[Cite as First Fin. Bank v. Tailored Fund Cap, L.L.C., 2024-Ohio-4982.]
IN THE COURT OF APPEALS FIRST APPELLATE DISTRICT OF OHIO HAMILTON COUNTY, OHIO
FIRST FINANCIAL BANK, : APPEAL NO. C-230626 TRIAL NO. A-2101849 Plaintiff-Appellee, : O P I N I O N. vs. :
TAILORED FUND CAP, LLC, :
Defendant-Appellant. :
Civil Appeal From: Hamilton County Court of Common Pleas
Judgment Appealed From Is: Reversed and Cause Remanded
Date of Judgment Entry on Appeal: October 16, 2024
Bricker Graydon LLP, Susan M. Argo, Jeffrey M. Hendricks and Austin Z. Baurichter, for Plaintiff-Appellee,
Durst Kerridge LLC, Alexander J. Durst and Paul R. Kerridge, for Defendant- Appellant. OHIO FIRST DISTRICT COURT OF APPEALS
KINSLEY, Judge.
{¶1} This appeal presents an issue of first impression for this court: when
there has been no collusion, does R.C. 1309.332(B), a statute that mirrors Section 9-
332 of the Uniform Commercial Code (“UCC”), bar recovery for conversion when
funds secured by one party’s security interest are withdrawn from a deposit account
by another party? In keeping with the majority of courts across the country to consider
this issue, we answer the question in the affirmative. Both the plain meaning of the
statute and the legislative history of UCC 9-332 suggest broad protection for
transferees of funds from a deposit account. This reasoned policy decision adopts a
preference for finality in financial transactions that we, as a court, are powerless to
disturb.
{¶2} As a result, we reverse the decision of the Hamilton County Common
Pleas Court awarding summary judgment to plaintiff-appellee First Financial Bank
(“FFB”) on its claim for conversion against defendant-appellant Tailored Fund Cap,
LLC (“TFC”). We remand the cause to the trial court with instructions to dismiss FFB’s
complaint.
Facts and Procedural History
{¶3} This dispute arises from the collapse of healthcare companies owned by
Cincinnati businessman Harold Sosna. Sosna engaged in a costly check-kiting scheme
for which he was ultimately convicted of federal crimes.1 But before his operation was
discovered, several entities controlled by Sosna contracted with merchant cash
advance (“MCA”) companies to sell their accounts receivable. MCAs provide lump-
1 Check kiting is a type of fraud that involves writing a check from one account containing insufficient funds and depositing it into another account. The funds are then used from the second account before the check bounces from the first account. See, e.g., Kaplan v. Regions Bank, 2023 U.S. Dist. LEXIS 49770, *3, fn. 2 (M.D. Fl. Mar. 23, 2023).
2 OHIO FIRST DISTRICT COURT OF APPEALS
sum cash advances to businesses in exchange for a set amount of the businesses’ future
receivables. See Professional Merchant Advance Capital, LLC v. Care Servs., LLC,
2013 U.S. Dist. LEXIS 203114, *2 (S.D.N.Y. Oct. 2, 2013).
{¶4} TFC is one such MCA. According to TFC’s owner and managing partner,
TFC purchases receivables, finances real estate transactions, and undertakes “almost
everything related to financing except traditional mortgages.”
{¶5} Sosna also financed his businesses through more conventional means.
To this end, his corporations entered into various financial agreements with banking
institutions, including FFB.
A. FFB’s relationship to Shining Knight and Wexford
{¶6} In January 2018, MainSource Bank, which later merged with FFB,
entered into loan agreements with three Sosna entities: Shining Knight Realty, LLC
(“Shining Knight”), Wexford Place, Inc., and Wexford Care Center, Inc. (collectively
“Wexford”). Shining Knight was a real estate holding company, and the Wexford
entities operated residential care facilities.
{¶7} When MainSource Bank merged with FFB, FFB became a successor in
interest to the loan obligations.
1. The Shining Knight Agreements
{¶8} Shining Knight’s loan obligations to FFB consisted of (1) a January 26,
2018 term note for $12,557,000 and a related loan agreement dated January 26, 2018,
and (2) a master agreement dated January 5, 2018. Shining Knight was also obligated
to FFB on a January 26, 2018 guaranty, which guaranteed the full and prompt
payment of all obligations owed by Wexford to FFB. FFB secured these obligations
3 OHIO FIRST DISTRICT COURT OF APPEALS
through an open-end mortgage, assignment of rents and leases, security agreement,
and fixture filing (“Shining Knight mortgage”).2
{¶9} In that regard, Section 1.1.7 of the Shining Knight mortgage granted FFB
a first-priority security interest in:
all moneys, credits, and other property of any nature whatsoever of
[Shining Knight] now or hereafter in the possession of, in transit to or
from, under the custody or control of, or on deposit with (whether held
by [Shining Knight] individually or jointly with another) [FFB] or any
affiliate of [FFB], including but not limited to cash collateral accounts,
construction disbursement accounts and reserve accounts (but
excluding fiduciary accounts, if any)[.]
(Emphasis added.)
{¶10} Pursuant to this provision, on January 26, 2018, FFB filed a UCC
financing statement with the Ohio Secretary of State to perfect its security interest in
Shining Knight’s assets.
{¶11} Section 6.1 of the Shining Knight mortgage detailed what would occur
in the event Shining Knight defaulted on its loan obligation:
The entire Indebtedness will become due, at the option of [FFB], upon
occurrence of an event of default under the . . . Guaranty, Loan
Agreement or the Note or upon the failure of the Mortgagor to comply
with any term or condition contained in this Mortgage, the Hazardous
Substance Indemnity Agreement between [Shining Knight], the
Guarantors (as defined in the Mortgagor Loan Agreement) and [FFB] of
2 The Shining Knight mortgage included one amendment dated August 5, 2019.
4 OHIO FIRST DISTRICT COURT OF APPEALS
even date herewith, or any other document or agreement entered into
between [Shining Knight] and [FFB] in connection with the Loan
Agreement, all subject to any applicable notice and cure period, if any
(each such occurrence, an “Event of Default”).
{¶12} Section 3.8 of the Shining Knight mortgage, entitled “Sale, Transfer or
Encumbrance,” further provided:
Except for personal property sold in the ordinary course of business,
[Shining Knight] will not, without [FFB’s] prior written consent . . . sell
or convey, grant a deed of trust, pledge, grant a security interest in,
lease, execute a land contract or installment sales contract, or otherwise
dispose of, further encumber or suffer the encumbrance of, whether by
operation or otherwise, any or all of its interest in the Property.
2. The Wexford Agreements
{¶13} Wexford’s loan obligations to FFB consisted of a term note for $637,945
and a related loan agreement.3 Wexford also guaranteed full and prompt payment of
all obligations owed by Shining Knight to FFB. FFB secured these obligations through
a security agreement dated January 26, 2018.
{¶14} Sections 1 and 2 of the Wexford security agreement granted FFB a
security interest in the following collateral:
1. All of [Wexford’s] Accessions, Accounts, As-Extracted Collateral,
Assets, Cash Proceeds, Documents, Inventory, Deposit Accounts, . . .
3 The loan agreement was twice amended, first on November 6, 2018 and then again on August 5, 2019.
5 OHIO FIRST DISTRICT COURT OF APPEALS
Healthcare Receivables . . . and all other personal property and other
assets, of any type, of [Wexford];
2. All moneys, credits and other property of any nature whatsoever of
[Wexford] now or hereafter in the possession of, in transit to or from,
under the custody or control of, or on deposit with (whether held by
[Wexford] individually or jointly with another and including specifically
but not by way of limitation all demand, time, savings, passbook, or
other similar accounts) [FFB] or any [FFB] Affiliate, including but not
limited to cash collateral accounts[.]
{¶15} As it did with Shining Knight, FFB filed UCC financing statements with
the Ohio Secretary of State on January 26, 2018 regarding its security interest in
Wexford’s assets.
{¶16} The Wexford guaranty contained a different restriction on asset transfer
from the Shining Knight mortgage. To that end, section 12 of the Wexford guaranty
provided: “[Wexford] further agrees not to transfer in excess of fifteen percent (15%)
of its assets without fair and adequate consideration, unless otherwise agreed to in
writing by [FFB].”
B. TFC’s Merchant Agreements with Shining Knight and Wexford
{¶17} Following their contracts with FFB, both Shining Knight and Wexford,
along with 15 other business entities controlled by Sosna, entered into cash advance
agreements with TFC.4 Known as factoring agreements, these contracts provided for
4 There were a total of 18 Sosna entities in the transaction: the 15 unnamed entities, Shining Knight, and the two Wexford entities.
6 OHIO FIRST DISTRICT COURT OF APPEALS
the sale of the entities’ future receivables in exchange for a current lump-sum
payment.
{¶18} TFC secured its interests in the factoring agreements through a security
agreement and guaranty. To this end, the first paragraph of each factoring agreement
stated:
Merchant [Shining Knight and Wexford] hereby sells, assigns and
transfers to [TFC] (making [TFC] the absolute owner) in consideration
of the funds provided (“Purchase Price”) specified below, all of [Shining
Knight’s and Wexford’s] future accounts, contract rights and other
obligations arising from or relating to the payment of monies from
[Shining Knight’s and Wexford’s] customers and/or other third party
payers (the “Total Gross Receipts”) for the payment of [Shining Knight’s
and Wexford’s] sale of goods or services until the amount specified
below (the “Purchased Amount”) has been remitted from [Shining
Knight and Wexford] to [TFC].
{¶19} Under the first factoring agreement with the 18 Sosna entities, TFC
purchased $2,798,000 in future receipts for $2,000,000. Under the second factoring
agreement, TFC purchased $1,399,000 in future receipts for $1,000,000. In total,
TFC purchased $4,197,000 worth of future receipts for $3,000,000.
{¶20} Both agreements required the 18 entities to deposit 20 percent of their
daily receipts into a single account. As a result, the funds that TFC later withdrew
came from a comingled account at FFB, which ended in the numbers 7599 and was
held in Wexford’s name. Between March and May 2020, Shining Knight and Wexford
transferred at least $3,644,922 from Wexford’s 7599 account to TFC.
7 OHIO FIRST DISTRICT COURT OF APPEALS
{¶21} TFC paid for the future receipts through a separate entity known as
YRB.5 In three installments, YRB deposited a total of $2,600,002 into the 7599
account, which was less than the contract price of $3 million. TFC’s owner provided
uncontroverted testimony at a hearing on damages that the shortfall in the purchase
price and the installment payments was due to the subtraction of fees provided for by
TFC’s factoring agreements with the 18 Sosna entities.
C. Shining Knight and Wexford Defaults
{¶22} Sosna’s check-kiting scheme came to light in May of 2020. FFB claims
that Shining Knight and Wexford defaulted on their loan obligations as a result of his
fraud operation, although the bank presented no specific evidence of payment default
by these entities.6
{¶23} In June 2020, FFB brought suit against Shining Knight and Wexford to
collect to the remaining balance due under the loan obligations. Around this time,
FFB discovered Shining Knight’s and Wexford’s factoring agreements with TFC. It
wrote to TFC demanding that, within ten days, TFC return of “all payments wrongfully
received from [Shining Knight and Wexford] . . . in the approximate sum of
$3,860,992.00.” The letter did not explain the discrepancy between the $3,644,922
TFC withdrew from the 7599 account and the $3,860,992 demand.
{¶24} TFC did not pay FFB as demanded. Thus, on May 28, 2021, FFB filed a
complaint against TFC for conversion. The complaint sought to recover the funds TFC
withdrew from the 7599 account.
5 YRB stands for the initials of TFC’s owner. 6 To the contrary, the evidence in the case reflects that the Shining Knight and Wexford loan
balances continued to decline through the duration of the litigation.
8 OHIO FIRST DISTRICT COURT OF APPEALS
D. FFB’s and TFC’s Motions for Summary Judgment
{¶25} On January 4, 2022, FFB filed a motion for summary judgment.
Whereas its complaint sought the return of the withdrawn funds, FFB’s summary
judgment motion instead sought approximately $3.1 million rather than $3.6 million
in damages. This was based on an altered theory of recovery—that FFB was entitled
to the remaining balance on Shining Knight’s and Wexford’s loans. In its motion, FFB
also argued that TFC had actual or constructive knowledge of FFB’s first-priority
security interest in Shining Knight’s and Wexford’s accounts receivable by virtue of its
UCC filings.
{¶26} FFB’s summary judgment motion was supported by an affidavit of FFB’s
vice president. The affidavit included copies of Wexford’s account statements
detailing payments made from the 7599 account to TFC.
{¶27} On February 18, 2022, TFC filed a preliminary memorandum in
opposition to FFB’s motion for summary judgment. In its memorandum, TFC argued
R.C. 1309.332(B) precluded FFB’s conversion claim. To this end, TFC claimed that it
had not colluded with Shining Knight and Wexford to avoid any debt owed by those
companies and that, as a result, it was protected as transferee of funds from a deposit
account. In doing so, TFC relied on Cortland Savs. and Banking Co. v. Platinum
Rapid Funding Group, Ltd, 2021-Ohio-461 (11th Dist.), for the proposition that the
UCC eliminates any security interest in funds taken from a deposit account.
{¶28} In response, FFB argued that R.C. 1309.332(B) did not bar its
conversion claim. It contended that the conversion took place when Shining Knight’s
and Wexford’s receivables were sold, rather than when TFC withdrew funds from the
7599 account. Thus, it argued that TFC’s status as a transferee of funds from a deposit
account was immaterial to its conversion claim. In other words, FFB contended that
9 OHIO FIRST DISTRICT COURT OF APPEALS
TFC’s withdrawal of funds from the 7599 account was the means by which the
conversion occurred rather than the conversion itself. Relying on In re Tusa-Expo
Holdings, 811 F.3d 786 (5th Cir. 2016), FFB argued that if R.C. 1309.332(B) applied,
its protections would only strip FFB of its interest in the 7599 account, not the funds
contained within the account.
E. The Trial Court’s Summary Judgment Decision in Favor of FFB
{¶29} On January 23, 2023, the trial court granted FFB’s motion for summary
judgment. It held that the Shining Knight mortgage and the Wexford security
agreement granted FFB a first-priority security interest in the assets of both entities.
It also held that FFB had established the elements of conversion as a matter of law.
But it was not specific as to what action by TFC constituted the conversion—the
purchase of the receivables or the withdrawal of funds from the 7599 account.
{¶30} At various points, the trial court implied that both actions might form
the basis of the conversion. It described TFC as “obtain[ing] the receivables” in
violation of FFB’s security interest, suggesting that the conversion occurred when the
money transferred hands. But it also favorably cited language from Fifth Third Bank
Cent. Ohio v. Avnet, Inc., 2005 U.S. Dist. LEXIS 59361, *15 (S.D. Ohio Oct. 6, 2005),
that “a seller can sell only what it owns.” And it emphasized that FFB did not consent
to the sale of Shining Knight’s and Wexford’s receivables to TFC. These latter two
aspects of the trial court’s decision imply that it might have agreed with FFB that the
conversion occurred at the point of sale, rather than at the time of transfer.
{¶31} Nonetheless, the trial court analyzed the applicability of R.C.
1309.332(B) to TFC. Rather than following the decision in Cortland that innocent
transferees of funds from a deposit account take free and clear of a security interest in
the funds, the trial court instead adopted the view of the Tenth District in RFC Capital
10 OHIO FIRST DISTRICT COURT OF APPEALS
Corp. v. EarthLink, Inc., 2004-Ohio-7146 (10th Dist.), and the United States District
Court for the Southern District of Ohio in Avnet, 2005 U.S. Dist. LEXIS 59631. Neither
case directly discusses R.C. 1309.332(B). Instead, they suggest under other provisions
of the UCC that a perfected first-in-time security interest controls absent implied
authorization or consent to sell. See RFC Capital at ¶ 62-64; Avnet at *15-16. Relying
on RFC Capital and Avnet, the trial court concluded that it would be unfair to allow
TFC to retain the funds it contracted for given that FFB retained a priority security
interest in Shining Knight’s and Wexford’s assets.
{¶32} In its summary judgment order, the trial court highlighted a similar case
filed by FFB in federal court against a different MCA that contracted with Shining
Knight and Wexford. See First Fin. Bank v. Fox Capital Group, Inc., 633 F.Supp.3d
1041 (S.D. Ohio 2022). In First Fin. Bank, the federal district court concluded that
R.C. 1309.332(B) barred FFB’s claim for conversion absent collusion between the
MCA, Shining Knight, and Wexford. Id. at 1047. The trial court dismissed this
conclusion as inconsistent with the policy adopted in RFC Capital and Avnet.
{¶33} Regarding damages, the trial court declined to award FFB the remaining
loan balance it requested. It instead held an evidentiary hearing to ascertain the
amount of money TFC owed to FFB on its conversion claim.
F. Damages Hearing
{¶34} At the damages hearing, FFB departed from the two previous methods
it had used to calculate damages, namely the amount of the funds withdrawn from the
7599 account by TFC and the amount of Shining Knight’s and Wexford’s outstanding
loan balances. Instead, it advanced a new way of measuring damage in the case: the
value of the accounts receivable at the time TFC entered into the factoring agreements
with the Sosna entities.
11 OHIO FIRST DISTRICT COURT OF APPEALS
{¶35} Under this new formula, FFB argued that the value of the collateral at
the time of conversion was the approximately $4.2 million in future receivables
purchased by TFC. In contrast, TFC argued it was the $3 million it agreed to pay
Shining Knight and Wexford under the factoring agreements, less what TFC actually
paid into the 7599 account.
{¶36} At the damages hearing, the trial court received evidence indicating that
there remained a balance of $1,187,886.29 on the Shining Knight loan and that the
Wexford loan had been paid in full. FFB also claimed that it had incurred $685,715.22
in interest and $861,428.18 in legal fees.
{¶37} In addition, the trial court heard testimony from FFB’s vice president,
who testified that the money that TFC received from Shining Knight and Wexford
came from Wexford’s 7599 account at FFB. However, she could not say exactly how
much of the money TFC transferred came from Shining Knight’s and Wexford’s
accounts receivable as opposed to the other 15 Sosna entities with which TFC
contracted.
{¶38} The owner of TFC also testified. He explained that TFC did not run a
UCC search on Sosna’s entities before entering into the factoring agreements. Rather,
TFC searched the entities on LexisNexis and relied on Sosna’s assertion that there
were no liens on the accounts.
{¶39} At the conclusion of the damages hearing, TFC orally moved to dismiss
the case pursuant to Civ.R. 41(B)(2) on the basis that FFB did not prove the traceability
of the funds withdrawn by TFC. The trial court overruled the motion.
{¶40} On November 3, 2023, in a written entry, the trial court awarded FFB
$1,187,886.29 in damages. It held that TFC had converted approximately $3.6 million
from the 7599 account. It declined to award attorney fees and interest because TFC
12 OHIO FIRST DISTRICT COURT OF APPEALS
was not a party to the provisions allowing these damages in Shining Knight’s and
Wexford’s agreements with the bank. But it set damages in the amount of the
outstanding Shining Knight loan balance, finding the damage fairly traceable to TFC’s
conversion.
{¶41} TFC timely appealed the trial court’s judgment. We now consider TFC’s
assignments of error on appeal.
Assignments of Error
{¶42} TFC raises two assignments of error. The first assignment of error
challenges the trial court’s summary judgment decision, and the second challenges the
trial court’s calculation of damages.
{¶43} The first assignment of error raises three separate issues for our review:
(1) whether the Shining Knight and Wexford loan documents sufficiently describe
accounts receivable as collateral; (2) whether R.C. 1309.332(B) acts as a bar to
recovery; and (3) whether FFB proved the elements of the tort of conversion.
{¶44} The second assignment of error also raises three separate issues: (1)
whether FFB adequately traced the proceeds of Shining Knight’s and Wexford’s
accounts receivable; (2) whether FFB was attempting to create a windfall by suing
multiple MCAs for the same damages; and (3) whether the trial court abused its
discretion in awarding FFB more money in damages than it actually lost.
{¶45} Because the second issue of the first assignment of error—that R.C.
1309.332(B) bars recovery—is dispositive of this appeal, we consider it first out of
order.
R.C. 1309.332(B) and the UCC
{¶46} As part of its first assignment of error, TFC argues that R.C. 1309.332(B)
bars FFB from clawing back funds that have already been disbursed from the 7599
13 OHIO FIRST DISTRICT COURT OF APPEALS
deposit account. As this issue both arises in the context of a summary judgment
decision and involves a question of statutory interpretation, the standard of review on
appeal is de novo. See Cortland, 2021-Ohio-461, at ¶ 9 (11th Dist.).
{¶47} The starting point of our analysis is the statute. To that end, R.C.
1309.332 provides:
(A) A transferee of money takes the money free of a security interest
unless the transferee acts in collusion with the debtor in violating the
rights of the secured party.
(B) A transferee of funds from a deposit account takes the funds free of
a security interest in the deposit account unless the transferee acts in
collusion with the debtor in violating the rights of the secured party.
{¶48} Adopted in 2001, R.C. 1309.332(B) mirrors identical language added
the year before to UCC 9-332. Both sections represent an attempt by policymakers to
strike a balance between the competing interests of financial institutions on the one
hand and clients who utilize their services to execute commercial transactions on the
other.
A. The Adoption of UCC 9-332
{¶49} The history of UCC 9-332 is instructive in understanding these
legislative judgments. That section was preceded in the Uniform Commercial Code by
Comment 2(c) to UCC 9-306. Lacking the force of a full UCC code section, Comment
2(c) provided that recipients of cash proceeds from a debtor’s checking account “paid
out in the operation of the debtor’s business” took free of any claim that a secured
party may have in the proceeds. See Keybank Natl. Assn. v. Ruiz Food Prods., 2005
U.S. Dist. LEXIS 48262, *15-16 (D. Idaho Sept. 9, 2005).
14 OHIO FIRST DISTRICT COURT OF APPEALS
{¶50} Most courts interpreted Comment 2(c) to protect transferees from claw-
back suits filed by secured parties after the funds had been transferred out of the bank.
Id. at *16, citing Textron Fin. Corp. v. Firstar Bank Wisconsin, 217 Wis.2d 582 (Wis.
Ct. App. 1998). This was the case even if the security interest attached to defined
collateral sold for proceeds. Id. Once the proceeds from the collateral sale had cleared
the bank transfer, courts almost universally protected the transferee against the
secured party under Comment 2(c). Id.
{¶51} But a minority of courts went the opposite way. Id. at *17. These courts
held that Comment 2(c) and its state-level analogs did not apply if the proceeds were
identifiable and could be traced to a specific, defined security interest. See, e.g., Linn
Cooperative Oil Co. v. Norwest Bank Marion, N.A., 444 N.W.2d 497, 499 (Iowa 1989).
{¶52} In response to this split of authority, the UCC Permanent Editorial
Board recommended the addition of supplemental commentary to Comment 2(c) to
make clear that the majority line of cases was the correct one. Keybank, 2005 U.S.
Dist. LEXIS 48262, at *17-18. But in place of inserting this commentary, the drafters
instead added Section 9-332, which formalized Comment 2(c)’s place in the UCC. Id.
at *18. Some might argue this made former Comment 2(c)’s protection for transferees
even stronger, given that the suggested language moved from a comment to a
provision in the code.
{¶53} As the federal district court outlined in Keybank, 2005 U.S. Dist. LEXIS
48262, at *18-19, numerous secondary sources confirm this understanding of UCC 9-
332’s adoption. Once source even goes so far as to suggest that UCC 9-332 negates the
minority jurisprudence that allowed a security interest in specific collateral to survive
a Comment 2(c) transfer. Id. at *18.
15 OHIO FIRST DISTRICT COURT OF APPEALS
{¶54} Considering this history and the interpretation of courts and
commentators at the time, it seems reasonably likely that UCC 9-322 was intended to
have the same effect as the suggested commentary to Comment 2(c)—to entrench the
majority view that transferees of funds from a deposit account take free of a security
interest, even if that interest was in collateral to which the funds can be traced.
B. The Meaning of R.C. 1309.332(B)
{¶55} Ohio codified UCC 9-332 in 2001. See R.C. 1309.332. A local impact
statement supporting the law indicated that, as of 1999, 32 states had aligned their
respective laws with Article 9 of the UCC. See Ohio Legislative Service Commission,
Fiscal Note & Local Impact Statement S.B. 74 (Apr. 4, 2001), https://search-
prod.lis.state.oh.us/api/v2/general_assembly_124/legislation/sb74/supporting_doc
uments/fn_124_sb74in/pdf/ (accessed Oct. 3, 2024). The purpose of Ohio’s law was
to accomplish the same objective. Id.
{¶56} R.C. 1309.332(B) contains virtually identical commentary to UCC 9-
332(B). Under a heading entitled “Scope of This Section,” the comments explain that
the law “affords broad protection to transferees who take funds from a deposit
account.” R.C. 1309.332(B), Comment 2. The comments also explain the policy
embodied in the law. Extinguishing the security interest once funds have transferred
out of a deposit account to a noncolluding transferee “helps to ensure that security
interests in deposit accounts do not impair the free flow of funds.” R.C. 1309.332(B),
Comment 3. In balancing respect for security interests against the need for
uninterrupted commerce, the comments to R.C. 1309.332(B) place a “high value on
finality” and accordingly instruct that opportunities for upsetting completed
transactions should be “severely limited.” Id.
C. R.C. 1309.332(B) and Security Interests in Deposit Accounts
16 OHIO FIRST DISTRICT COURT OF APPEALS
{¶57} Drawing support from this commentary, TFC argues that R.C.
1309.332(B) bars FFB from recovering the funds it received from the 7599 account.
Its position relies upon both the plain meaning of the statute, as well as the public
policy arguments advanced in Comment 3 that support extinguishing a perfected first-
priority security interest in favor of transferees from deposit accounts. Citing the UCC
commentary, TFC contends that claw-back lawsuits like this one undermine the free
flow of commerce, upset the preference for finality in commercial transactions, and
wrongfully punish third parties who stop short of colluding with debtors.
{¶58} FFB, on the other hand, argues that R.C. 1309.332(B) merely strips
funds passing through a deposit account of a security interest in the account, not in
the funds themselves. It too advances public policy arguments in support of this
interpretation, chief among them the importance of protecting perfected first-priority
security interests from transferees who take collateral proceeds out of a deposit
account on notice of their subservient position.
{¶59} Both parties seem to agree that case law construing UCC 9-332 is
instructive. But there is a split of authority on which interpretation of UCC 9-332 is
correct, although a distinct majority and minority approach have emerged since UCC
9-332 was adopted. Virtually every court to consider the question–and every Ohio
court to do so in a published decision–has concluded that TFC’s reading controls. See,
e.g., Keybank, 2005 U.S. Dist. LEXIS 48262, at *19-20 (“an innocent transferee takes
funds transferred from a deposit account free of a security interest in the collateral of
which the funds were proceeds”); First Fin. Bank, 633 F.Supp.3d at 1046 (prohibiting
FFB from pursuing conversion claim against MCA involving Sosna entities absent
collusion because R.C. 1309.332(B) bars recovery); Cortland, 2021-Ohio-461, at ¶ 18
(11th Dist.) (relying on comments to R.C. 1309.332(B) to bar conversion claim against
17 OHIO FIRST DISTRICT COURT OF APPEALS
transferee from deposit account that was the subject of a perfected security interest);
Legal Asset Funding, LLC v. Cousins, 2013 N.J. Super. Unpub. LEXIS 1241, *18 (N.J.
Super. May 23, 2013) (noting that UCC 9-332(B) does not follow creditor priority and
may upset normal priority of security interests). Adding to the majority approach in
Ohio is the fact that a different judge of the Hamilton County Common Pleas Court
than the one whose decision we are reviewing dismissed a related Sosna MCA case
brought by FFB under R.C. 1309.332(B), and FFB did not appeal. See First Fin. Bank
v. Avanza, Hamilton C.P. No. A-2101701 (Jul. 11, 2023) (granting summary judgment
to Avanza on the basis of Cortland).
{¶60} The leading authority in Ohio on this question is Cortland, 2021-Ohio-
461 (11th Dist.).7 In that case, the Eleventh District concluded that a security interest
in a deposit account cannot be divorced from a security interest in the obligation to
pay funds from the account. Id. at ¶ 15-16. In doing so, it leaned heavily on the fact
that Article 9 of the UCC defines a “deposit account” as an obligation to pay funds from
the account. Id. Viewed in this way, a security interest in a deposit account is merely
a security interest in a right to payment from the account, i.e., the funds deposited in
the account. Id. at ¶ 16-18. Thus, under Cortland, R.C. 1309.332(B) extinguishes a
security interest in a right to payment from the deposit account once payment has been
made from the account to a noncolluding third party. Id. at ¶ 19.
{¶61} FFB nonetheless argues that R.C. 1309.332(B) does not bar its
conversion action because the provision applies solely to a security interest in a deposit
account and not to the funds contained within the deposit account. FFB contends that
7 The Ohio Supreme Court accepted the Eleventh District’s decision in Cortland for review, but the matter was dismissed before the court reached a decision as to the merits of the discretionary appeal. See Farmers Nat. Bank v. Platinum Rapid Funding Group, Ltd., 2023-Ohio-1649.
18 OHIO FIRST DISTRICT COURT OF APPEALS
its security interest in Shining Knight’s and Wexford’s accounts receivable accordingly
survived the transfer of funds through Wexford’s 7599 deposit account because R.C.
1309.332(B) at most stripped FFB of its security interest in the account itself.
{¶62} In advancing this argument, FFB relies heavily on In re Tusa-Expo
Holdings, Inc., 811 F.3d 786 (5th Cir. 2016). That case involved a complicated three-
way financial relationship between a furniture designer, a furniture retailer, and a
financing company. Tusa, the furniture retailer, operated furniture outlets that would
sell furniture designed by Knoll to its customers. Id. at 789. Knoll advanced the
furniture to Tusa pursuant to a perfected security interest on Knoll’s part in Tusa’s
accounts receivable. Id. Tusa then acquired Office Expo, an underperforming retail
outlet, to expand its retail footprint. Id. Tusa began siphoning off cash to Office Expo
to bolster its performance, creating past-due balances on Tusa’s account with Knoll.
Id. at 789-790. Tusa solved the problem by entering into a financing agreement with
Textron, a financing company, under which Textron loaned Tusa $6.5 million in
exchange for a first-priority security interest in all Tusa’s assets including Knoll’s
collateral. Id. at 790. Tusa was then required to have its customers deposit their
payments into a lockbox account controlled by Textron. Id. To facilitate the deal,
Textron and Knoll entered into a subordination agreement whereby Knoll retained a
first-priority security interest in specified receivables and a second-priority security
interest in all other of Tusa’s assets. Id. Tusa then went bankrupt, leaving the parties
to fight over the remaining assets. Id.
{¶63} A key issue on appeal was whether Texas’s version of UCC 9-332(B)
stripped Knoll’s first-priority security interest in the specified receivables once they
were paid into the Textron lockbox by Tusa’s customers and then transferred from the
lockbox to Textron. Id. at 795. The Fifth Circuit held that, based on the plain meaning
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of the provision, Knoll’s security interest survived the transfer. Id. at 797. In doing
so, the court interpreted the Texas analog to UCC 9-332(B) to wash only a security
interest in a deposit account itself from funds passing through the account, as opposed
to cleansing the funds of a security interest that might attach specifically to them. Id.
It supported this reading with UCC comments implying that the transfer of the entire
deposit account is distinct from the transfer of funds in the account from a security
interest perspective. Id. But it also grounded its holding in the specific facts of the
case, remarking that its protection of Knoll’s security interest was consistent with both
the subrogation agreement between it and Textron, as well as the parties’ intent that
Knoll’s interest in specific receivables predominate. Id. at 797, fn. 35. Thus, in many
respects, the Fifth Circuit’s reading of Texas’s version of the statute merely tracked the
parties’ contractual obligations.
{¶64} As the court in Tusa noted, at least one other court in Texas had adopted
its interpretation prior to its decision. Id. at 796, fn.30, citing Madisonville State Bank
v. Canterbury, 209 S.W.3d 254 (Tx. Ct. App. 2006). But no other court outside of
Texas has followed this logic since the adoption of UCC 9-332(B). And notably, the
Tusa decision did not wrestle with the legislative history of UCC 9-332, nor did it
discuss contradictory federal authority—namely Keybank, 2005 U.S. Dist. LEXIS
48262—even though Keybank was decided over a decade before Tusa.
{¶65} Moreover, key factual differences separate Tusa from the case before us.
Tusa dealt with a subordination agreement between the first-priority secured party
and the ultimate transferee, and Tusa’s reading of the statute was inextricably linked
with the parties’ contractual agreement. Tusa, 811 F.3d at 790, 797 (noting that the
court’s holding, in which it deemed Texas’s version of UCC 9-332(B) inapplicable, was
“consistent with the Subordination Agreement” between the parties). In contrast, no
20 OHIO FIRST DISTRICT COURT OF APPEALS
contractual arrangement exists between FFB and TFC regarding the prioritization of
the parties’ respective security interests in Shining Knight’s and Wexford’s accounts
receivable. The first-priority secured party in Tusa also retained a security interest in
specific accounts receivable identified by contract, rather than undefined accounts
receivable as a generic asset. Id. at 789-790. Here, however, FFB secured its loan with
a general security interest in Shining Knight’s and Wexford’s receivables not
referenced by a particular account or amount number.
{¶66} In light of these distinctions, we find Keybank and Cortland to be the
more persuasive precedent on the proper interpretation of R.C. 1309.332(B). With the
statutory text as a starting point, Cortland illuminates that a security interest in a
deposit account is really no different than a security interest in the funds in the
account. Cortland, 2021-Ohio-461, at ¶ 15-16 (11th Dist.). Keybank’s analysis of the
legislative history and commentary to UCC 9-332(B) then confirms that the provision
is intended to provide broad support for transferees. See Keybank, 2005 U.S. Dist.
LEXIS 48262, at *19. While there are strong public policy arguments on both sides,
both cases make clear that the code and statute embody a legislative preference for
transactional finality over the preservation of security interests when it comes to funds
moving through deposit accounts. Id. at *13-14; Cortland at ¶ 19.
{¶67} We therefore adopt the majority approach and hold that R.C.
1309.332(B) bars recovery for conversion when funds secured by a first-priority
security interest transfer through a deposit account to a noncolluding third party. We
agree with Keybank and Cortland that R.C. 1309.332(B) strips the funds themselves,
and not just the deposit account, of the perfected security interest.
{¶68} As a result, FFB cannot recover in conversion from TFC absent
collusion, which it has not alleged in this case. While we appreciate the trial court’s
21 OHIO FIRST DISTRICT COURT OF APPEALS
concern for equity and FFB’s desire to protect its first-in-time security interest, we
must nonetheless follow the law adopted by the legislature. R.C. 1309.332(B)
represents the General Assembly’s reasoned judgment that funds transferred out of a
deposit account should not be the subject of conversion lawsuits absent some evidence
that the account holder colluded with the funds’ recipient. In the end, this means that
security interests in deposit accounts are simply less secure than other forms of
collateral.
{¶69} One additional point bears mentioning. Throughout this litigation, FFB
has shifted its theory of recovery, arguing initially that its action for conversion was to
recover the funds TFC transferred out of Wexford’s 7599 account and then later
shifting to the contention that the conversion occurred when TFC contracted to
purchase receivables from the 18 Sosna entities only after TFC asserted a R.C.
1309.332(B) defense in its initial summary judgment filing. On appeal, FFB repeats
the argument that it avoids the application of R.C. 1309.332(B) because TFC converted
its collateral at the time of the factoring agreements, before any funds ever transferred
through the 7599 deposit account.
{¶70} FFB’s contention is unpersuasive. This is because FFB could not change
its theory of recovery in response to TFC’s summary judgment response. See Aronhalt
v. Castle, 2012-Ohio-5666, ¶ 26, 41 (10th Dist.). FFB sued on a theory that TFC
converted its asset by withdrawing funds from the 7599 account, and it could not alter
that position at the summary judgment stage. Id. If FFB had intended to sue on the
basis of a contract theory rather than a transfer theory, it could have done so prior to
TFC’s summary judgment pleadings. Id.
22 OHIO FIRST DISTRICT COURT OF APPEALS
{¶71} We accordingly sustain TFC’s first assignment of error insofar as it
argues that R.C. 1309.332(B) bars FFB’s action for conversion. We remand the cause
to the trial court with instructions to dismiss FFB’s complaint.
{¶72} Our holding as to this assignment of error renders the remainder of
TFC’s appeal moot, and we decline to address TFC’s second assignment of error on
this basis.
Conclusion
{¶73} The General Assembly enacted R.C. 1309.332(B) for the stated purpose
of ensuring finality in commercial transactions. Absent collusion between a third
party receiving funds from a deposit account and the account holder, and consistent
with the legislature’s policy preference, a party with a security interest in a deposit
account cannot sue for conversion under that statute.
{¶74} FFB therefore cannot sue TFC for conversion. We accordingly sustain
TFC’s first assignment of error, reverse the trial court’s judgment, and remand the
cause to the trial court with instructions to dismiss FFB’s complaint.
Judgment reversed and cause remanded.
BOCK, P.J., and CROUSE, J., concur.
Please note: The court has recorded its own on the date of the release of this opinion.