Plaintiff Co., Ltd. (Attorney Lee Im-hoon, Counsel for plaintiff-appellant)

Korea Land Trust Co., Ltd. (Law Firm Namsan, Attorneys Kim Tae-hun et al., Counsel for the plaintiff-appellant)

Yong-Nam Construction Co., Ltd., a trustee of Yong-Nam Construction Co., Ltd. (Law Firm Samil, Attorneys Jeon Tae-tae et al., Counsel for the plaintiff-appellant)

Construction Financial Cooperative (Attorney Han-ro et al., Counsel for the plaintiff-appellant)

November 1, 2006

Seoul Central District Court Decision 2005Gahap74202 Decided May 10, 2006

1. The plaintiff's appeal against the defendant Construction Mutual Aid Association shall be dismissed.

2. Of the judgment of the court of first instance, the part against the defendant ordering the plaintiff to pay in excess of the amount equivalent to 318,90,000 won per annum from May 18, 2005 to May 10, 2006, and 20% per annum from May 11, 2006 to the date of full payment, and the part against the defendant ordering payment in excess of the amount equivalent to 318,90,000 won per annum from May 18, 2005 to the date of full payment, shall be revoked, and the plaintiff's claim against the defendant

3. The remaining appeal against the plaintiff by the land trust company against the defendant is dismissed.

4. Of the litigation costs, the costs of appeal arising between the Plaintiff and the Defendant Construction Mutual Aid Association are assessed against the Plaintiff. Of the total costs of the lawsuit arising between the Plaintiff and the Defendant Land Trust Co., Ltd., the part arising from the participation in the lawsuit is assessed against the Intervenor, and

1. Purport of claim

A. For the primary defendant: The land trust company against the defendant shall pay to the plaintiff 318,90,000 won with 5% per annum from May 18, 2005 to the delivery date of the copy of the complaint of this case, and 20% per annum from the next day to the day of complete payment.

B. For the conjunctive Defendant: Defendant Construction Mutual Aid Association shall pay to the Plaintiff 318,90,000 won with 5% interest per annum from January 25, 2005 to the delivery date of a copy of the complaint of this case; and 20% interest per annum from the following day to the day of full payment.

2. Purport of appeal

A. The plaintiff shall revoke the part of the judgment of the court of first instance regarding the conjunctive defendant Construction Mutual Aid Association. The above defendant shall pay to the plaintiff 318,900,000 won with 5% per annum from January 25, 2005 to the delivery date of the copy of the complaint of this case, and 20% per annum from the next day to the day of full payment.

B. Defendant Land Trust Co., Ltd.: The judgment of the first instance is revoked, and the Plaintiff’s claim is dismissed.

1. Whether an appeal filed by the Plaintiff against the conjunctive Defendant Construction Mutual Aid Association is legitimate

An appeal is to seek a change in favor of the appellant in relation to a judgment unfavorable to himself/herself, so it is a matter of principle that the appeal is not permitted, and the judgment is disadvantageous to the appellant, and in principle, the order of the judgment shall be determined on the basis of the order of the judgment. The plaintiff has won all the part against the land trust company for the primary defendant in the first instance. The plaintiff has no interest in appeal since he/she has no choice but to file an appeal against the primary defendant in the appellate trial. However, in the preliminary or selective co-litigation, if one of the co-litigants who has lost in order to resolve the conflict between the non-litigants who are legally incompatible, files an appeal, the appellate court filed an appeal against the primary defendant in relation to the judgment of the first instance, and the judgment of the first instance shall be closed from the final judgment and the higher court shall not apply. Accordingly, if the confirmation of the conjunctive claim is interrupted, and if the plaintiff's conjunctive claim against the primary defendant in relation to the construction of the defendant is dismissed as a result of the judgment of the appellate court, the plaintiff's assertion against the plaintiff's appeal against the defendant is unlawful.

2. Judgment on the merits

(a) Basic facts;

The following facts may be acknowledged in combination with the testimony of Gap 2 through 9 (including each number), Eul 1, Eul 1 and 2 (including each number), the witness red-style of the first instance court, and leapho Lake 1, each of the testimony of the first instance court.

(1) Conclusion of subcontract and payment guarantee contract

(A) On November 26, 2004, the Plaintiff, as a subcontractor under Article 2(3) of the Fair Transactions in Subcontracting Act (hereinafter “subcontract”) with capital of KRW 1.5 billion, concluded a subcontract on November 26, 2004 with regard to the part of the supplementary intervenor, Youngnam Construction Co., Ltd. (hereinafter “Ynam Construction”), and the Defendant Korea Land Trust Co., Ltd. (hereinafter “Defendant Land Trust Co., Ltd. (hereinafter “Defendant Land Trust”) ordering the construction of Yong-Nam-dong 527, Young-dong, Young-gu, Seoul Special Metropolitan City Co., Ltd. (hereinafter “Defendant Land Trust”), with regard to the construction cost of KRW 432,200,000,000 and the construction period of construction from December 1, 2004 to March 31, 2005.

(B) On December 15, 2004, the Plaintiff entered into a guarantee agreement with the Defendant Construction Mutual Aid Association and the Yong-Nam Construction Mutual Aid Association for the instant construction project, setting the guarantee agreement from December 15, 2004 to March 31, 2005, with regard to the guarantee amount of KRW 4320,000,000, and the guarantee period of the instant construction project.

(2) Suspension of current account transactions and commencement of company reorganization procedures for Yong-Nam Construction

In the course of the plaintiff's execution of construction work under the above subcontract, Yong-Nam Construction was dealt with as the suspension of current account transactions on January 25, 2005, and the company reorganization procedure was commenced on February 17, 2005.

(3) Settlement of the Plaintiff’s price of the construction work

On January 24, 2005, the Plaintiff had confirmed the validity of KRW 318,90,000 among the instant construction works from Yong-Nam Construction. On February 25, 2005, the Plaintiff prepared and sent to the Defendant Land Trust a letter of commitment to settle the subcontract price (hereinafter “the letter of commitment to settle the accounts in this case”) requesting the direct payment of the remaining construction works after re-verification of the said work price. The main contents are as follows.

(1) Type of work: Hot-project site construction.

(2) The amount of a contract and progress payment.

433,200,000 318,900,000 114,300,000 114,300,000 x

“I, by January 25, 2005, undertake to execute the remaining construction without raising any objection to the amount of the completed construction as agreed and settled with the Yong-Nam Construction (State) with respect to the portion of the construction (supply) executed by us by us not later than January 25, 2005. In addition, I request us to pay the balance directly to us the amount determined by the Yong-Nam Construction (State) and the us’s approval of the completed portion.”

(4) Claim for payment of construction price

Around that time, the Plaintiff received payment of KRW 114.3 million for the remaining construction cost from the Defendant’s land trust. At the time of the above settlement, on January 24, 2005, the Plaintiff filed a claim with the Defendant Construction Mutual Aid Association for payment of KRW 318.9 million for the construction cost, and on May 17, 2005, filed a claim for payment with the Defendant Land Trust by content-certified mail, and the mail reached the above Defendant at that time, and thereafter, in the reorganization procedure for Yong-Nam Construction, the said construction cost was reported as a reorganization claim.

(5) Approval of reorganization programs and termination of reorganization proceedings

On August 24, 2005, the Daegu District Court approved the company reorganization plan of Yong-Nam Construction. Under the relevant reorganization plan, 50% of the principal and interest of the subcontract price to the plaintiff of Yong-Nam Construction was fully exempted. The construction of Yong-Nam was subsequently decided by the above reorganization court on October 31, 2006.

B. Determination as to the claim against the main defendant's land trust

(1) Occurrence of the obligation to pay the subcontract price

As seen above, according to Article 30 (1) of the former Company Reorganization Act (amended by Act No. 7428 of Mar. 31, 2005), the former Company Reorganization Act (amended by Act No. 1 and Article 2 of the Addenda of the Debtor Rehabilitation and Bankruptcy Act (amended by Act No. 7428 of Apr. 1, 2006; hereinafter the " Company Reorganization Act"), where it is impossible to repay debts due to the due date and the company's bankruptcy is likely to cause occurrence. Thus, in light of the fact that the company reorganization procedure was commenced on Feb. 17, 2005 with respect to Yong-Nam Construction, and that the repayment of those debts due to the commencement of the company reorganization procedure is prohibited, since the current account transaction of Yong-Nam Construction is suspended and the payment of the subcontract price cannot be paid to the plaintiff under Article 10 (1) 14 of the Subcontract Act, the person ordering the above land cannot be directly paid the subcontract price to the plaintiff under the provisions of Article 10 (1) 30 of the Subcontract Act.

(2) Determination as to the assertion of the Defendant’s land trust and its auxiliary intervenor’s construction in Yong-Nam

(A) The assertion that there is a lack of direct claim requirements under the Subcontract Act

Defendant land trust and its assistant intervenor asserted that since the claim of this case for the construction of Yong-Nam Nam is reported as reorganization claim in the reorganization procedure for the construction of Yong-Nam Nam, the above claim of the Plaintiff can be repaid in the above reorganization procedure, it does not constitute "cases where payment of subcontract price is impossible" as stipulated in Article 14 (1) 1 of the Subcontract Act.

On May 17, 2005, the plaintiff requested the direct payment of the subcontract price to the defendant land trust on May 17, 2005, and around that time, the expression of intent reached the defendant land trust. Thus, the defendant land trust bears the duty of direct payment of the subcontract price of this case to the plaintiff (Article 14(1) and (2) of the Subcontract Act, and Article 4(1) and (3) of the Enforcement Decree of the Subcontract Act). Since the defendant land trust bears the duty of direct payment of the subcontract price of this case to the plaintiff (Article 14(1) and (2) of the Subcontract Act and Article 4(1) and (3) of the Enforcement Decree of the same Act, the plaintiff's report on the reorganization claim of this case after the above obligation of direct payment occurred is merely a report on the right already extinguished. Thus,

(B) The assertion to waive the direct payment claim

The Defendant’s land trust and its assistant intervenor promised in the instant settlement agreement that “the remaining construction works shall be executed without raising any objection to the amount of the advance payment,” the Plaintiff waives the right to demand direct payment of the advance payment as to the portion of the advance payment, and even if not, thereafter, waives the right to demand direct payment as long as the portion of the advance payment was reported as reorganization claim in the reorganization procedure of Yong-Nam Construction, Yong-Nam, as long as the portion of the advance payment was reported as reorganization claim.

In light of the purport of the Subcontract Act that intends to protect a subcontractor, a small and medium enterprise, in the event of the suspension of payment or bankruptcy of a principal contractor, the right to demand direct payment under Article 14 of the Subcontract Act is not prohibited. However, in light of the purport of the Subcontract Act that intends to protect the subcontractor, a small and medium enterprise, the intent to waive shall be clearly indicated and strictly interpreted. Considering the purport of Gap evidence 8, Eul evidence 1, and the purport of the entire pleadings in the first instance trial, the plaintiff may receive the payment of the construction price from the non-party of the Yong-Nam Construction Vice, the non-party on February 25, 2005 at the time of the completion of the construction in Yong-Nam Construction's demand for the payment of the construction price after the completion of the construction in Yong-Nam Construction, the plaintiff's right to demand direct payment in the form sent by the non-party, stating the contract price, the amount of completed portion and the balance, and the plaintiff's right to demand direct payment of the remaining portion of the construction in this case's land with the settlement agreement.

(C) Claim of denial of direct payment claim related to company reorganization procedure

The Defendant’s land trust and its auxiliary intervenor, insofar as the reorganization claim cannot be repaid, received repayment, or extinguished without reorganization proceedings (Article 112 of the Company Reorganization Act), and the subcontract consideration claim of this case against the Plaintiff’s Yong-Nam Construction, also can be satisfied only through reorganization proceedings, as a reorganization claim. The Defendant’s land trust and its auxiliary intervenor asserted that a direct payment claim against the Defendant’s land trust may not be permitted as it accords the Plaintiff with preferential payment right and infringes upon other reorganization creditors

On the other hand, Article 14 of the Subcontract Act provides that it is necessary to prevent the subcontractor from leading to the chain of a subcontractor who is insolvent by the subcontractor by guaranteeing the payment of subcontract price to the subcontractor. As long as the difference between the contract price and the subcontract price is a business income of the contractor, it is sufficient that the above business income is the principal contractor's property in order for the general creditor protection of the principal contractor, and the subcontract price actually belongs to the subcontractor's property. Thus, even if the principal contractor's right to demand direct payment against the ordering person of the subcontractor is exercised and the principal contractor's right to demand direct payment is extinguished, it is merely the effect of the principal contractor's right to claim direct payment against the subcontractor, and it does not conflict with Article 112 of the Company Reorganization Act, and even if other reorganization creditors are at a relative disadvantage due to the said demand for direct payment, it does not go against the essence of the company reorganization system (see, e.g., Supreme Court Decision 2013Hun-Ba8, May 8, 2015).

(D) The assertion that the direct payment claim is denied regarding the performance of the obligation to guarantee payment.

The defendant land trust assistance intervenor asserts that the construction of Yong-Nam, the principal contractor, performed the obligation to guarantee payment of subcontract consideration under Article 13-2 (1) of the Subcontract Act to the plaintiff under the opposite interpretation of Article 14 (1) 4 of the Subcontract Act. Thus, the plaintiff is not entitled to exercise the right to demand direct payment to the defendant land trust and is obliged to claim the deposit first to the defendant construction mutual aid association. However, it is clear in the text of the law that the subcontractor's right to demand direct payment of subcontract consideration to the ordering person of the subcontractor arises in any of the causes provided for in each subparagraph of Article 14 (1) of the Subcontract Act. Thus, it cannot be deemed that the right to demand direct payment is extinguished immediately because the requirements provided for in Article 14 (1) 4 of the Subcontract Act are not satisfied. In addition, there is no ground to view that the plaintiff should first claim the deposit to the defendant construction mutual aid association

(e) Claim for reduction of direct payment under the reorganization program.

The defendant land trust assistance intervenor asserts that since 50% of the principal and interest of the defendant in Yong-Nam Construction under the approved reorganization plan are exempted in full, the plaintiff's claim for direct payment of the defendant land trust should also be reduced to the same extent. However, as long as the plaintiff requested a direct payment of subcontract consideration to the defendant land trust pursuant to Article 14 of the Subcontract Act and the above defendant's obligation for direct payment of subcontract consideration has already been extinguished within the scope, the above reorganization plan is invalid against the plaintiff. Accordingly, the plaintiff's claim for direct payment of subcontract consideration is without merit.

(f) The assertion that the contract price is divided;

The defendant land trust asserts that the total amount of the subcontract price for which the sewage supplier of Yong-Nam Construction claims the defendant to pay directly exceeds the unpaid contract price for the construction in Yong-Nam. Thus, the defendant can pay the plaintiff the amount in proportion to the amount of the claim of the relevant sewage supplier in proportion to the amount of the claim of the relevant sewage supplier. However, there is no evidence to acknowledge that the total amount of the direct payment exceeds the unpaid contract price. Thus, the above defendant's assertion does not need to be examined

(G) Invalidity of a direct payment claim without a document with a certified fixed date

The defendant land trust assistant intervenor in relation to the defendant land trust with another creditor of Yong-Nam Construction, the principal contractor, must make a direct claim based on a document with a fixed date, since the direct claim against the defendant land trust, which is the ordering person, is not in fact different from the assignment of claims, and thus, the plaintiff's direct claim without such a method is invalid. However, there is no legal ground to view that the direct payment claim should be the same as the assignment of claims or must be based on a document with a fixed date, and even if so, the fact that the plaintiff made a direct claim against the defendant land trust on May 17, 2005 by content-certified mail constitutes a document with a fixed date (see, e.g., Supreme Court Decision 2001Da72036, Apr. 12, 2002). The plaintiff's above assertion by the assistant intervenor constitutes a document with a fixed date.

(3) Conclusion

Therefore, the defendant land trust is obligated to pay damages for delay at each rate of 20% per annum as stipulated in the Civil Act from May 18, 2005 to May 10, 2006, which is the date of the first instance judgment where it is deemed reasonable for the defendant land trust to dispute about the existence and scope of the obligation to pay the price for delay to the plaintiff who seeks a direct payment of the price for delay, and from May 18, 2005 to the date of full payment, from May 10, 2006, the next day of May 11, 2006 to the date of full payment.

C. Determination on the claim against the Preliminary Defendant Construction Financial Cooperative

This Court’s reasoning is as follows: (a) the reasoning for the judgment of the first instance court is the same as the part concerning “determination on claims against the Preliminary Defendant Construction Mutual Aid Association” under Article 420 of the Civil Procedure Act.

3. Conclusion

Therefore, the plaintiff's claim against the main defendant's land trust shall be accepted within the extent of the above recognition, and the remaining claim shall be dismissed without merit, and the claim against the conjunctive defendant Construction Mutual Aid Association shall be dismissed as it is without merit. Since the part against the defendant who ordered payment to the defendant's land trust in excess of the above amount cited by the plaintiff is unfair, among the judgment of the court of first instance, the part against the defendant is revoked, and the plaintiff's claim against the above defendant is dismissed, and the plaintiff's appeal against the conjunctive defendant Construction Mutual Aid Association is unlawful, and the remaining appeal against the plaintiff's land trust is dismissed. It is so decided as per Disposition.

Judges Jeong Young-tae (Presiding Judge)