695 F.

2d 1109
8 Collier Bankr.Cas.2d 34, 9 Bankr.Ct.Dec. 1429,
Bankr. L. Rep. P 68,919

In re IOWA PREMIUM SERVICE CO., INC., Debtor.

IOWA PREMIUM SERVICE CO., INC., Appellee,
v.
FIRST NATIONAL BANK IN ST. LOUIS, ST. LOUIS,
MISSOURI, Appellant.
No. 81-2060.

United States Court of Appeals,

Eighth Circuit.
Submitted Oct. 13, 1982.
Decided Dec. 17, 1982.

W.D. Brittin, Jr., F.L. Burnette, II, Nyemaster, Goode, McLaughlin,

Emery & O'Brien, P.C., Des Moines, Iowa, for appellant First Nat. Bank
in St. Louis.
Thomas L. Flynn, Wimer, Hudson, Flynn & Neugent, P.C., Des Moines,
Iowa, for appellee Iowa Premium Service Co., Inc.
Before LAY, Chief Judge, FLOYD R. GIBSON, Senior Circuit Judge,
and HEANEY, BRIGHT, ROSS, McMILLIAN, ARNOLD and JOHN R.
GIBSON, Circuit Judges, en banc.
FLOYD R. GIBSON, Senior Circuit Judge.

First National Bank in St. Louis (Bank) appeals from an order of the bankruptcy
court, 12 B.R. 597,1 which denied the Bank's motion to amend an order
directing the return of funds received by the Bank because such funds
constituted a preference under the Bankruptcy Act. A panel of this Court
affirmed the judgment, one judge dissenting. 676 F.2d 1220. Rehearing en banc
was granted, and the case was reargued.2 We now reverse.

I. Facts

Debtor-appellee Iowa Premium Service Co. (IPSCO), a premium finance

company, borrowed $400,000.00 from appellant Bank and in exchange
executed a promissory note on November 13, 1979, payable to the Bank. The
interest was to be calculated daily at a rate that could fluctuate (prime + 1
1/4%) and paid monthly. The note was subject to payment on demand and
subject to prepayment. The note by its terms matured on July 31, 1980. IPSCO
regularly made interest payments pursuant to the agreement, including the
payments at issue here. The payments at issue were made by IPSCO in the first
half of the month in May, June, and July, 1980, for the interest which accrued
in each of the preceding months.3 Shortly after IPSCO made the payment in
July for the June interest the Bank learned of IPSCO's insolvency. On July 31,
1980, IPSCO filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code. 11 U.S.C. Secs. 1101-1174, (Supp. III 1979).

IPSCO as debtor-in-possession sought the return of the last three interest

payments arguing they were preferential transfers because they were made
within ninety days before the date of the filing of the petition of bankruptcy. Id.
at Sec. 547(b)(4)(A).4 The Bank argued that the payments fell within an
exception to the preferential transfer section in Sec. 547(c)(2) for payments
made in the ordinary course of business and made not later than forty-five days
after the debt was incurred.5 The parties stipulated that the payments were
made in the ordinary course of business, so the only issue was whether the
payments were made within forty-five days after the debt was incurred. IPSCO
argued that the debt for the interest payments was incurred when the note was
executed. The Bank argued that the debt was incurred daily as each day's
interest accrued.6 The bankruptcy court found in IPSCO's favor, concluding
that the debt for the interest payments was incurred when the note was
executed.

II. Analysis
4

Before discussing the relevant statutes and case law, it is important to

understand the contingent nature of the debt at issue. IPSCO was obligated to
pay interest only for the time it retained the use of the money that the Bank had
loaned to it. The interest accrued daily, and under the terms of the agreement
IPSCO became obligated to pay at the scheduled rate at the end of the month.
The Bank would not have a cause of action for nonpayment of the interest until
the end of the month in which IPSCO retained use of the principal. IPSCO had
the option to prepay the loan, and if it did so the total interest payments would
have been less than if the payments were made according to schedule. The
amount of interest IPSCO was obligated to pay was not reduced to a sum
certain as of the date of execution of the note and this would be the case even if

the interest rate did not fluctuate. A fixed obligation arose only after each day
IPSCO retained the use of the money. IPSCO's argument is that the debt for the
interest was incurred on the date of execution even though an action would not
lie to collect the interest at that time.
5

The Bankruptcy Act does not define when a debt is incurred. It does define
"debt" as "liability on a claim." 11 U.S.C. Sec. 101(11) (Supp. III 1979). The
Act defines a "claim" as a:

(A) right to payment, whether or not such right is reduced to judgment,

liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives
rise to a right to payment, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, or unsecured[.]

Id. at Sec. 101(4). The House and Senate reports on the Bankruptcy Act say
that the terms "debt" and "claim" are coextensive. S.Rep. No. 989, 95th Cong.,
2d Sess. 23, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5809;
H.R.Rep. No. 595, 95th Cong., 1st Sess. 310, reprinted in 1978 U.S.Code
Cong. & Ad.News 5963, 6267 [hereinafter House Report]. These provisions
leave unanswered the question of when the debt is "incurred." However,
bankruptcy case law indicates that an interest debt is not incurred until the
interest accrues.

Cases interpreting Sec. 547(c)(2) hold that a debt is incurred on the date upon
which the debtor first becomes legally bound to pay, a conclusion with which
we agree. Barash v. Public Finance Corp., 658 F.2d 504, 512 (7th Cir.1981); In
re Ken Gardner Ford Sales, Inc., 10 B.R. 632, 647 (Bkrtcy.E.D.Tenn.1981); In
re McCormick, 5 B.R. 726, 731 (Bkrtcy.N.D.Ohio 1980).

10

There can be no doubt that IPSCO was not legally bound to pay interest when
the note was executed; it had no obligation to pay interest until it used the
money. IPSCO can be compared to a tenant who leases property; the tenant
pays for the continued use of the property, not just for taking possession.7
Interest is simply rent for the use of money. IPSCO can also be compared to a
customer of an electric utility. The customer agrees to pay for whatever
electricity it uses, but the debt to the utility is not incurred until the resource is
consumed. A customer does not incur a debt when it makes the original

agreement with the utility. Likewise, IPSCO agreed to pay interest for the use it
made of the money, but the debt was not incurred until IPSCO actually used the
money. This analogy is found in the House Report at 373, and it is discussed in
Barash, 658 F.2d at 509, and 4 Collier on Bankruptcy, p 547.38 (15th ed.1982).
Similarly, the court in In re Hersman, 20 B.R. 569, 571-72 (Bkrtcy.N.D.Ohio
1982) held that the mere establishment of a creditor-debtor relationship in the
context of a credit card agreement was not the incurrence of a debt.
11

Collier states that a debt is incurred when the debtor obtains a property interest
in the consideration exchanged giving rise to the debt. 4 Collier, supra, at p
547.38. It is clear that this definition would apply to interest payments once one
understands that the use of the money for another day is new consideration
each day.

12

Furthermore, only two cases other than the instant case discuss the question of
when a debt for an interest payment is incurred, In re Goodman Industries, Inc.,
21 B.R. 512, 521-22 (Bkrtcy.D.Mass.1982); Ken Gardner, 10 B.R. at 647, and
the latter reaches the same conclusion we do. The cases relied on by IPSCO are
distinguishable. Barash, McCormick, and In re Bowen, 3 B.R. 617
(Bkrtcy.E.D.Tenn.1980) addressed the issue of when a debt for a payment
under an installment plan is incurred. Some or all of the payments were mixed
principal-and-interest payments; others might not have had an interest
component. The courts did not discuss the possibility of segregating the interest
portion of the installment payments, so these cases cannot be said to have
reached a conclusion as to when the debt for the interest was incurred.
Furthermore, the judge who decided Bowen was the same judge who decided
Ken Gardner. In Ken Gardner he did give separate consideration to the interest
payments and distinguished them from the installment payments in Bowen. 10
B.R. at 647. As for the Goodman case, the court reached its conclusion by
citing Barash, McCormick, Bowen, and the bankruptcy court in the instant
case, but the court offered no analysis. The court cited Ken Gardner as offering
a contrary view, but it made no attempt to reconcile the fact that Bowen and
Ken Gardner were decided by the same judge.

13

Finally, the policies behind the preferential section are consistent with the
language of the Bankruptcy Act. The exception to the preference section is
intended to insulate ordinary trade credit transactions that are kept current, and
Congress believed that such transactions would involve the provision of a
product in one month and the billing for the product near the beginning of the
following month. Levin, An Introduction to the Trustee's Avoiding Powers, 53
Am.Bankr.L.J. 173, 186-87 (1979). The product a bank deals in is money, and
a bank charges for the continued use of money. If IPSCO's interpretation of the

Act were adopted, banks would be in a disadvantaged position compared with

trade creditors who deal in the sale of tangible goods. Putting banks in such a
position would discourage them from giving loans to marginal debtors, which
would increase the likelihood of bankruptcies.
14

We are not suggesting that there are not countervailing policy considerations.
When dealing with reorganization, one creditor's gain is usually another's loss.
Congress could decide that banks are less in need of protection than other
creditors and legislate accordingly. But a court should not make such a decision
absent evidence of a congressional intent to do so, especially when the plain
language and usual meaning of the words are clear. We will treat interest
obligations like any other debt and hold that a debt for interest payments is
incurred on the date upon which the obligor first becomes legally bound to pay
that interest. In this case the obligor first became legally bound to pay on the
date on which the interest accrued.

15

The judgment of the bankruptcy court is reversed.

16

ROSS, Circuit Judge, dissenting, with whom HEANEY and McMILLIAN,

Circuit Judges, join.

17

It is my opinion that the interest payments were made more than 45 days after
the debt was incurred, and I therefore dissent. I do not share in the majority's
certainty that there can be no doubt as to when IPSCO became legally bound to
make the interest payments. The parties agree that the sole issue on appeal is
whether the transfer was made not later than 45 days after the debt was
incurred as is required by section 547(c)(2)(B). More simply, whether the debt
for interest was incurred on November 13, 1979, when the note was executed,
or monthly as each payment came due. I believe that the debt was incurred on
November 13, 1979; thus, the interest payments were preferential transfers not
insulated by the section 547(c)(2) exception.

18

Congress has not defined when a debt is incurred. However, case law holds that
a debt is "incurred" on the date upon which the debtor first becomes legally
bound to pay. See Barash v. Public Finance Corp., 658 F.2d 504 (7th Cir.1981);
In re McCormick, 5 B.R. 726 (Bkrtcy.N.D.Ohio 1980); In re Bowen, 3 B.R. 617
(Bkrtcy.E.D.Tenn.1980). I submit that Congress intended the phrase here
involved to relate only to the date the debtor originally undertook the obligation
to pay the debt in question; that is, the date the promissory note was signed.
This is supported by Congress' selection of the 45-day time period; Congress
treated as nonpreferential an ordinary-course payment of trade credit in the first

15 days of the month following the month in which the legal obligation to pay
arose.
19

Section 547(c)(2) was not intended to cover the kind of transaction before this
court. IPSCO had received the full consideration and was obligated to the Bank
for the full amount for much more than 45 days before the interest payments
were made. The section 547(c)(2) exception extends only to situations where
payment is made within 45 days after the debtor first becomes legally bound to
pay. Barash v. Public Finance Corp., supra, 658 F.2d at 512. I conclude that the
interest payments were made more than 45 days after the debt was incurred and
are avoidable preferences under section 547.

20

I disagree with the majority's explanation of the contingent nature of the

interest payments made by IPSCO. At 1111. It is my view that a fixed
obligation arose on November 13, 1979, by virtue of the execution of the
promissory note. The majority states that the payments are of a contingent
nature and the amount of interest was not reduced to a sum certain on the date
of execution. I disagree. The amount of interest could easily be reduced to a
concrete amount by using the interest formula set out in the note itself; the only
contingent feature was the clause which made the note subject to prepayment at
IPSCO's desire. The majority's focus on the prepayment clause as reducing the
interest obligation to that of a contingent obligation would allow all installment
loan debtors to use this same reasoning. If an installment loan can be prepaid at
any time, then the monthly payments are also not reduced to a sum certain and,
therefore, section 547(c)(2) would also apply in that situation. The majority
also relies on the fact that the bank would not have a cause of action for
nonpayment of interest until the end of the month in which IPSCO retained use
of the principal. Similarly, a bank would not have a cause of action for
nonpayment of an installment loan until the end of the month in which the
debtor retained use of the principal. That is why the court in Barash v. Public
Finance Corp., supra, chose not to differentiate between the interest and the
principal amounts in considering when a debt is incurred in an installment loan
situation.

21

The majority's comparison of IPSCO's payment of interest with a tenant's

payment of rent, at 1111, is contrary to the most recent pronouncement of the
law. Carmack v. Zell, 17 B.R. 177 (Bkrtcy.S.D.Ohio 1982). In Carmack, the
court declined

22 follow the rationale advanced by the trustee that the debt was incurred at the time
to
of the original signing of the lease obligations. The total lease obligation, at that
point in time, was not due and payable--it was only due and payable as the lease term

progressed and as the lessee occupied the premises subject to the leasehold in
accordance with the terms of the lease. Contrary to the suggestion of the trustee, this
situation is not analogous to payments on a long-term unsecured note obligation. An
unexpired lease on real estate is treated as an executory contract under the
Bankruptcy Code (11 U.S.C. Sec. 365), a recognition of the principle that such lease
involves an exchange of rights and obligations by the parties to the lease throughout
its term. The concept of adequate assurance of future performance under a lease is
separately provided for in the Bankruptcy Code because unlike the payee on a longterm note obligation who merely accepts periodic payments from a payor, a lessor
(or lessee in rarer circumstances) continues to supply to a lessee performance under
the lease and, as rent is paid, continues to provide to the lessee the benefit of an ongoing leasehold estate.
23

Id. at 179. I agree that interest payments on an unsecured note are not
analogous to rent payments. In the instant case, the bank had fully performed
all of its obligations on the date of the note's execution while IPSCO was still
required to perform by continuing to make periodic payments.

24

I also do not agree that this situation is analogous to that of a consumer of an

electric utility; nor is it similar to that of a debtor in a credit card arrangement.
The majority states:

25
IPSCO
can also be compared to a customer of an electric utility. The customer
agrees to pay for whatever electricity it uses, but the debt to the utility is not
incurred until the resource is consumed. A customer does not incur a debt when it
makes the original agreement with the utility. Likewise, IPSCO agreed to pay
interest for the use it made of the money, but the debt was not incurred until IPSCO
actually used the money.
26

At 1111-1112. I agree that the debt is not incurred until the resource is
consumed; however, IPSCO consumed the resource when it borrowed the
money in November of 1979. IPSCO does not consume a new resource each
month as does the electric utility consumer. Furthermore, IPSCO's position is
not comparable to that of a credit card user. The court in In re Brown, 20 B.R.
554 (Bkrtcy.S.D.New York 1982), held that credit card debts were incurred on
the date when the debtor obtained a property interest in the consideration
exchanged for the debt rather than when the invoice or statement was due.
However, the court further held that the policy behind section 547(c)(2) was
applicable to credit card agreements because:

27

Short term credit, which normally involves relatively small amounts, was
originally intended to be protected when the Commission on the Bankruptcy

Law proposed that payments made within five days of the filing of the petition
and payments in small amounts should be excepted from avoidance as
preferences. Commission Report, Part II, pp. 166-67, Sec. 4-607(b)(g)(1).
Although the Commission's proposal was not adopted in its original form, the
45-day limitation period continued the concept of protection for short term
payments, which are usually relatively small in amount.
28

Id. at 555-556. Thus, if the Commission desired only to protect short term
payments in small amounts, credit card purchases could be excepted while
large interest payments on a long term note would not be so excepted.

29

I also take issue with the majority's position that the only case which addresses
the question involved in this case is In Re Ken Gardner Ford Sales, Inc., 10
B.R. 632 (Bkrtcy.E.D.Tenn.1981). Ken Gardner is one bankruptcy judge's
interpretation of section 547(c)(2). A contrary interpretation was reached by the
bankruptcy judges in: In Re Goodman Industries, Inc., 21 B.R. 512
(Bkrtcy.Mass.1982); Iowa Premium Service Co. v. First Nat'l Bank of St.
Louis, 12 B.R. 597 (Bkrtcy.S.D.Iowa 1981); In Re McCormick, 5 B.R. 726
(Bkrtcy.N.D.Ohio 1980); and In Re Bowen, 3 B.R. 617
(Bkrtcy.E.D.Tenn.1980). The majority asserts that McCormick and Bowen are
distinguishable because they involve mixed payments of principal and interest.
For the reasons we stated earlier, we deem that assertion to be a distinction
without a difference. Further, the court in the Goodman case dealt only with the
status of interest payments and held that section 547(c)(2) does not insulate
such interest payments and therefore they are preferences which can be avoided
by the trustee. Moreover, in Barash, the Seventh Circuit held that a debt is
incurred when the debtor first becomes legally bound to pay. I feel compelled
to afford more deference to the Seventh Circuit's opinion than to a single
bankruptcy judge's opinion.

30

I also disagree with the majority's policy argument that if IPSCO's

interpretation were adopted, banks would be in a disadvantaged position
compared with trade creditors who deal in the sale of tangible goods. I feel that
my interpretation would put banks and trade creditors in exactly the same
position: a trade creditor sells his product in one month and the billing for the
entire cost of the product occurs near the beginning of the following month;
however, a bank sells its product (the loan of money) in one month, and it is
billed out (in interest payments) over a span of many months. Thus, if a bank
would bill out in the same manner as a trade creditor, it would receive the same
insulation as an ordinary trade credit transaction.

31

For the foregoing reasons, I would affirm the decision of the bankruptcy court.

The Honorable Richard F. Stageman, United States Bankruptcy Judge,

Southern District of Iowa

The case was reargued before the judges of the circuit in regular active service
and the Honorable Floyd R. Gibson, Senior Circuit Judge, who elected to and
was designated to participate because he was the member of the panel which
originally decided the case. 28 U.S.C.S. Sec. 46(c) (Cum.Stat.Serv.1982)

The April interest was paid on May 8, the May interest was paid on June 12,
and the June interest was paid on July 15

Section 547(b) reads in pertinent part:

"Except as provided in subsection (c) of this section, the trustee may avoid any
transfer of property of the debtor ... (4) made--(A) on or within 90 days before
the date of the filing of the petition ...."

Section 547(c) reads in pertinent part:

The trustee may not avoid under this section a transfer-....
(2) to the extent that such transfer was-(A) in payment of a debt incurred in the ordinary course of business or financial
affairs of the debtor and the transferee;
(B) made not later than 45 days after such debt was incurred;
(C) made in the ordinary course of business or financial affairs of the debtor
and the transferee; and
(D) made according to ordinary business terms ....

All the interest payments at issue were made within forty-five days of the
accrual of interest for the first day of the month, see note 3, supra, so the entire
month's interest payment would be nonpreferential under the Bank's argument.
If the interest payments had not been made until later in the month, only the
interest which had accrued within forty-five days of the payment would be
nonpreferential under the Bank's argument

In In re Mindy's, Inc., 17 B.R. 177, 179 (Bkrtcy.S.D.Ohio 1982), cited by the

dissent as Carmack v. Zell, 17 B.R. 177 p. 1113-1114, post, the court held that
a debt for rent is incurred as the lease progressed rather than (as the trustee
contended) when the lease was executed. In dicta the court stated that rent is
distinguishable from interest payments. We disagree with the dicta in this case