2005.01.17

2001 (Ju) 704

Minshu Vol. 59, No. 1

Judgment concerning whether or not it is allowable for a bankruptcy creditor to seek setoff between his/her claim in bankruptcy and his/her debt that was subject to a time limit or condition precedent at the time of the declaration of bankruptcy and the time limit is reached or the condition precedent is satisfied after the declaration of bankruptcy

Case to seek declaration of the claim in bankruptcy and payment of surrender value

Judgment of the Second Petty Bench, partially dismissed, partially quashed and decided by the Supreme Court

Hiroshima High Court, Okayama Branch, Judgment of February 8, 2001

If a debt owed by a bankruptcy creditor to a bankrupt debtor is, at the time of declaration of bankruptcy, subject to a time limit or condition precedent, unless there are special circumstances, it is allowable, in accordance with the provision of the second sentence of Article 99 of the former Bankruptcy Law (before abolishment by Law No. 75 of 2004), for the bankruptcy creditor to seek setoff between his/her claim in bankruptcy and the claim for such debt, not only where the bankruptcy creditor relinquishes the benefit of time or benefit of non-satisfaction of the condition precedent, but also where the time limit is reached or the condition precedent is satisfied after the declaration of bankruptcy.

Article 99 and Article 104, Sub-para. 1 of the former Bankruptcy Law (before abolishment by Law No. 75 of 2004), Article 67, Para. 2 and Article 71, Para. 1, Sub-para. 1 of the Bankruptcy Law

Article 99 of the former Bankruptcy Law (before abolishment by Law No. 75 of 2004)
(Setoff of claims and debts subject to time limit or condition subsequent)
Even in cases where the claim held by the bankruptcy creditor is, at the time of the declaration of bankruptcy, subject to a time limit or condition subsequent, or where it is any of the claims mentioned in Article 22, setoff shall not be precluded. The same shall also apply in cases where the debt is subject to a time limit or condition or where it relates to a future claim.

Article 104, Sub-para. 1 of the former Bankruptcy Law (before abolishment by Law No. 75 of 2004)
(Prohibition of setoff)
Setoff shall not be made in any of the following cases:
(i) Where, after the declaration of bankruptcy, the bankruptcy creditor has assumed debt to the bankrupt estate.

Article 67, Para. 2 of the Bankruptcy Law
Even in cases where the claim held by the bankruptcy creditor is, at the time of the commencement of bankruptcy proceedings, subject to a time limit or condition subsequent, or where it is any of the claims mentioned in Article 103, Para. 2, Sub-para. 1, the bankruptcy creditor shall not be precluded from making setoff under the preceding paragraph. The same shall apply in cases where the debt owed by the bankruptcy creditor is subject to a time limit or condition or where it relates to a future claim.

Article 71, Para. 1, Sub-para. 1 of the Bankruptcy Law
(Prohibition of setoff)
The bankruptcy creditor shall not make setoff in any of the following cases:
(i) Where, after the commencement of bankruptcy proceedings, the bankruptcy creditor has assumed debt to the bankrupt estate.

1. The second paragraph of the main text of the judgment of the second instance shall be changed as follows.
(1) The jokoku appellee shall pay the jokoku appellant 2,805,000 yen and interest thereon at 6% per annum for the period from May 19, 1999, until the completion of payment.
(2) Other claims made by the jokoku appellant shall be dismissed.
2. The whole cost of the lawsuit shall be divided into seven parts, one part of which shall be born by the jokoku appellee and the rest by the jokoku appellant.

I. Outline of the case
1. The outline of the facts legally determined by the court of the second instance is as follows.
(1) On March 28, 1996, the jokoku appellee concluded a storekeeper's comprehensive insurance contract with Company B, in which A (hereinafter referred to as the "bankrupt debtor") served as representative director, with respect to the building owned by Company B, which is indicated in the list attached to the judgment of the first instance (hereinafter referred to as the "Building"), for the insurance period from 4:00 p.m. on March 29, 1996, to 4:00 p.m. on March 29, 1997.
The bankrupt debtor, in an attempt to obtain by fraud fire insurance money under the storekeeper's comprehensive insurance contract mentioned above (hereinafter referred to as "storekeeper's comprehensive insurance money"), set fire to the Building. On January 16, 1997, the fire completely destroyed the Building and the machinery, equipment, tools, etc. within the Building (this fire shall hereinafter be referred to as the "Fire").
The jokoku appellee, without knowing that the Fire had been started by the bankrupt debtor, requested Company C to appraise the amount of loss due to the Fire, and paid the company 356,769 yen as appraisal fee. On February 18, 1997, the jokoku appellee paid Company B, under the storekeeper's comprehensive insurance contract mentioned above, 25,149,440 yen as storekeeper's comprehensive insurance money for the Fire.
After it was revealed that the Fire had been started by the bankrupt debtor, the jokoku appellee brought a case against the bankrupt debtor to seek damages for the unlawful act of obtaining insurance money by fraud (hereinafter referred to as the "separate case"), and retained a lawyer to carry out legal proceedings.
(2) On February 19, 1999, the bankrupt debtor was declared bankrupt by the Okayama District Court, and the jokoku appellant was appointed as bankruptcy administrator. The jokoku appellant took over the legal proceedings in the separate case.
(3) The jokoku appellee had concluded, with the bankrupt debtor, insurance contracts including long-term ordinary personal ordinary accident insurance contracts with maturity refund numbered from 1 to 52 in the list of insurance contracts attached to the judgment of the second instance (these insurance contracts shall hereinafter be referred to as "Insurance Contract 1" and so forth according to the numbers indicated in the list).
By the time the bankrupt debtor was declared bankrupt, Insurance Contracts 1 to 21 had already reached maturity, whereas Insurance Contracts 22 to 52 had yet reached maturity. Insurance Contracts 22 to 47 and 50 to 52 are saving-type insurance contracts, and Insurance Contracts 48 and 49 are nonrefundable insurance contracts.
Insurance Contracts No. 22 to 24 reached maturity on March 23 or 24, 1999, after the declaration of bankruptcy. On April 2, 1999, the jokoku appellant notified the jokoku appellee of the intention of canceling Insurance Contracts 25 to 52.
The total amount of maturity refund under Insurance Contracts 1 to 21 was 11,332,950 yen, and the sum of the amount of maturity refund under Insurance Contracts 22 to 24 and the amount of surrender value under Insurance Contracts 25 to 52 (the sum shall hereinafter be referred to as the "Refund") was 22,291,040 yen.
(4) On May 15, 1999, the jokoku appellee claimed that the jokoku appellee was entitled to damages for the bankrupt debtor's unlawful act of obtaining insurance money by fraud, which totaled 30,861,829 yen (the sum total of 25,149,440 yen as storekeeper's comprehensive insurance money, 356,769 yen as appraisal fee, 2,550,000 yen as legal attorney fee for carrying out the proceedings in the separate case, and 2,805,620 yen as delay damages at 5% per annum on the total amount of damages 28,056,209 yen for the period from February 19, 1997, the day following the date of payment of the insurance money, to February 18, 1999, the day preceding the date of declaration of bankruptcy), and notified the jokoku appellant of the intention of making setoff between its claim for damages and its jokoku appellant's claims for maturity refund and for surrender value under Insurance Contracts 1 to 52, which totaled 33,623,990 yen (this setoff shall hereinafter be refereed to as the "Setoff"). On May 19, 1999, the jokoku appellee paid the jokoku appellant 2,762,161 yen, the amount that remained after the Setoff was made.
There is no dispute between the parties concerned over the fact that due to the Setoff, 11,332,950 yen of the claim for damages mentioned above was extinguished by being offset with the claim for maturity refund, 11,332,950 yen, under Insurance Contracts 1 to 21, which had already reached maturity before the declaration of bankruptcy.
(5) The jokoku appellant brought this case to seek, from the jokoku appellee, amount unpaid, 19,528,879 yen, the remaining amount after the amount paid, 2,762,161 yen, is subtracted from the total amount of the Refund, 22,291,040 yen, with delay damages thereon, on the ground that the maturity or cancellation of the insurance contracts occurred after the declaration of bankruptcy.
The jokoku appellee alleges that the debt for the unpaid part of the Refund has been extinguished due to the Setoff. On the other hand, the jokoku appellant alleges that the jokoku appellee cannot allege setoff of the claim for the Refund because, with respect to the claim for the Refund, the time limit has been reached or the condition precedent has been fulfilled after the declaration of bankruptcy.
(6) The court of the first instance consolidated this case with the separate case, and dismissed the claim made by the jokoku appellee in the separate case. The judgment of the first instance became final and conclusive with respect to the part that related to the dismissal.

2. The court of the second instance judged the setoff of the claim for the Refund alleged by the jokoku appellee to be valid, and revoked the judgment of the first instance that had denied the validity of the setoff and upheld the jokoku appellant's claims. The court of the second instance dismissed all claims made by the jokoku appellant.

II. Concerning Ground 1 for the petition for accepting the jokoku appeal argued by the jokoku appellant (except for (4))
The second sentence of Article 99 of the former Bankruptcy Law (before abolishment by Law No. 75 of 2004; hereinafter referred to as the "Law") provides that in cases where the debt owed by a bankruptcy creditor is, at the time of declaration of bankruptcy, subject to a time limit or condition precedent, the bankruptcy creditor shall not be precluded from making setoff. The purport of this provision is to ensure that the bankruptcy creditor can expect to allege setoff, as a security measure, between the bankrupt debtor's claim for the debt and his/her claim in bankruptcy, and the Law imposes no restrictions on the exercise of the right of setoff. Also, in bankruptcy proceedings, there is no limit to the period during which the bankruptcy creditor can exercise the right of setoff. Consequently, it seems reasonable to construe this provision as follows. If the debt owed by the bankruptcy creditor is, at the time of declaration of bankruptcy, subject to a time limit, unless there are special circumstances, it is allowable, under the provision of the second sentence of Article 99 of the Law, for the bankruptcy creditor to allege setoff between the bankrupt debtor's claim for the debt and his/her claim in bankruptcy, not only where the bankruptcy creditor relinquishes the benefit of time but also where the time limit is reached after the declaration of bankruptcy. Also, if the debt owed by the bankruptcy creditor is, at the time of declaration of bankruptcy, subject to a condition precedent, unless there are special circumstances, the same shall apply not only where the bankruptcy creditor relinquishes the benefit of non-fulfillment of the condition precedent but also where the condition precedent is satisfied after the declaration of bankruptcy.
According to the facts mentioned above, at the time when the bankrupt debtor was declared bankrupt, the jokoku appellee owed a time debt to pay maturity refunds under Insurance Contracts 22 to 47 and 50 to 52 at maturity, and also owed a conditional debt to pay surrender value under Insurance Contracts 22 to 52 in the event of cancellation. Insurance Contracts 22 to 24 reached maturity after the declaration of bankruptcy, and the condition precedent for Insurance Contracts 25 to 52 was fulfilled by the cancellation after the declaration of bankruptcy. Consequently, as there seem to be no special circumstances, it is allowable for the jokoku appellee to setoff its claims with its debt (the jokoku appellant's claim) for the Refund, 22,291,040 yen. The judgment of the second instance that goes along with this reasoning can be accepted as justifiable. The judicial precedent cited in the jokoku appellant's argument (1970 (O) No. 449, judgment of the First Petty Bench of the Supreme Court of July 13, 1972, Minshu Vol. 26, No. 6, at 1151) is irrelevant in this case because it addresses a different type of case. The jokoku appellant's argument cannot be accepted.

III. Concerning Ground 2
1. The court of the second instance, ruling that due to the bankrupt debtor's unlawful act mentioned above, the jokoku appellee had incurred a loss of 2,250,000 yen as legal attorney fee for carrying out the proceedings in the separate case, included the legal attorney fee and delay damages thereon in the jokoku appellee's claim that may be subject to the Setoff.

2. However, the judgment of the second instance cannot be accepted on the following grounds.
The legal attorney fee incurred by the victim of an unlawful act may be deemed to be a loss in a reasonable and probable causal relation with the unlawful act and damages may be claimed for such loss, only if the victim has entrusted a lawyer to carry out proceedings to seek damages for other losses due to the unlawful act and won the case against the other party, and only to the extent that the amount is deemed to be reasonable in light of the difficulty of the case, the damages claimed, the awarded amount, and various other circumstances (See 1966 (O) No. 280, judgment of the First Petty Bench of the Supreme Court of February 27, 1969, Minshu Vol. 23, No. 2, at 441 and 1980 (O) No. 1113, judgment of the Third Petty Bench of the Supreme Court of September 6, 1983, Minshu Vol. 37, No. 7, at 901).
In this case, since the judgment of the first instance became final and conclusive with respect to the part that dismissed the claim made by the jokoku appellee in the separate case, the legal attorney fee incurred by the jokoku appellee for carrying out legal proceedings in the separate case cannot be deemed to be a loss in a reasonable and probable causal relation with the bankrupt debtor's unlawful act.
It would follow that the judgment of the second instance that is contrary to the above reasoning contains an apparent violation of laws that has affected the judgment. The jokoku appellant's argument is well-grounded.

IV. Conclusion
For the reasons stated above, due to the Setoff, the jokoku appellant's claim for the unpaid part of the Refund, 19,528,879 yen has been extinguished up to 16,723,879 yen, the amount calculated by subtracting the amount of the claim for maturity refund under Insurance Contracts 1 to 21, 11,332,950 yen, from the amount of the claim for damages for the bankrupt debtor's unlawful act, 28,056,829 yen (the sum total of 25,149,440 yen as storekeeper's comprehensive insurance money, 356,769 yen as appraisal fee, and 2,550,620 yen (figures rounded to nearest yen) as delay damages at 5% per annum on the total amount of damage 25,506,209 yen for the period from February 19, 1997, to February 18, 1999). The remaining amount is 2,805,000 yen.
Consequently, the jokoku appellant's claim shall be accepted as well-grounded to the extent to seek payment of 2,805,000 yen and delay damages thereon. The other claims made by the jokoku appellant shall be dismissed as groundless. The judgment of the second instance that is contrary to this reasoning should be changed as shown in the first paragraph of the main text.

Therefore, the judgment was rendered in the form of the main text by the unanimous consent of the Justices.

Justice TAKII Shigeo
Justice FUKUDA Hiroshi
Justice KITAGAWA Hiroharu
Justice KAJITANI Gen
Justice TSUNO Osamu