Supreme Court: "Using Long-term Care Benefits as Collateral for Debt Recycling Infringes on Other Creditors' Rights"

[Asia Economy Reporter Kim Hyung-min] The Supreme Court has ruled that if a medical institution that has fallen into a state of excessive debt borrows money from a financial institution using the National Health Insurance Service's medical benefit claims as collateral and uses it to repay debts, it constitutes an act that harms the interests of other creditors.

The Supreme Court's Second Division (Presiding Justice Cheon Dae-yeop) announced on the 7th that it upheld the lower court's ruling in favor of creditor A in the fraudulent conveyance cancellation lawsuit filed against Financial Institution B by a Korean medicine hospital.

In September 2015, the Korean medicine hospital agreed to borrow 100 million KRW from Financial Institution B and signed a claim transfer contract assigning medical benefit claims worth 3 billion KRW that the hospital currently holds or will hold in the future against the National Health Insurance Service as collateral. The hospital used this money to repay approximately 100 million KRW borrowed from another bank.

According to their "Medical Loan" agreement, from September of that year until around May 2017, when the loan repayment was completed, the National Health Insurance Service deposited about 630 million KRW of the hospital's medical benefit costs into Financial Institution B's account, and Financial Institution B, following its internal guidelines, returned the remaining amount after deducting the monthly principal and interest to the hospital's account.

At that time, the Korean medicine hospital was in a state of excessive debt. The hospital had also drafted a notarized document in 2014 to repay 1.53 billion KRW owed to creditor A and others in installments by 2016.

Creditor A filed a lawsuit claiming that allowing other creditors to recover the National Health Insurance Service's insurance benefit costs as claims while the hospital had only repaid about 270 million KRW to him constituted a "fraudulent conveyance." Fraudulent conveyance refers to an act by a debtor that reduces assets through disposal, causing a deficiency in joint collateral and making it impossible to satisfy creditors' claims.

The first and second trials accepted A's claim and ruled that the claim transfer contract worth about 630 million KRW between the Korean medicine hospital and Financial Institution B should be canceled.

The Supreme Court stated, "Providing current or future medical benefit claims as collateral within a reasonable scope when a medical institution borrows from a financial institution can be a useful method to continue operations through the inflow of new funds and improve repayment ability," but added, "However, if such collateral provision harms the interests of other creditors, it must be canceled as a fraudulent conveyance."

This content was produced with the assistance of AI translation services.