Parties, Time of Occurrence, and Methods of Exercise of the Right to Claim Reimbursement

4. Parties to the Right to Claim Reimbursement

The right to claim reimbursement is a special claim right (nominative claim) granted to the holder on the principle of equity when rights on bills or checks have been extinguished. The parties who exercise this right (claimants) and those who bear the obligation to fulfill it (obligors) are determined according to the Bills Act, Checks Act, and related precedents.

4.1 Claimants (Right Holders)

Those who can exercise the right to claim reimbursement are the legitimate holders of bills or checks at the time when the rights on those instruments are extinguished due to procedural defects or the completion of the prescription period.

Scope of legitimate holders: Legitimate holders of bills or checks include not only those who have acquired the bills or checks through the last endorsement but also endorsers or guarantors who have fulfilled their obligations and recovered the bills or checks.

Requirements for exercising rights: There is a view that those who can exercise claim rights must be able to exercise rights on bills or checks, which means they must possess valid bills or checks.

Persons unable to exercise rights:

• Holders of formally invalid bills or checks.
• Holders of bills or checks that have lost their effect due to a public summons judgment (a judgment that nullifies the effect of an invalidated security).
• Persons who cannot exercise rights on bills or checks due to personal or material grounds for objection.
• Those who acquire bills or checks after the completion of the prescription period or after procedural defects have occurred cannot exercise the right to claim reimbursement. However, according to the condition subsequent theory (the prevailing theory and precedent), if the holder at the time of the expiration of the presentation period is the initial acquirer, and someone who legitimately received the check from that person acquires the already established right to claim reimbursement.

Substantive right holders: It is also considered that substantive right holders can exercise the right to claim reimbursement as they can exercise rights on bills or checks by proving their substantive rights.

Transferees by post-maturity endorsement: The prevailing theory holds that those who have acquired rights on bills or checks through post-maturity endorsement can also exercise the right to claim reimbursement if they possess the securities at the time the rights are extinguished.

4.2 Obligors (Debtors)

Since the purpose of the right to claim reimbursement system is to prevent unbalanced benefits by requiring those who have gained to make reimbursement, there must be a gain for the party bearing the obligation. The obligor for reimbursement is generally the party among the bill or check actors who has gained by not having to bear a debt.

Parties liable: The Bills Act and Checks Act recognize the holder’s right to claim reimbursement against the issuer, and also include endorsers among obligors if they have gained. This applies when endorsers substantively hold the position of issuers or when they endorse for guarantees and receive consideration.

The case of ‘without recourse’ endorsers: While there is an argument that endorsers who have endorsed ‘without recourse’ should also bear the obligation of reimbursement if they gain, there is a counterargument that it is unreasonable to hold those who declared from the time of the bill act that they would not bear responsibility on the bill liable, even if the right to claim reimbursement is considered a nominative claim based on rights on the bill.

Guarantors, acceptors by intervention, etc.: It is generally considered that guarantors, acceptors by intervention, etc., are excluded from the scope of obligors for reimbursement because positive law (Bills Act, Checks Act) does not explicitly identify them as obligors for reimbursement. Although they cannot become obligors for reimbursement through interpretation, there is a view that they could be included through legislation.

5. Time of Occurrence of the Right to Claim Reimbursement

The right to claim reimbursement is a special right granted to the holder on the principle of equity when rights on bills or checks have been extinguished due to procedural defects or the completion of the prescription period. When this right occurs differs somewhat due to the characteristics of bills and checks.

5.1 In the Case of Bills

The right to claim reimbursement for bills occurs when the rights on the bill are extinguished.

The point at which rights on the bill are extinguished and the point at which procedural defects in preserving rights occur can be identified relatively clearly.

In determining whether the right to claim reimbursement can be exercised, it does not matter whether the legitimate holder at the time the rights were extinguished was the holder at the bill’s maturity or acquired it through post-maturity endorsement. However, those who acquire bills after the completion of the prescription period or after procedural defects have occurred cannot exercise the right to claim reimbursement.

5.2 In the Case of Checks: Existing Discussions

Unlike bills, there is discussion about when the right to claim reimbursement occurs in the case of checks.

Whether the ‘authority to receive check payment’ is included in the rights on checks: The drawee of a check can pay the check amount even after the expiration of the presentation period unless the issuer cancels the payment mandate. While the check holder has the right of recourse (right to claim reimbursement) within the presentation period, they also have the authority to receive payment from the drawee if there is no cancellation of the payment mandate even after the presentation period has expired, that is, the authority to receive check payment. Whether this authority to receive check payment after the expiration of the presentation period is included in the ‘rights on checks’ is the core of the discussion on when the right to claim reimbursement occurs, as the time of occurrence of the right to claim reimbursement differs depending on whether it is a right on the check.

Theoretical dispute:

• Condition precedent theory: This view holds that the rights on checks include not only the right of recourse but also the authority to receive check payment after the expiration of the presentation period. Therefore, it argues that the right to claim reimbursement occurs with the condition precedent that the possibility of payment is extinguished, such as through the cancellation of the payment mandate or the refusal of payment. According to this view, the check holder must present the check for payment, and the right to claim reimbursement can only be exercised if payment is refused.
• Condition subsequent theory (prevailing theory and precedent): This view holds that the rights on checks are limited to the right of recourse. Therefore, when the payment presentation period expires, the rights on checks are definitively extinguished, and the right to claim reimbursement occurs at this point if the requirements for the right to claim reimbursement are met. However, if there is no cancellation of the payment mandate and valid payment is subsequently made by the drawee, the issuer’s gain is then extinguished, and the already established right to claim reimbursement is extinguished under this condition subsequent. Since ‘procedural defects’ under the Checks Act means not presenting within the time limit, it is reasonable that the right to claim reimbursement occurs with the expiration of the presentation period. This theory is the prevailing theory and the position of precedent.

Relationship with the drawee’s authority to make voluntary payment: The condition subsequent theory is based on the ground that the drawee’s ability to make voluntary payment after the expiration of the presentation period is only the drawee’s authority and not an obligation, so it cannot be considered a right on the check.

Practical differences between the theories: The practical difference between the two theories lies in when the right can be exercised.

• According to the condition precedent theory, the right to claim reimbursement can only be exercised after payment has been refused.
• According to the condition subsequent theory, the right to claim reimbursement can be exercised immediately when the presentation period expires.
• Also, the condition subsequent theory holds that the right to claim reimbursement can be exercised without possessing the check after the presentation period expires, while the condition precedent theory holds that the check must be possessed until presentation for payment after the presentation period expires.

Discussion on differences in application in the case of cashier’s checks: A cashier’s check is a check where the issuer designates themselves as the drawee, and it functions similarly to currency in real transactions. Since the issuing bank secures the payment funds and issues it, the holder need not worry about payment refusal, and the issuing bank has no reason to ultimately appropriate the funds for itself. Therefore, payment is often made even after the presentation period expires unless there are special circumstances such as theft or loss. Considering this reality and the provisions of the Checks Act, there is a view that the condition subsequent theory is reasonable in the case of cashier’s checks. Court precedents also appear to take the position of the condition subsequent theory, which holds that the right to claim reimbursement occurs when the presentation period for cashier’s checks expires. In this case, the check itself is not a security embodying the right to claim reimbursement but has significance as evidentiary security that the holder has acquired or transferred the right to claim reimbursement.

6. Exercise of the Right to Claim Reimbursement

6.1 Transfer of Rights

Transferability: The right to claim reimbursement, being a right, can be transferred. Therefore, a person who acquires the right to claim reimbursement from a legitimate holder at the time when the rights on bills or checks are extinguished can exercise it.

Method of transfer (differences according to legal nature): The method of transferring the right to claim reimbursement differs according to theories about its legal nature.

• Modified/Residual theory: This view holds that the right to claim reimbursement is represented in the bill or check, so the right is transferred merely by the delivery of the bill or check. The modified theory interprets securities such as checks after the occurrence of the right to claim reimbursement as securities representing rights of the same kind as non-endorsable bills.
• Nominative claim theory: This view considers the right to claim reimbursement as a nominative claim, so it requires the method of transferring nominative claims under civil law, that is, notification to the debtor or the debtor’s consent, to be effective against the debtor and third parties, and does not require the delivery of the security. This is the majority view.

The uniqueness of cashier’s check transfers (the purport of the en banc decision):

• The Supreme Court’s en banc decision holds that while the right to claim reimbursement for cashier’s checks belongs to nominative claims, it provides a special interpretation regarding the transfer of cashier’s checks after the payment presentation period has expired, reflecting actual transaction practices.
• The core of the en banc decision is that by delivering the check, the right to claim reimbursement is transferred, and at the same time, the transferee is granted the authority to notify the bank, which is the issuer who has gained, of the transfer on behalf of the holder (transferor). This means that despite the requirement for the opposing requirements of nominative claim transfer (notification/consent), considering the uniqueness of cashier’s check transactions, the transferee receives the authority to establish the opposing requirements themselves. This interpretation is evaluated as an attempt to legally protect the transaction practice of realizing the cash substitutability of cashier’s checks.
• Issue of double transfer: If the purport of the en banc decision is accepted, it is considered that after the right to claim reimbursement and the authority to notify of the transfer have been attributed to the transferee due to the transfer of a cashier’s check after the payment presentation period has expired, the same right cannot be transferred to another third party. This is interpreted as recognizing that the transferee is the sole right holder of the right to claim reimbursement.

Possibility of good faith acquisition: As long as the right to claim reimbursement is considered a nominative claim, nominative claims cannot be the object of good faith acquisition. Courts also do not recognize the good faith acquisition of the right to claim reimbursement. Therefore, one does not lose the right to claim reimbursement due to the loss or theft of bills or checks, and those who acquire or transfer them in good faith do not acquire the right to claim reimbursement.

6.2 Necessity of Possessing Bills/Checks

Whether one needs to possess bills or checks to exercise the right to claim reimbursement depends on how the legal nature of the right to claim reimbursement is understood.

Nominative claim theory: According to the majority view, the nominative claim theory, it is not necessary to possess bills or checks to exercise the right to claim reimbursement. However, notification or consent regarding the transfer of nominative claims is required.

Residual/Modified theory: This view explains that possession of bills or checks in a modified form is necessary because the right to claim reimbursement is seen as a modified or residual form of the rights on bills or checks.

Precedents (regarding cashier’s checks): Courts understand the right to claim reimbursement as a nominative claim, but in the case of cashier’s checks, they view that notification to the debtor includes the authority to notify through the transfer of the check. This is interpreted to mean that a cashier’s check after the expiration of the payment presentation period is difficult to see as a security representing the right to claim reimbursement, and the holder merely possesses it as evidentiary security supporting the point that they have acquired or transferred the right to claim reimbursement. In other words, while it is not necessarily required to possess the check for the exercise of the right itself, the delivery of the check plays an important role in the transfer process.

6.3 Place of Performance (Place of Payment)

The place of performance (place of payment) of the right to claim reimbursement differs from bill or check debts in that it is not the place indicated on the bill or check.

Discussion on the creditor’s address (debt to be brought) vs. the debtor’s address/place of business (debt to be claimed) under the nominative claim theory: When understood as a nominative claim under civil law, it would in principle be a debt to be brought, paid at the current address of the creditor (holder), but there is discussion about the right to claim reimbursement.

Grounds for viewing it as a debt to be claimed (prevention of disadvantage to the debtor): There is a view that the debt according to the right to claim reimbursement should be a debt to be claimed, where the holder collects it from the debtor’s (issuer, endorser, etc.) address or place of business. The reason is that a debtor whose rights on bills or checks have been extinguished should not be placed in a more disadvantageous position than before as a result.

6.4 Delay in Performance and Effects

Point of delay in performance when viewed as a debt to be claimed: As long as the debt according to the right to claim reimbursement is understood as a debt to be claimed, the debtor does not fall into delay in performance until the holder of the bill or check demands performance at the debtor’s address or place of business.

Delay rate (Nominative claim theory vs. Modified/Residual theory):

• If the right to claim reimbursement is understood as a nominative claim under civil law, the debtor bears responsibility according to the civil law delay rate of 5% per annum from the time of the demand for performance.
• However, if the right to claim reimbursement is understood as a modified or residual form of bills or checks, the debtor must pay interest at the rate of 6% per annum according to the provisions of the Bills Act and Checks Act.

K&P Law Firm has recent experience in successfully resolving disputes over the right to claim reimbursement arising from bill and check transactions between companies, and has deep expertise particularly regarding issues related to the transfer of the right to claim reimbursement for cashier’s checks. If issues related to bills or checks arise in transactions between companies, you can protect your company’s rights through professional legal advice.