The Legality of “Kye” Loans in Korean Immigrant Communities
A “Kye” (pronounced "keh") is a rotating credit association common among Korean immigrant communities. Members of the Kye contribute a fixed amount on a regular basis, and each member then receives the “pot” on a rotating basis until all members have received it. The Kye’s origins are said to date back to sixteenth century Korean farming villages as a means of raising capital for those that would not otherwise have access to loans. A recent case considered whether a Kye was enforceable or against public policy. Hea Sook Han v. Cindy E. Jang, No. BER-L-6208-11 (N.J. Super. Ct., July 31, 2014).
In Han, the Kye was comprised of 26 members split into two groups of 13, each with a “leader.” The plaintiff was in the group led by Khang and the defendant was in the group led by Kim. Each member gave their respective leader $3,000 each month to deposit in the Kye and each month a member would receive a payout of $72,000. The members’ identities, contributions and payments, and dates of payment were recorded by the leaders into a “Kye chart,” which was written in Korean. Upon dissolution, the Kye was required to reimburse investments of members who did not receive a payout. In order to accomplish that, the Kye required members who received a $72,000 payout to return the amount of money they received in excess of the amount of their investment.
The dispute in this case arose when the Kye dissolved after Khang’s members did not make their monthly payments, leaving plaintiff to be reimbursed for the net amount of $42,000. Defendant Jang was instructed to sign 14 checks in the amount of $3,000 each with the payee line blank so that her leader (Kim) could reimburse those members who did not receive a payout. These checks were given to the plaintiff Han. Plaintiff testified that her son went to the defendant’s jewelry store and exchanged one check for $3,000 in cash. Thereafter plaintiff went to the store and received $13,000 worth of jewelry, which she claimed was to secure payment on the remaining checks. The defendant Jang testified differently: that she gave plaintiff the jewelry in return for plaintiff’s agreement to return the remaining checks. When plaintiff did not return the remaining checks, Jang stopped payment. As a result, plaintiff Han filed a complaint for breach of contract for $39,000 and Jang counterclaimed for the value of the jewelry.
Defendant Jang requested a jury charge that the alleged contract was unenforceable because the Kye violated law and public policy. Jang alleged that the Kye violated, among other laws, 26 C.F.R.§ 1.60501 (requiring a report of any receipt of cash in excess of $10,000); the New Jersey Uniform Securities Law, N.J.S.A. 49:3-47 to -76 (requiring registration of securities); the New Jersey State Tax Uniform Procedures Law, N.J.S.A. 54:48-1 to -7 (imposing penalties for certain transactions); and N.J.S.A. 17:16A-2 (establishing registration requirements for investment companies). Defendant also argued that the Kye offered outrageously high interest rates and members did not report the interest as income.
The trial judge declined to give the illegality charge, reasoning that whether or not the Kye itself was illegal was irrelevant because the parties’ contract was separate and distinct from the Kye. The jury found that the plaintiff had established an enforceable contract and the defendant had breached it, and awarded $39,000 (13 checks at $3,000 per check). The jury also found for Jang on her counterclaim for $13,000 (the jewelry given to Han). Accordingly, a judgment was returned in favor of plaintiff in the amount of $26,000.
On appeal, the Appellate Division held that the trial court should have decided whether or not the Kye was illegal or unenforceable as against public policy, law and regulations. The Appellate Division then remanded the case to the trial court to make that determination.
On remand, the trial court did not find any merit in defendant’s argument. Noting that the defendant produced no authority showing that any Kye transaction had been declared illegal by any court, the court upheld the Kye as legal and enforceable:
The Kye reflects a cornerstone of the Korean community in which the established members of the community make private loans to new members. While this particular Kye differed by referring to itself as an investment club, the purpose remained the same. The Kye was a private agreement to pool funds to be lent to borrowers for legitimate business purposes. The Defendant’s contention that some of the members may not have properly accounted for the income from the Kye on their tax returns is a collateral issue that does not affect the validity of the Kye. Similarly, failure to register with a government agency does not make the contract unenforceable. The Defendant has been unable to overcome the presumption that the Kye was legal. Slip op. at 8.
Ultimately, the court concluded that the contract that governed the Kye did not have, at its heart, any illegal purpose and that “[a]ny ancillary regulation or failures that might have violated tax laws were not the subject matter of the Kye.” The court refused to invalidate a contract the jury found to exist between the plaintiff and defendant because the defendant claimed that “ancillary aspects of the Kye may have theoretically violated tax and regulatory statutes.”
By affirming the legal validity of Kye transactions, Han offers common law protection for these traditional Korean financial arrangements.