Bill of Exchange and Check Restitution Claims – Relationship with Underlying Obligations and Practical Issues

7. Relationship Between Underlying Obligations and Bills of Exchange/Checks

7.1. Separation and Coexistence of Underlying Obligations and Bills of Exchange

Bills of exchange primarily serve as instruments to implement and fulfill underlying obligations. Therefore, the relationship between bills of exchange and underlying obligations is generally understood as separate.

However, when bills of exchange or checks are delivered, there are cases where the existing underlying obligation and the bill/check obligation coexist. This occurs when bills or checks are not delivered “in lieu of payment” but rather “as security” or as separate obligations coexisting with the underlying obligation. The requirements for restitution claims are discussed on the premise of this coexistence relationship.

7.2. Order of Exercising Rights

The provided materials do not clearly specify regulations or academic theories regarding the order of exercising rights when bills/checks are delivered for security purposes or for payment. However, discussions proceed on the premise that bills were not delivered in lieu of payment (where underlying and bill obligations coexist).

In this case, the mandatory order in which the underlying obligation and bill obligation must be exercised is not directly derived from the materials. Generally, when obligations coexist, it is interpreted that the creditor can choose to exercise either one at their discretion, but the provided materials do not clearly support this.

7.3. Effect of Exercising One Right on the Statute of Limitations of the Other

Effect of exercising bill/check rights on the statute of limitations of underlying obligations (case law and majority view):

• Case law and the prevailing theory hold that exercising rights under bills/checks interrupts the statute of limitations for underlying obligations.
• Rationale for interruption: The rationale for this view is as follows: (i) Bills economically target the same wealth as the underlying obligation, and exercising bill rights aims to realize the underlying obligation. (ii) In bill litigation, the statute of limitations for underlying obligations becomes a defense for the debtor. Therefore, when a creditor holds both bill rights and underlying rights, and the bill rights expire first, since the creditor still has the underlying rights, restitution claims are not recognized.

This is because if the statute of limitations for underlying obligations is not interrupted along with the bill rights, the unreasonable result would occur where rights cannot be realized due to the debtor’s defenses.

• Counter-arguments: Some argue based on the fundamental purpose of the statute of limitations that exercising one of two homogeneous rights can hardly be seen as “sleeping on one’s rights,” so it is reasonable to consider the statute of limitations for the other as interrupted. However, there are counter-arguments that it is difficult to treat underlying obligations and bill rights on the same level.

Effect of exercising underlying rights on bill/check rights’ statute of limitations (prevailing theory):

• According to the prevailing theory, exercising underlying rights does not interrupt the statute of limitations for bill/check rights.

Asymmetry discussion: As examined above, while exercising bill/check rights interrupts the statute of limitations for underlying obligations, exercising underlying rights does not interrupt the statute of limitations for bill/check rights, showing asymmetry. The prevailing theory and case law hold that such asymmetric results are reasonable based on the principle of separation between underlying and bill relationships.

7.4. Effect of Prescription of One Right

Expiration of one right does not automatically affect the other (case law):

• Even if only the underlying obligation expires due to prescription, bill/check rights do not automatically expire. However, the expiration of the underlying obligation can be a personal defense against the exercise of bill/check rights.
• The case law position is that when an underlying obligation expires due to prescription or other reasons, regardless of whether the expiration occurs before or after the expiration of the bill/check obligation, restitution claims do not arise. This is based on the view that restitution claims aim to recover the debtor’s gains from the expiration of bill/check obligations, not to deprive the debtor of gains from the expiration of underlying obligations. Additionally, when an underlying obligation expires first while coexisting with a bill obligation, the bill obligation is effectively nullified, so no new gain is considered to have occurred even after the bill’s statute of limitations is completed.
• There are criticisms of this case law position questioning the purpose of the restitution claim system or arguing that it renders the system ineffective.

8. Special Characteristics and Recent Issues of Restitution Claims for Cashier’s Checks

8.1. Characteristics of Cashier’s Checks (Cash Equivalence, Issuer=Payer, Funds Secured)

A cashier’s check is a check where the issuer designates themselves as the payer (Check Act Article 6, Paragraph 3).

This stems from the function of cashier’s checks as cash equivalents.

Generally, cashier’s checks are issued after the requesting party provides the bank with funds equivalent to the face value or withdraws from their deposit to secure payment funds in advance. Therefore, the holder hardly needs to worry about payment refusal due to insufficient funds from the issuer.

8.2. Practical Treatment After Presentation Period Expiry

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, after the presentation period expires, the issuer can cancel the payment instruction (Check Act Article 32, Paragraph 1), and the holder loses the right to redeem (Check Act Article 39).

However, in practical business society, cashier’s checks are often paid by banks without refusal even after the presentation period expires. Unless there are special circumstances (such as theft, loss reports, etc.), banks do not refuse payment.

Even after the presentation period expires, there exists a nominative claim called the restitution claim.

8.3. Issues in Transferring Restitution Claims After Presentation Period Expiry

A restitution claim is a right of the holder to claim from the debtor the return of gains when rights under bills/checks have expired due to procedural defects or prescription (Bill of Exchange Act Article 79, Check Act Article 63). This is a nominative claim.

En banc Supreme Court decision: Transfer of restitution claims through check delivery + granting notification authority

• The Supreme Court en banc decision (case number 81da220) ruled that transferring a cashier’s check whose rights have expired due to the passage of the presentation period, in the absence of special circumstances, transfers not only the authority to receive payment of the check amount but also the restitution claim, and grants the authority to notify the bank, which gained the benefit, of the transfer on behalf of the holder.
• This decision is interpreted as reflecting the trading reality of cashier’s checks and aiming to protect transferees.
• While recognizing the legal nature of restitution claims as nominative claims, this evaluates that by granting the authority to notify the debtor (bank) through check delivery alone, the transferee can satisfy the requirements for opposing the transfer of nominative claims. This en banc decision has been maintained without changes until now.

Recent Supreme Court decision (Supreme Court 2023. 11. 30, 2019da203286, hereinafter “the subject decision”): Requirements for opposing nominative claim transfers (Civil Act Article 450, Paragraph 2) necessary

• The subject decision analyzed in this material held that the restitution claim for cashier’s checks after the presentation period has expired is a nominative claim, and the check in this case is not a security embodying the restitution claim but merely an evidentiary document supporting that its holder has acquired or transferred the restitution claim.
• Therefore, the transfer of restitution claims must follow the method for transferring nominative claims, and especially to oppose third parties (attachment creditors, etc.), the requirements of Civil Act Article 450, Paragraph 2 (notification or consent with a fixed date instrument) must be satisfied.
• This position holds that the mere fact of delivering the check alone cannot be considered to have satisfied the requirements for opposing third parties.

8.4. Criticisms of the Recent Court Decision

The subject decision overlooked the intention of the en banc decision in granting transferees the authority to notify transfers in reflection of the trading reality of cashier’s checks.

This is criticized for ignoring the reality of cashier’s check transactions and potentially seriously threatening the safety of the trading practice where transactions occur solely through check delivery after the presentation period has expired.

Issues of case law consistency arise as it reaches a different conclusion without changing the en banc decision.

There are also concerns that by deliberately ignoring the actual circulation process of cashier’s checks that takes place through check delivery alone, future transaction parties may refuse to use cashier’s checks, potentially disrupting the domestic payment market.

8.5. Issues Related to Attachment of Restitution Claims (Tax Collection)

According to the facts, when a delinquent party (A) continued to hold a check after the presentation period had expired, the tax authority determined that a restitution claim had arisen and proceeded with attachment by delivering a claim attachment notice to the bank (defendant). Subsequently, despite the attachment notice, the bank paid the check amount to other persons (B, C) who presented the check, and the tax authority (plaintiff, Republic of Korea) filed a lawsuit against the bank.

Regarding the attachment method, while the attachment of securities requires possession (former National Tax Collection Act Article 38), the attachment of claims requires notification to the debtor (former National Tax Collection Act Article 41, Paragraph 1). The subject decision determined that since the restitution claim is a nominative claim, it should be attached by the claim attachment method of notification, not by the securities possession method.

Key issue: The effect of attachment differs depending on whether the restitution claim of a cashier’s check that was transferred after the presentation period expired belongs to the transferee, or whether it still belongs to the transferor’s creditor (attaching creditor) if the transferor has not satisfied the opposition requirements of Civil Act Article 450, Paragraph 2.

Position of the subject decision: The subject decision ruled that when the transferee has not satisfied the requirements for opposing third parties, the restitution claim is still deemed to belong to the transferor, so an attaching creditor like the tax authority can demand payment from the bank (third-party debtor) by subrogating the delinquent taxpayer (transferor).

Critical examination: Following the intent of the en banc decision (81da220), since the restitution claim and notification authority are vested in the transferee through the mere delivery of the check, the transferee assumes the position of the only creditor who has satisfied the opposition requirements. Therefore, there is criticism that the transferor’s creditor can hardly claim an interest in the restitution claim and cannot attach it.

The en banc decision recognized the transfer of restitution claims through check delivery alone, limited to cases without “special circumstances,” and the material interprets that the attachment notice by the attaching creditor is not a circumstance connected to the transferee, so it is reasonable not to include it in “special circumstances.” According to this interpretation, considering the restitution claim as belonging to the transferor due to attachment, as in the subject decision, contradicts the intent of the en banc decision.

9. Purpose of Delivering Bills of Exchange/Checks and Restitution Claims

9.1. Relationship Between Underlying Obligations and Bills of Exchange

Generally, rights under bills of exchange (bill rights) are separate from rights under the underlying relationship (underlying rights) that formed the basis for issuing the bill, and the underlying relationship and bill relationship are strictly separated.

However, the issue of prescription of underlying rights and bill rights, and the issue of restitution claims, need to be carefully examined in relation to this separation.

The rights of a bill holder take two forms: the underlying relationship and the bill relationship. This complexity becomes more pronounced in issues of prescription of underlying or bill rights, and in restitution claims that require these as conditions.

While the discussion in the provided material primarily focuses on promissory notes, it suggests that this distinction may also be relevant in the case of restitution claims for cashier’s checks.

9.2. Order of Exercising Rights Based on Delivery Purpose

When underlying rights and bill rights coexist, the order of exercising rights depends on whether the bill was delivered “as security” or “for payment.”

When delivered “as security,” the bill holder can choose to exercise either underlying rights or bill rights at their discretion.

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

When the bill holder has an obligation to exercise bill rights first, until bill rights are exercised, the prior exercise of underlying rights is improper, making it difficult to consider interrupting the statute of limitations for underlying rights. There is a view that it is reasonable to consider the statute of limitations for underlying rights as running from the maturity of bill rights.

9.3. Lack of Other Remedies as a Requirement for Restitution Claims

The Bill of Exchange Act and Check Act recognize restitution claims for holders when rights under bills/checks are extinguished due to procedural defects or prescription.

Case law consistently takes the “narrow view,” holding that restitution claims can only arise when the bill holder has no remedy not only under the bill law but also under civil law.

In other words, for a restitution claim to arise, not only must all rights under bills or checks be extinguished, but all civil law remedies such as claims under the underlying relationship must also be extinguished. This stems from the view that the restitution claim is an “extremely exceptional system” and its scope of application should be limited.

Therefore, since most bills or general checks are delivered “for payment,” there is very little chance of recognizing restitution claims as long as rights under the underlying relationship exist.

Courts tend to hold that when rights under the underlying relationship have expired due to prescription or other reasons, regardless of whether the timing is before or after the expiration of the bill obligation (or check obligation), if the bill was delivered “for payment” or “as security” so that underlying rights and bill rights coexisted, restitution claims do not arise.

9.4. Effect of Prescription of Underlying Obligations on Restitution Claims

In a situation where underlying rights and bill rights coexist (i.e., when the bill is delivered “for payment” or “as security”), if the underlying rights expire first, the debtor can raise the defense of the extinction of the underlying relationship against the exercise of bill rights, effectively nullifying the bill rights. In this case, there is a view that the debtor’s gain is considered to have arisen from the prescription of the underlying rights, and even if the bill’s prescription is later completed, the restitution claim should be denied. This is based on the perspective that the purpose of the restitution claim is to recover the debtor’s gain from the expiration of the bill’s prescription, not to deprive them of the gain from the extinction of the underlying rights.

Even when underlying rights and bill rights expire simultaneously, case law and the majority theory hold that restitution claims do not arise. Regardless of the order of extinction of both rights, restitution claims do not arise, and if they were coincidentally extinguished simultaneously, recognizing restitution claims would be inequitable and would result in the debtor being placed in a more disadvantageous position.

9.5. Third-Party Bills of Exchange (When the Underlying Debtor Endorses the Bill)

When a debtor delivers a third-party bill to a creditor, courts are likely to recognize it as being delivered “for payment.”

On the other hand, there is a view that restitution claims should be recognized when the underlying rights against B (the underlying debtor) expire first, and then the bill rights against A (the third-party issuer) expire. At the point of prescription of the underlying rights, B can defend against C and is practically relieved of the recourse obligation, and A is also relieved of the underlying debt to B, but A still bears the bill debt. When the bill’s prescription is later completed, A is relieved of the bill debt as well, thereby obtaining a substantial benefit, so restitution claims should be recognized.

In conclusion, the purpose of delivering bills of exchange and checks (“for payment,” “in lieu of payment,” “as security”) has a very significant impact on establishing the relationship between underlying rights and bill rights, determining the order of exercising rights, and especially in determining the “absence of other remedies,” which is a requirement for the arising of restitution claims. Case law views restitution claims as highly supplementary rights and tends strongly to deny the arising of restitution claims when underlying rights exist.

K&P Law Firm has recently provided successful legal advice in disputes related to restitution claims for cashier’s checks, and has particularly rich experience in complex bill and check transaction patterns that occur in business-to-business transactions. We have specialized expertise in bill and check law consulting for companies in the Incheon Songdo area.