## Facts

- Mega Power, Inc. (Mega), a Korean exporter, agreed to ship goods from Korea to Audiobahn, Inc. (Audiobahn), a U.S. buyer.
- To finance the shipments, Mega drew bills of exchange (time drafts) on Audiobahn and sold the bills to Kookmin Bank (Kookmin). Korea Export Insurance Corporation (KEIC) underwrote the bills as export insurance for the bank’s risk of nonpayment.
- Mega also assigned its rights under its sales agreement with Audiobahn to Kookmin in connection with the financing arrangement.
- The bills named Kookmin as payee and were payable after Audiobahn accepted them.
- Audiobahn accepted the bills of exchange, thereby undertaking the acceptor’s obligation to pay the instruments when due.
- Audiobahn later failed to pay. It initially attributed nonpayment to cash-flow problems and later asserted it was entitled to set off amounts it claimed Mega owed Audiobahn from earlier disputes.
- After Audiobahn’s nonpayment, KEIC paid Kookmin the amount due on the bills under the export insurance arrangement.
- KEIC then sued Audiobahn to recover the amount KEIC paid, relying on its subrogation to Kookmin’s rights (and also pointing to assignment documents used in the overall transaction).
- The trial court found Kookmin was a holder in due course of the bills and that KEIC, as subrogee, stood in Kookmin’s position as to enforcement against Audiobahn.
- The trial court nonetheless entered judgment for Audiobahn after concluding that letters of assignment required prompt notice to Audiobahn of an assignment, that no such notice was given, and that notice operated as a condition subsequent that defeated KEIC’s ability to enforce the bills.

## Issues

1. Whether KEIC, after paying the bank and becoming subrogated to the bank’s rights, could enforce Audiobahn’s accepted bills of exchange free of Audiobahn’s contract-based defenses against Mega.
2. Whether an assignment-related notice provision could be treated as a condition subsequent that stripped KEIC (standing in the bank’s shoes) of holder-in-due-course-based enforcement rights on the bills.

## Decision

- The Court of Appeal reversed the judgment for Audiobahn.
- The court held that KEIC, as subrogee to Kookmin (a holder in due course), was entitled to enforce the accepted bills of exchange against Audiobahn.
- The court rejected the trial court’s use of an assignment notice concept as a forfeiture device that would defeat KEIC’s rights on the negotiable instruments.
- The court concluded Audiobahn’s asserted offsets and disputes with Mega were personal defenses tied to the underlying sales relationship and did not defeat enforcement by a holder in due course or a party subrogated to that status.
- The matter was remanded with directions consistent with entering judgment for KEIC on the bills.

## Legal Principles

- An acceptor of a bill of exchange is obligated to pay the instrument according to its terms; that obligation is enforceable by a holder in due course.
- A holder in due course takes a negotiable instrument free of personal defenses arising from the underlying transaction (such as setoff and many contract disputes), subject only to limited “real” defenses recognized by negotiable-instrument law.
- An insurer that pays a holder in due course under an export credit insurance arrangement may be subrogated to the holder’s rights and may enforce the instrument as the holder could have.
- A notice clause connected to assignment of related contract rights does not, without clear language and proper fit with negotiable-instrument rules, operate as a condition subsequent that defeats enforcement rights derived from holder-in-due-course status on an accepted instrument.

## Conclusion

Korea Export Insurance Corp. v. Audiobahn, Inc. holds that KEIC, after paying Kookmin on Audiobahn’s defaulted accepted bills of exchange, could sue Audiobahn as subrogee to Kookmin’s holder-in-due-course rights, and Audiobahn could not avoid liability by pointing to disputes with Mega or by treating an assignment notice provision as a condition that extinguished KEIC’s ability to enforce the negotiable instruments.


Korea Export Insurance Corp. v. Audiobahn, Inc., 67 U.C.C. Rep. Serv. 2d 339 (2008)