Promissory Note & Check Restitution Claims Guide Part 3 – Underlying Obligations & Cashier’s Check Issues

7. Interrelationship Between Underlying Obligations and Promissory Note/Check Claims

7.1. Separation Principle and Coexistence of Underlying and Note/Check Claims

Promissory note relationships fundamentally possess an instrumental character for specifically performing and realizing underlying relationships. Accordingly, promissory note relationships and underlying relationships are principally understood as separately distinct.

However, when promissory notes or checks are delivered, there can be situations where existing underlying obligations and newly arising note/check claims exist simultaneously (coexistence). Such situations correspond to cases where promissory notes or checks are not delivered ‘in lieu of payment’ but are delivered ‘for security purposes’ or coexist as separate claims independent from underlying obligations. The requirements for generating restitution claims are discussed based on such coexistence relationships.

7.2. Priority Order and Procedures for Claim Exercise

Examining the provided materials, clear regulations or academic disputes regarding the priority order of claim exercise based on whether the delivery of promissory notes/checks is for security purposes or payment purposes are not presented in detail. However, discussions proceed on the premise of situations where promissory notes are not delivered for the purpose of substituting payment (situations where underlying obligations and note claims coexist).

In such situations, there is no mandatory order regarding which of the underlying obligations or note claims should be exercised first that can be directly derived from the materials. Generally, in cases of coexistence, it is interpreted that creditors can arbitrarily choose and exercise either one, but this is difficult to clearly support with the provided materials alone.

7.3. Statute of Limitations Interruption Effect of One Claim on Another

Interruption of Underlying Claim Statute of Limitations by Exercise of Note/Check Claims (Case Law and Majority Opinion):

According to case law and established theory, the exercise of note/check claims has the effect of interrupting the statute of limitations for underlying claims.

Basis for Interruption: The grounds for this view are as follows:
– Economically, promissory notes target the same performance as underlying claims, and the exercise of note claims is a means to realize underlying claims.
– In promissory note claim litigation, the statute of limitations for underlying claims becomes a personal defense ground for the debtor. Therefore, when a creditor holds both note claims and underlying claims and the note claim expires first, there is a view that restitution claims are not recognized because the creditor still has underlying claims.

If the statute of limitations for underlying claims is not interrupted together even when the statute of limitations for note/check claims is interrupted, unreasonable results occur where rights cannot be realized due to the debtor’s defense.

Counterarguments to the Basis: Some argue that based on the fundamental purpose of the statute of limitations system, the exercise of one right among two rights of the same nature cannot be seen as ‘sleeping on rights,’ so it is reasonable to see that the statute of limitations progress for the other is also interrupted. However, there are also counterarguments that it is difficult to treat underlying claims and note claims on the same level.

Non-Interruption of Note/Check Claim Statute of Limitations by Exercise of Underlying Claims (Established Theory):

According to the established theory, the exercise of underlying claims does not interrupt the statute of limitations for note/check claims.

Asymmetry Discussion: As examined above, while the exercise of note/check claims interrupts the statute of limitations for underlying claims, the exercise of underlying claims does not interrupt the statute of limitations for note/check claims, showing asymmetry. The position of case law and established theory is that such asymmetrical results are appropriate based on the principle of separation between underlying relationships and note relationships.

7.4. Effect of Statute of Limitations Expiration on One of the Claims

Unilateral Expiration Does Not Necessarily Affect the Other (Case Law):

Even when only underlying claims expire due to statute of limitations, note/check claims do not necessarily expire. However, such expiration of underlying claims can become grounds for personal defense against the exercise of note/check claims.

When underlying claims expire due to statute of limitations or other causes, regardless of whether the timing is before or after the expiration of note/check obligations, restitution claims do not arise according to case law. This is based on the perspective that restitution claims are intended to recover benefits obtained by debtors due to note/check statute of limitations expiration, not to deprive debtors of benefits arising from underlying claim expiration. Additionally, there is an argument that when underlying claims and note claims coexist and underlying claims expire first, note claims are substantially neutralized, so even if note statute of limitations is completed afterward, it is difficult to see new benefits as having arisen.

There are also criticisms of this case law position that question the purpose of the restitution claim system or that it renders the system meaningless.

8. Specificity of Cashier’s Check Restitution Claims and Recent Case Law

8.1. Legal Characteristics of Cashier’s Checks and Cash Equivalency

Cashier’s checks are checks where the issuer designates themselves as the payee (Check Act Article 6, Paragraph 3).

This stems from the function that cashier’s checks possess as cash substitutes.

Generally, cashier’s checks are issued when the request applicant provides funds corresponding to the face amount to the bank or withdraws from deposits to secure payment funds in advance. Therefore, holders rarely need to worry about payment refusal due to insufficient deposits by the issuer.

8.2. Transaction Reality and Legal Treatment After Presentation Period

The presentation period for checks is 10 days for domestic issuance/payment (Check Act Article 29, Paragraph 1). This period cannot be arbitrarily changed.

Legally, when the presentation period expires, the issuer can cancel the payment entrustment (Check Act Article 32, Paragraph 1), and holders lose recourse rights (Check Act Article 39).

However, in actual transaction society, cashier’s checks are often paid by banks without payment refusal even after the presentation period has expired. Unless there are special circumstances (accident reports due to theft, loss, etc.), banks do not refuse payment.

Even after the presentation period expires, restitution claims as nominative claims exist.

8.3. Legal Issues in Assignment of Restitution Claims After Presentation Period

Restitution claims refer to the rights that holders can claim from debtors for the return of benefits they received when rights on promissory notes/checks expire due to procedural defects or statute of limitations completion (Promissory Note Act Article 79, Check Act Article 63). These correspond to nominative claims.

En Banc Decision: Assignment of Restitution Claims + Granting of Assignment Notification Authority through Check Delivery

The Supreme Court En Banc Decision (Case No. 81da220) ruled that the act of assigning cashier’s checks whose rights have expired due to the passage of the presentation period, unless there are special circumstances, assigns up to the authority to receive check amount payments and restitution claims, and also grants the authority to notify the issuing bank that obtained benefits on behalf of the holder regarding that assignment.

This decision is interpreted as stemming from the purpose of reflecting the transaction reality of cashier’s checks and protecting assignees.

This is evaluated as recognizing that the legal nature of restitution claims is nominative claims while allowing assignees to substitute for meeting the requirements for opposing nominative claim assignments by granting notification authority to debtors (banks) through check delivery alone. This En Banc decision continues to be maintained without change to date.

Recent Supreme Court Decision (Supreme Court November 30, 2023, 2019da203286, hereinafter Target Decision): Need to Meet Requirements for Opposing Nominative Claim Assignment (Civil Act Article 450, Paragraph 2)

The target decision analyzed in this material viewed that restitution claims for cashier’s checks that have passed the presentation period correspond to nominative claims, and that such checks are not securities embodying restitution claims but merely evidence securities supporting that their holders acquired or were assigned restitution claims.

Therefore, the assignment of restitution claims must follow the methods of nominative claim assignment, and particularly to oppose third parties other than debtors (seizure creditors, etc.), they must meet the requirements for opposition (notification or acknowledgment by documents with confirmed dates) specified in Civil Act Article 450, Paragraph 2.

This is the position that the fact of check delivery alone cannot be seen as meeting requirements for opposition to third parties.

8.4. Problems with Recent Supreme Court Decisions and Industry Criticism

The target decision overlooked the intent of the En Banc decision to grant assignment notification authority to assignees reflecting the transaction reality of cashier’s checks.

This faces criticism that it ignores the transaction reality of cashier’s checks and could very much threaten the safety of transaction practices that rely solely on check delivery after the presentation period expires.

Problems of case law consistency are raised by reaching different conclusions without the En Banc decision being changed.

There are also criticisms that by intentionally ignoring the actual circulation process of cashier’s checks conducted through check delivery alone, there is a high possibility that transaction parties will refuse to use cashier’s checks in the future, creating risks of disrupting the domestic payment market.

8.5. Seizure and Tax Collection Issues of Restitution Claims

According to the facts, when the delinquent party (Party A) continued to hold checks even after the presentation period expired, tax authorities judged that restitution claims had arisen and proceeded with seizure by serving credit seizure notices to the bank (defendant). Subsequently, despite the seizure notice, the bank paid check amounts to other persons (Parties B and C) who presented checks, leading tax authorities (plaintiff, Republic of Korea) to file lawsuits against the bank.

Regarding seizure methods, while securities seizure requires possession (former National Tax Collection Act Article 38), credit seizure requires notification to debtors (former National Tax Collection Act Article 41, Paragraph 1). The target decision judged that since restitution claims are nominative claims, they should be notified through credit seizure methods, and should not be seen as requiring seizure through securities possession methods.

Core Issue: Whether restitution claims for cashier’s checks assigned after the presentation period expires belong to assignees, or whether they still belong to assignors’ creditors (seizure creditors) unless assignors meet the requirements for opposition under Civil Act Article 450, Paragraph 2, determines the effect of seizure.

Position of Target Decision: The target decision ruled that when assignees fail to meet requirements for opposition to third parties, restitution claims still belong to assignors, so seizure creditors like tax authorities can demand payments from banks (third debtors) by substituting for delinquents (assignors).

Critical Review: Following the intent of the En Banc Decision (81da220), since assignees acquire restitution claims and assignment notification authority through check delivery alone, assignees stand in the position of being the sole creditors who have met requirements for opposition. Therefore, assignors’ creditors find it difficult to claim interests in such restitution claims and should not be able to seize them, according to criticism raised.

The En Banc decision recognized the assignment of restitution claims through check delivery alone while limiting it to cases without ‘special circumstances.’ The materials interpret that seizure notices from seizure creditors are not circumstances connected to assignees, so they should not be reasonably included in ‘special circumstances.’ According to this interpretation, viewing restitution claims as belonging to assignors due to seizure as in the target decision contradicts the intent of the En Banc decision.

9. Restitution Claim Requirements by Promissory Note/Check Delivery Purpose

9.1. Legal Significance of Distinguishing Underlying and Note Claims

Generally, rights on promissory notes (note claims) are separate rights from rights in underlying relationships that form the basis for promissory note issuance (underlying claims), and underlying relationships and note relationships are strictly separated.

However, statute of limitations expiration issues for underlying claims and note claims, and restitution claim issues based on these, are areas that must be carefully examined in relation to such separation.

Rights of note holders take two forms: underlying relationships and note relationships. This complexity becomes even more pronounced in problems of statute of limitations expiration for underlying claims or note claims, and restitution claim issues that require these as conditions.

While the discussions in the provided materials focus mainly on promissory notes, they suggest that such distinctions can also be relevant in restitution claim issues for cashier’s checks.

9.2. Claim Exercise Order and Statute of Limitations Interruption by Delivery Purpose

When underlying claims and note claims exist together, the order of exercising claims differs depending on whether the delivery of such promissory notes was made “for security” or “for payment.”

When delivered “for security,” note holders can arbitrarily choose and exercise either underlying claims or note claims.

When delivered “for payment,” note claims must be exercised first (obligation to exercise note claims first).

When note holders have obligations to exercise note claims first, since the prior exercise of underlying claims is improper until note claims are exercised, it is difficult to consider interruption of statute of limitations for underlying claims. There is a view that it is appropriate to see the statute of limitations for underlying claims as proceeding from the maturity of note claims.

9.3. Subsidiary Principle of Restitution Claim Generation

Promissory Note Act and Check Act recognize restitution claims for holders when rights on promissory notes/checks expire due to procedural defects or statute of limitations completion.

Case law consistently takes the position of “narrow theory,” viewing that restitution claims can arise only when note holders have no remedy methods under not only Promissory Note Act but also Civil Act.

That is, for restitution claims to arise, not only must all rights on promissory notes or checks be extinguished, but all civil law remedy methods such as underlying relationship claims must also be extinguished. This stems from the perspective that restitution claims are “extremely exceptional systems” whose scope of application should be limited.

Therefore, since promissory notes or general checks are mostly delivered “for payment,” there is very little room for recognizing restitution claims as long as underlying relationship claims exist.

Courts tend to view that restitution claims do not arise when promissory notes are delivered “for payment” or “for security” and underlying claims and note claims coexisted, regardless of whether underlying relationship claims expire due to statute of limitations or other causes and whether the timing is before or after the expiration of note obligations (or check obligations).

9.4. Relationship Between Underlying Claim Expiration and Restitution Claim Generation

In situations where underlying claims and note claims coexist (i.e., when promissory notes are delivered “for payment” or “for security”), if underlying claims expire first due to statute of limitations, debtors can raise defenses of underlying relationship expiration against note claim exercise, so note claims are substantially neutralized. At this time, there is a view that debtors’ benefits should be seen as arising from underlying claim statute of limitations expiration, so restitution claims should be denied even if note statute of limitations is completed afterward. This is based on the perspective that restitution claims aim to recover debtors’ benefits arising from note statute of limitations expiration, not to deprive benefits arising from underlying claim expiration.

Even when underlying claims and note claims expire simultaneously due to statute of limitations, case law and majority academic theories view that restitution claims do not arise. Regardless of the sequence of both claim expirations, restitution claims do not arise, but recognizing restitution claims based solely on the circumstance of coincidental simultaneous expiration would not meet equity standards and would result in debtors being more disadvantaged.

9.5. Restitution Claims in Third-Party Issued Notes

When debtors deliver third-party issued promissory notes to creditors, courts view that there is high possibility of recognizing that promissory notes were delivered “for payment.”

Conversely, when underlying claims against B (underlying debtor) expire first due to statute of limitations and subsequently note claims against A (third-party issuer) expire due to statute of limitations, there is a view that restitution claims should be recognized. At the point of underlying claim statute of limitations expiration, B can raise defenses against C, substantially being relieved of recourse obligations, and A is also relieved of underlying obligations to B, but A still bears note obligations. Subsequently, when note statute of limitations is completed, A is also relieved of note obligations while obtaining substantial benefits, so restitution claims should be recognized.

In conclusion, the delivery purpose of promissory notes and checks (“for payment,” “in lieu of payment,” “to secure payment”) has very important effects on establishing relationships between underlying claims and note claims, determining the order of rights exercise, and particularly judging ‘absence of other remedy methods,’ which is a requirement for generating restitution claims. Case law views restitution claims as extremely subsidiary rights and strongly tends to deny the generation of restitution claims when underlying claims exist.

K&P Law Firm has experience in successfully winning recent disputes related to restitution claims for promissory notes, and particularly possesses extensive experience with complex promissory note and check transaction patterns arising in inter-corporate transactions. The firm has specialized expertise in advising companies in the Incheon Songdo area on matters related to Promissory Note Act and Check Act.

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