“Got a Bounced Bill?” What Are Reimbursement Claims and When Can You Use Them?

7. Relationship Between Underlying Claims and Bills/Checks Claims

7.1. Separation and Coexistence of Underlying Claims and Bills Claims

Bill relationships have a strong instrumental nature for specifically implementing and realizing underlying relationships. Therefore, bill relationships and underlying relationships are essentially understood as separate.

However, when bills or checks are delivered, there are cases where existing underlying claims and bills/checks claims exist together (coexistence). This occurs when bills or checks are not delivered ‘in lieu of payment’ but rather ‘as security’ or coexist separately with underlying claims. The requirements for unjust enrichment claims are discussed based on this coexistence relationship.

7.2. Order of Exercising Claims

The provided materials do not present clear regulations or academic debates regarding the order of claim exercise based on whether checks/bills are delivered for security or for payment. However, discussions proceed on the premise that bills are not delivered in lieu of payment (where underlying claims and bills claims coexist).

In this case, the provided materials do not directly derive a mandatory order for which claim should be exercised first between underlying claims and bills claims. While generally in cases of coexistence, creditors can choose to exercise either claim at their discretion, this is difficult to clearly substantiate based solely on the provided materials.

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

Effect of bills/checks claims on underlying claim’s statute of limitations (precedent and majority view):

• Precedents and established theory hold that exercising bills/checks claims suspends the statute of limitations for underlying claims.
• Rationale for suspension: The reasoning for this view is as follows: (i) Bills economically target the same substance as underlying claims, and exercising bills claims is meant to realize underlying claims. (ii) In bills claim lawsuits, the statute of limitations for underlying claims becomes a personal defense for the debtor; thus, when a creditor holds both bills claims and underlying claims and the bills claim’s statute of limitations expires first, there is a view that since the creditor still has the underlying claim, unjust enrichment claims should not be recognized.

This is because if the statute of limitations for the underlying claim is not suspended along with the bill claim’s statute of limitations, the unreasonable result would occur where the right cannot be realized due to the debtor’s defense.

• Counter-argument to the rationale: Some argue that based on the fundamental intent of the statute of limitations system, the exercise of one right among homogeneous rights is difficult to view as ‘sleeping on one’s rights’, so it’s reasonable to consider the statute of limitations for the other right also suspended. However, there is also a counterargument that it’s difficult to treat underlying claims and bills claims on the same level.

Denial of the effect of underlying claim exercise on bills/checks claim’s statute of limitations (established theory):

• According to established theory, exercising an underlying claim does not suspend the statute of limitations for bills/checks claims.

Asymmetry discussion: As examined above, exercising bills/checks claims suspends the statute of limitations for underlying claims, but exercising underlying claims does not suspend the statute of limitations for bills/checks claims, showing asymmetry. The position of precedent and established theory is that such asymmetric results are appropriate when based on the principle of separation between underlying relationships and bill relationships.

7.4. Effect of Statute of Limitations Expiration on Either Underlying or Bills/Checks Claims

Expiration of one claim does not naturally affect the other (precedent):

• Even when only the underlying claim’s statute of limitations expires, bills/checks claims do not automatically expire. However, the expiration of such underlying claims can serve as grounds for personal defense against exercising bills/checks claims.
• Precedent holds that when an underlying claim expires due to reasons such as statute of limitations, right to claim reimbursement does not arise regardless of whether the expiration occurred before or after the expiration of the bills/checks obligation. This is based on the view that right to claim reimbursement aims to recover the debtor’s gains due to the statute of limitations expiration of bills/checks, not to deprive gains due to underlying claim expiration. Additionally, if an underlying claim and bills claim coexist and the underlying claim expires first, the bills claim is effectively nullified, so even if the bill’s statute of limitations later completes, it’s difficult to view new gains as arising.
• There are also criticisms questioning the intent of the right to claim reimbursement system or arguing that it renders the system ineffective.

8. Special Characteristics and Recent Issues of Right to Claim Reimbursement for Cashier’s Checks

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

A cashier’s check is a check where the issuer is their own drawee (Article 6(3) of the Checks Act).

This derives 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 amount or withdraws them from their deposit, securing payment funds in advance. Therefore, holders need hardly worry about payment refusal due to insufficient issuer deposits.

8.2. Practical Treatment After Expiration of Presentation Period

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

Legally, after the presentation period expires, the issuer can cancel the payment entrustment (Article 32(1) of the Checks Act), and the holder loses the right to recourse (Article 39 of the Checks Act).

However, in actual business practice, cashier’s checks are often paid without refusal by banks 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, a designated claim known as a right to claim reimbursement still exists.

8.3. Issues with Transfer of Right to Claim Reimbursement After Expiration of Presentation Period

A right to claim reimbursement is a right where the holder can claim the return of gains received by the debtor when rights on bills/checks expire due to procedural defects or statute of limitations completion (Article 79 of the Bills Act, Article 63 of the Checks Act). This constitutes a designated claim.

En banc Decision: Transfer of right to claim reimbursement through check delivery + granting authority for transfer notification

• The Supreme Court en banc decision (Case No. 81Da220) held that transferring a cashier’s check whose rights have expired due to the presentation period expiration constitutes, absent special circumstances, transferring both the authority to receive payment of the check amount and the right to claim reimbursement, along with granting the authority to notify the bank (the issuer who gained) about the transfer on behalf of the holder.
• This decision is interpreted as reflecting the transactional reality of cashier’s checks and aiming to protect transferees.
• While acknowledging the legal nature of right to claim reimbursement as designated claims, this is evaluated as allowing the transferee to satisfy the requirements for opposition through notification authority granted by check delivery alone, replacing the typical requirements for transferring designated claims. This en banc decision remains unchanged to date.

Recent Supreme Court Decision (Supreme Court Nov. 30, 2023, 2019Da203286, hereinafter “subject decision”): Need to satisfy requirements for opposition in designated claim transfer (Civil Act Article 450(2))

• The subject decision analyzed in this material held that right to claim reimbursement for cashier’s checks after the presentation period expires constitute designated claims, and in this case, the check is not a valuable instrument embodying the right to claim reimbursement but merely evidence supporting that the holder acquired or transferred the right to claim reimbursement.
• Therefore, the transfer of right to claim reimbursement must follow the method for transferring designated claims, and especially to assert against third parties (such as attaching creditors), one must satisfy the requirements for opposition stipulated in Civil Act Article 450(2) (notification or acceptance via a document with a fixed date).
• This position holds that the mere fact of check delivery cannot be considered as satisfying the requirements for opposition against third parties.

8.4. Problems and Criticisms of the Subject Decision

The subject decision overlooked the intent of the en banc decision to grant transferees notification authority reflecting the transactional reality of cashier’s checks.

This is criticized for disregarding the reality of cashier’s check transactions and potentially greatly threatening the safety of transactional practices that involve only check delivery after the presentation period expires.

By deriving a different conclusion without changing the en banc decision, issues with precedent consistency are raised.

By intentionally disregarding the actual circulation process of cashier’s checks that occurs solely through check delivery, there are concerns that future transaction parties may be more likely to refuse using cashier’s checks, potentially disrupting the domestic payment market.

8.5. Issues with Attachment of Right to Claim Reimbursement (Tax Collection Measures)

According to the facts, when a tax delinquent (甲) still possessed checks after the presentation period expired, tax authorities determined that right to claim reimbursement had arisen and proceeded with attachment by delivering claim attachment notices to the bank (defendant). Subsequently, despite the attachment notice, the bank paid the check amount to other individuals (乙, 丙) who presented the checks, prompting the tax authorities (plaintiff, Republic of Korea) to file a lawsuit against the bank.

Regarding the attachment method, valuable securities attachment requires possession (former National Tax Collection Act Article 38), but claim attachment requires notification to the debtor (former National Tax Collection Act Article 41(1)). The subject decision determined that since right to claim reimbursement are designated claims, they should be attached through claim attachment methods with notification, not through valuable securities possession methods.

Key issue: The effectiveness of attachment varies depending on whether right to claim reimbursement for transferred cashier’s checks after the presentation period expires are attributed to the transferee, or still attributed to the transferor’s creditor (attaching creditor) unless the transferor satisfies the requirements for opposition under Civil Act Article 450(2).

Subject decision’s position: The subject decision held that if the transferee fails to satisfy the requirements for opposition against third parties, the right to claim reimbursement remains attributed to the transferor, allowing tax authorities and other attaching creditors to demand payment from the bank (third-party debtor) by subrogating the delinquent (transferor).

Critical review: Following the intent of the en banc decision (81Da220), since check delivery alone attributes both the right to claim reimbursement and transfer notification authority to the transferee, the transferee becomes the sole creditor with satisfied opposition requirements. Therefore, criticism suggests that the transferor’s creditors should have difficulty asserting interest in the relevant right to claim reimbursement and should be unable to attach it.

The en banc decision recognized right to claim reimbursement transfer through check delivery alone, limited to cases “absent special circumstances,” but the material interprets it as reasonable not to include attaching creditors’ attachment notices as “special circumstances” since they’re not connected to transferees. Under this interpretation, viewing right to claim reimbursement as attributable to transferors due to attachment, as in the subject decision, contradicts the intent of the en banc decision.

9. Purpose of Delivery of Bills and Checks and Right to Claim Reimbursement

9.1. Relationship Between Underlying Claims and Bills Claims and Importance of Distinction

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

However, issues of statute of limitations expiration for underlying claims and bills claims, and right to claim reimbursement, must be carefully examined in relation to this separation.

The bill holder’s rights take two forms—underlying relationship and bill relationship—and this complexity becomes more pronounced in issues of statute of limitations expiration for underlying claims or bills claims, and right to claim reimbursement predicated on these.

While the provided material’s discussion primarily focuses on promissory notes, it suggests that this distinction may also be relevant to right to claim reimbursement issues for cashier’s checks.

9.2. Order of Exercising Rights and Statute of Limitations Suspension According to Delivery Purpose

When underlying claims and bills claims coexist, the order for exercising claims differs depending on whether the bill was delivered “as security” or “for payment.”

When delivered “as security,” the bill holder can freely choose to exercise either the underlying claim or the bills claim.

When delivered “for payment,” the bills claim must be exercised first (obligation to exercise bills claim first).

When the bill holder has an obligation to exercise the bills claim first, the exercise of the underlying claim is inappropriate until the bills claim is exercised, making it difficult to consider the suspension of the underlying claim’s statute of limitations. There is a view that it’s reasonable to consider the underlying claim’s statute of limitations as running from the maturity of the bills claim.

9.3. Absence of Other Remedies as a Requirement for Right to Claim Reimbursement

The Bills Act and Checks Act recognize right to claim reimbursement for holders when rights on bills or checks expire due to procedural defects or statute of limitations completion.

Precedents consistently take the “narrow interpretation” position that right to claim reimbursement can only arise when the bill holder has no remedy available not only under the Bills Act but also under civil law.

That is, for right to claim reimbursement to arise, not only must all rights on bills or checks have expired, but all civil law remedies, such as claims in the underlying relationship, must also have expired. This stems from the perspective that right to claim reimbursement is an “extremely exceptional system” whose scope of application should be limited.

Therefore, since bills or general checks are mostly delivered “for payment,” as long as claims in the underlying relationship exist, there is very little possibility for right to claim reimbursement to be recognized.

Courts tend to hold that right to claim reimbursement does not arise when claims in the underlying relationship expire due to reasons such as statute of limitations, regardless of whether the time of expiration is before or after the bills (or checks) obligation expiration, in cases where bills were delivered “for payment” or “as security” and underlying claims and bills claims coexisted.

9.4. Impact of Underlying Claim’s Statute of Limitations Expiration on Right to Claim Reimbursement

In situations where underlying claims and bills claims coexist (i.e., when bills are delivered “for payment” or “as security”), if the underlying claim’s statute of limitations expires first, the debtor can raise the defense of underlying relationship expiration against bills claim exercise, effectively nullifying the bills claim. Here, the debtor’s gain is viewed as occurring due to the underlying claim’s statute of limitations expiration, so even if the bill’s statute of limitations later completes, there is a view that right to claim reimbursement should be denied. This is based on the perspective that right to claim reimbursement aims to recover the debtor’s gains due to the bill’s statute of limitations expiration, not to deprive gains due to underlying claim expiration.

Even when underlying claims and bills claims expire simultaneously, precedent and majority scholarship hold that right to claim reimbursement does not arise. Since right to claim reimbursement does not arise regardless of which claim expires first, recognizing right to claim reimbursement solely because they coincidentally expired simultaneously would be inequitable and result in the debtor being even more disadvantaged.

9.5. Third-Party Issued Bills (When the Underlying Debtor Endorses and Transfers the Bill)

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

Conversely, there is a view that right to claim reimbursement should be recognized when B’s (underlying debtor) underlying claim expires first, and subsequently A’s (third-party issuer) bills claim expires. At the point of the underlying claim’s statute of limitations expiration, B can raise defenses against C, effectively avoiding recourse obligations, and A also avoids underlying obligations to B, but A still bears the bill obligation. If the bill’s statute of limitations later completes, A avoids the bill obligation as well, gaining substantial benefit, so right to claim reimbursement should be recognized.

In conclusion, the purpose of delivering bills and checks (“for payment,” “in lieu of payment,” “as security”) has a very significant impact on establishing the relationship between underlying claims and bills claims, determining the order of rights exercise, and especially on judging the ‘absence of other remedies’ as a requirement for right to claim reimbursement. Precedents strongly view right to claim reimbursement as extremely supplementary rights and tend to deny the arising of right to claim reimbursement when underlying claims exist.

Courts tend to hold that right to claim reimbursement does not arise when claims in the underlying relationship expire due to reasons such as statute of limitations, regardless of whether the time of expiration is before or after the bills (or checks) obligation expiration, in cases where bills were delivered “for payment” or “as security” and underlying claims and bills claims coexisted.

9.4. Impact of Underlying Claim’s Statute of Limitations Expiration on Right to Claim Reimbursement

In situations where underlying claims and bills claims coexist (i.e., when bills are delivered “for payment” or “as security”), if the underlying claim’s statute of limitations expires first, the debtor can raise the defense of underlying relationship expiration against bills claim exercise, effectively nullifying the bills claim. Here, the debtor’s gain is viewed as occurring due to the underlying claim’s statute of limitations expiration, so even if the bill’s statute of limitations later completes, there is a view that right to claim reimbursement should be denied. This is based on the perspective that right to claim reimbursement aims to recover the debtor’s gains due to the bill’s statute of limitations expiration, not to deprive gains due to underlying claim expiration.

Even when underlying claims and bills claims expire simultaneously, precedent and majority scholarship hold that right to claim reimbursement does not arise. Since right to claim reimbursement does not arise regardless of which claim expires first, recognizing right to claim reimbursement solely because they coincidentally expired simultaneously would be inequitable and result in the debtor being even more disadvantaged.

9.5. Third-Party Issued Bills (When the Underlying Debtor Endorses and Transfers the Bill)

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

Conversely, there is a view that right to claim reimbursement should be recognized when B’s (underlying debtor) underlying claim expires first, and subsequently A’s (third-party issuer) bills claim expires. At the point of the underlying claim’s statute of limitations expiration, B can raise defenses against C, effectively avoiding recourse obligations, and A also avoids underlying obligations to B, but A still bears the bill obligation. If the bill’s statute of limitations later completes, A avoids the bill obligation as well, gaining substantial benefit, so right to claim reimbursement should be recognized.

In conclusion, the purpose of delivering bills and checks (“for payment,” “in lieu of payment,” “as security”) has a very significant impact on establishing the relationship between underlying claims and bills claims, determining the order of rights exercise, and especially on judging the ‘absence of other remedies’ as a requirement for right to claim reimbursement. Precedents strongly view right to claim reimbursement as extremely supplementary rights and tend to deny the arising of right to claim reimbursement when underlying claims exist.

K&P Law Firm has recently provided successful legal advice in disputes related to right to claim reimbursement for cashier’s checks, and possesses extensive experience with complex bill and check transaction patterns that occur between businesses. We have specialized expertise in providing consultation on Bills Act and Checks Act matters for businesses in the Incheon Songdo area of South Korea.