Pledge vs. Seizure on Monetary Claims in Japan: Who Gets Paid First and Can We Deposit?

When a company (the "third-party obligor") owes a monetary debt to a creditor (the "pledgor" or "primary debtor"), and that creditor has both pledged the receivable to a lender (the "pledgee") and also has another creditor (the "seizing creditor") who subsequently obtains a court order to seize the same receivable, the third-party obligor faces a critical dilemma. To whom should payment be made? Does the pledge take precedence over the seizure, or vice versa? And, importantly, can the third-party obligor protect itself from potential double liability or ongoing default interest by depositing the funds with a Japanese legal affairs bureau (a kyotakusho)? This article delves into the complexities of competing pledge and seizure rights over monetary claims in Japan.

Understanding Pledge of Monetary Claims (債権質 - Saiken-jichi) in Japan

A pledge of a monetary claim (saiken-jichi) is a type of security interest recognized under the Japanese Civil Code (Articles 362-368). It allows a creditor (the pledgor) to grant a security interest over a receivable owed to them by a third party (the third-party obligor) to secure an obligation owed by the pledgor to the pledgee.

Key Elements of a Pledge of Claims:

1. Pledge Agreement: Established by a contract between the pledgor and the pledgee.
2. Perfection (対抗要件 - Taikō Yōken): For the pledge to be effective against the third-party obligor and other third parties (such as subsequent seizing creditors), it must be "perfected." Article 364 of the Civil Code dictates that the provisions concerning the assignment of nominative claims (Article 467) apply mutatis mutandis to the perfection of a pledge of claims. This means perfection requires either:
   • The pledgor giving notice of the pledge to the third-party obligor using an instrument bearing a certified date (kakutei hizuke 確定日付 – e.g., through a notary public or content-certified mail).
   • The third-party obligor giving their consent to the pledge using an instrument bearing a certified date.
     Without this dated notice or consent, the pledge cannot be asserted against the third-party obligor or other competing claimants.
3. Pledgee's Rights to Collect:
   • Once the secured claim (the debt owed by the pledgor to the pledgee) becomes due, the pledgee can directly collect the pledged monetary claim from the third-party obligor, up to the amount of the secured claim (Civil Code Article 366, Paragraphs 1 and 2).
   • Early Maturing Pledged Claim (Civil Code Article 366, Paragraph 3): A crucial provision states that if the pledged claim (the debt owed by the third-party obligor to the pledgor) becomes due before the claim secured by the pledge is due, the pledgee has the right to request the third-party obligor to deposit the payment with an official depository. The pledge then continues to exist over the money deposited. This mechanism protects the pledgee's security interest in the funds even if their own claim against the pledgor is not yet enforceable.

Pledgeability of Certain Claims:
Most monetary claims are pledgeable. For instance, remuneration owed to public officials, such as a city council member's remuneration (giin hōshū), is generally considered pledgeable in Japan unless specific local ordinances prohibit it (Supreme Court judgment of February 23, 1978 ). This contrasts with regular employment wages, substantial portions of which are typically protected from seizure for living expenses; such broad exemptions often do not apply to remuneration like director's fees or certain official stipends, making them fully attachable by pledge or seizure.

Priority: Perfected Pledge vs. Subsequent Seizure Order

The general rule for determining priority between competing security interests or claims is often "first in time, first in right," based on the date of perfection.

• If a pledge over a monetary claim was validly created and perfected (i.e., notice with a certified date was received by, or consent with a certified date was obtained from, the third-party obligor) before a seizure order from another creditor of the pledgor is served on that same third-party obligor, the perfected pledge generally takes priority over the subsequent seizure.
• Implication for the Third-Party Obligor: In such a clear-cut case, the third-party obligor's duty is to pay the pledgee (up to the extent of the pledgee's secured claim or the amount of the pledged receivable, whichever is less) when the conditions for the pledgee's collection are met.
• When a Deposit is Initially Inappropriate: If the pledge is clearly prior and valid, a "deposit due to an unascertainable creditor" (saikensha fukakuchi kyotaku) or a general "rights deposit" under Civil Execution Act Article 156, Paragraph 1, simply because a later, subordinate seizure order arrives, would typically be considered inappropriate. The third-party obligor has a clear path to discharge their debt by paying the senior claimant (the pledgee).

The Twist: Fraudulent Conveyance Challenge to the Pledge (詐害行為取消権 - Sagaikōi Torikeshi-ken)

The situation becomes significantly more hazardous for the third-party obligor if the validity of the (otherwise prior and perfected) pledge is itself challenged.

• Scenario: After a pledge has been created and perfected, and perhaps even after a subsequent seizure order has been served, a creditor of the pledgor (often the seizing creditor) initiates a lawsuit under Article 424 of the Civil Code to nullify the pledge. The allegation is that the pledge was a "fraudulent conveyance" – an act by the pledgor (debtor) done with the knowledge that it would prejudice their other creditors (e.g., transferring an asset into a pledge to keep it away from general creditors when insolvent).
• Nature of Fraudulent Conveyance Revocation:
  • This right must be exercised through a court action.
  • If the court revokes the pledge as a fraudulent act, the revocation has retroactive effect (sokyūkō 遡及効). This means the pledge is treated as if it never existed from its inception.
• The Third-Party Obligor's New Dilemma:
  The third-party obligor is now caught in a difficult position:
  1. There is a currently perfected pledge, which prima facie obligates them to pay the pledgee.
  2. There is a seizure order from another creditor.
  3. There is a pending lawsuit that could retroactively invalidate the pledge.
• If they pay the pledgee, and the pledge is later nullified, the seizure order might become the primary effective claim, forcing them to potentially pay the seizing creditor as well (risk of double payment).
• If they pay the seizing creditor (ignoring the currently perfected pledge), they could be liable to the pledgee if the fraudulent conveyance action fails and the pledge remains valid.
• Withholding payment from everyone pending the lawsuit's outcome could lead to accruing default interest on their debt.

The "Mixed Deposit" (混合供託 - Kongō Kyotaku): A Protective Measure in Complex Cases

When a prior pledge is subject to a pending fraudulent conveyance lawsuit and a subsequent seizure order also exists, Japanese legal practice has explored a "mixed deposit" as a potential solution for the third-party obligor. This aims to protect the obligor from the risks outlined above.

Potential Legal Basis (as discussed in legal commentaries ):
The legal rationale for such a deposit often combines elements from both pledge law and execution law:

1. Civil Code Article 366, Paragraph 3 (Deposit related to the Pledge): As noted, this article allows a pledgee to request the third-party obligor to deposit payment if the pledged claim matures before the secured claim. Some interpretations, particularly in the context of protecting the third-party obligor, suggest that even without an explicit request from the pledgee, the obligor facing genuine uncertainty due to the fraudulent conveyance suit (which challenges the pledgee's ultimate entitlement) might be able to proactively make a deposit. The pledge would then notionally attach to the deposited sum, pending the outcome of the litigation concerning its validity. This is because the fraudulent conveyance suit renders the pledgee's right to the funds "provisional" or uncertain until the court decides.
2. Civil Execution Act Article 156, Paragraph 1 (Rights Deposit related to the Seizure): This provision allows a third-party obligor served with a seizure order to deposit the funds to obtain a discharge from the seizing creditor.

The Mixed Deposit in Practice:
By citing both these (or analogous) grounds, the third-party obligor aims to:

• Place the disputed funds with a neutral official depository.
• Suspend their direct payment obligation to either the pledgee or the seizing creditor while the fraudulent conveyance lawsuit (which will determine the pledge's validity) is ongoing.
• Mitigate the risk of double payment.
• Potentially stop the accrual of default interest on their own debt if the deposit is deemed valid.

Identifying Parties in a Mixed Deposit:
If such a deposit is made, the "depositee" (hi-kyotakusha) on the deposit form, especially if framed under the logic of Article 366(3), would typically be the pledgor (the third-party obligor's original creditor). The pledgee and the seizing creditor would then be named in the "facts constituting the cause for deposit" section of the application as parties with an interest in, or claims against, the deposited funds. The deposit effectively freezes the situation, allowing the court handling the fraudulent conveyance case (and potentially the execution court overseeing the seizure) to determine the ultimate entitlement to the funds.

Legal practitioners have noted that allowing such a deposit is often seen as necessary to avoid imposing an unfair and prolonged burden of uncertainty and risk on an innocent third-party obligor caught between warring claimants when the foundation of one of those claims (the pledge) is under direct judicial challenge with potential retroactive consequences. A resolution from a meeting of deposit officers from the Tokyo Legal Affairs Bureau and its district offices in FY2007 also supported the idea of a mixed deposit under similar circumstances involving competing claims (a provisional seizure, a pledge, and a seizure order), even without the pledgee's explicit request, citing the need to protect the third-party obligor.

Default Interest Considerations

A significant concern for the third-party obligor who withholds payment due to such conflicts is the accrual of default interest on the debt they owe.

• For most commercial debts, if payment is delayed past the due date without a valid reason (like a proper deposit), default interest will accrue.
• There are limited exceptions. For example, some public official remuneration (like the giin hōshū mentioned in the background materials ) might be characterized as a "collection debt" (toritate saimu), where the onus is on the creditor to demand or collect payment. In such specific cases, default interest might not automatically accrue merely by the passing of the due date unless there's a formal demand from the entitled party or other special circumstances. However, this is a narrow exception and does not apply to typical commercial payment obligations, which are usually "bring-to" obligations (jisansaimu).

Making a valid deposit can stop the clock on default interest from the date of deposit.

Conclusion: Navigating Murky Waters with Caution

When a third-party obligor in Japan is faced with both a pledge over a receivable they owe and a subsequent seizure order for the same receivable, the first step is to determine priority based on the perfection dates. If the pledge is clearly senior and its validity is not contested, payment should generally be made to the pledgee.

However, the landscape shifts dramatically if the validity of the prior-perfected pledge is challenged through a fraudulent conveyance lawsuit. This introduces a significant element of uncertainty and risk of double payment for the third-party obligor. In such complex circumstances, a "mixed deposit"—citing grounds related to both the challenged pledge (drawing on principles similar to Civil Code Art. 366(3)) and the seizure order (under Civil Execution Act Art. 156(1))—may be a viable, albeit complex, protective strategy. This places the funds in neutral custody pending the resolution of the fraudulent conveyance claim, which will ultimately determine the rightful recipient.

Given the legal intricacies, particularly the nuanced grounds for such specialized deposits and the potential for ongoing liability if missteps are made, it is imperative for any third-party obligor caught in such a conflict to seek prompt and expert legal advice in Japan. This will ensure they correctly navigate their obligations and protect their interests amidst competing claims.