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 _________________

In re: DAYTON TITLE AGENCY, INC.,

Debtor.

_____________________________________

THE WHITE FAMILY COMPANIES, INC.;

NELSON D. WENRICK,

Appellees,

v.

RUTH A. SLONE, as Trustee of the Bankruptcy

Estate of Dayton Title Agency (12-3265);

PNC BANK, NATIONAL ASSOCIATION,

successor by merger to National City Bank

(12-3359),

Appellants.

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Nos. 12-3265;3359

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

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.

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
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

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.

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
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

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).

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
No. 12-3265;3359 White Family Co., Inc., et al. v. Slone, et al. Page 13

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.

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 checkwriter. 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
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

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).

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.
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.