In stepping through the code, I see that the logic only detects for the presence of one corner inside another. So when the draggable is larger, it can overlap yet have no corner inside. This change solved the problem for me:

case 'touch':
	return ( (y1 >= t && y1 <= b) ||	// Top edge touching	
		 (y2 >= t && y2 <= b) ||	// Bottom edge touching	
		 (y1 < t && y2 > b)		// Surrounded vertically	
		) && (
		 (x1 >= l && x1 <= r) ||	// Left edge touching	
		 (x2 >= l && x2 <= r) ||	// Right edge touching	
		 (x1 < l && x2 > r)		// Surrounded horizontally
		);

You can see this working at:

http://cobalt.scorpiontechnology.com/Test/HTMLPage2.htm

JK