[1] The degree of autonomy and discretion of the general assembly of the reconstruction association as the highest decision-making body for the association

[2] In a case where the general meeting of a reconstruction association resolves that an amount equivalent to a substantial portion of the additional profit accrued after the completion of a reconstruction project should be paid as incentives to union officers, the validity of the resolution on incentives payment beyond the reasonable scope (negative) and the standard for determining whether the contents of incentives are unreasonably excessive

[3] In a case where Party A, at the special general meeting of the reconstruction association, made a decision to the effect that “in the event additional profits have occurred when the additional charges are increased and the additional charges are decreased, 20% of the additional profits shall be paid to the union executives as incentives (e.g., incentives) for the union executives,” and that part of the union members sought confirmation of invalidity of the above resolution, the case holding that the court below erred by misapprehending the legal principles that the above incentive cannot be deemed null and void without any particular examination as to whether the above incentive has a reasonable proportional relation with the union executives’ duties

[1] The general assembly of a reconstruction association is the highest decision-making body of the association, and has the discretion to make a resolution within a wide range of the business affairs of the association. However, such autonomy and discretion cannot be unlimited.

[2] In particular, the contents of incentives for the officers of a reconstruction association are closely related to the reliability and fairness of the performance of a rearrangement project, and may cause various side effects and problems. Thus, it is not possible to simply leave the decision-making of an organization pursuant to private autonomy. In a case where a general meeting adopts a resolution to provide incentives to union executives with an amount equivalent to a considerable portion of the additional profits accrued after the following as a result of the implementation of a reconstruction project, if there are special circumstances to deem that the contents of incentives to be unduly excessive to the union executives are contrary to the principle of trust and good faith or the concept of equity, the pertinent portion of the resolution to pay incentives beyond the reasonable scope should be deemed null and void. Whether the contents of incentives are unreasonably excessive should be determined by comprehensively taking into account the period of performance of duties, progress and difficulty of duties, the degree of actual effort made by union executives, the amount of benefits gained from a reconstruction project, the amount of compensation, whether the union members could have anticipated the amount of compensation after the resolution of the general meeting, and other circumstances surrounding the progress of the reconstruction project.

[3] The case holding that the judgment below did not err in misapprehending the legal principles as to whether the above incentive for the officers of a partnership could be held invalid, in a case where: (a) the resolution was made to the effect that “in the event an additional profit was incurred in the event of dissolution of a partnership and a decrease in additional charges were paid to union members, 20% of the additional profit would be paid to union executives as incentives (in the event of an increase in additional charges; and (b) part of union members sought confirmation of invalidity of the above resolution; (c) the above resolution limits the maximum limit of the amount to be borne by union officers in the event of an occurrence of losses due to a reconstruction project; (d) the incentive for union officers would be limited to 20% of the additional profit in the event of an occurrence of additional profit; and (e) the total amount would not be limited to the maximum amount to be paid by the union executives; and (e) the number of union members of a reconstruction association A, the scale of its facilities, and the location of its project implementation; and (e) there was a possibility that the amount of incentives to be increased.

[1] Article 40 (3) of the Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents / [2] Article 20 (1) 6 of the former Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents (Amended by Act No. 12116, Dec. 24, 2013; see Article 40 (1) 6 of the current Act), Article 80 (1) 8 of the former Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents (Amended by Act No. 12116, Dec. 24, 2013; see Article 40 (1) 6 of the current Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents) / [3] Article 20 (1) 6 of the former Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents (Amended by Act No. 12116, Dec. 24, 2013; see Article 134 of the current Act), Article 40 (3)

[1] Supreme Court Decision 2016Du35281 Decided March 13, 2018 (Gong2018Sang, 703)

See Attached List of Plaintiffs (Law Firm Hann Law Firm et al., Counsel for the plaintiff-appellant)

New Distribution Primary Rebuilding Housing Association (Law Firm LLC et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2016Na2012609, 2012616 decided February 15, 2017

The part of the lower judgment against the Plaintiffs is reversed, and that part of the case is remanded to the Seoul High Court.

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

1. Case summary

According to the reasoning of the lower judgment, the following facts are revealed.

A. On November 1, 1977, the Defendant is an association established to promote a reconstruction project of the (multi-unit name omitted) apartment (hereinafter “instant apartment”) established on the land of Seocho-gu Seoul (number omitted) (hereinafter “instant apartment”), and the Plaintiff is its members. The Defendant obtained authorization to establish the association on June 27, 2003, and completed the establishment registration on July 21, 2003.

B. On September 25, 2013, the Defendant decided to open the board of directors No. 169 on September 25, 2013 to present a resolution to increase profitability to the board of representatives.

C. On October 4, 2013, around 18:20 on October 4, 2013, the Defendant opened a meeting of the 170th board of directors and passed a resolution on the agenda on October 29, 2013. On the same day, around 19:00, the Defendant opened a meeting of the 126th board of representatives and proposed a resolution on the improvement of the above profitability. However, the Defendant’s association head and eight directors were withdrawn from the proposal on the contrary of some representatives. On the other hand, the Defendant’s association head and eight directors of the association opened the 171st board of directors and passed a resolution on the meeting of the board of representatives for the purpose of forming an election committee for the election of new executive departments.

D. Accordingly, at the 127th meeting of the Defendant, which was held on October 7, 2013, the composition of the said election commission was rejected as a unanimous order of the participating representatives. A resolution was made to request the withdrawal of resignation and the performance of duties to the term of office for the executive officers who have retired en bloc, and to require eight representatives to organize a training committee and to prepare a reasonable compromise on the plan to enhance profitability.

E. On October 8, 2013, the Settlement Board organized by the above resolution discussed a plan to increase profitability, and concluded that “(i) loss due to reconstruction, profit, shall be borne by all union members, and shall be equally apportioned; (ii) 30 times the refund amount of the general union members for the president of the union; and three times the refund amount of the general union members for the director and auditor for the president of the union; and (iii) delivered the above conclusion to the head of the Defendant’s association on October 11, 2013.

F. On October 15, 2013, the Defendant: (a) held an explanatory meeting on a plan to increase profitability while 528 members present; (b) held an explanatory meeting on a plan to increase profitability; and (c) decided to present the case to the agenda of the special meeting of the Association on October 29, 2013, including the following: (a) “if losses are incurred due to reconstruction, the executive officers of the association shall be compensated by one billion won; (b) the head of the association shall be KRW 1 billion; and (c) the other executive officers shall be KRW 500 million per capita; and (b) the additional profit shall be paid 20% of the additional profit in the event of an increase in the refund and a decrease in the additional charge to the executive officers of the association.”

G. On October 29, 2013, the Defendant opened an extraordinary general meeting and passed the instant agenda with the affirmative votes of 543 members (148 dissenting votes, 19 dissenting votes) from among 710 full members (hereinafter “instant resolution”).

2. The judgment of the court below on the primary claim of the plaintiffs

The lower court dismissed the Plaintiffs’ primary claim seeking confirmation of invalidity of the instant resolution on the following grounds.

A. The instant resolution cannot be deemed null and void in violation of the mandatory law and the good faith principle, or that the instant agenda is essentially an infringement on the rights of the union members. It is insufficient to recognize the content of the instant resolution as being considerably lost fairness due to the following reasons: (a) it is due to illegal acts, such as deception, deception, and threat of union officers; and (b) it is difficult to deem the instant agenda to be contrary to good morals and other social order. Furthermore, the instant resolution to determine whether to pay incentives or compensate for losses and its calculation standards depending on the occurrence of additional business profits following the progress of the instant reconstruction project, and its contents are specified. Thus, the instant resolution cannot be deemed null and void solely on the ground that the specific calculation was reserved at the time of the future project settlement.

B. It is difficult to view that the president of the Defendant partnership violated the duty to explain, and there is procedural defect, such as failing to meet the quorum for resolution in the instant case or failing to undergo prior deliberation and resolution procedures by the board of representatives, etc., even if such defect is recognized, it does not constitute a serious procedural violation to the extent that the validity of the instant resolution is deemed null and void.

C. The instant agenda may be resolved at a general meeting of the Defendant, regardless of whether or not the Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents (hereinafter “Urban Improvement Act”) or the articles of association have been stipulated as the resolution of the general meeting.

3. Judgment of the Supreme Court

A. The general assembly of a reconstruction association, as the highest decision-making body of the association, has the discretion to make decisions on autonomy and formation that can be made within a wide range of business affairs of the association. However, such autonomy and discretion cannot be unlimited (see Supreme Court Decision 2016Du35281, Mar. 13, 2018).

B. The contents of special incentives for officers of a reconstruction association are closely related to the reliability and fairness of the performance of a rearrangement project, and may cause various side effects and problems. As such, it can not be simply entrusted to the decision-making of an organization pursuant to private autonomy. In a case where a general meeting passes a resolution to provide incentives to union executives with an amount equivalent to a considerable portion of the profits accrued after the following as a result of the implementation of a reconstruction project, if there are special circumstances to deem that the contents of incentives to be unduly excessive to the union executives are contrary to the principle of trust and good faith or the concept of equity, the portion of the resolution to pay incentives beyond the reasonable scope should be deemed null and void. Whether the contents of incentives are unreasonably excessive should be determined by comprehensively taking into account the following factors: the period of performance of duties, the progress and difficulty of duties, the degree of actual effort by the union executives; the amount of benefits gained from the implementation of a reconstruction project; the amount of compensation for losses to be paid by union executives in the event of losses caused by a reconstruction project; the extent of the amount of compensation for losses; and the following reasons should be determined in detail.

1) Before the implementation of the Urban Improvement Act, housing reconstruction projects were operated by autonomous decisions of owners of old housing rather than by public projects, unlike housing redevelopment projects. However, the Urban Improvement Act was enacted for the purpose of contributing to improving urban environments and enhancing the quality of residential life by prescribing matters necessary to restore urban functions or to systematically rearrange areas where poor residential environment is required, and to efficiently improve old and inferior buildings. Housing reconstruction projects were also stipulated as urban rearrangement projects along with housing redevelopment projects, and public regulations for housing reconstruction projects were strengthened.

Accordingly, the former Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents (amended and implemented by Act No. 12116, Dec. 24, 2013; hereinafter “former Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents”) is a project implemented to improve the residential environment in the area where the infrastructure for rearrangement is good, but the worn-out and inferior buildings are concentrated (Article 2 subparag. 2(c)), the formulation of the basic plan for urban and residential environment rearrangement (Article 3), the formulation of the maintenance plan, the designation and public announcement of the improvement zone (Article 4), the establishment of the association and authorization of the improvement zone (Article 16), the establishment of the management and disposal plan, the establishment of the management and disposal plan (Article 48), the public announcement of transfer (Article 54), and the liquidation (Article 57).

Considering the contents and purpose of the housing reconstruction project as above, the housing reconstruction project has the character of public interest to improve the residential environment by improving old and inferior buildings (see Supreme Court Decision 2007Do694, Apr. 27, 2007).

2) The president and the officers of the association having the right to execute the duties of the reconstruction association must carry out the affairs of the association with the duty of due care of good managers. In addition, the officers of the reconstruction association are deemed public officials in the application of bribery, etc. under the Criminal Act (Article 84 of the former Act). This is to ensure fairness and integrity in the performance of duties of the reconstruction association

A resolution to pay a significant amount of the additional profits generated from a reconstruction project to the executives of the partnership in the form of incentives can promote speculative spirit by inducing the executives of the partnership to excessively lower or unreasonably promote the project costs necessary for the implementation of a reconstruction project, and it may distort the foundation of a reconstruction project by deviating from the main purpose of a reconstruction project such as improving residential environment and restoring urban functions.

3) Loss or profit from a reconstruction project is not solely made by the effort of an executive officer of the partnership, but is affected by various external factors, such as changes in public regulations on real estate games and reconstruction projects. Accordingly, the relationship between the duties provided and the remuneration paid by the executive officers of the partnership to the partnership should be maintained reasonably and should not be excessive to the extent that the balance has significantly been lost.

4) Article 20(1)6 and 8 of the former Act stipulate that “A union shall not pay remuneration to executives other than full-time officers in accordance with the separate remuneration regulations prescribed by the union, but the remuneration regulations shall require prior resolution by the general meeting.” Such provisions can be deemed to protect the interests of union members and creditors by preventing the harmful effects of union executives’ interests in the course of performing their duties. Even if the activities of union executives have contributed to an increase in the profit to be additionally paid to union members, if a union’s general meeting passed a resolution to pay the actual expenses or excessive remuneration to union executives rather than paying the excessive remuneration within the reasonable scope, the portion of the subsidy for the payment of incentives beyond the reasonable scope should be deemed to be lacking in social validity.

5) As to the degree of difficulty, progress, and outlook, etc. of a reconstruction project, information imbalance between the officers of a reconstruction association and the general members is inevitable. Furthermore, in the event that a reconstruction project is being implemented as a normal tramway due to a business gap due to the collective resignation of the executives of the association, etc., it would inevitably cause trouble in the normal progress of the reconstruction project, and thereby, a delay in the project may lead to an increase in the cost. It may not be ruled out that the executives of the association suggest the agenda items for the payment of excessive performance-based rates beyond a reasonable level based on the superior advantage of the bargaining power at this time, and may attempt to make a resolution at the general meeting.

Besides, according to the progress of a reconstruction project, the amount of the performance-based rates initially adopted and resolved due to the unexpected change of circumstances that the parties expected, and there is a need to restrict this. In such a case, limiting the amount of excessive performance-based rates determined by the resolution of the general meeting is necessary to resolve the side effects caused by the imbalance of information between the officers of the reconstruction association and the general members of the reconstruction association and to prevent the smooth progress of the reconstruction project and the legitimate interests of the reconstruction members from being unfairly infringed.

C. Examining the facts above in light of the aforementioned legal principles, the lower court’s dismissal of the Plaintiffs’ primary claim seeking confirmation of invalidation of the instant resolution is difficult to accept for the following reasons.

1) The resolution of this case limits the maximum amount to be borne by the officers of the association in total to KRW 5.5 billion in the event of loss resulting from the reconstruction project of this case. On the other hand, in the event of additional profit, the amount to be borne by the officers of the association is limited to 20% of the additional profit, and there is no limit on the total amount. Considering the number of the members of the association, the size of the facilities, the location of the implementation of the project, etc., a large amount of loss or additional profit may accrue depending on the failure of the reconstruction project. Accordingly, there is a possibility that the scale of incentives to be borne by the officers of the association may sharply increase.

2) The Defendant’s officers, at the time of the resolution of the instant case that had been held in advance, could have predicted to some extent the amount of expenses incurred in the instant reconstruction project and the approximate profits that may arise from the general sale. On the other hand, it seems that it was not easy for the Defendant’s general members to grasp the specific contents of the expenses incurred in the instant reconstruction project, the process of implementation, and the scale of additional profits that may arise from the reconstruction project, etc. In light of the record, it is not confirmed that the said contents were explained to the union members at the briefing session that had been prior to the resolution of the instant case.

3) According to the record, a new apartment under the instant reconstruction project is deemed to have been completed as of the date of closing argument in the lower court. However, the lower court appears to have determined that it was difficult for the lower court to examine the revenues and expenditures accruing from the process of the project to find it difficult to determine the extent to which the additional profit would have reached the approximate level.

4) It seems that the Defendant’s officers have not sufficiently examined what contributed to the successful progress of the instant reconstruction project, such as prompt promotion of the reconstruction project or the selling price, timing of sale, and establishment and implementation of the public relations strategies for the portion sold in lots.

D. Nevertheless, in light of the aforementioned factors, the lower court determined that the instant resolution cannot be deemed null and void on the grounds that there is no objective evidence to deem that the Defendant’s incentive amount to be paid to the executives of the association pursuant to the instant resolution without conducting any particular deliberation as to whether the incentive amount to be paid to the executives of the association has a reasonable proportional relationship with the duties of the association members, and that there seems to be difficult to grasp the amount of the incentive amount to be paid to the executives of the association as alleged by the Plaintiffs. In so determining, the lower court erred by misapprehending the legal doctrine on the resolution of the general meeting of the reconstruction association and the principle of good faith, which led to failure to exhaust all necessary deliberations,

4. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, the part of the judgment below against the plaintiffs is reversed, and this part of the case is remanded to the court below for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices.

[Attachment] List of Plaintiffs: Omitted

Justices Lee Ki-taik (Presiding Justice)