The bank sued a merchant cash advance (the “corporation”) over funds withdrawn from a commingled account. The deposit account was held by businesses owned by a bank customer, who was later convicted of a check-kiting scheme. The bank had loan agreements with several of the customer’s companies, which were secured by first-priority security interests in the companies’ assets, including accounts receivable. The corporation had entered into factoring agreements with many of the customer’s businesses, including the companies with accounts at the bank, purchasing future receivables in exchange for cash up front. Funds from these receivables were deposited into the customer’s account at the bank, from which the corporation withdrew approximately $3.6 million. The bank sued for conversion after the customer’s check-kiting fraud was uncovered, arguing that the corporation unlawfully took funds in which the bank held a perfected security interest. The trial court granted summary judgment to the bank, awarded it the remaining balance of one company’s loan, but denied attorneys’ fees and interest. The bank appealed, and the court of appeals considered its assignment of error. The first assignment of error raised three issues: whether the loan documents adequately described accounts receivable as collateral, whether R.C. 1309.332(B) barred the bank’s claim, and whether the bank had proven the elements of conversion. The second assignment of error challenged the traceability of the transferred funds, the risk of a windfall from overlapping lawsuits, and whether the damages award exceeded the bank’s actual loss.
In First Fin. Bank v. Tailored Fund Cap., LLC, No. C-230626, 2024 WL 5949821, 2024 Ohio App. LEXIS 3716 (Ohio Ct. App. Oct. 16, 2024) (opinion not yet released for publication), the court interpreted Ohio Revised Code (R.C.) 1309.332(B)—which protects transferees of deposit account funds from prior security interests unless collusion has been proven— to bar the bank’s claim. The court began its analysis by examining the plain language and legislative intent behind R.C. 1309.332(B), which mirrors UCC § 9-332. The court emphasized that this provision was designed to create finality in financial transactions by ensuring that funds transferred out of deposit accounts are not subject to claw-back claims by secured parties, such as the bank in this case. The court relied on UCC commentary and case law to confirm that the statute’s purpose is to protect innocent transferees and maintain the free flow of commerce. Ultimately, the court held that R.C. 1309.332(B) barred the bank’s conversion claim because the corporation, as an innocent transferee, took the funds free of the bank’s security interest. The court also faulted the bank for improperly shifting its theory of conversion mid-litigation in response to the transferee’s statutory defense. The court adopted the majority approach, which “bars recovery for conversion” absent a “noncolluding third party.” Because the bank had failed to allege collusion it therefore could not recover in this case.
By Audrey Spotts, [email protected]
Edited By Callighan Ard, [email protected]
Edited By Hayden Mariott, [email protected]