                                   ___________

                                   No. 95-3872
                                   ___________

Berry F. Laws, III, Trustee,            *
                                        *
     Plaintiff - Appellant,             *
                                        *
     v.                                 *
                                        *
United Missouri Bank of Kansas          *   Appeal from the United States
City, N.A.,                             *   District Court for the
                                        *   Western District of Missouri.
     Defendant - Appellee.              *
                                        *
--------------------------------
                                        *
The Missouri Bankers                    *
Association,                            *
                                        *
     Amicus Curiae.                     *
                                   ___________

                   Submitted:      May 15, 1996

                         Filed:    October 21, 1996
                                   ___________

Before FAGG, WOLLMAN, and LOKEN, Circuit Judges.
                               ___________


LOKEN, Circuit Judge.


           On October 20, 1986, Kroh Brothers Development Company ("Kroh")
wire transferred $4 million into its checking account at United Missouri
Bank of Kansas City ("UMB").      In February 1987, Kroh filed for Chapter 11
bankruptcy protection.     The trustee then commenced this proceeding to
recover the $4 million from UMB as an avoidable preference under the
Bankruptcy Code.   The district court1 held that provisional credits UMB
extended before collecting




     1
      The HONORABLE HOWARD F. SACHS, United States District Judge
for the Western District of Missouri.
Kroh's    deposits   were   "antecedent   debts"   for   purposes    of   11   U.S.C.
§ 547(b)(2).    However, the court concluded there was no preference, and
granted summary judgment to UMB, because the $4 million transfer did not
improve UMB's position as a fully secured creditor under Mo. Rev. Stat.
§ 400.4-210(a)(3).     Laws v. United Mo. Bank of Kansas City, 188 B.R. 263
(W.D. Mo. 1995).


     The trustee appeals, arguing that the transfer enabled UMB to avoid
losses from Kroh's on-going check kiting scheme.            While defending the
district court's grant of summary judgment, UMB and The Missouri Bankers
Association as amicus curiae argue that the court erred in treating
provisional credits for uncollected deposits as antecedent debts.              Though
we disagree with the district court's interpretation of antecedent debt,
we agree with its analysis of the Kroh/UMB relationship and therefore
affirm.


     Before filing for Chapter 11 protection, Kroh was a large real estate
developer that regularly took advantage of the fact that UMB and other
banks allowed Kroh to write checks on uncollected deposits.          To illustrate
how the bank collection process provided this opportunity, assume Kroh
deposited a check drawn on another Kansas City bank into its UMB account
on Monday afternoon.        UMB provisionally credited Kroh's account for the
amount deposited at the close of business that day, thereby permitting Kroh
to write checks against the deposit.         On Tuesday morning, UMB sent the
check to the Kansas City Clearing House ("Clearing House") for collection.
At Tuesday noon, the Clearing House presented the check to the drawee bank
and provisionally credited UMB's Clearing House account.            The drawee bank
then had until midnight Wednesday to pay or dishonor the check.                If the
drawee bank paid, the provisional credits from the Clearing House to UMB
and from UMB to Kroh's account became final.       If the drawee bank dishonored
the check before Wednesday, the Clearing House and UMB would reverse their
provisional credits.    See generally Mo. Rev. Stat. §§ 400.4-202, 400.4-215.




                                       -2-
     The ability to write checks against provisional credits gives the
shrewd bank customer free use of someone else's money.    Viewed charitably,
this is called aggressive cash management.    It also gives the dishonest
customer a chance to write checks against non-existent deposits.   When done
systematically and fraudulently, prosecutors call this criminal check
kiting.   See Williams v. United States, 458 U.S. 279, 281 n.1 (1982).    By
whatever name it is called, when done with large amounts of money, it
exposes banks to large losses, and they do not willingly tolerate the
practice.
     Because of these bank collection delays, at the time in question UMB
calculated two balances for its customer accounts, the "ledger balance" and
the "collected funds balance."    The ledger balance was the sum of all
collected and uncollected deposits, less debits to the account such as
checks presented for payment.    The collected funds balance consisted of
collected funds less debits to the account.     UMB's practice was to pay
checks drawn on a customer's provisional credits.        In other words, UMB
refused to pay only if paying would result in a negative ledger balance.
When paying resulted in a negative collected funds balance, UMB in effect
advanced money it would owe the customer when (and if) all uncollected
deposits were collected.2


     In 1986, as Kroh approached insolvency, it increasingly used UMB's
provisional credits.   Kroh's average negative collected funds balance at
UMB grew from $287,000 in March 1986 to $2,600,000 in September 1986.    UMB
was aware of this development and in June,




     2
      Most banks give customers same-day or next-day availability
for both local and nonlocal checks, and banks ultimately collect
the vast majority of checks for which such provisional credit is
granted.    See Clark and Clark, The Law of Bank Deposits,
Collections & Credit Cards ¶ 9.08 (1996 cum. supp. 2); Cooper,
Checks Held Hostage - The Funds Availability Controversy, 102
Banking L.J. 532, 537 (1985). The U.C.C. encourages this practice.
See Mo. Rev. Stat. § 400.4-210, Official U.C.C. Comment 1. The
Expedited Funds Availability Act of 1987 mandates expedited
availability in many situations. See 12 U.S.C. §§ 4001-4010.

                                   -3-
with Kroh's consent, began charging Kroh interest on its month-end negative
collected funds balance.    Though Kroh avoided an overdraft position by
maintaining a positive ledger balance, its negative collected funds balance
continued to grow.    On October 17, UMB concluded it was unacceptably at
risk and advised Kroh that it would no longer pay on Kroh's uncollected
deposits.    On October 20, Kroh borrowed from another bank and wire
transferred $4 million of the loan proceeds to its account at UMB,
virtually eliminating Kroh's negative collected funds balance.           This
satisfied UMB's immediate concern, but it only succeeded in keeping Kroh
out of bankruptcy until February 1987.


       To recover this pre-petition transfer as preferential, the trustee
must prove that Kroh's property was transferred to or for the benefit of
UMB; that the transfer was made when Kroh was insolvent for the purpose of
satisfying an antecedent debt to UMB; that UMB was an insider (because the
transfer was made more than ninety days before Kroh's bankruptcy filing);
and that the transfer enabled UMB to receive more than it would have
received in a Chapter 7 liquidating bankruptcy.   See 11 U.S.C. § 547(b)(1)-
(5).   In granting UMB summary judgment, the district court considered only
whether the $4 million transfer satisfied an antecedent debt, and whether
that transfer enabled UMB to improve its position as a creditor of Kroh.
The court noted "strong evidence of a check kiting scheme in October."    188
B.R. at 271 n.16.    Therefore, in reviewing the facts in the light most
favorable to the trustee, we will assume UMB knew that Kroh was likely
kiting checks.


       On appeal, the trustee argues that Kroh's negative collected funds
balance at UMB on October 20, 1986, was an "antecedent debt" to UMB, and
that elimination of that balance improved UMB's position as a creditor.
Those are the only issues before us, and the trustee must prevail on both
to avoid summary judgment for UMB.    In other words, we will affirm if we
conclude either that there was no antecedent debt, contrary to the district
court's conclusion, or




                                     -4-
that the transfer did not improve UMB's position, as the district court
held.    We of course review the district court's grant of summary judgment
de novo.     See, e.g., Thomason v. SCAN Volunteer Serv., Inc., 85 F.3d 1365,
1370 (8th Cir. 1996).


                           I. The Antecedent Debt Issue.


                 The Code defines "debt" as a "liability on a claim."   11 U.S.C.
             3
§ 101(12).         When a debt was incurred is often important for preference
purposes.    In this circuit, "a debt is incurred on the date upon which the
debtor first becomes legally bound to pay."       In re Iowa Premium Serv. Co.,
695 F.2d 1109, 1111 (8th Cir. 1982) (en banc); accord In re Gold Coast Seed
Co, 751 F.2d 1118, 1119 (9th Cir. 1985); see generally 4 Collier on
Bankruptcy, ¶ 547.10 n.3 (15th Ed. 1996).


        If a customer deposits a check, immediately withdraws the entire
amount in cash, and the check is later dishonored, common sense and the
Uniform Commercial Code tell us that the bank has a claim against the
customer for the dishonored amount.         See Mo. Rev. Stat. § 400.4-214(a).
On the other hand, most bank deposits do not create claims against the bank
customer.    Quite the opposite.     "A person with an account at a bank enjoys
a claim against the bank




         3
       "Claim" is defined as "a right to payment, whether . . .
liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured." 11
U.S.C. § 101(5). Congress defined "claim" broadly so that "[a]ll
claims against the debtor, whether or not contingent or
unliquidated, will be dealt with in the bankruptcy case." H.R.
Rep. No. 95-595, 95th Cong., 2d Sess. 180, reprinted in 1978
U.S.C.C.A.N. 5963, 6141. Though the bankruptcy concepts of "claim"
and "debt" are generally coextensive, the debt issue in this case
does not affect the bankruptcy court's authority to deal with all
claims against Kroh's estate. Indeed, to the extent that a check
kiter, in moving money rapidly between a group of unsuspecting
banks, generates negative collected funds balances which, in the
aggregate, exceed the actual "kite debt," the rule urged by the
trustee would seem to create redundant bankruptcy claims.

                                         -5-
for funds in an amount equal to the account balance."          Barnhill v. Johnson,
503 U.S. 393, 398 (1992) (emphasis added).               So at some point in the
unsuccessful collection process, a "role reversal" occurs, with the
putative customer-creditor becoming a customer-debtor of the bank.              There
are three times when this type of debt might logically be "incurred" for
preference purposes -- when the bank provisionally credits the customer's
account for a deposited check, when the customer uses that provisional
credit by drawing down the account, or when the deposited check is in fact
dishonored.     The first two would expose banks to preference liability every
time they advance funds against uncollected deposits.             The third would
limit preference exposure to dishonor (ledger overdraft) situations.


        Are Provisional Credits Depositor Debt?          The district court ruled
that a depositor incurs a debt when the bank provisionally credits the
account for uncollected deposits, "regardless of whether the depositor
makes    use   of   this   credit."   188   B.R.   at   268.   Other   courts   have
consistently refused to hold that the mere extension of provisional credit
creates a bankruptcy debt.       See Matter of Smith, 966 F.2d 1527, 1535 & n.12
(7th Cir.), cert. dism'd sub nom. Baker & Schultz, Inc. v. Boyer, 506 U.S.
1030 (1992); In re Frigitemp Corp., 34 B.R. 1000, 1015-16 (Bankr. S.D.N.Y.
1983); In re Hudson Valley Quality Meats, Inc., 29 B.R. 67, 77 (Bankr.
N.D.N.Y. 1982) (bank that granted provisional credit to a check kiter
received no preference when deposited funds were collected).


        We find these decisions persuasive.        A provisional credit, like a
line of credit, is no more than the opportunity to obtain funds.            Like a
credit card, a line of credit does not create debt until the customer uses
the credit to borrow funds or obtain goods or services.         See In re Hersman,
20 B.R. 569, 572 (Bankr. N.D. Ohio 1982).               Therefore, even if actual
advances against uncollected deposits are loans, the depositor does not
incur this debt when the




                                        -6-
bank first provisionally credits the amount of an uncollected deposit to
the depositor's account.


       Are Routine Advances Against Uncollected Deposits Depositor Debt?
In this case UMB did not simply post provisional credits to Kroh's account.
Kroh   drew against its uncollected deposits, creating large negative
collected funds balances.        Abandoning the district court's analysis, the
trustee argues that a depositor first incurs a debt when it draws against
uncollected deposits.       This is a more plausible position.              Certainly the
depositor    receives   tangible       value    when   permitted     to     draw   against
uncollected deposits.        At this point, for preference purposes, "the
provisional credit [has] ripened into an interest in property of the
Debtor."    Matter of Smith, 966 F.2d at 1535.


       But to say that advances drawn by the depositor are his property does
not necessarily mean that the depositor thereby incurs a debt.                     The bank
is the depositor's agent during the collection process.              See Mo. Rev. Stat.
§ 4-215, Comment 9.     The bank routinely makes uncollected funds available
to    the depositor, not as a loan, but in recognition of the bank's
anticipated debt to the depositor.           Because the vast majority of deposits
are    collected,   banks   do   not   see     the   decision   to   make    advances   on
uncollected deposits as a credit decision.               It is a service decision,
driven by laws such as the Expedited Funds Availability Act, and by the
financial demands of bank customers.           True, a debt will arise if deposited
checks are dishonored.      But until dishonor, a bank that advances funds in
the expectation that deposits will routinely be collected acts as a conduit
for the depositor's financial transactions, not as a creditor.                 See In re
Chase & Sanborn Corp., 848 F.2d 1196, 1201 (11th Cir. 1988).


       The test for when a debt is incurred is whether the debtor is legally
obligated to pay.    Because the bank collection process is rapid, there are
no prior cases determining whether a bank has a




                                          -7-
legal right to recover advances on uncollected deposits before those
deposits are dishonored.   But it is worth noting that banks do not behave
as though they have a right to repayment before dishonor.      In this case,
for example, when UMB concluded in June 1986 that Kroh's negative collected
funds balance was too high, it did not demand repayment.       Instead, UMB
threatened to stop advancing credit on future uncollected deposits unless
Kroh agreed to pay interest on the resulting negative balances, and UMB did
not charge such interest until Kroh agreed to that change in their
relationship.


      We further note that federal bank regulators do not consider routine
advances on uncollected deposits to be "debts" to a bank.      The Office of
the Comptroller of Currency in calculating whether a bank has exceeded its
lending limit defines "extensions of credit" to exclude "amounts paid
against uncollected funds in the normal process of collection."   12 C.F.R.
§§   32.2(j)(2)(v).   Apparently, the Federal Reserve Board has long taken
a similar view.    See Clark and Clark ¶ 9.08, at S9-6 & n.48 (1996 Cum.
Supp. No. 2).


      Although the issue is not free from doubt, we conclude that routine
advances against uncollected deposits do not create a "debt" to the bank.4
A contrary rule would be inconsistent with the parties' expectations and
their view of the banking relationship. A contrary rule would pin banks
between the strong federal policy in favor of expedited funds availability
and a Bankruptcy Code that treats advances as loans and their reduction as
preferences.    Such a rule might cause banks to terminate a




      4
      The trustee relies on In re Montgomery, 123 B.R. 801 (Bankr.
M.D. Tenn. 1991), aff'd, 136 B.R. 727 (M.D. Tenn. 1992), aff'd, 983
F.2d 1389 (6th Cir. 1993).       Although we disagree with broad
language in the opinions in that case, we agree with the result.
Montgomery involved a bank that granted a check-kiting depositor a
$500,000 line of credit to cover ledger overdrafts in a checking
account. See 123 B.R. at 811. Draws on that line of credit, like
any other, created depositor debt for preference purposes.

                                    -8-
service that is invaluable in today's economy.      See In re Frigitemp, 34
B.R. at 1020.   At a minimum, it would immensely complicate many bankruptcy
            5
proceedings.


     What If the Advances Were Not Routine?       Our analysis thus far has
dealt with advances that a bank routinely makes available against a
depositor's uncollected deposits.    But this is not the usual case.   Here,
as Kroh's negative collected funds balance grew rapidly in mid-1986, UMB
viewed the situation with alarm.    Internal bank documents described Kroh's
negative balance as "an interest free loan," and a bank officer testified,
"we were lending money and the loan was not approved."   Concluding that the
situation was unacceptable, UMB gave Kroh the option of eliminating the
negative balances or paying interest on them.      When Kroh agreed to pay
interest, its negative collected funds balance began to reflect a banking
relationship having many indicia of a loan.     Had Kroh and UMB explicitly
agreed to convert future negative collected funds balances into loans, Kroh
would have been legally bound to pay such debts as incurred.   Whether such
an agreement may here be implied is a disputed issue of material fact.
Thus, while we arrive at this conclusion by a different analysis, we agree
with the district court that UMB was not entitled to summary judgment on
the issue whether the $4 million transfer satisfied Kroh's antecedent debt
to UMB.




     5
      The trustee argues that, to determine the debt owing to banks
before a check kite "collapses," one must "(i) examine and
reconcile the bank statements, deposits, and paid checks from all
the accounts in the kite with one another; (ii) remove kite checks
and deposits from the system by all banks with negative collected
balances by returning all items that were still subject to return
under the rules of the Clearing House; (iii) the resultant balance
is the actual debt owing to the bank based on the actual flow of
funds." Brief of Appellant 28. We are loathe to adopt a rule that
would require litigation of these issues every time a debtor in
bankruptcy is alleged to have been "kiting checks."

                                     -9-
                    II. Whether UMB Improved Its Position.


      The district court granted summary judgment on the ground that Kroh's
antecedent debt -- its negative collected funds balance -- was fully
secured and therefore the $4 million transfer did not improve UMB's
position.   We agree.     When a check is deposited for collection, Missouri's
Uniform Commercial Code grants the depository bank a security interest in
the check and its proceeds "to the extent to which credit given for the
[check] has been withdrawn or applied."          Mo. Rev. Stat. § 400.4-210(a)(1).
Thus, at all times, UMB had a security interest in the deposited checks and
provisional Clearing House credits underlying Kroh's negative collected
funds balance.      Collection and final settlement realized UMB's security
interest on those checks.       § 400.4-210(c).     The trustee concedes that UMB
ultimately collected the checks that comprised Kroh's negative collected
funds balance on October 20, 1996.          Thus, the district court's decision
that UMB did not improve its fully secured position appears to state the
obvious.    Cf. In re Two S. Corp, 875 F.2d 240 (9th Cir. 1989) (amount
received from the disposition of collateral in a commercially reasonable
manner determines its value).


       The trustee urges a different result in this case because Kroh was
allegedly kiting checks and kited checks are worthless.                  But as the
district court noted, the deposited checks in an on-going check kite are
not worthless, though some may be dishonored if the kite collapses.              188
B.R. at 270, citing Mo. Rev. Stat. § 400.4-210, comment 3.           The trustee's
theory finds no support in the language of § 547(b) of the Bankruptcy Code
and   Article   4   of   the   Missouri   Uniform   Commercial   Code.    In   these
circumstances, we agree with the district court that UMB was a fully
secured creditor.    As the court said in In re Frigitemp, 34 B.R. at 1015-16
(citation omitted):




                                          -10-
Because the bank's security interest in the check and its
proceeds was released when the provisional credit was repaid .
. . the estate was not depleted and no preferential transfer
occurred. Whether a provisional credit is construed as a loan
secured by the check, or simply as too "provisional" to be
treated as debt for bankruptcy purposes, it cannot properly
serve as the basis for preference liability.


The judgment of the district court is affirmed.


A true copy.


     Attest:


          CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




                            -11-
