Keun mortgage

Keun mortgage (근저당권/根抵當權) is collateral that a mortgage is created with the amount of claims to be fixed in the future up to the maximum amount at maturity to pay back the fluctuating claims based upon the underlying contract such as overdraft loan, continuous goods supply contract, etc. So temporary extinction or transfer of the debt cannot affect the mortgage until the claims are determined at maturity. Art. 357 of the Civil Act.

In principle, mortgage (continuing or collective mortgage) is insaparable from the secured claims. It is called the appendant nature (부종성/附從性) of the mortgage. But this nature of the mortgage is relaxed with the keun mortgage (continuing mortgage). In Korea, keun mortgage is created subject to the registration with the Court Registry Office. So it is disputed who should pay the keun mortgage creation fee.

Occasionally there occurs a difficult case to determine in relation to the sale and financing of real estate, though it is commonly used in practice. The court approved such transaction by a full bench decision in 2001.

Key words
mortgage, keun mortgage, real estate, security, appendant nature

Facts
In November 1996, "A" intended to sell his own real estate (land) to C Company for 450 million won, down payment 50 million won, intermediate payment 200 million won, final payment 200 million won, respectively. "A" allowed C Company to borrow the money to pay for the land even before C Company paid in full. It was conditioned that "D" designated by "A" should be a senior lender up to 200 million won backed by the the first priority mortgage on the land.

"A" made a virtual arrangement that "A" had borrowed 200 million won from "D" with the interest rate at 25 percent p.a., and made an IOU. A virtual debtor "A" created the first priority keun mortgage for a virtual creditor "D" with the maximum amount up to 200 million won. Upon the receipt of 200 million won check as collateral, "A" provided all mortgage-related documents to C Company.

Then C Company was successful in borrowing 400 million won from B Bank in the name of "E" after creating the second keun mortgage up to 460 million won. C Company did not observe the initial promise to make intermediate and final payments to "A". In addition, the 200 million won check was not honored by C Company.

Also, "E" and C Company were in default to repay to B Bank, which applied to the court for the enforcement of its second keun mortgage. At the court auction, the land was sold to a bidder for 444 million won. The dividend with expenses deductible was to be distributed to "D" up to 249 million won, then the remaining 239 million won to B Bank. To its disappointment, B Bank raised an objection to deny "D"'s claim to the court.

Court Decision
It was at issue how strong the appendant nature of keun mortgage is. Is it possible that a virtual creditor could be protected by law? In other words, it is a question whether a purchaser of real estate who would not intentionally pay in full the purchase money could be discharged from the obligation. It is noteworthy that the Supreme Court has changed its stance on the appendant nature of mortgage so as to deny the injustice in the real business world.

Where the registration of the creation of a keun mortgage has been completed on real estate, with respect to which the registration of transfer of title has not been completed in the name of the purchaser, with a third party designated by the seller as the keun mortgage holder and the seller as the debtor in order to secure the payment of the purchase price of the real estate, whether the registration of creation of keun mortgage is void in violation of the appendant nature of the real right (jus in rem) granted by way of security.

Majority Opinion
It is a general principle that a creditor and a keun mortgage holder should be the same person because keun mortgage is created to secure debts. But in creating keun mortgage whose holder is a third party, if a creditor, a debtor, and a third party agree in that regard, and if some particular circumstances arise where debts are deemed to be attributed to a third party such as a transfer of debts, a contract on behalf of the third party, and an inseparable relationship arising out of loans, then the registration of the establishment of the keun mortgage in the name of a third party, should be valid.

On the other hand, in case that the purchaser completed the registration of creation of the keun mortgage over the real estate, with respect to which the registration of transfer of ownership in the name of the purchaser has not been completed with the seller, instead of the purchaser, as the debtor who was the owner of record for convenience by the agreement of the parties at the time of providing the real estate as collateral with consent of the seller, i.e., the owner of the real estate, such registration shall be valid as securing the obligation of the purchaser's debt against the keun mortgage holder.

Therefore, even if the keun mortgage is the combination of the two forms afore-mentioned, it will not affect the validity of the keun mortgage from the perspective of its appendant nature so that the keun mortgage becomes void. While the registration of transfer of ownership with respect to the real estate has not been completed in the name of the purchaser who has to pay the remainder of the purchase price, if the seller and the purchaser agreed to pay the remainder of the purchase price through borrowed money providing the real estate as security, and also agreed to issue and deliver a check for the payment of the remainder of the purchase price in order to secure such obligations and create the first priority keun mortgage over the real estate, upon agreement among the seller (creditor), the purchaser (debtor) and a third party designated by the seller, by registering the third party as the keun mortgage holder and the purchaser as the debtor as a specific method and the seller executed and delivered an IOU to the effect that the seller borrowed the money equivalent to the remainder of the purchase price from the third party, then it should not be interpreted that the seller trusted the title to the third party without assigning the claims for the remainder of the purchase price.

Rather it should be interpreted that the claims for the remainder of the purchase price has been assigned to the third party with consent of the purchaser (debtor) based on the genuine intention of the parties reflected in the course of the said process. Therefore, the registration of the keun mortgage has been created based on the secured obligation and, thus, shall not be deemed void due to lack of a cause or violation of the appendant nature.

Dissenting Opinion
In the case of the sale of real estate, if the seller executed an IOU to the effect that money was borrowed from a third party despite the fact that there existed no lending and borrowing of money between the seller and the third party. The agreement was only to secure the payment of the remainder of the purchase price, so such IOU cannot be interpreted as 'the claims for the remainder of the purchase price has been assigned to the third party by the seller's assignment of such claims through the execution and delivery of the IOU with consent of the purchaser' even when examining the overall actions of the parties involved.

On the other hand, if we permit the registration of the establishment of a keun mortgage with registering 'the owner, who should be the creditor, as the debtor,' it would result in acknowledging the negotiable mortgage or real estate obligation system under the German Civil Act (BGB), which has not been adopted by our Civil Act. Therefore, from the perspective of appendant nature, such keun mortgage should be deemed as void.

To acknowledge that such keun mortgage as valid shall not be permitted under the principle of law to specify the real right (jus in rem) which prohibits the creation of new systems even though the parties otherwise agreed. In addition, the view of the majority that the registration of establishment of keun mortgage, completed in the name of a third party, other than the creditor, shall be valid if there is a special circumstance where the creditor, the debtor, and the third party agreed so and the claims were practically assigned or attributed to the third party will result in ignoring the prohibition of title trust on the real rights on the real estate as stipulated by the Act on the Registration of Real Estate under Actual Title holder's Name.