Partial Payment Without Designation of Appropriation for Multiple Principal Debts and Interruption of Extinctive Prescription
Supreme Court, Third Petty Bench, Dec. 15, 2020, Minshu Vol. 74, No. 9, p. 2259
https://www.courts.go.jp/app/hanrei_jp/detail2?id=89896
As commentaries and reviews, I cite: (1) Takuro Nakano, Hoso Jiho Vol. 73, No. 9, p. 1831; (2) Naoki Kanayama, Minshoho Zasshi Vol. 158, No. 1, p. 141; and (3) Yuki Setoguchi, Kinyu Homu Jijo No. 2189, p. 33. (1) is a commentary by the investigating judge in charge, (2) is a review from the perspective of criticizing the judgment, and (3) is a review from a supportive perspective. Other than these, they are comprehensively introduced in (3).
1. Overview of the Case
A lent 2,535,000 yen to his eldest son Y in October 2004 (Loan ①), 4,000,000 yen in September 2005 (Loan ②), and 3,000,000 yen in May 2006 (Loan ③). In September 2008, Y paid over 780,000 yen to A as repayment of the loan debts without designating which principal the payment should be applied to.
A died in January 2013, and his third daughter, X, inherited all loan claims against Y. In August 2018, X filed a lawsuit against Y seeking repayment of each of the loan claims in this case.
In response, Y asserted the extinctive prescription of the debts related to Loans ② and ③ based on Article 167, Paragraph 1 of the Civil Code. X disputed this, arguing that the effect of interrupting the extinctive prescription had occurred because the debts were acknowledged by Y's payment in September 2008.
The first instance and the appellate court held that Y's payment in September 2008 was applied to the debt related to Loan ① by statutory appropriation (Article 489 of the pre-amendment Civil Code / Article 488, Paragraph 4 of the post-amendment Civil Code), and since Y acknowledged the debt to which it was applied, the interruption of extinctive prescription was recognized. On the other hand, regarding Loans ② and ③, they held that the extinctive prescription was not interrupted and the debts were extinguished by prescription. Thus, they granted X's claim to the extent of seeking payment of the remaining principal related to Loan ① and its delay damages, and dismissed the claims regarding the debts related to Loans ② and ③.
Consequently, X filed a petition for acceptance of final appeal.
2. Summary of the Judgment
In a case where multiple principal debts based on several money loan contracts exist between the same parties, if the borrower makes a payment of an amount insufficient to fully repay all debts without designating which debt the payment should be applied to, it is reasonable to construe that such payment, unless there are special circumstances, has the effect of interrupting the extinctive prescription as an acknowledgment of each of the above principal debts (see the Great Court of Judicature judgment of June 25, 1938, Great Court of Judicature Judgment Collection, Vol. 5, No. 14, p. 4). This is because, in the above case, the borrower is usually aware of the existence of each principal debt based on the several money loan contracts to which they are a party, and can designate the debt to which the payment should be applied at the time of payment. Therefore, the borrower making a payment without designating the debt to be applied is construed, unless there are special circumstances, as indicating that they are aware of the existence of all of the above principal debts.
In this case, at the time Y's payment was made in September 2008, each debt related to the loans in this case existed between A and Y, and Y did not designate the debt to which the payment should be applied. Since no special circumstances were found to suggest that Y's payment should not be construed as having the effect of acknowledging the debts related to Loans ② and ③, the court held that Y's payment had the effect of interrupting the extinctive prescription as an acknowledgment of the debts related to Loans ② and ③, and granted X's claim.
3. Checkpoints of this Judgment
(1) Significance of this Judgment
This judgment concerns an event prior to the 2017 Civil Code amendment.
According to the pre-amendment Civil Code, general claims were extinguished if not exercised for 10 years from the time they could be exercised (Article 167, Paragraph 1). If there were grounds for interruption of prescription such as acknowledgment of debt (Article 147, Item 3), the completion of prescription was prevented, and the interrupted prescription would begin to run anew from the time the grounds for interruption ended (Article 157, Paragraph 1). This judgment addressed whether a partial payment by a borrower without designation of appropriation is recognized as having the effect of interrupting extinctive prescription as an acknowledgment of debt when multiple principal debts based on several money loan contracts exist between the same parties. The judgment follows the Great Court of Judicature judgment of June 25, 1938, and is also consistent with practical views (see Yoshioka, Watanabe et al. (eds.), "Practice of Prescription Management," p. 237 (2007, Kinzai)). However, it holds significant importance in case law as the first time the Supreme Court has provided a judgment with its reasoning. (Nakano (1), p. 1836 et seq., also discusses the relationship with the Great Court of Judicature judgment in detail.)
Under the amended Civil Code, a claim is extinguished by prescription if not exercised for 5 years from the time the creditor knows that the right can be exercised, or for 10 years from the time the right can be exercised (Article 166, Paragraph 1). When there is an acknowledgment of debt, the prescription is renewed and begins to run anew from that time (Article 152, Paragraph 1).
As such, since the rules regarding acknowledgment have not been substantially changed before or after the amendment, this judgment, although based on the pre-amendment law, is positioned as having significance as a precedent even in relation to the prescription renewal system after the 2017 amendment.
Added on 2023/02/05
At the Orion Association (a legal practice study group held at the conference room of the Chuo Sogo Law Office), a practice was introduced where, when a payment is made without designating the debt to be applied, the creditor who receives the repayment designates the application by pro-rating it across all multiple debts.
(2) Acknowledgment as a Ground for Interruption (Renewal) of Prescription
This judgment states that "since a borrower making a payment without designating the debt to be applied is construed, unless there are special circumstances, as indicating that they are aware of the existence of all of the above principal debts," "such payment, unless there are special circumstances, has the effect of interrupting the extinctive prescription as an acknowledgment of each of the above principal debts."
Academic theory defines acknowledgment as "the person who should receive the benefit of prescription indicating to the person who should lose the right due to prescription that they recognize the existence of the right and will not dispute it." It explains that because of this, "it is normal for the right holder not to think it necessary to take special measures to preserve the right, and they cannot be blamed for that," so the effect of interruption (renewal) of prescription occurs when there is an acknowledgment (Takeshi Sakuma, "Basics of Civil Law 1: General Provisions [5th Edition]," p. 427). Based on this idea, judicial precedents interpret partial payment of a debt as meaning acknowledgment of the debt (Great Court of Judicature judgment of Dec. 26, 1919, Minroku Vol. 25, p. 2429; Supreme Court judgment of Sept. 13, 2013, Minshu Vol. 67, No. 6, p. 1356).
This judgment recognizes that Y's partial payment was applied to the debt related to Loan ①, and even if this was statutory appropriation, it constitutes an acknowledgment of the debt related to Loan ①. Regarding the debts related to Loans ② and ③, it construes that the partial payment related to the debt of Loan ① indicates that Y is aware of the existence of the debts related to Loans ② and ③, and thus falls under the grounds for interruption (renewal) of prescription.
Thus, this judgment interprets that Y's indication of being aware of their existence constitutes acknowledgment, but this does not necessarily seem to align with the understanding of the above precedents and academic theories. This is because an indication of being aware of the existence of a debt does not necessarily mean acknowledging the existence of the creditor's right and not disputing it. (Regarding those who question this point, see Kanayama (2), p. 155 et seq.)
Given this, it can be understood that this judgment has established a new rule that in cases where multiple principal debts based on several money loan contracts exist between the same parties, if the borrower makes a payment of an amount insufficient to fully repay all debts without designating which debt the payment should be applied to, such payment constitutes an acknowledgment of each of the above principal debts.
(3) Practical Points to Note
This judgment recognized the effect of acknowledgment of debt regarding a partial payment without designation of appropriation by the debtor in a case "where multiple principal debts based on several money loan contracts exist between the same parties." Therefore, even if a partial payment without designation of appropriation is made for debts such as payment obligations based on sales contracts between the same parties, it would not necessarily mean that acknowledgment is recognized for all of the debts.
Also, this judgment includes the reservation "unless there are special circumstances," and it becomes a question of what cases this refers to. Since it refers to cases where the debtor is not aware of the existence of all of the principal debts, for example, if a debt is inherited, it would be considered to fall under "special circumstances," and even if there is a payment regarding other debts, it would not be recognized that there was an acknowledgment of the inherited debt (see Setoguchi (3), p. 43).