Recently, two Korean banks – including Nonghyup Bank – obtained favorable decisions regarding their claims for insurance proceeds against the Korea Trade Insurance Corporation (“K-SURE”), in the widely reported export financing fraud case involving Moneual Inc. (“Moneual”), now a defunct exporter of consumer electronics. 

Details:

Six Korean banks purchased Moneual’s export receivables that were insured by short-term export policies (export financing facilities or “EFFs”) issued by K-SURE.  However, it turned out that the transactions underlying the export receivables were fraudulent, and it became impossible for the banks to recover on such false/fictitious export receivables.  Subsequently, each of the six banks filed a separate action against K-SURE in the Korean courts seeking payment under their EFFs.  Total claims amounted to approximately KRW 360 billion.

Although the claims made by the six banks in each case have involved substantially the same issues, the outcomes for the banks have been different.  In the first of the six lower court decisions¹, the court rejected all of the plaintiff bank’s claims on the grounds that: (i) a false/fictitious export transaction is not an “insured transaction” under the meaning of the general terms and conditions of the EFF; (ii) risks arising from false export transactions are not “insured risks”; and (iii) if the court were to accept the bank’s arguments, it would create moral hazard on the part of the exporters and financial institutions, potentially resulting in even more false/fictitious transactions.

However, in two consecutive decisions issued by the courts between December 2016 and February 2017, including in the case filed by Nonghyup Bank, the courts accepted the bank’s claims and ruled in favor of the banks.  The courts reasoned that:

(1) the general terms and conditions of the EFF cannot be interpreted as limiting “insured” transactions to only “true” export transaction, or as excluding risks arising from false/fictitious transactions as “insured risks”;

(2) applying the principle of interpreting contractual terms against the drafter, the insurance contracts were validly effectuated and the risks arising from false export transactions should be covered as insured risks;

(3) while it is true that recognizing the bank’s claims could create moral hazard on part of the banks, such a risk can be managed by requiring the banks to fulfill their duty of due care when reviewing export documents; 

(4) on the other hand, there would be no way of controlling K-SURE if its business practices are carried out in an inappropriate manner; for example, by setting the limit for total policies written at a level that is too high, or conducting credit review in an inadequate manner; and

(5) ultimately, it was up to K-SURE to conduct its business in a diligent manner, and moral hazard could be avoided by K-SURE’s own efforts; furthermore, imposing excessive burden on the banks goes against the purpose of the Trade Insurance Act (under which K-SURE was created), which was enacted to promote export trades.

The courts also noted that although it would be reasonable to hold the banks accountable for their failure to fulfill their duty of due care if there had been irregularities or abnormalities in the forms and appearances of the export documents, this was not the case for the Moneual export receivables, and as a result, it would be difficult to conclude that the banks had breached such duty of due care.

Meanwhile, in another recent decision rendered in February 2017, the court sided with K-SURE and dismissed the bank’s claims, stating that risks associated with false/fictitious export transactions are not covered as an insured risk.   

Potential Impact / Significance:

Despite the earlier November 2016 court decision that rejected all of the bank’s claims (in which Kim & Chang did not play a role), we were successful in persuading the other two courts to recognize the bank’s export insurance claims against K-SURE.  We focused on the policy reason for the existence of the trade insurance system in the first place, the background and purpose of the EFF as in insurance product, and the impact of this case to the export insurance system as a whole.  Meanwhile, the most recent decision that rejected the bank’s claims in favor of K-SURE has increased interest regarding the outcome of the appellate level proceeding, which is expected to commence in the near future.