  The other TILA disclosure requirements at issue
concern the term of the insurance and the amount
of the premium. Here, too, the defendants are not
entitled to judgment at this stage. The term of
the insurance is set forth in the Auto Theft
Registration form, but is set forth in the
smallest type on the form, which is so minuscule
as to be barely legible. Although the district
court notes that TILA does not mandate any
minimum type size, it simply does not follow that
type size is irrelevant to a determination of
whether a disclosure is "conspicuous." If the
term "conspicuous" is to retain any meaning at
all, it cannot be met as a matter of law by type
disproportionately small to that in the rest of
the document, and which is itself barely legible.
See Channell v. Citicorp National Services, Inc.,
89 F.3d 379, 382 (7th Cir. 1996) (noting that the
term "conspicuous" is a staple of commercial law
that refers to the mode of presentation, and is
defined in the UCC as "so written that a
reasonable person against whom it is to operate
ought to have noticed it.") Far from being
conspicuous, the "disclosure" here is quite the
opposite.

  Finally, the amount of the premium is allegedly
set forth on the purchase order under the
category "Vehicle Theft Registration." Nothing in
the documents, however, identifies that as a
premium or the Vehicle Theft Registration as
insurance. The documents do not even indicate
whether that is the only payment due for ATR
coverage. On the retail installment contract
itself, as previously discussed, the boxes
identifying insurance coverage are all marked
"N/A," as is the space marked "PREMIUM," thus
indicating that no premiums are being paid for
any type of "other optional insurance not
required to obtain credit," which would
presumably include ATR protection. On that
contract, the ATR payment is not separately
listed at all, but rather was already added in to
the price listed as the "Cash Price" for the
vehicle. The forms are thus ambiguous at best on
critical issues such as whether the payment is a
premium for insurance. In addition, the ATR
protection covered a three-year term, and nothing
in the documents indicates whether the premium is
an annual or a one-time payment. We cannot state
as a matter of law that the amount of the premium
is clearly and conspicuously set forth in the
documents.

  That would end our discussion, except that the
defendants propose an alternative argument for
affirmance. They contend that the TILA
disclosures are not even required because the ATR
protection was not a finance charge under TILA.
The defendants argue that a charge is considered
a "finance charge" only if it is imposed as an
incident to the extension of credit, and does not
include charges of a type payable in a comparable
cash transaction. For that proposition, the
defendants rely on 15 U.S.C. sec. 1605(a), which
defines "finance charge" as follows:

(a) "Finance charge" defined. Except as
otherwise provided in this section, the amount of
the finance charge in connection with any
consumer credit transaction shall be determined
as the sum of all charges, payable directly or
indirectly by the person to whom the credit is
extended, and imposed directly or indirectly by
the creditor as an incident to the extension of
credit. The finance charge does not include
charges of a type payable in a comparable cash
transaction. . . .

See also 12 C.F.R. sec. 226.4(a). The defendants
argue that the ATR charge was not imposed as an
incident of the extension of credit, and thus is
not subject to the TILA disclosure requirements.

  As support for that contention, the defendants
analogize the ATR protection to the GAP debt
cancellation insurance discussed by this court in
McGee v. Kerr-Hickman Chrysler Plymouth, 93 F.3d
380 (7th Cir. 1996). GAP debt cancellation
insurance protects a buyer in the event that the
car is stolen, and limits the buyer’s liability
in such a circumstance to the actual cash value
of the vehicle as determined by the buyer’s
insurance company plus any past due charges at
that time. The buyer is thus insured against the
risk of a shortfall (or "gap") between the cash
value determined by the insurance company and the
amount still owed on the car. The McGee court
began by noting that Regulation Z provides a
number of examples of charges that are included
and excluded as "finance charges," but that
neither list specifically addressed debt
cancellation agreements like GAP. Id. at 383. The
court then held that the GAP coverage was not
"incident to the extension of credit" because it
did not affect the credit terms of the deal
between McGee and Kerr-Hickman, and concluded
that it therefore was not a "finance charge"
under TILA. Id. at 384-85. The defendants assert
that the ATR protection in this case is analogous
to the debt cancellation coverage, in that it
does not affect the credit terms and thus should
not be considered a "finance charge."

  The reliance on McGee is misplaced. In contrast
to the GAP coverage in McGee, the type of
insurance at issue here is explicitly included in
the statute as a "finance charge:"

(c) Property damage and liability insurance
premiums included in finance charge. Charges or
premiums for insurance written in connection with
any consumer credit transaction, against loss of
or damage to property or against liability
arising out of the ownership or use of property,
shall be included in the finance charge . . . .

15 U.S.C. sec. 1605(c); see also 12 C.F.R. sec.
226.4(b)(8). Therefore, the statute identifies
this premium as a finance charge, and we need not
engage in the type of analysis that the McGee
court had to embark on once it determined that
debt cancellation insurance was not referenced in
the statute itself.

  Moreover, the McGee court’s conclusion that GAP
coverage is excluded from "finance charges" under
the statute is inapposite because subsequent to
the McGee decision, the Federal Reserve Board
issued a final rule which amended the Regulation
Z list of finance charges to explicitly include
debt cancellation coverage written in connection
with a credit transaction. 61 Fed. Reg. 49237-02.
That rule specifically stated that it was
imposing no additional disclosure requirements,
but was merely a clarification that fees charged
for debt cancellation coverage are considered
finance charges. Id. at 49238. Therefore, the
Federal Reserve Board has interpreted TILA in a
manner contrary to the conclusion in McGee, and
we owe deference to that interpretation unless it
is "demonstrably irrational." Ford Motor Credit
Co. v. Milhollin, 444 U.S. 555, 565 (1980). McGee
itself in fact recognized that pending official
staff commentary from the Federal Reserve Board
would almost certainly result in a different
conclusion on the issue of whether GAP protection
charges were finance charges, and that official
staff opinions are binding unless demonstrably
irrational. 93 F.3d at 383-84. At the time of the
McGee opinion, however, the proposed commentary
had been withdrawn, and the court therefore
proceeded with its analysis. Id. at 384. The
McGee court noted, however, that even if the GAP
charges were treated as finance charges under
TILA, the disclosure requirements were met and
thus the result would be the same. Therefore, the
McGee reasoning is unhelpful to the defendants,
given that the subsequent rule reached the
conclusion that debt cancellation insurance is in
fact included in the finance charge under
Regulation Z. The ATR insurance at issue here is
property insurance against loss or damage which
is explicitly included in the statute as a
finance charge, and the defendants have provided
no convincing rationale for ignoring that plain
language.

  Because the district court properly analyzed the
ATR protection as a finance charge under TILA,
the disclosure requirements apply. As set forth
above, the defendants have failed to establish as
a matter of law that the proper disclosures were
made, and their motion to dismiss on that basis
should have been denied. Accordingly, the
decision of the district court is reversed, and
the case is remanded for further proceedings
consistent with this opinion.
Reversed and Remanded.



/1 12 C.F.R. sec. 226.17(a) states that the required
disclosures shall be grouped together and be
segregated from everything else, but indicates
that the disclosures under sec. 226.18(n) "may be
made together with or separately from other
required disclosures." 12 C.F.R. sec. 226.17
n.38. The sec. 226.18(n) disclosures are those
required in order to exclude insurance premiums
from the finance charge, including the
disclosures that insurance may be obtained from
other persons, and the amount of the premium and
term of the insurance. Here, those three
disclosures are made in three different
documents. Lifanda does not argue that those sec.
226.18(n) disclosures must themselves be grouped
together even though they may be separate from
the other disclosures required by sec. 226.18.
Both parties, therefore, assume not only that the
three sec. 226.18(n) disclosures can be made
separately from the other sec. 226.18 disclosures
such as the finance charge and APR, but that
those three disclosures may be made separately
from each other and thus that even the sec.
226.18(n) disclosures themselves need not be
grouped together. Because Lifanda does not
challenge the failure to group the sec. 226.18(n)
disclosures together, we express no opinion on
whether that is consistent with the regulations.


APPENDIX
