Recently, the Ohio Court of Appeals for the First Appellate District found that a party with a security interest in a deposit account cannot sue for conversion under the Ohio Revised Code absent evidence of collusion between a third-party receiving funds from a deposit account and the account holder. The decision reversed and remanded a decision by the a lower county court.

In the underlying case, the plaintiff bank held a security interest in the deposit accounts of certain healthcare companies. After it was discovered that the health care companies were engaged in a check-kiting scheme, the plaintiff bank sought to recover funds that the healthcare companies had transferred from the deposit account to the defendant third-party merchant cash advance company. A footnote shared “check kiting” is a fraudulent act of 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.

The appellate court considered whether the statute in question, Ohio Revised Code (R.C.) 1309.332(B), “bars recovery for conversion when funds secured by one party’s security interest are withdrawn from a deposit account by another party.” In reaching its decision, the Court highlighted the virtually identical commentary in R.C. 1309.332(B) and UCC 9-332(B), to explain that the law “affords broad protection to transferees who take funds from a deposit account” and that extinguishing the security interest once funds have transferred out of a deposit account to a non-colluding transferee “helps to ensure that security interests in deposit accounts do not impair the free flow of funds.”

Adopting the majority approach in other jurisdictions, the court found that R.C. 1309.332(B) bars recovery for conversion absent collusion, which the plaintiff bank had not alleged in this case. The court emphasized that both the meaning of the statute and legislative history “suggest broad protection for transferees of funds from a deposit account,” and a preference for finality in financial transactions.

The appellate court remanded the case with instructions to dismiss the plaintiff’s complaint, underscoring that security interests in deposit accounts are less secure than other forms of collateral.