Where a garnishee subjected to an order of seizure of a claim has a counterclaim against the garnishee, requirements to oppose the execution creditor by a offset.

[Majority Opinion] Article 498 of the Civil Act provides, “A garnishee in receipt of an order prohibiting payment shall not set up against any creditor who has applied for the order any defense against set-off based on the claim acquired thereafter.” In light of the purport of the above provision, the purpose and function of the set-off system, and the interests of the relevant parties in cases where a debtor’s claim is seized, etc., in order to set up a defense against an execution creditor in cases where a garnishee subject to an order of seizure or provisional seizure order of seizure (limited to an order of seizure of a claim) has a opposing claim against the execution creditor, in order to set-off against the execution creditor. If there is a set-off claim in both opposing claims at the time the seizure becomes effective, or if the period of repayment of the opposite claim at that time has not yet arrived, it shall arrive at the same time

[Dissenting Opinion by Justice Kim Nung-hwan, Justice Ahn Dai-hee, and Justice Lee In-bok] When a claim subject to an order prohibiting the payment and all claims subject to a seizure have become due, a garnishee may set-off with an opposite claim as a matter of course, and even if both the opposite claim and the claims subject to a seizure are not set-off because either the due date has not yet arrived, even if the garnishee’s opposite claim and the claims subject to a seizure are not set-off, then the garnishee may set-off with an opposite claim even when the third obligor has both the opposite claim and the claims subject to a seizure during the period in which the obligor is not paying the claims subject

Articles 492(1) and 498 of the Civil Act

Supreme Court en banc Decision 73Da518 delivered on November 13, 1973 (No. 21-3, No. 155) Supreme Court Decision 82Meu200 delivered on June 22, 1982 (Gong1982, No. 691 delivered on June 27, 2003)

Hanhwa system Chang, Inc.

Defendant

Seoul High Court Decision 2010Na86664 decided April 27, 2011

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. Article 498 of the Civil Act provides, “A garnishee in receipt of an order prohibiting payment shall not set up against any creditor who has applied for the order any defense against set-off by the claim subsequently acquired.” In light of the purport of the above provision, the purpose and function of the set-off system, and the interests of the relevant parties in cases where a debtor’s claim is seized, etc., in order to oppose the execution creditor by set-off in cases where a garnishee who has been subject to an order of seizure or provisional seizure order of seizure (limited to an order of seizure of a claim) has a opposing claim against the execution creditor, in order to set-off against the execution creditor. If there is a set-off in both opposing claims at the time the seizure becomes effective, or if the period of repayment of the opposite claim at that time has not arrived, it shall arrive at the same time or earlier (see, e.g., Supreme Court Decisions 82Meu200, Jun. 22, 1982; 2003Da7623, Jun. 27, 2003).

2. After finding the facts in its holding, the court below determined that, when there exists a seizure and collection order prior to the provisional seizure of a monetary claim, a third party obligor may set up a defense against the execution creditor later on the grounds that the garnishee can set up against the provisional seizure obligor before the provisional seizure takes effect, so long as the third party obligor has already acquired the opposing claim at the time of the provisional seizure taking effect, the expectation of offset is reasonable and justifiable, and even if the third party obligor does not have both claims at the time of the provisional seizure and the repayment period of opposing claim has not arrived at the time of the provisional seizure, the execution creditor may set up a defense against the execution creditor by a set-off regardless of whether both claims were set-off or at the time of the expiration of the period of both claims. Accordingly, in this case, the date of the provisional seizure takes effect is the date of June 30, 2008, and the payment period of the construction price claim, which is the attached claim, is around June 10, 2008, the execution creditor's opposing claim at the time of the provisional seizure can be set-off against the construction price claim.

However, according to the legal principles as seen earlier, although the claim for construction cost, which is a claim seized at the time the provisional attachment became effective in this case, has already arrived but the opposite claim in this case has not yet arrived, it cannot be deemed that both claims were set-off, and further, since the repayment period of the opposite claim in this case comes later than the repayment period of the claim for construction cost, the defendant cannot set-off against the plaintiff who is the execution creditor.

Therefore, the judgment of the court below is erroneous in the misapprehension of legal principles as to set-off against claims, the payment of which is prohibited, which affected the conclusion of the judgment. The ground of appeal assigning this error is with merit.

3. Therefore, the lower judgment is reversed and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices, except for a dissenting opinion by Justice Kim Nung-hwan, Justice Ahn Dai-hee, and Justice Lee In-bok, and a concurrence with the Majority by Justice Yang Chang-soo and Justice Kim Nung-hwan, Justice Ahn Dai-hee, and Justice Lee In-bok, Justice

4. Dissenting Opinion by Justice Kim Nung-hwan, Justice Ahn Dai-hee, and Justice Lee In-bok

A. Article 498 of the Civil Act provides, “A garnishee in receipt of an order prohibiting payment shall not set up against the obligee who applied for the order by offsetting the claim subsequently acquired.” Therefore, the prohibition of set-off by a third obligor is limited to offsetting the claim newly acquired after a third obligor was ordered to prohibit payment by means of an automatic claim after the third obligor was ordered to prohibit payment. In light of the opposite interpretation, setting-off against the claim already acquired and held by the third obligor prior to that time is not prohibited by this provision, but rather permitted by this provision. There is no room for doubt as to whether the third obligor has already arrived at the time of receiving the order prohibiting payment.

B. The main text of Article 492(1) of the Civil Act provides, “Where both parties assume an obligation for the same kind of purpose, and both of them have due, each obligor may offset against an equal amount.” This principle applies even in cases where a third-party obligor is ordered to prohibit payment. Therefore, even if a third-party obligor has already acquired an opposite claim against the obligor at the time when he/she is ordered to prohibit payment, it may offset the opposite claim by either time or time, and only when the due date for the opposite claim and the attached claim have arrived. There are no reasons different from that of an order prohibiting payment. The order prohibiting payment does not change merely the prohibition of the payment of an opposite claim by the third-party obligor to the obligor, but also does not change the nature of the opposite claim or attached claim. Accordingly, even if both the opposite claim and the attached claim have come due at the time of receiving the order prohibiting payment, and even if either of them has not yet arrived at the time when the third-party obligor has already failed to offset against the obligor, it can be seen that the garnishee’s opposite claim has already been made during the due date.

C. The initial set-off is permissible for the purpose of facilitating and equitable settlement of claims and obligations conflicting with each other between the parties having the same kind of claims. Accordingly, even if the obligor’s ability to pay-off is insufficient, the obligee exercising the right of set-off is guaranteed the same interest as having received reimbursement in respect of his/her automatic claims, even if the obligor’s ability to pay-off is insufficient. In this regard, the obligee exercising the right of set-off has a status similar to the secured party. There is no reason to deny that the obligee having the right of set-off has issued an order to prohibit payment of the passive claims.

An order prohibiting payment is, as it is, prohibiting a third-party obligor from performing its obligations to the debtor, and does not result in any change in the nature or nature of the seized claim, nor does it have an effect to prevent the extinction or alteration of the claim by an objective fact unrelated to the debtor's act or an act of the third-party obligor from being extinguished or altered. This legal doctrine applies likewise to cases where the third-party obligor

D. If so, who is protected from among the creditors who requested an order prohibiting payment with a third party obligor entitled to set-off with opposing claims? The answer is clear. While the status of creditors who requested an order prohibiting payment is uncertain and unstable, the third party obligor has a status similar to the secured party, so the third party obligor’s exercise of set-off right should be guaranteed. Therefore, when all opposing claims and seized claims have come to the due date at the time of receiving an order prohibiting payment, the third party obligor may set-off with opposing claims as a matter of course, and even if both opposing claims and seized claims or either of them has not yet arrived, even if they are not set-off against the third party obligor as they have not yet arrived, the third party obligor may set-off against the obligee who requested an order prohibiting payment, even if all opposing claims and seized claims have come to the due date, and even if the third party obligor’s claims have not yet arrived at the time of receiving the order prohibiting payment, the third party obligor who requested an order prohibiting payment has to set-off against the obligor’s claims that were already due and effective before the due date arrives.

E. Article 492(1) of the Civil Act merely requires the arrival of both parties’ fulfillment period as an element of offset. If this principle is followed, even if there is an order prohibiting payment, the third obligor, regardless of whether the third obligor has acquired a counterclaim against the obligor before or after the order prohibiting payment of the opposite claim, may offset the opposite claim and the claim prohibited from payment at any time only when all the due date arrives. However, this may lead to an overly unstable situation in the status of the obligee who applied for the order prohibiting payment. Here, by adequately regulating the scope of the opposite claim, which may be offset by the third obligor, the benefit balance between the obligee who applied for the order prohibiting payment and the third obligor who applied for the order prohibiting payment is necessary by appropriately regulating the scope of the opposite claim, which may be offset by the third obligor. The issue is how to determine the specific standard. Our Civil Act is understood to be a matter that depends on legislative policy. It is understood that the standard is an order to prohibit payment without adopting legislation established after the due date of both claims and legislation established after the expiration of the third obligor’s opposite claim.

Nevertheless, it is unreasonable to determine whether a set-off by a third party obligor is permitted after the arrival of the maturity period, as shown in the Majority Opinion, because it goes against the provisions of Article 498 of the Civil Act, to restrict a set-off by a third party obligor without any legal

The majority opinion does not have any explanation on the reason or ground, even though it comes to a conclusion different from the original meaning of the provision of Article 498 of the Civil Code.

F. More than anything else, Supreme Court en banc Decision 73Da518 Decided November 13, 1973; Supreme Court Decision 82Meu200 Decided June 22, 1982; Supreme Court Decision 2003Da7623 Decided June 27, 2003; Supreme Court Decision 2003Da7623 Decided June 27, 2003.

In this case, the period of repayment of the seized claim has already arrived at the time when the provisional attachment order became effective, and the Defendant’s opposite claim, which is the garnishee, has not yet arrived. However, in light of the legal principles as seen earlier, insofar as the seized claim has not yet been collected and paid, the Defendant may set off the opposite claim against the Plaintiff as the creditor holding the provisional attachment by offsetting it as the automatic claim. The judgment of the court below to the same purport shall be justified and maintained, and the appeal shall be dismissed.

For the foregoing reasons, I oppose the Majority Opinion.

5. Concurrence with the Majority by Justice Yang Chang-soo

A. The Dissenting Opinion argues that even if a creditor who exercises the right of set-off is insufficient to satisfy the obligor’s ability to repay, he/she has a status similar to a secured party by guaranteeing interests, such as securing a clear and sufficient repayment of his/her automatic claim, and thus, he/she has no reason to deny such status on the ground that there is an order to

However, such “a position similar to a secured creditor” as mentioned above is guaranteed only on the basis of the balance between the legitimate interests of other creditors. As stated in the Dissenting Opinion, offset is recognized as a means of settling claims and obligations in a simplified manner between the parties having the same kind of claims and the parties having the same kind of claims. This is because it is not necessary to conclude that the settlement of only the remaining amount after the extinguishment of each claim against the other party and the debtor is saved from both the creditor and the debtor’s effort or cost-off, rather than receiving a claim and performance of each one’s claim, and performance. This is because it is not necessary to say that the settlement of only the remaining amount after the extinguishment of each one’s claim against the other party would be made between the creditor and the debtor’s effort and cost-off. As such, the offset brings about the effect of immediately satisfaction of one’s claim by unilateral declaration of intent

However, it is naturally limited to the purport of offsetting as such simple means of payment, which has function as a collateral or preferential repayment. In other words, in a case where an obligor bears an obligation against other creditors, all creditors may be equally responsible for the obligor’s own claims, and this principle is called “the principle of equality of creditors” as well as “the principle of equality of creditors” as it is known. If an obligor holds a claim against one of the creditors, this obligation shall also be used for all of the creditors. However, if it is allowed for a set-off with his/her own claims, if the obligee who bears the opposite obligation is allowed to return to the satisfaction of the obligee’s claims, then the obligee’s claim should be returned to the satisfaction of the obligee’s claims. Accordingly, the obligee who bears the opposite obligation is satisfied with the obligor’s own claims in preference to other creditors regardless of the obligor’s assets status. However, the problem is that such set-off is likely to cause any disadvantage to the obligor’s general property that is permissible to be set-off as a result of the foregoing set-off.

Nevertheless, recognition of the aforementioned function as a collateral is explained by the parties to a set-off and explanation that there is a need to protect the legitimate trust that one may obtain satisfaction of one’s own claim, regardless of the other party’s financial ability. However, if the collateral function is indefinitely acknowledged, the interests of other creditors may be unduly infringed if the obligor’s financial standing becomes worse. For instance, there is a defect that the obligor’s claims against “A” are in a critical part of the obligor’s property liability in cases where the obligor’s financial standing is likely to be omitted due to heavy debt burden. In such a case, the claim against “A” is traded at a higher price than its face value in accordance with the actual value. If the obligor’s claim against “B” is transferred at a salt price with “B” and the obligor’s claim against “A” is discarded by offsetting the obligor’s debt against “B,” and thus, the obligor’s property becomes considerably decreased, and thus, the obligor’s other creditors against “A” may have an unexpected disadvantage. The foregoing restriction is widely prohibited under the premise that the obligor’s bankruptcy proceeding is set-off.

In addition, for example, if other creditors: (a) seized the obligor A’s claim against the third obligor B and commenced compulsory execution; and (b) the obligor B may offset the counterclaim at any time, regardless of when it acquired the obligor A’s counterclaim; (c) such compulsory execution becomes possible at any time to return to the obligee; (d) however, in light of the nature of offset as a private execution, as seen earlier, it should not be permitted as a result of collaboration in the statutory compulsory execution. In particular, as the third obligor’s counterclaim is not disclosed in public; (e) there is a high risk that the obligee would suffer unexpected disadvantage; and (b) in fact, if the obligor seizes the claim against the third obligor, it may not be said that the obligor had already been omitted in the insolvency status, and thus, there is a risk of omission in such status. Accordingly, in such a case, it is reasonable to view that there is a reasonable ground to view that the obligee’s satisfaction interest through the public acquisition of the obligor’s property is urgent and arbitrably conflicting with each other, and that there is no other favorable legal resolution.

Therefore, the collateral function of a set-off is recognized as only incidental to the function as a simple means of payment as seen earlier, and it is not unlimitedly acceptable. It is desirable to set the scope of a set-off by taking into account the balanced interests of other creditors, creditors, including the legitimate interests of the set-off period and the creditor, and the creditor, etc., who has the creditor to make a set-off, and to impose an appropriate

The Dissenting Opinion argues that a creditor with the right of set-off has “a position similar to a de facto secured person”. However, such position is not stipulated in the clear text of our law emphasizing the Dissenting Opinion. It merely refers to the legal situation where a creditor with the right of set-off, which is accompanied by the original purport of the set-off system, which is a simple settlement as a result of a reasonable interpretation and determination by taking into account the requirements for and effects of set-off, and various relevant interests, actually obtains preferential payment within a certain scope. Therefore, it is thought that setting and recognizing “a position similar to a de facto secured person” in advance and setting the specific requirements for set-off and effects of the foundation on the ground of such establishment and recognition is the attitude prior to the end.

B. Article 498 of the Civil Act intends to set the limitation of the third-party obligor’s assertion of set-off in cases where one of the creditors seizes or provisionally seizes a debtor’s claim against the third-party obligor (hereinafter in this case, the same shall apply only to seizure).

As long as a garnishee had an automatic claim at the time of seizure, it should be deemed that a set-off can be set up against an execution creditor if a set-off occurs after the time of seizure without regard to the arrival of the due date or the prior relation thereto. Ultimately, even in cases where the due date of a claim subject to seizure arrives but the third obligor fails to perform it, and the due date of an automatic claim comes after the third obligor fails to perform it, the third obligor is entitled to oppose the execution creditor by a set-off. In such cases, in order for the third obligor to claim against the execution creditor by a set-off, as discussed earlier, the benefit of protecting his/her legitimate trust in the set-off is adequate and balanced compared with the legitimate interests of the execution creditor, so that the benefit of protecting the creditor’s legitimate trust in the set-off can be set-off, and thus, the benefit of the execution creditor may be set back later.

Until now, the Supreme Court has held that even if the set-off is not conducted at the time of seizure, and the set-off is made only after the seizure, the Supreme Court has taken into account the attitude that the creditor can be preferentially protected only when the third debtor's automatic credit is set-off at the same time as or earlier than the maturity date of the passive credit. This attitude has been as follows: Provided, however, if the third debtor's automatic credit repayment period comes later later than the maturity date of the passive credit, the third debtor must not perform his/her obligation despite the arrival of the maturity date of the claim; however, if the third debtor is liable for the non-performance of his/her obligation, at least if the third debtor is liable for the non-performance of his/her obligation, and at least it is objectively considered that the third debtor's automatic credit which can be set-off is not worth protecting the creditor who commenced the seizure prior

In other words, a set-off is permitted when both of the obligations have come due. Of course, if several claims have not come to the due date, a person who intends to set-off may waive the benefit of his/her obligations. Thus, a set-off may be recognized as against the automatic claims that have come to the due date. However, if the claims of the party who asserts a set-off are not due, i.e., where the automatic claims have come to the due date, a set-off shall not be permitted even if they have come to the due date, and if the passive claims have yet to come to the due date, they shall not be permitted, and if there are opposing claims which have yet to come to the due date, they shall not be refused due to the reason that they have yet to come to the due date, and if so, there is no reason to deny the creditor's exercise of rights as to the claims which have come to the due date, it would result in allowing delay of performance without the debtor's ground. This would be in accordance with the basic principle that even if those claims have already been seized with automatic claims that can be exercised without any legal impediment.

In this regard, the attitude of our precedent is the appropriate resolution that is adopted after sufficiently considering the contents of the interest that sharply conflict with each other. In such a case, if a good third-party debtor has performed his/her obligation at the time, the payment is practically belonging to the debtor's general property, and thus, there was a possibility that all creditors may obtain satisfaction of each creditor's obligation through it. Nevertheless, the fact that the third-party debtor may delay the performance of his/her obligation after the due date has arrived and obtain preferential satisfaction of his/her claim against the execution creditor with set-off which is possible after the due date has arrived, and that the execution of the execution of the creditor's claim may be avoided is excessively emphasizing the function of set-off as a security.

C. The attitude of our precedents is not even supported by comparative law. For example, the latter part of Article 392 of the German Civil Code explicitly provides that in the event a third-party obligor’s claim has arrived at the maturity after seizure, a set-off cannot be made if the period of repayment is later than that of the seized claim. The legislative reason is to prevent the third-party obligor from obtaining the right of set-off by delaying the performance of the obligation that the third-party obligor owes until the due date of the counter-performance of the obligation that the obligor owes.

D. To take the same attitude as the Dissenting Opinion, the legislative intent of Article 498 of the Civil Act, rather than allowing a set-off against a third-party obligor, which uses the claims acquired after the seizure, cannot be explained. The Dissenting Opinion, “The order of seizure is a prohibition against a third-party obligor’s repayment, not a change in the nature or nature of the claims subject to seizure, but does not bring about any change in the nature or nature of the claims subject to seizure, and does not have an effect to prevent the extinction of the claims or the alteration of the contents thereof as an objective fact unrelated to the obligor’s act or an act of the third-party obligor.” Thus, Article 498 of the Civil Act does not change the nature or nature of the claims subject to seizure on the ground that it does not result in any change in the nature or nature of the claims subject to seizure,

Article 498 of the Civil Code provides for a certain change in the situation of profit in relation to a set-off held by a third-party debtor as a fact of the seizure of claims, and it is reasonable to regard that the above legal issues should not be considered in the satisfaction of claims by the creditor. In addition, such legislative intent should be considered as a matter of course in interpreting the specific contents of “claim acquired after the order prohibiting payment is issued” as stipulated in Article 498 of the Civil Code. In this sense, the attitude of our precedents mentioned above cannot be deemed as contrary to the express text of Article 498 of the Civil Code, and rather, it should be deemed that the legislative intent is closely and appropriately realized.

6. Opinion concurring with the Dissenting Opinion by Justice Kim Nung-hwan, Justice Ahn Dai-hee, and Justice Lee In-bok

A. In light of the purpose and function of the set-off system, the status similar to the security interest of the creditor entitled to exercise the future set-off right is recognized only if there exist automatic claims and passive claims, and its existence does not vary depending on the existence of both claims after the maturity date of both claims. However, according to the Majority Opinion, for the third obligor who has been in a position similar to the security interest and whose maturity date arrives later than that of the seized claim because it is possible to exercise the future set-off right due to the opposing claims at the time of the effectiveness of the seizure of claims, the third obligor who has been in a position similar to the security interest and has not yet arrived at the maturity date of the seizure of claims, the reason why the seizure of claims cannot exercise the right of set-off is unreasonable.

B. The Majority Opinion seems to restrict the exercise of the right of offset on the ground that the expectation of offsetting against future set-off by a third party obligor who performed nonperformance due to nonperformance of an obligation that has already been due until the due date arrives is not protected. However, in such a case, it may be sufficient to impose liability for damages, etc. on a third party obligor according to the ordinary provisions of the Civil Act, and further limiting the exercise of the right of offset on the ground that the third party obligor has reached a set-off in the course of nonperformance of obligation is an excessive sanction against the third party obligor. In particular, even if the due date has reached a dispute over the scope of the obligation, etc., and thus, there are circumstances to consider the nonperformance of obligation, such as failure to repay the obligation, etc., the Majority Opinion uniformly restricting the exercise of the right of offset on the basis of the prior date of the due date may cause a harsh result on the third party obligor in such cases.

C. From a comparative perspective, the Dissenting Opinion’s interpretation is reasonable.

Article 392 of the German Civil Code stipulated the same interpretation as the majority opinion, but it is different from the legal text of Article 498 of the Korean Civil Code because it uses the term "acquisition" of a claim and the term "the arrival date of performance" of a claim. Unlike our Civil Execution Act, the German Civil Procedure Act does not provide that the need for protection of an execution creditor is our because the execution creditor acquires the status of a statutory pledgee who is subject to seizure of a claim subject to seizure. Considering these differences, the provisions of Article 392 of the German Civil Code cannot be applied as it is to the interpretation theory of Article 498 of the Korean Civil Code.

D. In the event that the garnishee is a financial institution, such as a bank, etc., a special agreement provides that when there is doubt as to the obligor’s ability to repay claims, such as loans, which are ordinary opposing claims, such as provisional seizure or seizure of claims, the obligor may lose the benefit of time and set-off claims such as deposits, which are attached claims. The Supreme Court recognizes the validity of special agreement, such as loss of the benefit of time, and recognizes the validity of the special agreement, such as the provisional seizure of claims or seizure of claims immediately set-off under such special agreement, and thus, financial institutions such as the third obligor bank, etc., which are the garnishee, can exercise the right of set-off without restriction (see, e.g., Supreme Court Decisions 8Da25120, Sept. 12, 1989; 2003Da7623, Jun. 27, 2003). In addition, the Supreme Court has determined that the third obligor’s right of set-off can be exercised where the obligor’s opposite claims and the obligor’s creditor’s right of execution are in concurrent relationship (see, 3.

Justices Yang Sung-tae (Presiding Justice)