I have a similar problem. There are many lists(divs) in my page that are sortable and connected to each other and only one of them have 'overflow:auto' and when I move a element from that div(with overflow) the element doesn't seem to move above, Instead it seems to move below and gets hidden (Actually within the div it moves properly, but it disappears or gets cut when crossing the div boundary. It gives a feeling like its moving below the screen, but still I can drag and drop it in another list). I have even set zIndex as the highest. This issue happens only in IEseries browsers. Firefox and chrome seem to work fine.
One work around will be to use helper and appendTo:'body' . This workaround works good. but I don't want to use helper in certain cases. Anyother ways? As of now this work around is fine, but I would like to have a permanent solution.