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.

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.

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.

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).

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.

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.

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.

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.

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.

The judgment of the bankruptcy court is reversed.

ROSS, Circuit Judge, dissenting, with whom HEANEY and McMILLIAN, Circuit Judges, join.

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.

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.

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.

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.

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

to follow the rationale advanced by the trustee that the debt was incurred at the time 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 long-term 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 on-going leasehold estate.

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.

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:

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.

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:

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.

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.

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.

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.

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