A 10 Billion Won Loan to a 20-Year College Friend Sparks 7-Year Legal Battle Over Compensation Responsibility

Fund Manager Turned to Senior to Cover Maturity Payment
Borrowed a Large Sum, Failed to Repay... Sentenced to 7 Years in Criminal Court
Asset Management Firm Paid Victims First, Then Filed Indemnity Lawsuit

A domestic fund manager borrowed 10 billion won from a company owned by his college senior of 20 years to cover fund maturity payments, but failed to repay the loan, leading to a legal dispute that has continued for seven years. An incident that occurred during the operation of a private equity fund escalated into both civil and criminal lawsuits, and recently, the court issued a first-instance ruling that clarified the indemnity responsibilities among the asset management company, the fund manager, and the investment target.

According to the legal community on October 8, the 31st Civil Division of the Seoul Central District Court (Presiding Judge Nam Insu) ruled in July that Energy Seven must pay approximately 9.2 billion won and delayed interest to Hyundai Investment Asset Management in an indemnity claim lawsuit filed by Hyundai Investment Asset Management against Mr. Cho, who was the fund operations team leader, Energy Seven Co., Ltd., and its executives. Of this amount, about 3 billion won is to be jointly borne by Mr. Kim, the former CEO of Energy Seven, and about 3.6 billion won is to be jointly borne by Mr. Cho, who was in charge of fund management at the time.

This first-instance ruling designated Energy Seven as the primary debtor, allowing Hyundai Investment Asset Management to recover virtually the entire compensation amount it had paid in advance to the victims. However, the court also specified that Hyundai Investment Asset Management bears some responsibility for inadequate supervision of the fund manager, and partially limited Mr. Cho's personal liability, citing work-related factors. The counterclaim filed by Energy Seven, which argued that the incident was caused by Hyundai Investment Asset Management's poor fund management, was entirely dismissed.

"I’ll pay you back with interest in a month" - 10 billion loaned on a friend’s word

The case dates back to 2016. At that time, Hyundai Investment Asset Management established a private equity fund that invested in private bonds issued by Energy Seven. Energy Seven managed its funds by purchasing large quantities of oil from refineries and selling them to wholesalers and retailers, but as the maturity date approached in 2018, the balance in the trust account plummeted, depleting the repayment funds.

Mr. Cho, who was responsible for fund management, borrowed 10 billion won from Company A to repay the maturing funds, promising to repay it with 200 million won in interest after one month. Company A was run by a college senior who had worked in real estate finance for a long time, and the two had a 20-year friendship. The senior lent the money without properly reviewing the fund’s status or repayment capability, placing full trust in Mr. Cho’s word.

However, Company A was unable to recover the large sum, and the incident escalated into both civil and criminal cases. In 2021, Mr. Cho was sentenced to seven years in prison for fraud under the Act on the Aggravated Punishment of Specific Economic Crimes, and former CEO Kim was sentenced to three years in prison.

Company A included Hyundai Investment Asset Management in its claim for damages. The court finalized a ruling ordering Mr. Kim, Mr. Cho, and Hyundai Investment Asset Management to jointly compensate 7 billion won plus delayed interest. Notably, the court recognized the employer liability of Hyundai Investment Asset Management, requiring it to share the damages. The court also pointed out that there was partial negligence in supervising and directing Mr. Cho, stating that "the company failed to fulfill its internal supervisory duties."

As a result, Hyundai Investment Asset Management paid Company A a total of over 9.2 billion won, including interest, in accordance with the damages ruling. Subsequently, Hyundai Investment Asset Management filed an indemnity claim against Energy Seven, former CEO Kim, and Mr. Cho to recover the amount paid in advance.

Court: "Related to company work... No evidence of personal gain"

This first-instance ruling determined that Hyundai Investment Asset Management can recover over 9.2 billion won plus interest. However, the court partially limited Hyundai Investment Asset Management’s indemnity claim against Mr. Cho, stating that "the company cannot be completely absolved of its responsibility for oversight and management of the overall investment structure."

Commuters are walking through the Yeouido financial district in Seoul. Photo by Asia Economy Database

The court stated, "There were no measures taken to investigate the illegality of Mr. Cho’s work, and there was partial negligence in supervising and directing him. It is difficult to conclude that Hyundai Investment Asset Management bears no responsibility for creating or failing to prevent the risk that led to the loss." The court also noted, "Mr. Cho, as the person in charge of overall fund management at the time, borrowed funds from Company A to secure repayment for investors. On the surface, this was related to company work, and there is no evidence that he personally benefited from it."

Regarding Energy Seven’s counterclaim that the incident was caused by Hyundai Investment Asset Management’s poor fund management, the court ruled, "The loan agreement falls within the scope of business judgment for repayment of maturing funds, and it is difficult to view the asset management company’s actions as illegal." As a result, while the responsibility of Energy Seven and its management was recognized, the court rejected claims of mismanagement by the asset management company.

Meanwhile, as both parties have appealed the first-instance ruling, the lawsuit is expected to be prolonged in the appellate court. The scope and proportion of indemnity liability are likely to remain key issues in the appeal.