[1] Purport of the provisions of Article 666 of the Civil Act concerning the contractor's right to demand mortgage, and whether the act of creating a mortgage on a building as security for the obligation for construction price according to the contractor's right to demand mortgage constitutes a fraudulent act (negative in principle)

[2] In a case where Gap et al. concluded a lease contract for each part of the aggregate building with Eul corporation, Byung Co., Ltd., and Eul Co., Ltd. concluded a subcontract for the above construction with Eul corporation after being awarded a contract for remodeling construction for the above building, and completed the construction by entering into a subcontract for the above construction, but Eul Co., Ltd. failed to pay the subcontract price to Byung et al., as Eul failed to pay the subcontract price, the Eul Co., Ltd., set the right to collateral security with the maximum amount of debt, which was not paid for the above building, but the issue was whether the act of establishing the right to collateral security was a fraudulent act against Eul et al., the case holding that the above right to collateral security was not a fraudulent act since Eul Co., Ltd. was established

[1] Article 666 of the Civil Act provides, “The contractor of the real estate construction may request the contractor for the establishment of a mortgage on the real estate in order to secure a claim for remuneration.” This purpose is to enable the contractor to receive a preferential payment of the construction price from the object in fact, by granting the contractor a right to claim the creation of mortgage on the object in consideration of the fact that the ownership of the object is completed by the contractor’s material and effort. Such status of the contractor is not always strengthened compared to the status of exercising the right of retention on the object, and it does not constitute a fraudulent act unless there are special circumstances. Therefore, the contractor for construction works does not constitute a fraudulent act, barring special circumstances.

[2] In a case where Gap et al. concluded a lease contract with Eul corporation as to each part of the aggregate building, Byung corporation added the construction work to Eul corporation as a joint collateral for the purpose of guaranteeing the amount of the construction work which is ultimately attributable to Eul corporation, Byung corporation, Byung corporation, and Byung corporation, after being awarded a contract with Eul for remodeling the above building, and completed the construction work by entering into a subcontract with Eul corporation, but Eul corporation failed to pay the subcontract work price, etc., and Eul corporation established a collateral with the maximum claim amount, and Eul corporation's act of establishing the collateral security was at issue as fraudulent act, the court held that Byung corporation's secured claim amount of the above collateral is the same amount as Eul corporation's claim for the construction work price against Eul corporation, and Byung company, Byung corporation, et al. established the joint collateral security right within the scope of the claim for the construction work price, and it does not constitute a joint collateral for the purpose of guaranteeing the amount of the construction work price which is ultimately attributable to Eul corporation, Byung corporation, Byung corporation, and Jung et al.

[1] Articles 406(1) and 666 of the Civil Act / [2] Articles 406(1) and 666 of the Civil Act

[1] Supreme Court Decision 2007Da78616 Decided March 27, 2008 (Gong2008Sang, 612)

Plaintiff 1 and five others (Law Firm LLC, Attorneys Kang Jong-ho et al., Counsel for the plaintiff-appellant)

See Attached List of the Defendants (Law Firm International Law, Attorney Yellow-soo, Counsel for the defendant-appellant)

Busan High Court Decision 2016Na55998 decided April 6, 2017

All appeals are dismissed. The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Case overview

The Plaintiffs are tenants who have concluded a lease agreement on the corresponding parts of the Red Profit Co., Ltd. (hereinafter “red Interest”) and the instant building, which is an aggregate building (Provided, That each divided part, referred to as “each of the instant real estate”).

Defendant Busan Construction Co., Ltd. (hereinafter “Defendant Busan Construction”) contracted remodeling construction for the instant building (hereinafter “instant construction”) from red interest, and entered into a subcontract with respect to the relevant part of the instant construction project with the other Defendants except for the construction of the Defendant Busan Integrated Construction (hereinafter “the Defendants”), or supplied goods necessary for construction from them. The instant construction project was performed.

Although the construction of the instant construction was completed, the Defendants did not receive KRW 1.78 billion out of the total construction cost, and the remainder Defendants did not pay the subcontract price or the total amount of the goods. The Red Profit set up against the Defendants each of the instant real estate with each of the maximum debt amount of KRW 1.788 billion, the obligor Red Profit and the Defendants as the right to collateral security (hereinafter “mortgage”).

After that, upon the commencement of an auction procedure with respect to each of the instant real estate, the Plaintiffs were creditors who have a preferential right to payment, provisional seizure right holder, or executory exemplification, and the Defendants respectively participated in a demand for distribution or a distribution as a mortgagee.

The execution court distributed the corresponding amount to the plaintiff 5 and the defendants, and the remaining plaintiffs set up a distribution schedule that did not distribute to them, and the plaintiffs raised an objection against the whole amount of dividends to the defendants.

The Plaintiffs filed the instant lawsuit claiming that the establishment of the instant right to collateral security constitutes a fraudulent act, and that the distribution schedule should be revised due to its revocation and restitution. Accordingly, the Defendants asserted that the instant act of creation of collateral security was lawful in accordance with Article 666 of the Civil Act and did not constitute a fraudulent act.

2. Whether the establishment of the instant right to collateral security constitutes a fraudulent act

A. Article 66 of the Civil Act provides, “A contractor of a real estate project may request the contractor for a construction project to establish a mortgage for the purpose of securing a claim for remuneration.” This purport is to allow the contractor to receive a preferential payment of the construction price from the object in fact, by granting the contractor a right to claim the creation of mortgage for the object, if the ownership of the object is originally reverted to the contractor in consideration of the completion of the object’s materials and effort by the contractor. Such status of the contractor is not always strengthened compared to the status of exercising the right of retention for the subject matter, and is not unfairly unfavorable to the general creditors of the contractor. Therefore, a contractor for a construction project does not constitute fraudulent act unless there are special circumstances (see, e.g., Supreme Court Decision 2007Da78616, Mar. 27, 2008).

B. Examining the following circumstances revealed in the reasoning of the judgment below in light of the aforementioned legal principles, the instant right to collateral security can be deemed as having been established for the purpose of securing the obligation of construction payment upon the exercise of the right to claim creation of mortgage by Defendant Deputy Construction, which is the contractor as provided by Article 666 of the Civil Act, and it does not constitute fraudulent act.

(1) The amount of the secured debt of the instant right to collateral security is the same as the amount of the claim for construction cost owed by the Construction on Red Profit, and the construction cost to be paid by the Construction on Red Profit is the money ultimately to be paid to the remainder of the Defendants, who are sewage suppliers or goods suppliers.

(2) Defendant Down Construction and the remaining Defendants set up a joint collateral within the scope of the claim for construction cost, not setting up several different orders of priority in each of the instant real estate, rather than setting up several joint collateral mortgages. Therefore, the remainder of the Defendants, on the ground that they are in the status of the joint collateral security holder with the construction of the joint collateral security, do

(3) The plaintiffs asserted that only the contractor may exercise the right to demand mortgage under Article 666 of the Civil Act and that the remaining Defendants, who are not the contractor (creditor) and the right to demand mortgage of this case, have been established in accordance with Article 66 of the Civil Act. However, as seen above, the judgment of the court below, which claimed that the right to demand mortgage was contradictory to each other, is the subject of the right to demand mortgage for the purpose of securing the obligation for the payment of the construction price. However, the Red Profit and the Construction of Deputy Exchange, and the other Defendants whose construction price belongs ultimately through an agreement, have been added to the joint collateral holder in order to ensure the relevant claim amount. There is no reason to deny the validity of the above agreement, and there is no reason to deny the validity of the agreement between the other Defendants, and there is no disadvantage to the plaintiffs. Accordingly, the judgment of the court below cannot be said to be contradictory.

C. In the same purport, the lower court determined that the instant act of establishing the right to collateral security was attributable to a contractor’s exercise of the right to demand mortgage under Article 666 of the Civil Act, and did not constitute a fraudulent act. In so doing, the lower court did not err by misapprehending the interpretation of Article 666 of the Civil Act and the legal doctrine

3. The remaining grounds of appeal

The remaining grounds of appeal by the plaintiffs are without merit, and they are not acceptable, or they are not legitimate grounds of appeal, since they dispute the selection of evidence and fact-finding belonging to the exclusive jurisdiction of the lower court, which is a fact-finding court. Furthermore, in light of the records, the lower court did not err by failing to exhaust all necessary deliberations, and exceeding the bounds of the principle of free evaluation

4. Conclusion

The plaintiffs' appeals are dismissed in entirety as it is without merit, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

[Separate] List of Defendants: omitted

Justices Ansan-chul (Presiding Justice)