The opinion
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0200p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
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In re: DAYTON TITLE AGENCY, INC.,
-
Debtor.
_____________________________________ -
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Nos. 12-3265;3359
,
>
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THE WHITE FAMILY COMPANIES, INC.;
Appellees, -
NELSON D. WENRICK,
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-
-
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v.
RUTH A. SLONE, as Trustee of the Bankruptcy -
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Estate of Dayton Title Agency (12-3265);
PNC BANK, NATIONAL ASSOCIATION, -
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successor by merger to National City Bank
Appellants. -
(12-3359),
N
Appeal from the United States District Court
for the Southern District of Ohio at Dayton.
No. 3:01-cv-481—Walter H. Rice, District Judge.
Argued: January 16, 2013
Decided and Filed: July 31, 2013
Before: BATCHELDER, Chief Judge; MERRITT and KETHLEDGE, Circuit
Judges.
_________________
COUNSEL
ARGUED: Stephen D. Brandt, Dayton, Ohio, for Appellant in 12-3265. Marcel C.
Duhamel, VORYS, SATER, SEYMOUR AND PEASE LLP, Cleveland, Ohio, for
Appellant in 12-3359. Paul H. Shaneyfelt, DUNGAN & LEFEVRE CO., L.P.A., Troy,
Ohio, for Appellee White Family Companies in 12-3265 and 12-3359. Dianne F. Marx,
SEBALY SHILLITO + DYER, Dayton, Ohio, for Appellee Wenrick in 12-3359.
ON BRIEF: Stephen D. Brandt, Dayton, Ohio, for Appellant in 12-3265. Marcel C.
Duhamel, Heather M. Lutz, VORYS, SATER, SEYMOUR AND PEASE LLP,
Cleveland, Ohio, Terry M. Miller, VORYS, SATER, SEYMOUR AND PEASE LLP,
Columbus, Ohio, for Appellant in 12-3359. Paul H. Shaneyfelt, DUNGAN &
LEFEVRE CO., L.P.A., Troy, Ohio, for Appellee White Family Companies in 12-3265
1
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 2
and 12-3359. Dianne F. Marx, SEBALY SHILLITO + DYER, Dayton, Ohio, for
Appellee Wenrick in 12-3359.
BATCHELDER, C. J., delivered the opinion of the court in which, MERRITT
and KETHLEDGE, J.J., joined. MERRITT, J. (pp. 17–18), delivered a separate
concurrence.
_________________
OPINION
_________________
I.
ALICE M. BATCHELDER, Chief Judge. Dayton Title Agency (Dayton Title)
was a small company that brokered financial transactions, primarily real estate closings.
As part of its operation, it had an “IOTA” (Interest on Trust Account) banking account
at PNC Bank (then National City Bank)1 to hold clients’ funds in trust as money was
passed from one party to the other in a transaction.
Dayton Title facilitated a series of loans that the defendants, White Family
Companies (“White”) and Nelson Wenrick, made to one Krishan Chari and his business
partner Michael Karaman, as well as to their corporate interests, The Chari Group, Ltd.,
and Invesco, LLC, (collectively, “Chari”). During 1998 and 1999, White made a series
of five short-term “bridge loans” to Chari, ranging from $1.9 million to $3.2 million, for
30 to 45 days, to facilitate specific commercial real estate purchases by Chari. Wenrick
made a sixth bridge loan to Chari for $1.2 million in 1999. In all these transactions, the
lender would deposit the funds into Dayton Title’s PNC account and Dayton Title would
then transfer the funds to Chari. Chari’s loan payments would also pass through Dayton
Title’s account. These first six loans “were paid back in full, but not always before the
due dates.” In re Dayton Title Agency, Inc., 292 B.R. 857, 863 (Bankr. S.D. Ohio 2003).
White and Wenrick each provided another bridge loan to Chari in September of
1999, for $3.2 million and $1.6 million, respectively, or $4.8 million total. Id. Chari
1
PNC bought out National City Bank, which was the bank that actually participated in these facts,
and took over this dispute from National City. For simplicity, we refer to PNC throughout.
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 3
agreed to pay back the loans, with interest, by October 3, 1999. Several days after the
deadline Chari paid back the loans, but both checks bounced because of insufficient
funds. Finally, on October 19, Chari deposited a check for the full amount owed
($4.885 million once interest was accounted for) into Dayton Title’s trust account at
PNC. “The check was purportedly drawn on a[n] . . . account at Oak Hill Bank. The
teller at [PNC] did not place a hold on the check Chari deposited.” Id. at 864.
Continuing in its role as intermediary, Dayton Title “[o]n that same day” and
“pursuant to Chari’s instructions” issued checks to White and Wenrick. Id. On October
20, PNC extended a “provisional credit” to Dayton Title for $4.885 million (the face
value of Chari’s check), pursuant to PNC’s standard “Rules for Business Accounts.”
Banks routinely extend these credits to a customer’s checking account while a check is
clearing, allowing the funds from the check to be “available” before the check has been
fully processed (this is discussed more fully below). White exchanged its check from
Dayton Title for an official bank check on October 20. Wenrick deposited his check at
another bank and it cleared on October 25. On October 26, PNC learned that Chari’s
check was a forgery drawn on a non-existing account at another bank. Chari deposited
two additional checks in Dayton Title’s account in the subsequent weeks, but both were
returned for insufficient funds.
PNC then exercised its right of “charge back” on the Dayton Title account.
There was about $740,000 already in the account (made up of third-party funds and
Dayton Title’s fees for other transactions) when Dayton Title deposited Chari’s check.
The provisional credit from PNC added $4.885 million to the account (the face value of
the check). The payments to White and Wenrick then debited $4.885 million from the
account, leaving $740,000. Because of the “first-in first-out” rule, the $4.885 million
paid to White and Wenrick was made up of the $740,000 already in the account and
about $4.1 million from the provisional credit funds. PNC’s charge-back debited
$4.885 million. PNC regained about $740,000 of the provisional credit funds it
advanced and left Dayton title with a negative balance of about $4.1 million. It is the
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 4
roughly $4.1 million from the provisional credit funds, which were subsequently
transferred to White and Wenrick, that is contested on appeal.
PNC froze Dayton Title’s account on November 4, and Dayton Title was forced
into bankruptcy. Chari and his corporate entities declared bankruptcy and Chari was
convicted on charges of racketeering, fraud, and forgery. After Dayton Title filed for
bankruptcy, the bankruptcy estate sued White and Wenrick, seeking to avoid the $4.885
million transfer to those parties as a fraudulent transfer under federal and state law. See
11 U.S.C. § 548; Ohio Rev. Code § 1336.04(A)(2). PNC intervened as an additional
plaintiff, suing White and Wenrick for fraudulent transfer and unjust enrichment. The
bankruptcy court held that all but $722,101.49 of the transfer to White and Wenrick was
fraudulent. On appeal, the district court held that all but $20,747.13 of the transfer was
not fraudulent. The Dayton Title estate and PNC now appeal.
II.
When a case originates in bankruptcy court, we review the decision of the
bankruptcy court directly. See Stevenson v. J.C. Bradford and Co., 277 F.3d 838, 849
(6th Cir. 2002) (In Re Cannon II). We give no deference to the opinion of the district
court. Id. Because we review a grant of summary judgment here, we review the
bankruptcy court’s decision de novo. Id.
The only question on appeal is whether that portion of the payment to White and
Wenrick that was drawn from the money that PNC had advanced was an “asset” of
Dayton Title for purposes of Ohio’s fraudulent transfer statute. Federal bankruptcy law
allows a claimant to bring a fraudulent transfer claim under both federal and state law.
A federal claim is brought under 11 U.S.C. § 548. A state fraudulent transfer claim may
be brought in a bankruptcy case under 11 U.S.C. § 544 and the applicable state
provision. See In re Fordu, 201 F.3d 693, 697 n.3 (6th Cir. 1999) (“The section 544
‘strong-arm’ provision of the Code allows the trustee to ‘step into the shoes’ of a creditor
in order to nullify transfers voidable under state fraudulent conveyance acts for the
benefit of all creditors.”).
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 5
Here, Dayton Title appeals under 11 U.S.C. § 544 and the Ohio Uniform
Fraudulent Transfer Act (UFTA). See Ohio Rev. Code § 1336.01 et. seq. In Ohio, a
transfer is fraudulent as to a creditor if:
(1) It is “[a] transfer made or an obligation incurred by a debtor,”
(2) “the debtor made the transfer or incurred the obligation . . . [w]ithout
receiving a reasonably equivalent value in exchange for the transfer or
obligation,” and
(3) “either of the following applies: (a) The debtor was engaged or was
about to engage in a business or a transaction for which the remaining
assets of the debtor were unreasonably small in relation to the business
or transaction; (b) The debtor intended to incur, or believed or reasonably
should have believed that he would incur, debts beyond his ability to pay
as they became due.”
Ohio Rev. Code § 1336.04(A)(2).
Both the district court and the bankruptcy court found that the second and third
elements of the claim are satisfied here, and we agree. Dayton Title did not receive a
“reasonably equivalent value” in exchange for its payments to White and Wenrick. As
the bankruptcy court explained, the transfer “created $4,885,000.00 in new claims
against Dayton Title that did not exist prior to the transfer.” In re Dayton Title Agency,
Inc., 262 B.R. 719 (Bankr. S.D. Ohio 2001). Dayton Title received nothing of value in
return for the transfer; nor was the transfer made to satisfy any obligation of Dayton
Title, because Chari, not Dayton Title, owed the money to White and Wenrick.
The transaction also left Dayton Title with remaining assets that were
unreasonably small in relation to the business or transaction. See id. at 732. In fact, the
transaction left Dayton Title some $4.1 million in debt. Again, “[t]he transfer not only
depleted Dayton Title’s assets, but left it unable to continue in business.” Id. at 733.
It is the first element of the claim–whether the transaction was a “transfer” for
purposes of the Ohio statute–that is at issue in this appeal.
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 6
III.
The question in this case is whether the payments made to White and Wenrick
qualify as a “transfer made . . . by the debtor.” A “transfer” is defined as a means of
disposing of an “asset.” See Ohio Rev. Code § 1336.01(L). An “asset” is defined as
“property of a debtor.” See Ohio Rev. Code § 1336.01(B). The definition of an asset
excludes, however, all of the following:
(1) Property to the extent it is encumbered by a valid lien;
(2) Property to the extent it generally is exempt under nonbankruptcy
law, including, but not limited to, section 2329.66 of the [Ohio] Revised
Code;
(3) An interest in property held in the form of a tenancy by the entireties
created under section 5302.17 of the [Ohio] Revised Code prior to April
4, 1985, to the extent it is not subject to process by a creditor holding a
claim against only one tenant.
Id. The primary question on appeal is whether White and Wenrick received Dayton
Title’s “assets,” because these plaintiffs may bring a fraudulent transfer claim only for
assets that belonged to Dayton Title.
For purposes of this question, the bankruptcy court split the $4.885 million
payment to White and Wenrick into three parts: (1) $20,747.13 in the account that
constituted fees and expenses owed to Dayton Title in connection with various real
estate closings; (2) $722,101.49 that Dayton Title was holding in its account on behalf
of third parties at the time of the transfer; and (3) $4,142,151.38 that came from PNC’s
provisional credit and resulted in a negative balance on Dayton Title’s account when
PNC charge-backed the credit after the check was returned. In re Dayton Title Agency,
Inc., 292 B.R. 857, 864, 870 (2003). Both the bankruptcy court and the district court
held that the first part–Dayton Title’s fees–is property of the estate, and that portion of
the transfer is fraudulent. Both courts also held that the second part–the third party trust
funds–is not property of the estate, and that portion of the transfer is not fraudulent.
These conclusions are not challenged by the parties. Only the third part–the transfer of
the provisional credit funds–is disputed in this appeal.
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 7
White and Wenrick argue that the provisional credit funds are not the assets of
Dayton Title: (A) the funds are trust funds belonging to a third party, or, alternatively,
(B) the funds are subject to PNC’s valid lien on the fraudulent check.
A.
The first argument is that the provisional credit funds transferred from Dayton
Title to White and Wenrick were trust funds and, therefore, were not the “assets” of
Dayton Title. The lower court opinions and the briefs primarily struggle with the
application of Stevenson v. J.C. Bradford and Co., 277 F.3d 838 (6th Cir. 2002) (In re
Cannon II). Cannon II grappled with the definition of “property of the estate” in a
federal fraudulent transfer claim, not a state claim. We note, however, that at least one
Ohio bankruptcy court has found the federal and state claims to be “substantially
similar.” See In re Grove-Merritt, 406 B.R. 778, 789 (Bankr. S.D. Ohio 2009). The
bankruptcy court here applied Cannon II without questioning the federal-state distinction
because the district court had remanded the case to the bankruptcy court specifically for
consideration of Cannon II, finding that Cannon II applied based on the reasoning of
Grove-Merritt.
The court in Cannon II found that “property of the estate” included only “that
property that would have been part of the estate had it not been transferred before the
commencement of the bankruptcy proceedings. . . . ‘[B]ecause the debtor does not own
an equitable interest in property he holds in trust for another, that interest is not property
of the estate.’” Cannon II, 277 F.3d at 849 (quoting Begier v. IRS, 496 U.S. 53, 58-59
(1990)). Thus, assets held in trust are excluded from the debtor’s estate and are not
subject to fraudulent transfer claims because the holder of a trust has only legal title. Id.
State law determines whether an asset is held in trust. Id.
Under Ohio law a trust is created when there is:
[1] an explicit declaration of trust, or circumstances which show beyond
reasonable doubt that a trust was intended to be created, [2] accompanied
with an intention to create a trust, [3] followed by an actual conveyance
or transfer of lawful, definite property or estate or interest, made by a
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 8
person capable of making a transfer thereof, for a definite term,
[4] vesting the legal title presently in a person capable of holding it.
Ulmer v. Fulton, 195 N.E. 557, 564 (Ohio 1935). The existence of a trust must be shown
by clear and convincing evidence. Hill v. Irons, 113 N.E.2d 243, 248 (Ohio 1953).
The provisional credits in this case were not held in trust for a third party under
Ohio law. At first glance, both of the first two elements of a trust appear to be satisfied
here: Dayton Title established a trust account, evidencing an intention to create a trust.
Dayton Title intended to create a trust relationship with Chari. However, there is no
trust here because there was no actual conveyance from Chari to Dayton Title. Dayton
Title received the funds from PNC as part of its contractual banking agreement with
PNC. Dayton Title did not receive the funds from Chari—Chari’s check bounced, so
Chari put no funds into Dayton Title’s account.
And while PNC did in fact actually convey funds to Dayton Title, PNC did not
place those funds in trust. There was never an explicit declaration of trust by PNC nor
are there circumstances showing that PNC intended to place property in trust. There is
no evidence that Dayton Title intended to hold property from PNC in trust. There may
have been an actual conveyance between PNC and Dayton Title, but the first two
elements are not satisfied. Nor, importantly, can the transfer from PNC to Dayton Title
vest legal title in Dayton Title and vest equitable title in White and Wenrick. Dayton
Title could be obligated to pay the funds to White and Wenrick only if the funds had
come from Chari.
White and Wenrick argue that Dayton Title was so obligated: because Dayton
Title would have been obligated to pay Chari’s check to White and Wenrick, Dayton
Title should hold the provisional credits in trust as well. But again, Chari never
conveyed any funds to Dayton Title. As the bankruptcy court put it: “the trust
relationship, if one had been created, would have been between Chari and Dayton Title
and, then, only to the extent Chari’s check resulted in a lawful conveyance of property.
Because this did not occur, no trust relationship was created.” In re DTA, 292 B.R. at
872.
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 9
The district court nonetheless held that Cannon II demanded a different
conclusion. Cannon was a Tennessee attorney who did a high volume of real estate
closings, averaging over 100 closings a month, and who had between $5 and $10 million
flowing through his trust accounts each month as a result. Cannon II, 277 F.3d at 843.
Cannon embezzled money from the accounts and kited checks as well.2 Id. at 844. At
some point, Cannon also deposited personal funds into the trust account in an attempt
to hide the scheme. Id. at 851. After Cannon was caught and filed for bankruptcy, a
federal fraudulent transfer suit was brought against the investor to whom he had paid
much of the embezzled funds. An accounting of the embezzled funds estimated that
83% of them were real estate closing funds taken from Cannon’s clients, 15% could be
traced to check kiting, and about 0.5% was traceable to Cannon’s personal assets. Id.
at 846.
The court in Cannon II made three separate holdings, all based on Tennessee law.
First, “the funds Cannon held in escrow for his clients were without question maintained
in an express trust” under Tennessee law. Id. at 850. Because they were trust funds, the
funds held in escrow were outside the estate and not subject to the fraudulent transfer
statute. Second, the court considered the personal funds that Cannon had deposited into
the trust account. The court decided that the personal funds had become part of the
escrow account because they were restitution for misappropriated funds. Id. at 851
(citing G.G. Bogert, et al., The Law of Trusts and Trustees § 929 (“Deposits as
restorations of trust funds after misappropriation”) (rev. 2d ed. 1984)). Third, the court
held that the funds misappropriated from the escrow accounts were considered converted
under Tennessee law. Since “one who obtains property by conversion acquires no title,
voidable or otherwise,” any misappropriated funds could not be part of Cannon’s estate.
Id.3
2
Check kiting is an illegal scheme that takes advantage of the lag time between when the bank
advances provisional credit for a check and when the bank receives final payment for the check.
3
It is unclear from the context whether this holding is meant to apply to the trust funds of third
parties or to the money obtained through check kiting. Cannon II, 277 F.3d at 850. What is clear is that
one of these three holdings was applied to provisional credits obtained through check kiting; thus, we
consider the applicability of all three holdings to this case.
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 10
In the present case, the district court reasoned that the provisional credit funds
that Cannon received as part of his check-kiting scheme were analogous to the
provisional credit funds Dayton Title received as a result of Chari’s fraudulent check.
The district court explained:
Of particular present pertinence is the Sixth Circuit’s conclusion that
$1,137,500 in Cannon’s trust accounts was not property of his
bankruptcy estate, even though that sum was based on provisional credits
made as a result of a check kiting scheme. Similarly, herein, [the bank]
made provisional credits to DTA’s trust account, based upon the deposit
therein of a forged check.
The district court concluded that the provisional credits here must also be trust funds.
While the similarities between the two cases are facially appealing, the district court’s
argument overlooks important differences.
None of the holdings in Cannon II applies to the provisional credit funds here.
As explained above, the provisional credit funds here were not held in trust for a client
or any other third party. Dayton Title never received any funds from Chari. Nor are the
provisional credits analogous to the personal funds Cannon placed in his trust account
as restitution. Dayton Title never misappropriated funds in the first place, so these
provisional funds from PNC cannot be restitution. Finally, the provisional credits are
not analogous to the funds converted by Cannon. The provisional credits were placed
in Cannon’s account as a result of his own wrongdoing, whereas here the provisional
credits were placed in Dayton Title’s account through no wrongdoing of its own. So
where in Cannon II the court asked whether, under state law, Cannon converted the
funds or obtained them by fraud, we never reach that question here because Dayton Title
obtained the funds legitimately. This case was set in motion by Chari’s fraud, but
Dayton Title obtained the funds according to the terms of its contract with PNC, not by
conversion or fraud.
In sum, Cannon II is simply inapposite here. Dayton Title did not hold the
provisional credit funds in trust.
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 11
B.
Next, White and Wenrick argue and the district court held that Dayton Title had
only legal title and not equitable title to the transferred funds because PNC had a security
interest in the funds. Under the U.C.C. as adopted in Ohio, PNC is both the “depositary
bank” (“the first bank to take an item”) and a “collecting bank” (“a bank handling the
item for collection except the payor bank”). See Ohio Rev. Code § 1304.01(B)(2) and
(5). As a collecting bank, PNC arguably had a security interest in the funds under Ohio
Rev. Code § 1304.20, which codifies U.C.C. § 4-210. That section provides as follows:
(a) A collecting bank has a security interest in an item and any
accompanying documents or the proceeds of the item or documents in
any of the following manners:
(1) In the case of an item deposited in an account, to the
extent to which credit given for the item has been
withdrawn or applied;
(2) In the case of an item for which it has given credit
available for withdrawal as of right, to the extent of the
credit given, whether or not the credit is drawn upon or
there is a right of charge-back;
(3) If it makes an advance on or against the item.
(b) If credit given for several items received at one time or pursuant to a
single agreement is withdrawn or applied in part, the security interest
remains upon all the items, any accompanying documents, or the
proceeds of either. For the purpose of this section, credits first given are
first withdrawn.
(c) Receipt by a collecting bank of a final settlement for an item is a
realization on its security interest in the item, accompanying documents,
and proceeds. So long as the bank does not receive final settlement for
the item or give up possession of the item or possession or control of the
accompanying documents for purposes other than collection, the security
interest continues to that extent and is subject to Chapter 1309[] of the
Revised Code, except for all of the following:
(1) No security agreement is necessary to make the
security interest enforceable under division (b)(3)(a) of
section 1309.203 of the Revised Code.
(2) No filing is required to perfect the security interest.
(3) The security interest has priority over conflicting
perfected security interests in the item, accompanying
documents, or proceeds.
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 12
U.C.C. § 4-210, codified at Ohio Rev. Code § 1304.20. A collecting bank receives a
security interest in a check (the “item”) and its proceeds to the extent it advances a
provisional credit to a depositor’s account in recognition of that check, if the depositor
can withdraw those funds “as of right.” Id. at (a)(2). The security interest is in the check
itself and its proceeds; White and Wenrick argue that the security interest is also in the
provisional credit funds.
The U.C.C. implies in subsection (c) above that the security interest plays an
important role in recovering the bank’s provisional extension of funds, but it is unclear
how it plays such a role.4 The district court agreed with White and Wenrick that the
U.C.C. security interest extends to the provisional funds:
Although the failure of [PNC] to claim a security interest could have
affected its recovery during [Dayton Title’s] bankruptcy proceedings,
[PNC] nevertheless had a security interest in the funds from forged
checks Chari wrote on a closed account, by operation of law, pursuant to
§ 1304.20(A)(1). Therefore this Court agrees with the alternative
premise of White and Wenrick that [Dayton Title] had nothing more than
mere legal title to the funds that were transferred from its trust account
to them, given that [PNC] had a security interest in those funds.
The district court here treats the “funds that were transferred” to White and Wenrick as
equivalent to the “funds from forged checks.” In the language of Ohio Rev. Code
§ 1304.20, the district court treats the transferred provisional credit funds as the
“proceeds” of the forged checks, and so gives PNC a security interest in the transferred
provisional credit funds. Thus, since the provisional credit funds cannot be an “asset”
of Dayton Title “to the extent [they are] encumbered by a valid lien,” the transfer to
White and Wenrick by Dayton Title could not be invalidated as a fraudulent transfer
under Ohio law. See Ohio Rev. Code § 1336.01(B). We disagree with the district court
4
Subsection (c) provides that the security interest continues if there is no final settlement of the
check, and notes that no filing or security agreement is necessary to perfect the interest. Ohio Rev. Code
§ 1304.20(c). This “correlates the security interest with the provisions of Article 9, particularly for use
in the cases of noncollection in which the security interest may be important.” Id. comm. 3. Elsewhere,
the U.C.C. clearly states that a person with a security interest under U.C.C. § 4-210 is a secured party
under Article 9. U.C.C. § 9-102 (73).
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 13
because the text of Ohio Rev. Code § 1304.20 simply does not support the idea that the
provisional credit funds are the proceeds of the check.
Understanding how a successful check collection works provides a framework
for analyzing the unsuccessful check collection here. The collection process can be
viewed as a principal-agent or debtor-creditor relationship and can be conceptually
divided into three steps.5 In the initial transaction, the depositor presents the check to
the bank, and the bank takes the check and agrees to act as the collecting agent for the
depositor. As Ohio Rev. Code § 1304.20 explains, the bank may also advance to the
depositor a provisional credit for the face value of the check and receive a security
interest in the check (the “item” in § 1304.20) and its proceeds. The second step in the
process is the collection of the check. The depositor’s bank will pass along the check,
usually through one or more intermediary banks, until it reaches the bank of the check-
writer. That bank then withdraws the funds from the check-writer’s account and passes
those funds back along the collection chain to the depositor’s bank. The third step is the
“second transaction” between the depositor and the depositor’s bank, which is often
invisible to the depositor. The depositor’s bank receives the funds from the check, keeps
these funds in satisfaction of its security interest, and converts the provisional credit to
the final payment (or “final settlement”) to the depositor.6 When a check cannot be
collected, the bank can revoke the provisional credit and “charge back the amount of any
credit given for the item to its customer’s account.” Ohio Rev. Code § 1304.24(A).
Here, the transfer to White and Wenrick occurs during step two–while the check
is being collected by PNC. PNC does have a security interest in Chari’s bad check
because the first step of the check collection–i.e., the deposit of that check into Dayton
5
“Subsection (a) states a rational rule for the interest of a bank in an item. The customer of the
depositary bank is normally the owner of the item and the several collecting banks are agents of the
customer (Section 4-201). A collecting agent may properly make advances on the security of paper held
for collection, and acquires at common law a possessory lien for these advances.” Ohio Rev. Code
§ 1304.20, comm. 1.
6
“Collection statistics establish that the vast majority of items handled for collection are in fact
collected. The first sentence of subsection (c) reflects the fact that in the normal case the bank’s security
interest is self-liquidating.” Ohio Rev. Code § 1304.20 comm. 3. “In due course the provisional
settlements become final simply with the lapse of time.” Ohio Rev. Code § 1304.24 comm. 1.
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 14
Title’s PNC account–has been completed. That security interest is worth the value of
the provisional credit, approximately $4.1 million. Although the check is worthless in
hindsight, and so the security interest may seem worthless in hindsight, the Sixth Circuit
has found that the security interest is worth as much as the bank “lent out” in provisional
funds. See First Tennessee Bank v. Stevenson, 237 F.3d 716, 721 (6th Cir. 2001) (In Re
Cannon I). “For the period during which [the bank] extended a provisional credit . . . the
kited checks are worth every penny of their face value . . . [because the depositor]
exercised effective control over ‘cash’ money equivalent to the face value of the
checks.” Id. at 721. The text of the U.C.C. demands this interpretation because it clearly
contemplates a security interest that survives noncollection of the check. The First
Tennessee court explained: “The security interest granted by article 4 is designed to
cover situations where the deposited check is ultimately dishonored by the drawee
institution by giving the depositor bank an expansive security interest. The security
interest lies in the kited check itself, as well as all of its proceeds, whatever form they
might take.” So PNC does have a security interest in the check under Ohio Rev. Code
§ 1304.20, which codifies U.C.C. § 4-210.
However, the provisional credit funds are not the “proceeds” of the check here.
First, there is no express textual support for concluding that they are proceeds. Ohio
Rev. Code § 1304.20 clearly grants PNC a security interest in the check itself and in its
proceeds when PNC extends the provisional credit. It mentions nothing about a security
interest in the funds PNC is extending.
Second, the initial transaction–where PNC receives Chari’s check from Dayton
Title and extends provisional credit in return–cannot be the transaction that makes the
provisional funds “proceeds” of the check. “Proceeds” include the following:
(A) whatever is acquired upon the sale, lease, license, exchange, or other
disposition of collateral;
(B) whatever is collected on, or distributed on account of, collateral;
(C) rights arising out of collateral;
(D) to the extent of the value of collateral, claims arising out of the loss,
nonconformity, or interference with the use of, defects or infringement
of rights in, or damage to, the collateral; or
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 15
(E) to the extent of the value of collateral and to the extent payable to the
debtor or the secured party, insurance payable by reason of the loss or
nonconformity of, defects or infringement of rights in, or damage to, the
collateral.
U.C.C. § 9-102(a)(64), codified at Ohio Rev. Code § 1309.102(a)(64). Whether the
provisional credit may be labeled “proceeds” of the check later in the collection process
when the check clears and the provisional credit automatically becomes the final
payment on the check, it can only become the proceeds of the check as a result of that
collection process and the “second transaction” with the depositor. It cannot become
proceeds as the result of just the initial transaction. The check is not “collateral” for the
provisional credit until the initial transaction is completed. So while the provisional
credit is acquired in “exchange” for the check or “distributed on account of” the check,
that check is not collateral until after the provisional credit has been extended. Looking
at the initial transaction in isolation, there is no reason to believe that PNC receives a
security interest in the money it advances. This was the only transaction that had been
completed by the time Dayton Title transferred the funds to White and Wenrick. Since
the initial transaction did not extend PNC’s security interest to the provisional funds,
PNC did not have a lien on the funds, and the funds were the property of Dayton Title.
Third, there is no support for the idea that the bad check here had “proceeds” at
all. The check was fraudulent, written on a non-existing account. While it is true that
U.C.C. § 4-210(c) presumes that even uncollected checks can have “proceeds,” there is
no reason why this uncollected check must have proceeds. A fraudulent check, drawn
on a non-existent account, is unlikely to have proceeds.
This holding is consistent with First Tennessee, despite that case’s declaration
of an “expansive security interest” in a check and its “proceeds, whatever form they
might take.” First Tennessee Bank, 237 F.3d at 721. First Tennessee makes this broad
claim in a context very different from the context here. First Tennessee Bank was able
to recover its provisional credit through its right of charge-back, after the depositor had
transferred funds back into the depositing account. The depositor’s bankruptcy estate
later sued the bank seeking to avoid the charge-back as a preferential transfer. First
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 16
Tennessee simply holds that the bank still had a security interest under U.C.C. § 4-210
despite the bounced check, that the security interest was for the full amount of the
provisional credit, and that the bank was thus a preferred creditor.7
The only instance where any court has found provisional credits to be the
proceeds of a bad check is when a bank has passed the check on to another bank along
the collection chain and in return received provisional credit for the check from that
collecting bank. See, e.g., Laws v. United Mo. Bank of Kan. City, 98 F.3d 1047, 1052
(8th Cir. 1996). Such a situation is distinguishable from this case. In a case such as
Laws, a bank receives a security interest from its transaction with the depositor. It then
receives the provisional credit in a second transaction with the collection-chain bank and
so may be able to consider the result of the second transaction to be “proceeds” of the
check.
Thus, the provisional credit funds were not encumbered by a lien at the time of
transfer and they were “assets” held by Dayton Title as that term is defined by Ohio’s
fraudulent transfer act. See Ohio Rev. Code § 1336.01(B). Because Dayton Title
transferred assets of its estate to White and Wenrick and that transfer satisfies the other
elements of a fraudulent transfer claim under Ohio Rev. Code § 1336.01 et. seq., we hold
that the transfer of the provisional credit funds was fraudulent and remand this case for
action consistent with this opinion.
IV.
For the foregoing reasons, we REVERSE the judgment of the district court and
AFFIRM the judgment of the bankruptcy court.
7
Even without a security interest directly in the provisional credit, there are a number of ways that
a bank can regain those funds. The bank’s security interest makes the bank a creditor of the depositor,
allowing the bank to pursue the depositor directly. The bank’s right of charge back gives the bank access
to any funds in the depositor’s account, and its security interest protects the bank against preference
actions, as it did in First Tennessee. See U.C.C. § 4-214, codified at Ohio Rev. Code § 1304.24. Finally,
its continued interest in the check itself gives the bank access to the account of the check-writer (although
here that account is non-existent).
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 17
__________________________
CONCURRENCE
__________________________
MERRITT, Circuit Judge, concurring. I agree with the court’s opinion but write
to make what may be an obvious point that the result is fair between the parties and
would be the result at common law without bringing the Uniform Commercial Code into
the picture.
Though on the surface it may seem unfair to penalize White and Wenrick by
taking back the money, in reality their business was with Chari, not with Dayton Title,
and they would never have had this money in the first place had they been dealing with
Chari directly. Similarly, if Dayton Title had simply indorsed the check to White and
Wenrick without the bank’s intervention, then White and Wenrick would have had
nothing but a worthless check. So there is no unfairness when White and Wenrick are
required to return money they would not have received in the absence of the bank
deposit and the way bank deposits are treated by the commercial check-deposit law.
If any party besides Chari is to blame, one might blame the bank, which could
have prevented this mess by refusing to extend to Dayton Title the provisional credit and
by waiting for Chari’s check to clear. But our commercial law, in order to facilitate
commerce, gives bank customers instant access to deposits, and a victory for the
defendants here would undermine that purpose.
The defendants think Dayton Title had only a legal interest in these funds
because Chari intended to create a trust. But Chari intended nothing of the sort. He
intended only to create a fraud. Dayton Title was able to transfer funds from its account
to the defendants because the bank offered it a provisional credit, not because Chari put
funds into the account. Moreover, the provisional credit was unencumbered by a lien,
contrary to the defendants’ second theory of why the provisional credit does not qualify
as property. Under U.C.C. § 4-210, the bank has a lien on the check itself and its
proceeds—which were nonexistent here—but not the provisional credit. The bank has
avenues to collect the value of a provisional credit, such as charging back the customer’s
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 18
account, but a lien on the provisional credit is not one of them. So I agree with the
outcome of this case not simply because of a linguistic analysis of the interlocking state
and federal statutes, but also because the result makes good sense as a matter of fairness
between the parties and good commercial policy.