‘Trust’ borrowed its legal concept from both the ‘Trust Act’ of English Common Law and the ‘Registration’ of Germany. While the former deals with the Civil Law, especially its Property Law, the latter is based on the Law of Reality. The mixture of two separate legal concept leaves Korean ‘Trust Act’ in vague, mostly in regards of its ownership. The ambiguity in the concept results in undesirable court decisions like Supreme Court case number 2013da71784 Declared on 2014.12.11.. Quoting the Supreme Court decisions and assuming the court’s implied intension of the judgement, this article elaborates on how unique the Korean Trust Act is compared to the original Trust Act of the Common Law. It also shows that specifying the ownership of ‘Property of Trust’ is necessary to preserve the rights of the bonafide third party purchaser.
The Supreme Court decided that a buyer who contracts with a company entrusting its real estate to a trustee is not eligible for claiming restoration to its contract counterpart because based on the trust registration, the formal owner of the concerned real estate is the trustee. Yet, the court admitted that the company may exercise its subrogation rights of a creditor to the truster since the right to be preserved and the subrogated rights are closely related. However, this court decision also addresses a chronic flaw in the Trust Act: the ownership of the trust property is unclear. By considering the origin of the Trust Act, with deliberation over how the current Trust Act works in Korea, this article clarifies why the court does not have a unified voice on to whom the trust property belongs. Based on such examination, this article presents how this problem should be fixed.
Ⅱ. Origin of the Trust Act
- What is a Trust?
Article 2 of the Trust Act states that “The term “trust” used in this Act means a legal relation that a person who creates a trust (hereinafter referred to as “truster”) transfers a specific piece of property (including a part of a business or an intellectual property right) to a person who accepts the trust (hereinafter referred to as “trustee”), establishes a security right or makes any other disposition, and requires the trustee to manage, dispose of, operate, or develop such property or engage in other necessary conducts to fulfill the purpose of the trust, for the benefit of a specific person (hereinafter referred to as “beneficiary”) or for a specific purpose, based on a confidence relation between the truster and the trustee.” Simply put, the trust means landing the property rights of the truster to enter a certain business or to get a loan. The beneficiary in the relationship is the last entity to get the remaining benefits from the legal structure. Basically, the trust relationship calls for three participants: truster, trustee and beneficiary. In the context of the Korean Property Law, the Trust Act was regarded as entrusting the property to take it back in the end while the traditional Trust Act of common law operated otherwise, which resulted in the ambiguity in the Korea Trust Act.2. The Background and the Purpose of the Act
It is stated that the origin of the Trust Act is the Property Law in English Common Law. This act was developed to evade taxes to king. The truster, who inherits an estate may leave the property under the possession of a church which was exempted from the tax and let the successor of the property be the beneficiary. Thus, in the Anglo-American culture, the trust-trustee-beneficiary structure was established for tax evasion purposes, making the position of the ‘beneficiary’ the main character. Creating the medium between an inheritor and an ancestor was the utmost aim, rendering the fiduciary duties of the trustee crucial in the operation of the act.
Ⅲ. How the Trust Act in Korea Works
- Types of Real Estate Trust in Korea in Practice
(1) The Development Trust
A land owner becomes a truster to entrust the land, while a trustee takes charge of an entire sequence of the development business from construction, making parceling-out contract or rental contract, preserving registration titled for the trustee, to transfering registration for purchaser of parceling-out contract. The truster takes the revenue of the business and the trustee gets commissions.
(2) The Collateral Trust
A truster entrusts certain real estate to a trustee on which the trustee issues priority beneficiary certificate to a lending agency. The trustee manages and preserves the value of the collateral to redeem the loan by disposing of the entrusted real estate when the lending agency demands the truster’s payment and the truster faces default.
(3) The Trust for Management
The Trust for management is a structure in which a trustee ‘manages’ the real estate in case the truster is not a professional manger of the real estate; The trustee preserves the rights surrounding the real estate by efficient and professional management, ensuring operating profit. Usually, the trustee becomes a business operator of an urban planning project. When the truster is unable to transfer its ownership of the estate, the trustee protects the rights of the entities who contracted pre-construction sales by disposing of the estate in question.
(4) The Disposal Trust
The Disposal Trust is a structure for an efficient real estate sell off by connecting an owner of real estates in complex situation and an end user. Often, interested parties’ rights are interconnected regarding the real estate. A truster transfers its ownership to a trustee by trust agreement for the trustee to manage, and when the trustee sells the real estate, they deliver the profits to the truster.
- Independence of Trusted Property
As Article 2 of the Trust Act mentions, requirements for the trust to activate are as follows: (1) the truster to transfer their property rights or to make any other dispositions, (2) the trustee to manage, or to dispose of property rights. Once a trust is established, it is manifested by registering, and the characteristic of the trust property is regarded neither as the truster’s property nor as the trustee’s property. Thus, creditors of both the trustor and trustee are not allowed to confiscate or to exercise forcible execution on the property, and if the execution is enforced against the law, the trustor, trustee or beneficiary may object.
Trust Act created the concept of ‘Property in Trust’, a new kind of property which Contract Law or the Law of Reality could no longer fully explain. In that registered trust may contest to a third person, the trust could be characterized as real rights, whereas other articles of trust act describe the general contract rules for establishment of trust agreement, manifesting its ambivalent character. Articles 22 to 30 of Chapter 3 establishes rules for the ‘Property in Trust’, elaborating how the legal characteristics of the trust property harmonizes with current legal system of Korean civil act where dual structure of real rights and claims are dominant. Likewise, the articles omit how ‘Property in trust’ differs itself from ‘Ownership’, leaving many legal conflicts, especially concerning real estate trust.
- Cases Concerning the Ownership of the Trust
Due to the forementioned ambiguity of the ‘Trust Property’ in the Trust Act, there has not yet been a dependable norm that decides the ownership of the real estate set in Trust. This resulted in ununified decisions of the court. In order to solve conflicts regarding the title of the ownership in Korean Civil Acts climate, precise judgement of what-belongs-to-whom needs to be determined first. In the same light, the current Trust Act that is unclear of who ‘Trust Property’ belongs to stirs a few problems.
(1) Decisions of Korean Courts on Ownership
The Dominant decisions sees trustees as owners of real estates. Registering trust means manifesting transfer of ownership and expired trust agreement should only oblige the trustee to transfer the ownership back to the truster. No automatic transfer of ownership to the truster is valid even with the termination of the agreement. Ministry of Government Legislation’s authoritative interpretation says, “In a Collateral Trust agreement with a Local Housing Cooperative and a trust company with lending agency as a beneficiary, the trustee has the exclusive rights to dispose of the real estate which makes the Cooperative an invalid entity to its ownership.” Another interpretation states, “Building Act requires ownership of a site to get a building permit for condominium to sell in lots. A Collateral Trust agreement with a building owner and a trust company means perfect transfer of the ownership to the company as a trustee, leaving the truster invalid to apply for the building permit.”
There are some exceptional cases too, while “admitting that an ownership of the trust property belongs to the trustee both in interior and exterior terms, there are some cases where the truster who takes the burden of development costs and the benefit from the business may claim the position of the owner.” Ministry of Government Legislation’s authoritative interpretation too, mainly focuses on where the benefit from the trust agreement goes at the end, saying that termination of the trust agreement means the benefit and the costs from the trust should be moved to the truster, who becomes the owner of the property.
(2) Reason for Varied Decisions and Following Problems
1) Reasons for Varied Decisions
As mentioned, Trust Act originated from the English Common Law and was designed to transfer the ownership of a land from an ancestor to a successor directly without returning it to the ownership of the king. The structure requires three separate parties and the truster and the beneficiary are different entities. Korean Trust Act brought the structure of the English Common Law without pondering that Korean Property Law is distinct in its character from the English Law. The latter does not require manifesting ‘to whom the trust property belong’ because the property clearly belongs to the beneficiary, while the former needs to clarify the ownership of the trust property. Chapter 3 of the Trust Act prohibits compulsory execution, forbids the trust property from being inherited, excludes trust property from constituting bankruptcy foundation, and prohibits setting-off, under the premise that the trust property neither belongs to the truster nor to the trustee. In short, the Trust Act elaborates on how trust property should be dealt with since it belongs to no one, and avoids clarifying its ownership.
2) Following Problem: Rights of the Third Party Infringed
Most importantly, a third party contracting with a truster may experience infringement in its rights. Article 4 of Trust Act requires trust registration, endowing trust a-real-right-like position, and providing justification to the court decisions that states that the properties belong to the trustee. In English Trust Act, such regulation doesn’t cause any problem since trust structures are mainly utilized for inheritance, while Korean Trust is used for various private contracts: setting collaterals for loans, development of sites, management of sites. A truster failing to perform the contract with the third party may avoid its responsibility for reparation because courts will see the party who is in trust agreement with the truster a concerned party. The situation only worsens for the third party since they are usually socially and economically less capable of enduring a long-term lawsuit. Following case is the example that addresses this very problem in that the Supreme Court implies legal defection in the trust structure of Korea.
Ⅳ. Case Analysis: Case number 2013da71784 Declared on 2014.12.11.
- Case Summary
STA Contruction(below noted as a nonparty company) Inc made a collateral trust agreement with Hana-Daol Trust and a nonparty company to be both a truster and a beneficiary. The company assigned priority beneficiary certificate to lending agencies and performed financial management instead of the truster. Also, the company sold the building concerned in lots to the plaintiff to release the sales contract. The plaintiff won a lawsuit against the truster to get their payment back. They claimed 1) a shortcut reparation to the trustee to get the payment and 2) that they had subrogation rights to the trustee on behalf of the nonparty company.
- Key Decisions
(1) Low Level Court’s Decisions
As to whether the defendant, notwithstanding the fact that the defendant company is not a party of sales contract, is obliged to return the payment, the court saw it invalid. The court said “A clearance of a contract should be dealt between the contract parties; entities outside the contracts should not be asked to return the benefits from the contract just because they are unjust enrichment.”Thus, parties concerned are the plaintiff and the nonparty company who takes the burden of restoration, which makes plaintiff’s direct claim of payment return to the defendant invalid.
While determining whether the defendant company is obliged to return the payment in subrogation of the nonparty company, the court quoted Article 22 of Trust Act, saying that “No compulsory execution or auction for exercise, etc. of security rights, conservative measure or disposition of default on national taxes, etc. may be made against any trust property.” Seemingly, the court never broke the premise that the property belongs to neither the truster or the trustee.
(2) Supreme Court’s Decisions
The plaintiff did not object to the court decision saying that the defendant had no obligation to return the payment, which deprived the Supreme Court of an opportunity to ponder upon the ownership of trust properties. However, while addressing the plaintiff’s objection, the Supreme court stated “The creditor may exercise its subrogation right to preserve its claim because the right preserved and debtor’s rights to be subrogated are closely related; there is a danger of inadequate fulfillment of the credit without subrogating the rights, necessitating subrogation of the debtor’s rights for efficient and proper fulfillment of one’s credit.” Furthermore, the Supreme Court overruled the low level court’s decision saying that “the nonparty company’s credit to the trustee is closely related to plaintiff’s payment credit to the nonparty company; insuring efficient and proper fulfillment of the payment return calls for subrogation”
- Commentary on the Supreme Court’s Decision: Implied Stance of the Supreme Court
The Supreme Court only had a partial opportunity to ascertain the ownership of the property of trust between the truster and the trustee. Nevertheless, it seems that the court has recognized a unique character of the trust structure in Korea. By saying that “the right to preserve and the debtor’s rights to be subrogated are closely related”, the Supreme Court implied that the plaintiff could substitute direct claim against the truster with subrogating the position of the trustee. The court was unable to acknowledge the plaintiff’s right for direct restoration from the trustee because the current Trust Act lacks the provisions on ownership of the trust property and the plaintiff failed to object to the first and second trial’s ruling. Yet the court admitted the right of subrogation, recognizing ‘close relation’. It can be assumed that the court regards subrogation claim for the benefits which are supposed to be handed to the beneficiary equal to the direct claim for the truster because the beneficiary holds additional position as the truster. Furthermore, one can also presume that the court is under the premise that Korea’s trust structure lacks an actual ‘beneficiary’ since the truster gets the benefits back from the trustee. The court never affirmed this presumption yet, but considering the uniqueness of the trust structure, progressive approach is called for in a foreseeable future.
Ⅴ. Proposal on the Trust Act: How to be Revised?
The major victims of an ambiguous ownership provisions of the Trust Act are buyers in lots who made contracts with the trusters. Mostly, they lack financial fitness, unable to handle the truster’s failure to fulfill the contracts which results in an insolvency. Thus, the Trust Act should be revised in regard to protecting the third party’s rights. A collateral trust, a trust for management, a development trust are trust forms intended to return the title to the truster, not to a separate beneficiary. As some current authoritative interpretations said that the property of the trust in which a truster takes the profits back from a trustee belongs to the truster, ‘who eventually takes the profits’ seems to be the most crucial factor in deciding the ownership. Hence, in the trust structure which equalizes the truster and the beneficiary, the truster should be deemed as the owner of the property. This should be taken into consideration when revising the Trust Act. This way, the truster will not be able to make a detour under a nominal title of the trustee when the buyers, or the third party of the trust agreement, claim restoration.
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