[1] The meaning of "bilateral contract" under Article 119(1) of the Debtor Rehabilitation and Bankruptcy Act

[2] The case affirming the judgment below holding that Gap corporation's claim for the refund of security deposit constitutes a priority claim under Article 179 (1) 7 of the Debtor Rehabilitation and Bankruptcy Act, in case where Gap corporation paid security deposit for the settlement of price for goods to Eul corporation, and thereafter the rehabilitation procedure commenced to Eul corporation, and the administrator agreed to continue to supply Eul company's goods, and Gap corporation claimed the return of security deposit against Eul corporation after the contract term expires

[1] Article 119(1) main text of the Debtor Rehabilitation and Bankruptcy Act provides, “When both the debtor and his other party with respect to a bilateral contract have not yet completed the performance thereof at the time rehabilitation procedures commence, the custodian may rescind or terminate the bilateral contract, or claim for the performance of the other party’s obligation.” Article 179(1)7 of the Debtor Rehabilitation Act provides, “The other party’s right at the time when the custodian performs his/her obligation under Article 119(1)” as a public-interest claim. A bilateral contract under Article 119(1) of the Debtor Rehabilitation and Bankruptcy Act refers to a contract under which both parties are liable for a debt in quid pro quo relationship, and both parties are able to function as a security when both parties are able to perform their obligations.”

[2] The case affirming the judgment below which held that, in case where Gap corporation's contract for the supply of goods with Eul corporation, paid a security deposit for the settlement of goods price to Eul corporation, and thereafter the rehabilitation procedure commenced, and the administrator agreed for Eul corporation to continue to supply the goods to Eul corporation and Eul corporation, and Gap corporation sought the return of the security deposit against Eul corporation after the contract term expires, the security deposit paid by Eul corporation to Eul corporation is appropriated for the payment of goods without a separate declaration of intention when the requirements stipulated in the contract are satisfied, since the security deposit paid by Eul corporation to Eul corporation is appropriated for the payment of goods without a separate declaration of intention, the security deposit of Eul corporation can be deemed as an advance payment for the goods price of Eul corporation, and therefore, it can be deemed that Eul's claim for the refund of security deposit to Eul corporation function as a security for each other because it has the satisfaction with Eul company's goods price claim and the performance and continuation of the contract.

[1] Articles 119(1) and 179(1)7 of the Debtor Rehabilitation and Bankruptcy Act / [2] Articles 119(1) and 179(1)7 of the Debtor Rehabilitation and Bankruptcy Act

Gyeong-type Construction Co., Ltd. (Attorney Kim Jin-jin, Counsel for defendant-appellant)

Postal Special Enterprise Co., Ltd. (Law Firm Es., Attorneys Cho Young-young, Counsel for the defendant-appellant)

Seoul Central District Court Decision 2017Na35891 Decided July 3, 2018

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. The main text of Article 119(1) of the Debtor Rehabilitation and Bankruptcy Act (hereinafter “ Debtor Rehabilitation Act”) provides that “When both the debtor and the other party to a bilateral contract have not yet completed the performance of the bilateral contract at the time rehabilitation procedures commence, the custodian may rescind or terminate the bilateral contract, or claim for the performance of the other party’s obligation.” Article 179(1)7 of the Debtor Rehabilitation Act provides that “a claim held by the other party at the time when the custodian performs the obligation under Article 119(1)” refers to a priority claim. A bilateral contract under Article 119(1) of the Debtor Rehabilitation Act is a contract under which both parties are liable for the obligation in quid pro quo, and both parties are able to function as a security in the formation, performance, and existence of both parties’ obligations.”

2. According to the reasoning of the lower judgment and the record, the following facts are revealed.

The plaintiff is a company that engages in wholesale and retail business of building materials, and the defendant is a company that receives and enters building materials.

On June 17, 2014, the Plaintiff and the Defendant entered into a business agreement (hereinafter “instant contract”) on the supply of the patented goods to the Plaintiff (hereinafter “instant contract”). The contract period shall be two years from July 1, 2014, but may be extended by mutual consultation, and the Plaintiff paid KRW 100 million to the Defendant and returned within ten days from the termination of the contract. The Plaintiff paid KRW 100 million to the Defendant on June 30, 2014.

On September 25, 2014, the Defendant filed an application for commencement of rehabilitation procedures with Seoul Central District Court 2014 Ma169 (Seoul Central District Court). On November 3, 2014, the above court decided that the Defendant deemed the Defendant as the custodian of the rehabilitation procedures and the Defendant’s representative director as the custodian. On April 22, 2015, the court decided to grant authorization for the rehabilitation plan and decided to discontinue the rehabilitation procedure on June 29, 2016.

On December 5, 2014, the non-party, who was the administrator of the rehabilitation company as the representative director of the defendant, agreed with the plaintiff to continue to supply goods.

On May 2016, the Plaintiff requested the Defendant to return the deposit by July 10, 2016, on June 24, 2016, on the ground that he/she had no intent to renew the contract after the expiration of the contract term on June 30, 2016.

3. The lower court, on the following grounds, accepted the Plaintiff’s claim by deeming that the Plaintiff’s claim to return security deposit is not a rehabilitation claim but a public-interest claim.

Article 4 of the instant contract provides that the Plaintiff may order the product within the scope of the deposit (Paragraph 1), and where the price of the ordered product exceeds the deposit, the order may be issued after making the advance payment of the excess amount (proviso 2). In the event that the Plaintiff fails to pay the product price at his own discretion for not less than 30 days without prior written consent, the Defendant shall pay the total amount of the outstanding amount in preference to the deposit (Paragraph 3). Article 10(2) of the instant contract provides that the termination of the contract may be made where the other party causes damage exceeding the deposit, in violation of the provisions of this contract. In light of the language and text of this contract, the deposit that the Plaintiff paid to the Defendant is appropriated for the payment of the product price without separate declaration of intention of the original Defendant, and thus, the deposit has the nature of advance payment

Therefore, the Plaintiff’s claim for the return of deposit against the Defendant can be deemed to function as a security for each other inasmuch as the Defendant’s claim for the purchase price of goods against the Plaintiff and the performance and continued existence. Therefore, it constitutes a priority claim under Article 179(1)7 of the Debtor Rehabilitation Act.

4. Examining the reasoning of the lower judgment in light of the foregoing legal doctrine, the lower judgment was justifiable and did not err by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, or by misapprehending the legal doctrine on claims for public interest

5. The Defendant’s appeal is without merit, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Lee Dong-won (Presiding Justice)