Developing Trusts and Their Jurisprudences: Real Estate Trusts in Korea
Seoul National Univ. School of Law
Prof. Hyeok-Joon RHOI.

Introduction

The concept of trust was introduced in Korea by the Trust Act of 1961, which had 72
articles. Based upon a typical civil law system, however, the Korean trust took on uniquejurisprudence different from common law trust. 1 For example, no split between the legal
ownership and equity ownership is allowed in the Korean Civil Act, and therefore the rights
of beneficiaries tend to be characterized as rights in personam. 2 Another important feature of
Korean trust is that it is mostly commercial, not gratuitous. Because the Capital Market and
Financial Investment Business Act (CMFIBA) regulates an entity that is engaged in a trust
business in a regular and commercial way, professional trustees were most likely to be
subject to the CMFIBA as well as the Trust Act. A criticism of the Trust Act of 1961 is that
the Act, which was designed long ago upon gratuitous trust, failed to reflect commercial
aspect of trust and to adopt various usages by modern trust, hence the overall revision in the
Trust Act of 2011. The new Act, with its detailed 147 articles, introduced new provisions
including those on limited-liability trust, trust with certificates of beneficial interests,
declaration of trust, merger and demerger of trust, and trust with successive beneficiary.
Because most of the newly adopted provisions are helpful devices for developing structured
transactions, commercial usages of trust in Korea are expected to further flourish.
What types of commercial trust are available in Korea? Basic classification can be madebased upon the CMFIBA, which regulates commercial trust. The CMFIBA has an exhaustive
list of qualified trust properties: ①money, ② securities, ③ monetary claims, ④ chattels, ⑤real estate, ⑥ rights relating to real estate {including superficies (地上權), a right to lease on
a deposit basis (傳貰權), a right to lease real estate (不動産賃借權), and a claim forregistration of transfer of ownership of real estate (不動産所有權 移轉登記請求權), and ⑦
intangible property rights. If a trustee company is licensed to cover all types of trust property,
it would be named as a comprehensive trustee; if a trustee company covers only ① through③, it would be called (exclusive) pecuniary trustee; a trustee company with ⑥ and ⑦ as its
inherent business can be classified as (exclusive) real estate trustee. Many Korean banks,
securities companies, and insurance companies with their comprehensive trustee licenses areengaged in real estate trust. However, the real estate businesses available to a comprehensive
trustee are limited: The banks are not allowed to practice Land Trust (the definition of which
1

More and more civil law countries have adopted trust-like institutions. Some observers feel the trust is likely
to become the most important contribution of the common law tradition to the civil law countries. Henry
Hansmann and Ugo Mattei, The Function of Trust Law: A Comparative Legal and Economic Analysis, 73 New
York University Law Review 434, 435-436 (1998).
2
One of the major technical obstacles to the introduction of trusts in civil law jurisdictions is the split
ownership over the trust assets, where the trustee has legal title and the beneficiary has equitable title. Tory
Honoré, On Fitting Trusts into Civil Law Jurisdictions, University of Oxford Legal Research Paper No. 27/2008,
p.10 (2008) (available at www.ssrn.com).
1

shall be explained in Chapter II. A.); the securities companies and insurance companies may
only practice Real Estate Sale Trust and Real Estate Management. Table 1 shows statistics on
professional institutions engaged in trust business.
[Table 1] Trustee Companies Subject to the CMFIBA 3
Type of License

Bank

Domestic
Foreign

Securities Co.

No.

Name of Trust Companies

17

Shinhan, Woori, SC Korea Limited Hana, KEB, Citi, KB, DGB,
BNK, Kwangju, Kyongnam, KDB, IBK, NH, Suhyup

Compre- Pecuniary Real Estatehensive
Trust
Trust
○

JB, Jeju○

3

Deutsche Bank, HSBC, Bank of NY Mellon Corp.

○

21

Shinhan, Kyobo, Daishin, KDB, Hana Daetoo, Yuanta, Samsung, Miraeasset,,
Woori Investment, NH Investment,KoreaInvestment,Hyundai,Hanwha,Meritz,
Shinyoung, Eugene Investment, HMC Investment, Dongbu, SK○○

Hi Investment, IBK
Insurance Co.

5

Real Estate Trustee
Company

11

Miraeasset, Samsung, Hanwha,, Heungkuk
Kyobo
Koreit, KB, Daehan Real Estate, Saengbo, Kait, Hana, Koramco, Asia,
Kukje, Mugunghwa, Korea○○○

Among various types of trusts, this paper focuses upon real estate trusts in Korea.
Compared to pecuniary trust, which is another major area of the commercial trust, real estate
trusts tend to invite more disputes and lawsuits in Korea: While the financial institutions
engaged in structured financing via trust vehicle tended to cautiously consult with regulatory
authorities and legal professions, real estate developers using trust structure often proceededwith legal uncertainty. Large land development projects are especially vulnerable to legal
claims from various parties including landowners and investors. Those disputes, while
unfortunate to the parties concerned, have been providing rich sources to refine Korean trust
jurisprudence. Further, the real estate trusts account for 34.2% of the total assets transferredto the trustee, and more and more land development projects are based upon trust structure.
Following up the jurisprudence on real estate trust is essential to correctly understand the
Korean trust law.
The rest of this paper proceeds as follows. Chapter II offers a bird’s-eye view of Korea’s
real estate trust. By introducing trust types, performances of real estate trustees, and major
regulations over real estate trust in Korea, this chapter will help readers understand the usage
and major legal issues of real estate trust. Against this backdrop, the following chaptersreview major jurisprudence on real estate trust, issues pertaining to outside the trust andinside the trust, respectively. Issues regarding outside the trust are mostly associated with theprotection of settlor’s creditors. Under the separation of assets doctrine and the principle ofcomplete ownership by the trustee, settlor’s creditors may not enforce upon legitimately

3
Financial Supervisory Service, Analysis of the Business of Trust as of June 30, 2014 (in Korean, available at
http://www.fss.or.kr/fss/kr/promo/bodobbs_view.jsp?url=&seqno=18116).

2

established trust properties. 4 However, the inability of settlor’s creditors often seems
unreasonable, and the Korean statutes and case laws have developed various theories tackling
the status of settlor’s creditors. The topics in Chapter III include ① the cancelation by
settlor’s creditors of fraudulent trust; ② the priority among settlor’s creditors who haveunsecured, secured by mortgage, or secured by Trust for Security Purpose, respectively; and③ the status of tax authority as the creditor of the settlor. On the other hand, the issues
regarding inside the trust in this paper are concerned with the reimbursement of expenses
obtained by the trustee. Chapter IV has two sections: In the first section, the possibility andthe range of reimbursement against trust property will be explored, especially where a loan
from a trustee’s own account to trust account has been made; the second section will deal
with a further reimbursement against a beneficiary. Finally, Chapter V summarizes andconcludes this paper.

II.

Real Estate Trusts in Korea Overview

A. Types of Real Estate Trusts
Real estate trusts are generally classified into four categories in Korea: (a) Trust for
Security Purpose, (b) Land Trust, (c) Real Estate Sale Trust, and (d) Real Estate Management
Trust.
A Trust for Security Purpose is created in order to provide creditors with security bydesignating them as beneficiaries over the trust property: On receiving a loan from creditors,
the settlor establishes a Trust for Security Purpose in which the superior beneficial interest is
given to creditors while the settlor has the subordinated beneficial interest. Once the settlor isin default on his debt, the trustee will sell the property and pay back the loan, with theremainder being returned to the settlor.
A Land Trust is made to explore a project on undeveloped land. The trustee of a Land Trustinvests funds of its own or from outside, builds houses or business buildings, and receives therent or proceeds from the sale of those houses or buildings. The earnings from thedevelopment project shall be distributed to the beneficiaries, most of whom are landowners,
and the trustee will get commission and incentive. Land Trusts have two subcategories
according to the responsibility of financing: While the settlor is responsible for financing the
project in Settlor-Responsible Land Trust, the trustee has the responsibility of financing inTrustee-Responsible Land Trust. In the case of Settlor-Responsible Land Trust, the role oftrustee is limited to the management of trust property and the sale of houses or buildings
successfully constructed.
A Real Estate Sale Trust is established for the sale of the trust property. If the estimatedprice of the real estate is very high or special promotion activities are necessary, the realestate owner often turns to Real Estate Sale Trust. Also, if the real estate has a complicatedlegal relationship with multiple owners and secured obligees, the sale through a Real Estate
4

Henry Hansmann and Ugo Mattei (supra note 1, at 454) analyzed theoretically the reason why the settlor’s
creditors generally cannot reach the trust property: They have no reason to rely on the value of the trust property
in extending credit to the settlor, as the title to the property is in the hands of the trustee and no material benefits
are flowing to the settlor from the property.
3Sale Trust, which may clarify the rights and obligations of interested parties, is preferred bysellers and purchasers.
A Real Estate Management Trust is mainly for the management of trust property. The rolesof trustee are different according to the type of Real Estate Management: In an Active Style(so called Kap-chong [甲種]), the trustee is expected to actively maintain and manage real
property. Receiving rent and paying expenses on the real property operation are also thetrustee’s responsibility. The Active Style is generally used by owners of real property wholack professional knowledge of building management or live abroad; in a Passive Style (socalled Ul-chong [乙種]), the trustee’s role is limited to keep the ownership of the trust
property. A Passive Style is used in a real estate development project to guarantee
bankruptcy-remoteness, which can be accomplished through trust structure. 5
B. Performance of Real Estate Trust Companies in Korea
Periodically the Financial Supervisory Service in Korea (FSS) publishes statistics on thetrust industry. Because donative trust is underdeveloped in Korea, the commercial trusts
supervised by the FSS account for a major part of trusts in Korea. Table 2 shows theimportance of real estate property compared to other types of trust in terms of the value oftrust properties. As of June 30, 2014, trust properties owned by the trustee company for realestate (i.e. exclusive real estate trustee company) account for 23.8%. The percentage reaches
28.8% with the addition of the real estate trusted onto the banks, securities companies, andinsurance companies (i.e. comprehensive trustee company), which is 26.3 Trillion KRW.
[Table 2] Value of Trust Property Owned by Trustee Companies (as of June 30, 2014) 6

Financial Institutions
with Trust Business
LicenseBank

Value of Trust Property(Trillion KRW)
258.1

Securities Company
Insurance Company
Sub-total

144.1
2.5
404.7

27.1
0.5
76.2

126.7
531.4

23.8
100

Real Estate Trustee Companies
Total

Share (%)
48.6

Among real estate trusts, the Trust for Security Purpose is the most common form: It
occupies 65.2% of real estate trusts as shown in Table 3. While the amount decreased from its
peak of 102.6 Trillion KRW in 2011, arguably due to a recession in the real estate market, it
still champions other types of real estate trusts by a large margin. The reason that the Trust for
Security Purpose is so popular in Korea is associated with the unique feature of bankruptcy
remoteness accomplished by this type of trust and shall be examined in Chapter III, section B.
5

Another type of a Real Estate Management Trust can be made on the Act of the Parceling-out of Buildings.
According to the Sec. 1 of the Art. 4 of the Act, if a seller of buildings in units is to parcel out units of thebuilding, he should have a management contract with a trustee company on the land for the development project.
The purpose of the requirement is to secure the buyer’s ownership of the unit in case of the bankruptcy by seller,
developer or constructer. The trust based upon this Act is often called Parceling-out Management Trust, one of
the Real Estate Management Trust in a broad sense.
6
Financial Supervisory Service, Analysis of the Business of Trust as of June 30, 2014 (in Korean, available at
http://www.fss.or.kr/fss/kr/promo/bodobbs_view.jsp?url=&seqno=18116).
4

[Table 3] Value of Trust Property Owned by Real Estate Trust Companies 7(Trillion KRW, %)2009
Trustee Responsible
Settlor Responsible
Real EstateManagement Trust
Real Estate Sale
Trust
Trust for Security
Purpose

Land
Trust

Total

2010

2011

2012

2013

2014 (June30)

Share(%)

1.5

1.5

1.9

2.4

2.9

2.9

2.3

15.3

17.7

21.3

23.6

25.1

27.6

21.8

7.7

9.0

7.3

6.4

6.4

6.5

5.1

17.5

18.1

15.7

8.2

7.9

7.0

5.5

82.0

95.8

102.6

80.3

76.4

82.6

65.2

124.0

142.2

148.7

120.9

118.7

126.6

100.0

Table 4 explains the net income of real estate trustee companies. Despite the fact that thesize of trusted assets was reduced in 2012, as shown in Table 2, the net income increased by
96.7%. Another notable feature in Table 4 is that operating earnings have increased since2010. This increase of earning, for example 9.4 billion KRW in 2012, may well be
attributable to the activation of Trustee-Responsible Land Trust as shown in Table 2. 8
Because the trustee is responsible for financing land development projects, a TrusteeResponsible Land Trust may generate decent income for the trustee from reaping commission
and interest on investment using its own funds and intermediated funds. Under the TrusteeResponsible Land Trust, however, a loan from a trustee’s inherent account to a trust accountmight be made, a transaction that looks problematic because the trustee might pursue its own
profit. The issue over the transaction between a trustee’s own account and a trust accountshall be explored in detail in Chapter IV, section A.

[Table 4] Net Income of Real Estate Trustee Company( 0.1 billion KRW, %)

2009

2010

2011

2012

2013

2013
(Jan.Jun)

2014
Growth(Jan.-Jun.) rate
(2014)

7

Financial Supervisory Service, Analysis of the Performance by Real Estate Trust Companies as of June 30,
2014 (in Korean, available at http://www.fss.or.kr/fss/kr/promo/bodobbs_view.jsp?url=&seqno=18080). Real
Estate Management Trust in this table includes Parceling-out Management Trust.
8
The Financial Supervisory Service analyzed that the growth of net income is attributable to the increased
operating earnings from Trustee-Responsible Land Trust and Trust for Security Purpose, 5.8 billion KRW, 11.1
billion KRW, respectively. Financial Supervisory Service, Analysis of the Performance by Real Estate Trust
Companies as of June 30, 2014 (in Korean, available at
http://www.fss.or.kr/fss/kr/promo/bodobbs_view.jsp?url=&seqno=18080).
5

Operating
Earning
Operating
Cost
Operating
IncomeNet Income

3,616

3,268

3,832

3,926

4,491

2,144

2,209

3.0%

2,430

3,511

2,975

2,426

2,841

1,226

1,245

1.5%

1,186

△242

857

1,500

1,650

918

964

5.0%

907

△153

575

1,132

1,222

695

735

5.8%

C. Regulation on Real Estate Trust Companies: Brief History and Major Rules
Most trusts on real estate in Korea are operated by professional trustee companies. Thus aquick review of the history and current provisions of the regulation over real estate trustee
companies would aid understanding in further discussions on the jurisprudence inside andoutside a real estate trust.
Real estate trusts were encouraged by the Korean government in the early 1990s in order toboost the supply of houses and business buildings: In consideration of the chronic lack of realestate supplies, the Korean government wanted trustee companies to launch various realestate development projects and to use the land more efficiently. Behind this backdrop, realestate trustee companies aggressively expanded their business, especially in Land Trust, butthey soon faced financial crisis in the late 1990s. Daehan Realty Trust and Hankook Realty
Trust, two biggest real estate trustee companies, were suspended from business in 2001 andtheir business licenses were cancelled in 2002. Following the bankruptcy of real estate trustee
companies, the government tightly regulated the business of trustee companies, limiting newlicenses of real estate trusts to those companies whose major shareholders are financial
institutions. While the strict regulation has been loosened, there are still complicatedprovisions in the CMFIBA on the establishment and operation of real estate trust companies.
Among the regulations applicable to trust companies, the regulation specific to real estate
trust shall be briefly reviewed below.
To enter the real estate trust business, the threshold of minimum capital requirement of 10
billion KRW is lower than 13 billion KRW for the pecuniary trust business. 9 In order toengage in the real estate business, a real estate trustee company should have two or more
specialized personnel in the real estate business and three or more in the securities business. 10
The same rules of governance of other trustee companies shall apply to real estate trustee
companies: A person who was sentenced imprisonment or heavier punishment shall bedisqualified as an executive or a director 11; if the worth of the trustee company’s assets is notless than 2 trillion KRW or the worth of the trusted properties is not less than 6 trillion KRW,
the trustee company shall have three or more outside directors, and the number of outside
directors shall account for at least half of the board 12; and the trustee company, through theboard’s resolution, shall designate not less than one compliance officer who shall be
responsible for monitoring compliance with the internal control guidelines and reporting to

9Sec. 2 of Art. 12 of the CMFIBA, Sec. 3 of Art. 16, and the attached table (1) of the Enforcement Decree of
the CMFIBA.
10
Art. 2-6 and the attached table (2) of the Regulation on the Financial Investment Business (金融投資業規程).
11
Sec. 1 of Art. 24 of the CMFIBA. If five years have elapsed since the completion of the imprisonment, thequalification of the person will be resumed, though.
12
Sec. 1 of Art. 25 of the CMFIBA and Sec. 1 of Art. 28 of the Enforcement Decree of the CMFIBA.

6

the audit committee or the auditors. 13
In practicing real estate trust, a trustee company should follow the rules of conduct
stipulated in the CMFIBA and its Enforcement Decree. One of the most important rules in thecontext of trust is the separation of inherent assets and trust properties. While Sec. 2 of Art.
34 of the Trust Act adopted exceptions to the separation rule by allowing a transaction based
upon the trust instrument or the beneficiary’s approval, Sec. 1 of Art. 104 of the CMFIBA
maintains the strict separation rule. 14 Accordingly, the trust instrument or the beneficiary’s
approval may not justify a purchase of the trust property by the trustee’s own fund. 15 Under
the CMFIBA, a trustee company may purchase the trust property on its inherent account in
two cases only: (a) If it is necessary for performing the obligation that it owns to beneficiaries
as a consequence of its trust activities, or (b) if it is unavoidable in order to terminate the trust
contract or to protect beneficiaries for any other reason. Also, a loan from the inherent
account to the trust account is strictly regulated. 16
Further, real estate trustee companies shall be subject to strict regulations on how tomanage surplus cash, if any: If they have obtained surplus cash in the operation of real estate
trust, they should invest it in a conservative way, such as purchasing national bonds anddepositing the money in a financial institution. 17

III.

Outside the Trust: The Protection of Settlor’s Creditors

A. Cancellation of Fraudulent Trust
1. Overview(1) Why Does the Trust Act Need to Regulate Fraudulent Trust?
Under Art. 406 of the Civil Act in Korea, a creditor may cancel a fraudulent transaction
made by a debtor: If the debtor has disposed of his property rights with the knowledge thatthe disposal would prejudice the creditor, the creditor may file a suit to the court for its
revocation and the restitution of property rights. The right of cancellation is to preserve thedebtor’s properties that had been subject to enforcement by creditors but was transferred toothers to the detriment of creditors as a whole. 18 Similar cancellation rights are given toadministrators in a bankruptcy or rehabilitation process, 19 the purpose of which is to preserve
the foundation for creditors as a whole.
In creating a trust, a settlor transfers his property rights to a trustee, and those property
rights shall no longer be subject to enforcement by settlor’s creditors. 20 By using such a trust
13

Sec. 2 of Art. 28 of the CMFIBA.
Sec. 1 of Art. 104 of the CMFIBA excludes the application of Sec. 2 of Art. 34 of the Trust Act.
15
Sec. 2 of Art. 104 of the CMFIBA.
16
According to Sec. 2 of Art. 105 of the CMFIBA and Sec. 4 of Art. 106 of the Enforcement Decree of the
CMFIBA, a loan from a trustee’s inherent account to trust account is allowed for limited surroundings: (a) If theamount of cash as trust property is quite small compared to the scale of real estate development project (i.e. only
15% or less of the project size), or (b) if a partial termination of the trust is required and the division of the trust
property is implausible.
17
Art. 106 of the CMFIBA.
18
2000Da 44348, Feb. 27, 2001 (the Supreme Court of Korea).
19
Art. 100 and Art. 391 of the Debtor Rehabilitation and Bankruptcy Act (the DRBA).
20
Art. 22 of the Trust Act.
14

7

feature, the settlor may avoid creditors’ enforcement, a situation quite similar to what Art.
406 of the Civil Act tries to regulate. Hence comes Art. 8 of the Trust Act, which provides
creditors of the settlor with special right to cancellation. What if no provision has been
adopted in the Trust Act? Is a creditor of settlor still able to cancel the establishment of trust
based upon Art. 406 of the Civil Act? There is no provision that prohibits the application ofArt. 406 to establishment of trust. For example, if a settlor’s real estate was transferred to thetrustee as trust property and was legitimately resold to a third party by the trustee, the creditorof settlor may turn to Art. 406 of the Civil Act for the restitution of the real estate.
The structure of deal in a trust, however, is unique as shown in two examples. ① While
Art. 406 assumes a transaction from A (debtor) to B (counterparty) and further to C
(subsequent purchaser) in which B and C each pursues its own interest, the basic scheme oftrust is the transfer of asset from P (debtor/settlor) to Q (trustee), giving beneficial interest to
R (beneficiary). Unlike B, who has purchased the asset for his own benefit, Q is supposed toserve R’s benefit. Thus Q, with good faith in the trust creation, might have a different statusfrom B with good faith as far as the fraudulent conveyance of jurisprudence is concerned.
This was an approach taken by Art. 8 of the old Trust Act. ② What if the settlor created a
so-called self-interest trust (自益信託), a trust in which a settlor also has the status as abeneficiary as opposed to a trust for another’s interest (他益信託)? In a case where A sold its
land to B and received proceeds, A’s asset value looks maintained throughout the sale. The
Supreme Court of Korea, however, stated that the sale is subject to the cancellation right of
A’s creditors under Art. 406 of the Civil Act. 21 According to the court, the sale might threaten
the claim of A’s creditors by transforming the land into cash, an asset which is easily
dispensable and hardly traceable. In a self-interest trust, P transfers its property to Q andreceives beneficial interest as a beneficiary. It looks similar to the sale of A’s asset to B
because P’s property is changed into another form, the value of which is equivalent totransferred property. But in this case the Supreme Court tended to adopt a stricter standard in
declaring the creation of the trust is fraudulent: Because the disposal of beneficial rights in aconfidential way is quite difficult compared to disposal of cash, and the transfer of assets isgenerally made to a professional trustee who is under strict regulation by the government, theCourt did not think the risk to settlor’s creditors from the creation of self-interest trust was
high. 22
In consideration of the feature of a trust scheme, Art. 8 of the Trust Act adopted acomplicated provision regulating the establishment of a fraudulent trust. Because the origin
and purpose are similar, though, the interpretations of Art. 406 of the Civil Act are often
referred to in applying Art. 8 of the Trust Act.
(2) 2011 Trust Act Reform on the Cancellation of Fraudulent TrustThe earlier provision on cancellation of fraudulent trust, Art. 8 of the old Trust Act wasquite simple: If the debtor has created a trust with the knowledge that the creation would
prejudice the creditor, the creditor, as in Art. 406 of the Civil Act, may file a suit to the court
for its cancellation and the restitution of property rights even where the trustee has acted ingood faith; the cancellation and the restitution shall not affect any benefit that the beneficiaryhas already obtained provided that he was not aware of the creation’s being detrimental to21
22

66Da1535, Oct. 4, 1966 (the Supreme Court of Korea).
2009Ma1176, May 23, 2011 (the Supreme Court of Korea).
8

settlor’s creditors and his unawareness was not from gross negligence. There are, among
others, three major criticisms against the provision, though. First, it failed to protect innocent
trustees. As mentioned above, most trusts in Korea are for commercial purposes and areoperated by professional trustee companies. It is true that the trust they have assumed does
not operate for their benefit, but they are expecting to reap commissions from the
management of trust properties. That perspective made a persuasive argument that
retrospective cancellation of trust based upon the old Art. 8 should be limited. Secondly, italso failed to provide sufficient protection for beneficiaries with good faith. While thecancellation shall not affect any benefit that the good-faith beneficiary has already obtained,even a good-faith beneficiary cannot prevent the trust being cancelled by creditors of afraudulent settlor. Thirdly, it did not address the issue of protecting those who have transactedwith the trustee property and obtained claim (“obligees of trust”). Once the trust wascancelled and the trust property was returned to the settlor, the claim of such creditors might
get difficult to exercise: They can still enforce their claim against the former trustee, but theirclaim shall not be fully satisfied especially where the main trust property is returned to thesettlor and the trustee goes bankrupt. The result looks absurd because their claims are closely
associated with the trust property even though the counterparty of their claim is the former
trustee. The cancellation of fraudulent trust is for the benefit of settlor’s creditors as a whole,and the limitation on it for protecting other parties such as trustee, beneficiary, and obligeesof trust will be disadvantageous to settlor’s creditors. Three revisions on these points by the2011 Reform Act will be reviewed in turn below.
2. Exception (1): For Trustees
The initial draft provision on the fraudulent trust in the reform bill by the government,
widely supported by trustee companies, provided strong protection for the trustee who has
assumed and operated trust property for a commercial purpose: As far as those trustees areconcerned and if the trustees are in good faith, a creditor of settlor may not cancel the trusteven though the settlor created the trustee knowing that it would be prejudicial to creditors. 23
A typical example that the government pointed to was as follows: If a trust is nullified after
the trustee has finished distributing trust property to beneficiaries, the trustee, whether or not
he is in good faith, shall suffer not only from the loss of commission but also from being
obliged to return the amount equivalent to the trust property. 24
The initial proposal, however, invited severe criticism from practitioners and academia.
The trustee, who is supposed to serve beneficiaries, should not be placed in the shoes of apurchaser, and no legislation associates the possibility of canceling a fraudulent trust with thesubjective condition of trustee, they argued. 25 After lengthy discussions, a midway solution
was adopted by Sec. 3 of Art. 8: The right to cancelation and restoration may be exercisedeven against a good-faith trustee; the claim of restoration against a good-faith trustee,
however, shall be limited to the existing trust property as of the cancelation. The newprovision tried to compromise conflicting interests between trustee companies and settlor’s
creditors. While the trustee companies are professional, it is not always easy to identify
whether the creation of trust is detrimental to creditors of settlor. From that perspective theprotective device adopted by the new provision looks reasonable.
23

For the draft Art. 8 of the initial bill, please see The Ministry of Justice, Commentaries on the Trust Act of2011 (2012), p.81.
24
See id. at 81.
25
The Ministry of Justice, supra note 23, at 82.
9

3. Exception (2): For Beneficiaries
Before the 2011 reform, the old Trust Act allowed the cancelation of a fraudulent trust
whether the beneficiary was in good faith or not (the old Sec. 1 of Art. 8). While a beneficiarywith good faith may keep the benefit already obtained from the trust even after thenullification of trust (the old Sec. 2 of Art. 8), he could not save the trust from being
cancelled. The rationale behind the provision was that beneficiaries tended to receive
beneficial interest gratuitously.
The initial draft prepared by the government protected a trust created with detrimental
intention by a settlor against his creditors if the beneficiary of the trust ① was in good faithand ② had obtained his beneficiary interest for value. The final version, however, deleted
the requirement of ②, based upon the consideration that even the gratuitous beneficiary withgood faith deserves protection, and whether a trust is gratuitous or not is hard to clarify. 26
What if there are multiple beneficiaries and only some of the beneficiaries are in good faith?
Creditors of the settlor may cancel the trust in its entirety? In order to protect thosebeneficiaries in good faith, creditors should not be allowed to cancel the trust and restore thetrust property. Instead, the creditors may nullify the trust as far as the beneficiary in bad faith
is concerned and let him return the cash equivalent to what he received to the settlor. Further,
the creditors may force beneficiaries in bad faith to transfer their beneficial interest to thesettlor under Sec. 5 of Art. 8 of the Trust Act.
4. Exception (3): For Obligee
Under Sec. 4 of Art. 8 of the Trust Act, if a fraudulent trust is canceled and the trust
property is reinstated, the settlor shall, with respect to the canceled trust, be responsible to the
obligee in good faith who has conducted a transaction with the trustee on trustee property to
the extent of the trust property so reinstated. This is a new article adopted in 2011 in order toprotect those obligees who lent or invested money to the trustee concerning the operation of
the trust property. The article, however, is not meant to give obligees any exclusive or priorright over other creditors of the settlor. 27
If the trustee reimbursed the obligee’s claim over the trustee property and, by applicationof Art. 481 of the Civil Act, automatically entered into the obligee’s shoes, he may argue theobligee’s right under Sec. 4 of Art. 8 of the Trust Act. What if the trustee in good faith himself
has paid some expenses on the trust property and is entitled to indemnification from the trust
property but the trust was canceled? Can he still rest on Sec. 4 of Art. 8, arguing that he is an
obligee on the trust property? While not closely examined in academia or in the courts of
Korea, the obligee here should imply a third party other than the parties to the trust
instrument. 28 A possible alternative for protecting such a trustee in good faith should be,instead of returning (improved) trust property itself, to make the trustee return the cash
equivalent to the value of trust property after the trustee has written off his investment. Suchalternative reinstatement (價額返還) is acknowledged by the interpretation of Art. 406 of the
26

The Ministry of Justice, supra note 23, at 84-85.
Min Han, The cancellation of a fraudulent trust and the draft bill on the Debtor Rehabilitation and Bankruptcy
Act, BFL (Business, Finance and Law) No. 53, p.14.
28
See id. at 15-16.
27

10

Civil Act where the original reinstatement (原物返還) is implausible. 29

B. Bankruptcy Remoteness: Mortgage v. Trust for Security Purpose
1. The Structure of Real Estate Trusts with Security Function
The simplest way for a creditor to secure his claim against the owner of real estate is toestablish a mortgage right on the estate. More complicated structures using a trust, which
serves the same security function as a mortgage, have been widely used in Korea. At the coreof the use of a trust is the bankruptcy remoteness of trust properties: Once a trust is validly
created, settlor’s creditors as well as trustee’s creditors may not enforce their claims against
trust properties. Among others, the major possible schemes under the Trust Act are as follows:[Diagram 1] Real Estate Trusts with Security Function Type (1)First, as in Diagram 1, a self-interest trust may be used to serve a security function: Asked
by a lender (creditor) to provide security interest, the borrower (debtor/settlor) may create atrust and receive beneficial interest; as a next step the borrower, by transferring beneficial
interest, establishes a pledge over beneficial interest for the lender. 30 Now that the property
has been transferred to the trustee, other creditors of the settlor may not enforce against theproperty. If the settlor fails to discharge his debt, the lender may satisfy his claim byexecuting his pledge right.
[Diagram 2] Real Estate Trusts with Security Function Type (2)29302004Da54978, Dec. 7, 2006 (the Supreme Court of Korea).
The beneficiary may create a pledge over his beneficial interest (Sec. 1 of Art. 66).
11

Secondly, a trust for another’s interest may also be used as in Diagram 2: Under the
structure, a borrower/settlor creates a trust, the beneficiary of which is the lender. In mostcases the settlor receives secondary beneficial interest that is inferior to preferred beneficial
interest belonging to the preferred beneficiary (i.e. settlor’s creditor). Like a mortgage, acreditor with such beneficial interest may secure his claim against the settlor.
[Diagram 3] Real Estate Trusts with Security Function Type (3)The third type has become plausible in 2011 via Art. 2 of the Trust Act: The trust may becreated by transferring security rights (including mortgage right and pledge right). Before therevision, a structure in which the claim is owned by a beneficiary while its backing security
interest is enjoyed by a trustee was not allowed 31 under the traditional theory that a claim
and the security right should belong to the same person. Now that the separation of claim andthe security right are possible under the new Trust Act, so-called security trust (擔保權信託)as in Diagram 3 can be established. In the diagram, the borrower/settlor creates a security
trust by establishing a mortgage right to trustee, the beneficiary of which is thelender/creditor. Once the settlor fails to discharge the loan, the lender may direct the trustee
to exercise mortgage rights for the benefit of the lender, the beneficiary of the trust.
Among those three types, the most common scheme is the second one, and when we
mention a “Trust for Security Purpose (擔保信託),” it typically refers to this. But why is this31

One exception, however, is provided under the Secured Debentures Trust Act.
12

type so popular in Korea? The strength of type (2) is based upon its complete bankruptcy
remoteness and regulatory arbitrage, as shown below.
2. Merits of a Trust for Security Purpose
Table 5 shows the difference between a mortgage and a Trust for Security Purpose. As
noted in the table, both lenders and borrowers are more likely to prefer establishing a Trustfor Security Purpose. ① The cost of establishing a mortgage is much higher due to the tax
burden and the obligation to purchase state/national bonds. The establishment of a Trust for
Security Purpose, while entailing the commission to the trustee, costs a lot less thanks to tax
exemptions.32 ② The enforcement under a Trust for Security tends to be quite efficient andproduce more proceeds. Unlike a public auction by the courts, such enforcement is presided
over by a trustee company that has business networks and can make quick and flexible
decisions.
[Table 5] Mortgage vs. Trust for Security Purpose: In Case of Borrower’s Solvency33
Mortgage

Trust for Security Purpose

High
Low
- Acquisition tax and education tax: - Acquisition tax and education tax:
0.24% of the maximum secured
exempt 34
Cost to create andamount- Mandatory purchase of state/national
operate- Mandatory purchase of state/nationalbond: not applicablebond: 1% of the maximum secured - Trust commission: less than 0.5% ofamountthe beneficial interest
Difficult
Easy
Difficulty of enforcing- Sale through auction by the court- Sale by the trustee company
claim- Complicated and time consuming- Simple (negotiated sale is possible)
Low
High
Expected proceeds from- In auction process, no effort for - Trustee companies tend to be
enforcement
encouraging sale is made by the court
professional and active in sales

Table 1, which focuses upon the case of borrower’s solvency, however, misses one major
point that lenders consider most: What if the borrower gets insolvent and enters into arehabilitation process (similar to the U.S. Chapter 11 process) under the Debtor
Rehabilitation and Bankruptcy Act (the DRBA)? From that perspective, a Trust for Security
Purpose provides almost complete bankruptcy remoteness from settlor’s other creditors, agoal that cannot be achieved by other devices.
If a borrower enters into the rehabilitation process, the court will reduce and reschedule theclaims against the borrower according to the rehabilitation plan. Mortgaged or pledged
creditors as well as unsecured creditors shall be subject to the reorganization and even therights of secured creditors shall endure reductions. One important exception to this rule,
however, is provided by Sec. 2 of Art. 250 of the DRBA: The rehabilitation plan shall not
influence a creditor’s rights to security if the security has been provided by any person other
32

The rationale of the tax exemption is that to create a trust shall not change economic substance.
The table was modified from presentation material from the Financial Services Commission (2013).
34
Sec. 3 of Art. 9 of the Local Tax Act.
33

13

than the debtor. For example, having received loans from lender Y and Z respectively,
borrower X, for security purposes, created a mortgage on his property for Y and anothermortgage on Q’s property for Z. In this case, Q, X’s friend who was asked to provide his
property for X, is a person other than the debtor under Sec. 2 of Art. 250. Where X enters into
the rehabilitation process, Z maintains his status as a secured creditor under Sec. 2 of Art. 250
and may exercise his claim as ever before, while Y shall experience reduction of his secured
claim according to the rehabilitation plan. Regarding the purpose of such an exception, theSupreme Court once explained 35: “The purpose of the corporation rehabilitation process is toassist in reorganizing and reconstructing a corporation that is facing bankruptcy due tofinancial distress. To achieve this, the process reduces the corporation’s debts or obligations,so that the corporation may continue its business operations and gain profit….However,reducing the obligation of a third party including a grantor for the debtor corporation isunrelated to the purpose of the corporation rehabilitation process.”
In applying Sec. 2 of Art. 250 of the DRBA, how will a trust with security function betreated? For a Type (1) scheme, which is based upon self-interest trust, a lender may not
enjoy the bankruptcy remoteness. It is the debtor/settlor who owns certificates of beneficial
interest and has established a pledge by transferring them to the creditor. Accordingly, thepledged creditor shall be subject to the rehabilitation plan. It’s unlikely he may get fully
repaid if the debtor/settlor enters into the rehabilitation process and the rehabilitation plan
stipulates extensive adjustment of secured and unsecured claims against the debtor/settlor.
Type (3), a security trust, is also incomplete in terms of bankruptcy remoteness. While thesecurity interest through mortgage or pledge is given to a trustee, it is the debtor/settlor who
owns the property and provides a security. Like Type (1), the creditors in this scheme shallexperience reduction of the secured claim according to the rehabilitation plan.
To the contrary, Type (2), the Trust for Security Purpose can perfectly answer creditors’
concern. Now that the ownership of the trust property is transferred to the trustee, the rights
of beneficiaries on the trust property shall be regarded as unassociated with the rehabilitation
process on the settlor. Under Sec. 2 of Art. 250, the lender, unaffected by the rehabilitation
plan, can fully enforce his security right reflected as the beneficiary interest on the trustee
property. 36
Thanks to the complete bankruptcy remoteness, the Trust for Security Purpose has become
quite popular in the real estate security market. Lenders have strong motivation to secure
their loan by Trust for Security Purpose if other devices like mortgage, self-interest trust, andsecurity trust provide imperfect bankruptcy remoteness.
3. Analysis
The case law that provides complete bankruptcy remoteness often invites criticism fromacademia: (a) Despite its appearance, the economic substance and role of the Trust for
Security Purpose is just the same as mortgage. No rationale is found that a trust scheme
should be better treated than a mortgage scheme; (b) complete bankruptcy remoteness over
the Trust for Security Purpose implies unequal treatment of creditors of debtor/settlor; and (c)as the Court pointed out, Sec. 2 of Art. 250 assumes a property provided by a third party and
35

2010Da28383, Jun. 14, 2012; 2005Da48482, Nov. 10, 2005 (the Supreme Court of Korea). The decisions
were based upon Sec. 2 of Art. 240 of the previous Company Reorganization Act (revoked by the DRBA on Mar.
31, 2005), which has the same content as Sec. 2 of Art. 250 of the DRBA.
36
2001Da9267, Jul. 13, 2001; 2002Da49484, Dec. 26, 2002; 2003Da18685 May 30, 2003 (the Supreme Courtof Korea).
14

therefore not associated with a debtor’s financial capacity. However, it is difficult to say that atrust property stands totally independent from debtor/settlor’s assets, especially in economic
substance.
The Court, however, reiterated its jurisprudence over the Trust for Security Purpose. The
criticisms, while persuasive in some points, overemphasize the economic substance. The
Court’s jurisprudence may result in inequality among settlor’s creditors by favoring a creditor
with beneficiary status at the Trust for Security Purpose. However, disfavored creditors may
resort to other methods including canceling the trust under the fraudulent conveyance theory.
Making drastic changes to a fixed case law shall cause confusion in business practices
dealing with real estate transactions. We need not prohibit a scheme under which a creditor
enjoys complete bankruptcy remoteness. The more important thing is to keep thejurisprudence well-known and consistent.

C. Tax Authority as a Creditor of the Settlor or the Trustee
The creation of a trust separates formal legal obligations and rights from economic
substance: While the trustee has legal ownership of the trust property under the Korean civil
law system, the beneficiary has the economic interest in the property. The tax regulation in
Korea shows complicated jurisprudence over who will pay the tax concerning those
properties that have been trusted.
As far as the income tax (in case of the beneficiary’s being a corporation, the corporatetax) is concerned, a beneficiary is responsible. The statute on the income tax regards a trust as
a conduit: Because the profit made during the operation of a trust property is supposed to go
to the beneficiary, a beneficiary is expected to pay the income tax. By similar logic, abeneficiary is also responsible for the value-added tax arising from sale and purchase of thetrust property. 37 On other hand, a trustee is liable for the registration tax from the transfer ofproperty between the settlor to the beneficiary. 3839
One of the most controversial issues is who will bear the burden of the property tax on thetrust property. 40 The Korean government revised the Local Tax Act in 2013 so that a trustee
should be responsible for the trust property as of Jan. 1, 2014. The implication of this revisionneeds to be clarified.
1. The Tax Regulation Before 2014: Settlor as a Property Tax Payment Obligor
Before the revision of the Local Tax Act in 2013, a settlor was responsible for theproperty tax under Sec 2 of Art. 107 of the Local Tax Act. The Supreme Court stated thatwhile the ownership of a trust property is transferred to trustee on the title and the settlor may
not argue his ownership to anyone, the courts could not impose the property tax on the trustee(or on the beneficiary) to the contrary of explicit provisions under the Local Tax Act.41
Combined with the provisions of the Trust Act, Sec. 2 of Art. 107 of the Local Tax Act offers
strong protection to the management of the trust property, as shown below.
37

99Da59290, Apr. 25, 2003 (the Supreme Court of Korea).
2004Doo6761, Jun. 30, 2006 (the Supreme Court of Korea).
39
The acquisition tax arising from the transfer in creating a trust, however, shall be exempt as shown by Table 5.
40
The same logic shall be applied to the gross real estate tax because it adopted the same provision as theproperty tax. Please refer to Sec. 1 of Art. 7 and Sec. 1 of Art. 12 of the Gross Real Estate Tax Act.
41
2001Doo26223, May 10, 2012, 2009Da969, Oct. 27, 2011 (the Supreme Court of Korea).
38

15

Sec. 1 of Art. 22 of the Trust Act prohibits an enforcement upon the trust property withlimited exceptions: One of the major exceptions is where the right on which the enforcement
is made has arisen in the course of the trust’s operation. Can the tax authority’s right over theproperty tax be said to be obtained concerning the trust’s operation? A case was brought inover this issue: In the case, the settlor/beneficiary went bankrupt and the tax authority tried tosatisfy its property tax claim by the enforcement against the trust property. The lower court
stood by the tax authority. 42The right which has been obtained in the course of the trust’s
operation under Sec. 1 of Art. 22 includes, ① a right based upon the management and thesale of the trust property and ② a right which is originated from the trust property. The
property tax, even though it is imposed after the creation of trust, can be fairly said to beoriginated from the trust property, the lower court stated. Thus the trust property shall be
subject to the enforcement based upon a property tax claim. The Supreme Court, however,overruled the decision. 43 The Court focused upon the person who is subject to a property tax
claim. As shown above, the settlor, not the trustee, is responsible for property tax. Because it
should not be allowed to enforce upon the trust property arguing a claim against the “settlor,”
the tax authority may not exercise a property tax claim vis-à-vis the trust property. According
to this logic, the tax authority may enforce its tax claim against trustee property only if theclaim is owed by the trustee.
Criticisms have been raised against this ruling. The most important one is about theinequality. Generally speaking, the tax law gives privilege to the property tax claim in theprocess of enforcement: the property tax has priority to any secured as well as unsecured
creditors. 44 The rationale is that the tax is closely associated with the property itself and theinterested parties including secured creditors were able to expect the imposition and amountof the tax. The same logic should be applied to the secured and non-secured creditors on thetrust property, the critics argued.

2. The Tax Regulation After 2014: Trustee as a Property Tax Payment Obligor
In 2013, the Local Tax Act was revised to identify the trustee as a person to be responsible
for the property tax. 45 It is also notable that the property tax shall be imposed only upon thetrust property, separated from the trustee’s inherent assets, and thus the failure to pay suchproperty tax shall not function to the disadvantage of the trustee.
While no case law was reported yet, the courts would naturally allow the enforcement
against the trust property by the tax authority arguing a property tax claim. Now that thetrustee is obliged to pay property tax, a trustee or a settlor cannot resort to the prohibition
under Sec. 1 of Art. 22 of the Trust Act.

3. Analysis
The trustee companies in Korea strongly resisted the revision of 2013. They emphasized
42

2010Na5172, Jul. 9, 2010 (the Suwon District Court).
2010Da67593, Jul. 12, 2012 (the Supreme Court of Korea).
44
Sec. 1 of Art. 35 of the Framework Act on National Taxes and Art. 14-4 of the Enforcement Degree of the
Local Tax Act.
45
Sec. 1 of Art. 107 of the Local Tax Act.
43

16

that the trustee is not more than a nominal title-holder and the enforcement against trust
property shall threaten the stable management of the trust property.
The revision of 2013, however, seems to be a step in the right direction. What is the
purpose of Sec. 1 of Art. 22 of the Trust Act? The reason the provision allows an enforcement
against the trust property as far as the right was caused in the course of trust’s operation isthat such imposition or enforcement looks fair: Because the cost is derived from the operationof the property itself, the property should be subject to the claim based upon the cost. A
property tax can be safely regarded as an essential part of a cost related to the operation of aproperty. The revision of 2013, which enables the enforcement of tax authority, shall beviewed as filling a loophole.
What is the impact of the revision on the trust business? Under the old provision, theindependence of the trust property was strongly protected: A settlor and trustee might create atrust dissociated with a property tax claim. This feature of trust was detrimental to both tax
authority and other creditors of the settlor: The property tax authority was prohibited from theenforcement against the trust property; general creditors of the settlor should be subordinatedto the property tax authority as a settlor’s creditor. The new regime, on the contrary, shall be
detrimental to creditors of the trust business, who shall be subordinated to the property tax
authority.

IV.

Inside the Trust: Reimbursement by the Trustee

A. Reimbursement against the Trust Property – In Case of a Transaction with the Trust
Property
The Trust Act strictly regulates opportunistic behaviors by a trustee and imposes the duty
to avoid conflicts of interest on trustees: Art. 33 of the Act declares the general principle ofduty of loyalty by providing that a trustee should serve for the benefit of the beneficiary; Sec.
1 of Art. 34 of the Trust Act further stipulates specific transactions that are prohibited by thelaw, including (a) a transaction between the trust property and the trustee’s inherent property,(b) a transaction among different trusts belonging to the same trustee, and (c) a transaction
between the trust property and a third party who is represented by the trustee. Unless the trust
instrument allows such transactions, the trustee may execute such transactions only under theapproval by the beneficiaries or the court (Sec. 2 of Art. 34). What if a trustee ignores the ruleand proceeds with the prohibited transaction? While the Act does not stipulate the validity ofsuch transaction, the Korean courts and scholars opined that a transaction between the trust
property and the trustee’s inherent property shall be invalidated because no third-party
protection is to be considered.
In Korean real estate trust practice, the application of Art. 34 of the Trust Act has become
controversial. Real estate trustee companies for land development tend to serve as trustees for
multiple development projects at the same time. Those companies have “inherent accounts(固有口座)” that manage their own assets. Undoubtedly, the inherent account shall beseparated from each “trust account (信託口座)” that administers the trust property. Instead offinancing necessary funds for each project when required and then supplying it to a trust
account, many trustee companies raise money in advance based upon their credit and keep itin their inherent accounts. When a development project progresses and requires fresh funds,
they transmit money from inherent accounts to the trust account as a loan. Is the loan valid
under Sec. 1 of Art. 34, which prohibits a transaction between the inherent account and the17trust account? If not, what arguments can the trustee companies make for the loaned money
and its interest? The Korean Supreme Court recently made a decision on those issues. 46
While the decision was made under the old Trust Act, the same logic shall apply unless thetrust instrument or the beneficiaries’ approval exists.
On the validity of the transaction between the inherent account and the trustee account,
the Supreme Court regarded it void. A loan from a trustee’s own asset to the trust property
may be disadvantageous against trust property, and Sec. 1 of Art. 34 eliminates such risk.
According to the court’s decision, the trustee company could not ask for the payment of theprincipal and the interest promised in the loan agreement. The conclusion shall not beaffected by the fact that the transaction turned out to be advantageous to the trust property. 47
Faced with the denial of the loan agreement, the trustee companies took a different
approach based upon the reimbursement clause under Sec. 2 of Art. 46 of the Trust Act 48:
Where a trustee has paid expenses incurred in relation to the performance of trust
administration from the inherent property, he is entitled to imbursement by the trust property
for the expenses paid and the interest accrued from the date of payment. Under this clause atrustee may recover the principal paid to the trust property. But what about the interest borneby the loan agreement? For example, while the market interest rate is 4% a year, the trustee,based upon his reputation and higher credit rating, financed $10m cheaply at 3%. Then heloaned to the trust property the $1m along with $5m from his own fund at the interest rate of
5%. Is the trustee entitled to the interest at 5%, arguing that his claim is not based upon theloan agreement but upon Sec. 2 of Art. 46? The court took a different stance according to thesources of the fund: funds from an outside source ($10m in the example) and from an inside
source ($5m in the example). While both funds were managed by the trustee, the financing
cost concerning the former can be easily traceable and provable, while the cost of latter is not.
For funds from outside sources, the trustee is entitled to reimbursement of the sameinterest as he has financed, the Court concluded. In the example, he is not allowed to claim
market interest rate at 4% nor at 5% under the loan agreement but at 3% because this is theactual level of financing applied to him. That is, the Court denied any profit by the trusteefrom the transaction between the inherent property and the trustee property. The trustee
counter-argued based upon unfair enrichment doctrine: The financing without the
involvement of the trustee must be made at the market interest rate of 4%, and therefore theinterest rate of 3% in the real deal benefitted the trust property without legitimate cause. The
Court responded, however, that the reputation and higher credit rating is the reason that thesettlor chose the trustee and thus the benefit enjoyed by the trust property was not an unfair
enrichment.
More problematic was the issue of funds from an inside source. While the Court
acknowledged the possibility of a trustee’s proving the cost of financing, thereby claiming theinterest, it largely denied any interest claim from such a fund. Overturning the Seoul Higher
Court’s decision that funds from an inside source should be treated equally as those from an
outside source, the Supreme Court treated the former different from the latter. If the trustee isto be reimbursed on the interest from its own fund, he should prove the real payment of cost
concerning the fund. An economic analysis including opportunity cost borne by the trustee
was not sufficient. Actually, it seems almost implausible to claim the interest on the fund paid
46

2011Da18482, Jun. 10, 2011 (the Supreme Court of Korea).
2006da62461, Jan. 30, 2009 (the Supreme Court of Korea).
48
For this case, Art. 42 of the old trust law, which has a similar provision as the current Art. 46 of the Trust Act,was applied. The trust instrument in this case also had a reimbursement clause based upon Art. 42 of the oldtrust law.
47

18

to the trust property if the fund is sourced by the trustee’s own money.
The jurisprudences by the Supreme Court on the ① validity of transaction between theinherent account and the trust account and ② the scope of reimbursement where the trustee
has received cheap financing make sense. Potentially harmful transactions need to be strictly
regulated, and the duty of the trustee to serve the best benefit of beneficiaries should be
respected. The logic applied to the imbursement from the inside-sourced fund, however, issubject to criticism, especially in the context of a commercial trust. As mentioned above, realestate trustee companies tend to operate multiple real estate development projects and to raiseoutside funds in advance. Such outside-sourced funds, together with trustees’ own funds,
shall be operated in trustees’ inherent accounts. Following the Supreme Court decision, thetrustee companies should specify the source of funds in an inherent account so that they canidentify the nature of funds transferred to a trustee account. It’s doubtful that the impositionof such a burden on trustee companies would lead to better protection of beneficiaries.
Further, it seems absurd that a fund the source of which is a trustee company’s own reserve isdifferent from that from the outside source and shall not be entitled to the interest borne
during the loan period. The beneficiaries for the real estate development projects are investors
rather than seniors or minors requiring special protection, because the project is planned andexecuted on a commercial purpose. Just as the trustee companies should not gain improper
benefits from the transaction with a trust property, so shall they be entitled to recover
appropriate capital cost.

B. Reimbursement against Beneficiary – the Possibility of Waiving Beneficiary Rights
While the reimbursement of the legitimate expenses paid by the trustee against “trustee
property” is allowed in most jurisdictions, the legislations differ on the reimbursement
against “beneficiaries.” The new Korean Trust Act, like the old Act, acknowledges a trustee’s
reimbursement claim upon beneficiaries (Sec. 4 of Art. 46). The new Act, however, madesome modifications to the old Act: ① Beneficiaries are responsible for the reimbursement to
the extent of the benefit they have acquired (as compared to no limit under Sec. 2 of Art. 42of the old Act); ② the reimbursement against beneficiaries is allowed where trust property is
insufficient for indemnifying a trustee’s payment (as compared to the old act, which did nothave explicit priority provision between reimbursement against beneficiaries and the trust
property).
The two modifications by the new Act were made to balance the interest of beneficiaries
and trustees. The financial status of a real estate trust that has been quite strong in its initialstage may turn bad as its operation goes. In such surroundings it might be harsh to impose thecost and expenses for the management of the trust property only on a trustee even though thenature of trust is commercial. In order to protect the trustee, the new Act allows
reimbursement against the beneficiary, an approach basically same as in the old Act. The new
Act, however, also pursues the protection of beneficiaries by setting limits on reimbursement
and placing the reimbursement claim against the beneficiary as a last resort. One might thinka beneficiary who is also a settlor and has enjoyed the upside of the trust should be
responsible for the downside, whatever the amount is. But a trustee is not just an agent of thesettlor/beneficiary but a prudent person who can estimate the risk and cost from the realestate project. Even though the settlor/beneficiary has substantial residual interest in the trust
19

property, it is not always rational to impose on him all the cost and expense from the trust
management where the trust is directed by the trustee. If the trustee believes that more
liability should be put on the beneficiary/settlor, he should have negotiated for it in the trust
instrument.
What if a beneficiary waives his beneficial interest? For example, a beneficiary whoalready reaped $2m from the trust and spent all of it may try to waive his beneficial interest
when faced with the reimbursement claim by the trustee. Under Sec. 4 of Art. 46 of the Trust
Act, he should reimburse $2m for the trustee because he is liable for the benefit he received.
However, having waived his beneficial interest, he needs not reimburse anything because thewaiver shall nullify the trust instrument retrospectively and, under the Korean unfair
enrichment jurisprudence, he is obliged to return only what he currently has. While somelegislations deal with the possibility of waiver according to the type of trust, 49 the Korean
Trust Act generally allows the waiver no matter what the type of the trust: A beneficiary may
waive his beneficial interest as far as the waiver shall not infringe upon any third party’s right(Sec. 2 of Art. 57). There were some cases in Korea where a trustee made a reimbursement
claim against beneficiaries even though they had declared the waiver of beneficial interests.
While one lower court, based upon the abuse of right doctrine, limited beneficiary/settlor’s
right to waiver in a self-interest trust under the old Trust Act, 50 it is generally accepted that
beneficiaries may waive their beneficial interest. The difficulty with the possibility ofwaiving beneficial interest comes with the range of third parties under Sec. 2 of Art. 57. As
stated above, the waiver would be not allowed should it infringe upon a third party’s right. A
typical third party includes a person whose economic interest is extended from or based upona beneficiary’s beneficial interest, such as a pledgee of the beneficial interest. Is a trustee
qualified as a third party? The issue is debated in academia, and no case law exists. In legal
contexts, third party generally means someone who is not the party of the disputed
arrangement and is under the risk of being negatively influenced by nullification of thearrangement. By waiving the beneficial interest, a beneficiary is intended to actually nullify
the act of trust to which the trustee was a party. Therefore it is the trustee that is supposed toreceive the notification of waiver by the beneficiary. Thus a trustee cannot be regarded as athird party in the literal interpretation of Sec. 2 of Art. 57. However, it seems unreasonable
that, in the example above, the beneficiary is exempt from his obligation to reimburse $2m
thanks to a waiver. Further revision is required in terms of the harmonization of the benefit
between beneficiary and trustee.

V.

Concluding Remarks: Insights from the Korean Jurisprudences

The paper reviewed major jurisprudences developed in Korea from two perspectives:
outside and inside of the trust. Outside the trust, focused upon here are legal disputes
concerning settlor’s creditors. If the economic substance of a trust is just a nominaltransformation of settlor/beneficiary’s property and trustee is designated to serve only thebenefit of settlor/beneficiary, one may legitimately argue that trust properties, for the eyes ofsettlor’s creditors, should be regarded as settlor/beneficiary’s assets. From this reasoning, (1)49

According to Sec. 1 of Art. 99 of the Japanese Trust Act, “A beneficiary may make a manifestation of
intention to waive a beneficial interest to the trustee; provided, however, that this shall not apply where thebeneficiary is a party to the act of trust.” Thus, in general, a beneficiary may waive his beneficial interest, but
the waiver is not allowed for self-interest trusts.
50
2010Na84835, Feb. 2, 2012 (the Seoul Higher Court).
20

in deciding whether and to what extent a fraudulent trust is canceled and the trust property
should be resumed, the trustee’s good faith needs not be considered, because a trustee is just acustodian serving settlor/beneficiary’s benefit; (2) in a rehabilitation process, a secured
creditor by Trust for Security Purpose should have the same priority to a secured creditor bymortgage, because in two structures the nature of a property owner’s behaviors, which is toprovide security, is just the same; (3) the trust property should be subject to the enforcement
based upon property tax because the owner of a property should pay the property tax and,whether a property is owned directly or indirectly by trust, the settlor/beneficiary actuallyowns the property.
What about the jurisprudences in Korea? First, even in a fraudulent trust, a good-faith
trustee shall be protected under the Trust Act of 2011. The claim of restoration against a
good-faith trustee shall be limited to the existing trust property as of the timing of thecancelation. Second, for a Trust for Security Purpose, the Court provided perfect bankruptcy
remoteness as opposed to a mortgage. The Court pointed to the form made by the trust where
the ownership of the trust property is transferred to the trustee. Third, while the old Local Tax
Act did not allow the enforcement by tax authority against trust property based upon property
tax, the revised Local Tax Act of 2014 made the enforcement possible.
The first and second jurisprudences above will strengthen the commercial advantage oftrust structure and may benefit the trust industry: A good-faith trustee company may avoid
worst scenario of a fraudulent trust; a Trust for Security Purpose may be advertised asreasonable alternative to mortgage. Regarding the issue of property tax, the old provision wasquite advantageous to those investors who transacted with the trust business because they did
not have to worry about their claim being subordinate to tax authority’s property tax claims.
Downsides of those jurisprudences are the sacrifice of settlor’s creditors. By providing a trustwith the structure of independence and separateness, the jurisprudences could be estimated as“commercial trust friendly” at the cost of settlor’s creditors. From that perspective, the newprovision on the property tax, which shall function to the detriment of the trust industry,
seems to be a little trial for counterbalance.
The second major issue in this paper, inside the trust, explored the reimbursement by atrustee. Given the generally friendly jurisprudence on the issue of outside the trust, it may
sound natural that trustees should be firmly protected in terms of reimbursement. The
jurisprudences in Korea, however, showed a different approach here: The Supreme Court
seemed reluctant to allow reimbursement based upon a loan from a trustee’s inherent accountto the trust account, and denied any profit by the trustee from the transaction between theinherent property and the trust property; while still debated in academia, a beneficiary is
generally said to be able to waive beneficiary interest in a failed trust project, leaving thetrustee vulnerable to loss from the project without any reimbursement right against
beneficiaries.
What creates this difference between outside and inside the trust? As mentioned above, fora commercial trust to flourish, the conceptual and functional independence of a trust
including complete bankruptcy remoteness is necessary. When it comes to the inside issue,
however, the Korean jurisprudence seems to emphasize the role of the trustee as a fiduciary.
The reimbursement against the trust property and beneficiaries was based upon his
investment into the trust property or the project. In deciding such an investment, the trustee
must have, and usually has, the ability and capacity to estimate the inherent risk and prepare
the safeguard in advance. Thus it makes sense that the Korean jurisprudences applied a rather
harsh standard to trustees who claim reimbursement, even in the case of commercial trust.
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