Developing Trusts and Their Jurisprudences: Real
Estate Trusts in Korea
Hyeok-Joon Rho ＊I. 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 unique jurisprudence different from common law trust.1 For example, no split between the legal ownership andequity ownership is allowed in the Korean Civil Act, and therefore therights 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 Invest＊ Prof. Hyeok-Joon RHO got his Ph.D. at Seoul National University, Seoul, Korea. Before he joined
Seoul National University School of Law in 2007, he had worked as a practitioner: as a judge of theSeoul Southern District Court for two years and as a senior associate lawyer of the law firm “Woo &Yun” for two years. He also worked in the U.K. law firm Clifford Chance LLP under the international
lawyers exchange program between Korea and the U.K. In addition to his doctoral study in Seoul, hemade various academic visits to law schools outside Korea: at Bucerius Law School in Germany as
Humboldt research fellow, at Nagoya University School of Law in Japan as visiting professor and at
Harvard Law School in the U.S. as visiting scholar.
He has worked and published extensively on corporate law and trust law. The list of his selected
papers includes “New Squeeze-out Devices as a Part of Corporate Law Reform in Korea” (in English), “Invigorating Shareholder Derivatives Actions in South Korea” (coauthored in English), and “TheStock Corporation and the Business Trust: A Comparison in Terms of Asset Partitioning” (in Korean.
Awarded as Best Paper of 2013 by the Korean Securities Law Association)
1 More and more civil law countries have adopted trust-like institutions. Some observers feel thetrust 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 andEconomic 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).

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信託法研究第40号（2015）

ment Business Act (CMFIBA) regulates an entity that is engaged in atrust 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 oftrust and to adopt various usages by modern trust, hence the overallrevision 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 fordeveloping 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 made based 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 realestate（不動産賃借權）,and a claim for registration 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 typesof trust property, it would be named as a comprehensive trustee; if
a trustee company covers only ① through ③, 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 are engaged 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 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― 186 ―

[Table 1] Trustee Companies Subject to the CMFIBA3
No.

Name of Trust Companies

Shinhan, Woori, SC Korea Limited Hana, KEB, Citi, KB, DGB,
Domestic 17 BNK, Kwangju, Kyongnam, KDB,
IBK, NH, SuhyupBankJB, Jeju
Foreign

Securities Co.

Insurance Co.
Real Estate
TrusteeCompany

Deutsche Bank, HSBC, Bank of3
NY Mellon Corp.
Shinhan, Kyobo, Daishin, KDB,
Hana Daetoo, Yuanta, Samsung,Miraeasset,, Woori Investment,
NH Investment, Korea Invest21 ment, Hyundai, Hanwha, Meritz,
Shinyoung, Eugene Investment,
HMC Investment, Dongbu, SK
Hi Investment, IBK
5Miraeasset, Samsung, Hanwha,,
HeungkukType of LicenseCompre- Pecuniary Real Estatehensive
Trust
Trust
○
○
○

○

○
○

Kyobo
Koreit, KB, Daehan Real Estate,
11 Saengbo, Kait, Hana, Koramco,
Asia, Kukje, Mugunghwa, Korea○○

professional institutions engaged in trust business.
Among various types of trusts, this paper focuses upon real estate
trusts in Korea. Compared to pecuniary trust, which is another majorarea of the commercial trust, real estate trusts tend to invite more disputes and lawsuits in Korea: While the financial institutions engaged instructured financing via trust vehicle tended to cautiously consult withregulatory authorities and legal professions, real estate developers using
trust structure often proceeded with 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
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).

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信託法研究第40号（2015）

to refine Korean trust jurisprudence. Further, the real estate trusts account for 28.8% of the total assets transferred to 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 abird’s-eye view of Korea’s real estate trust. By introducing trust types,
performances of real estate trustees, and major regulations over realestate trust in Korea, this chapter will help readers understand the usage and major legal issues of real estate trust. Against this backdrop,
the following chapters review major jurisprudence on real estate trust,issues pertaining to outside the trust and inside the trust, respectively.
Issues regarding outside the trust are mostly associated with the protection of settlor’s creditors. Under the separation of assets doctrine
and the principle of complete ownership by the trustee, settlor’s creditors may not enforce upon legitimately 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 have unsecured, 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 concernedwith the reimbursement of expenses obtained by the trustee. Chapter
IV has two sections: In the first section, the possibility and the rangeof reimbursement against trust property will be explored, especiallywhere a loan from a trustee’s own account to trust account has beenmade; the second section will deal with a further reimbursement against
a beneficiary. Finally, Chapter V summarizes and concludes this paper.
4 Henry Hansmann and Ugo Mattei (supra note 1, at 454) analyzed theoretically the reason why thesettlor’s creditors generally cannot reach the trust property: They have no reason to rely on the valueof the trust property in extending credit to the settlor, as the title to the property is in the hands ofthe trustee and no material benefits are flowing to the settlor from the property.

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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 by designating 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 interestis given to creditors while the settlor has the subordinated beneficial
interest. Once the settlor is in default on his debt, the trustee will sell
the property and pay back the loan, with the remainder being returnedto the settlor.
A Land Trust is made to explore a project on undeveloped land.
The trustee of a Land Trust invests funds of its own or from outside,builds houses or business buildings, and receives the rent or proceedsfrom the sale of those houses or buildings. The earnings from the development 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 SettlorResponsible Land Trust, the trustee has the responsibility of financing
in Trustee-Responsible Land Trust. In the case of Settlor-Responsible
Land Trust, the role of trustee 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 estimated price of the real estate is very high or special
promotion activities are necessary, the real estate owner often turns
to Real Estate Sale Trust. Also, if the real estate has a complicatedlegal relationship with multiple owners and secured obligees, the salethrough a Real Estate Sale Trust, which may clarify the rights and― 189 ―

信託法研究第40号（2015）

obligations of interested parties, is preferred by sellers and purchasers.
A Real Estate Management Trust is mainly for the management oftrust property. The roles of trustee are different according to the typeof 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 the trustee’s responsibility. The Active Style is generally usedby owners of real property who lack professional knowledge of building management or live abroad; in a Passive Style (so called 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 toguarantee bankruptcy-remoteness, which can be accomplished throughtrust structure.5
B. Performance of Real Estate Trust Companies in Korea
Periodically the Financial Supervisory Service in Korea (FSS) publishes statistics on the trust industry. Because donative trust is underdeveloped in Korea, the commercial trusts supervised by the FSS accountfor a major part of trusts in Korea. Table 2 shows the importance ofreal estate property compared to other types of trust in terms of thevalue of trust properties. As of June 30, 2014, trust properties ownedby the trustee company for real estate (i.e. exclusive real estate trustee
company) account for 23.8%. The percentage reaches 28.8% with theaddition of the real estate trusted onto the banks, securities companies,
and insurance companies (i.e. comprehensive trustee company), which
is 26.3 Trillion KRW.
Among real estate trusts, the Trust for Security Purpose is themost common form: It occupies 65.2% of real estate trusts as shown
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 the building, he should have a management contract with a trustee company on the land forthe 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.

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[Table 2] Value of Trust Property Owned by Trustee Companies(as of June 30, 2014)6

Bank
Securities Company
Insurance Company
Sub-total
Real Estate Trustee Companies
Total

Financial Institutions
with Trust Business
LicenseValue of Trust Property(Trillion KRW)
258.1
144.1
2.5
404.7
126.7
531.4

Share (%)
48.6
27.1
0.5
76.2
23.8
100

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 isassociated with the unique feature of bankruptcy remoteness accomplished by this type of trust and shall be examined in Chapter III, section B.
[Table 3] Value of Trust Property Owned by Real Estate Trust Companies7(Trillion KRW, %)Trustee-Responsible
Settlor-Responsible
Real Estate Management Trust
Real Estate Sale Trust
Trust for Security Purpose
Total

Land
Trust

2009

2010

2011

2012

2013

2014
(June 30)

1.5
15.3
7.7
17.5
82.0
124.0

1.5
17.7
9.0
18.1
95.8
142.2

1.9
21.3
7.3
15.7
102.6
148.7

2.4
23.6
6.4
8.2
80.3
120.9

2.9
25.1
6.4
7.9
76.4
118.7

2.9
27.6
6.5
7.0
82.6
126.6

Share
(%)
2.3
21.8
5.1
5.5
65.2
100.0

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).
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.

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信託法研究第40号（2015）[Table 4] Net Income of Real Estate Trustee Company(0.1 billion KRW, %)OperatingEarning
Operating
Cost
Operating
IncomeNet Income

2014(Jan.-Jun.)

Growthrate (2014)

2,144

2,209

3.0%

2,841

1,226

1,245

1.5%

1,500

1,650

918

964

5.0%

1,132

1,222

695

735

5.8%

2009

2010

2011

2012

2013

2013
(Jan.-Jun.)

3,616

3,268

3,832

3,926

4,491

2,430

3,511

2,975

2,426

1,186 △242

857

907

575

△153

Table 4 explains the net income of real estate trustee companies.
Despite the fact that the size of trusted assets was reduced in 2012, asshown in Table 2, the net income increased by 96.7%. Another notablefeature in Table 4 is that operating earnings have increased since 2010.
This increase of operating earnings, for example 9.4 (3,926 - 3,832) billion
KRW in 2012, may well be attributable to the activation of TrusteeResponsible Land Trust as shown in Table 3.8 Because the trustee is
responsible for financing land development projects, a Trustee-Responsible 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 Trustee-Responsible 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 atrustee’s own account and a trust account shall be explored in detail in
Chapter IV, section A.

8 The Financial Supervisory Service analyzed that the growth of net income is attributable to theincreased 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).

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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 a quick 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 to boost the supply of houses and businessbuildings: In consideration of the chronic lack of real estate supplies,
the Korean government wanted trustee companies to launch various
real estate development projects and to use the land more efficiently.
Behind this backdrop, real estate trustee companies aggressively expanded their business, especially in Land Trust, but they 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 and their business licenses were cancelled in
2002. Following the bankruptcy of real estate trustee companies, thegovernment tightly regulated the business of trustee companies, limiting new licenses of real estate trusts to those companies whose major
shareholders are financial institutions. While the strict regulation has
been loosened, there are still complicated provisions in the CMFIBA on
the establishment and operation of real estate trust companies. Among
the regulations applicable to trust companies, the regulation specific toreal 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 forthe pecuniary trust business.9 In order to engage 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
9 Sec. 2 of Art. 12 of the CMFIBA, Sec. 3 of Art. 16, and the attached table (1) of the Enforcement
Decree of the CMFIBA.

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信託法研究第40号（2015）

business.10
The same rules of governance of other trustee companies shallapply to real estate trustee companies: A person who was sentenced
imprisonment or heavier punishment shall be disqualified as an execus assets is nottive or a director11; if the worth of the trustee company’less than 2 trillion KRW or the worth of the trusted properties is notless 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 board12; and the trustee company, through the board’sresolution, shall designate not less than one compliance officer who shallbe responsible for monitoring compliance with the internal control
guidelines and reporting to the audit committee or the auditors.13
In practicing real estate trust, a trustee company should follow therules of conduct stipulated in the CMFIBA and its Enforcement Decree.
One of the most important rules in the context 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
15fund. 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 aconsequence of its trust activities, or (b) if it is unavoidable in order toterminate the trust contract or to protect beneficiaries for any other
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, the qualification 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.
13 Sec. 2 of Art. 28 of the CMFIBA.
14 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.

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reason. Also, a loan from the inherent account to the trust account isstrictly regulated.16
Further, real estate trustee companies shall be subject to strict
regulations on how to manage surplus cash, if any: If they have obtained
surplus cash in the operation of real estate trust, they should invest it ina conservative way, such as purchasing national bonds and depositing
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 ofhis property rights with the knowledge that the 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 topreserve the debtor’s properties that had been subject to enforcement
by creditors but was transferred to others to the detriment of creditors
as a whole.18 Similar cancellation rights are given to administrators ina 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 trust16 According to Sec. 2 of Art. 105 of the CMFIBA and Sec. 4 of Art. 106 of the Enforcement Decreeof the CMFIBA, a loan from a trustee’s inherent account to trust account is allowed for limited surroundings: (a) If the amount of cash as trust property is quite small compared to the scale of real estatedevelopment 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).

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信託法研究第40号（2015）

ee, and those property rights shall no longer be subject to enforcement
by settlor’s creditors.20 By using such a trust 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 the trustee as trust property and was legitimately
resold to a third party by the trustee, the creditor of settlor may turn toArt. 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 of trust is thetransfer 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 to serve R’s benefit. Thus Q, with good faith
in the trust creation, might have a different status from B with goodfaith 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 inwhich a settlor also has the status as a beneficiary 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 thesale. 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’screditors by transforming the land into cash, an asset which is easily
dispensable and hardly traceable. In a self-interest trust, P transfers its
20 Art. 22 of the Trust Act.
21 66Da1535, Oct. 4, 1966 (the Supreme Court of Korea).

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property to Q and receives beneficial interest as a beneficiary. It looks
similar to the sale of A’s asset to B because P’
s property is changed intoanother form, the value of which is equivalent to transferred 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 disposalof beneficial rights in a confidential way is quite difficult compared todisposal of cash, and the transfer of assets is generally 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 ofself-interest trust was high.22
In consideration of the feature of a trust scheme, Art. 8 of the Trust
Act adopted a complicated provision regulating the establishment of afraudulent 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
Trust
The earlier provision on cancellation of fraudulent trust, Art. 8 of
the old Trust Act was quite simple: If the debtor has created a trustwith the knowledge that the creation would prejudice the creditor, thecreditor, as in Art. 406 of the Civil Act, may argue its cancellation andthe restitution of property rights even where the trustee has acted ingood faith; the cancellation and the restitution shall not affect any benefit that the beneficiary has already obtained provided that he was notaware of the creation’s being detrimental to 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 toprotect innocent trustees. As mentioned above, most trusts in Korea
are for commercial purposes and are operated 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
22 2009Ma1176, May 23, 2011 (the Supreme Court of Korea).

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信託法研究第40号（2015）

management of trust properties. That perspective made a persuasive
argument that retrospective cancellation of trust based upon the oldArt. 8 should be limited. Secondly, it also failed to provide sufficient protection for beneficiaries with good faith. While the cancellation shall notaffect any benefit that the good-faith beneficiary has already obtained,even a good-faith beneficiary cannot prevent the trust being cancelledby creditors of a fraudulent settlor. Thirdly, it did not address the issue
of protecting those who have transacted with the trustee property andobtained claim “obligees(of trust”). Once the trust was cancelled andthe 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 their claim shall not be fully satisfied especially where the main trust property is returned to the settlor and thetrustee goes bankrupt. The result looks absurd because their claims areclosely associated with the trust property even though the counterpartyof 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 the 2011 Reform Act will be reviewed in turn below.
2. Exception (1): For Trustees
The initial draft provision on the fraudulent trust in the reform billby 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 are concerned and if the trustees are in good faith, a creditor of settlor may notcancel the trust even though the settlor created the trust 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 commis23 For the draft Art. 8 of the initial bill, please see The Ministry of Justice, Commentaries on the
Trust Act of 2011 (2012), p.81.

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sion but also from being obliged to return the amount equivalent to thetrust 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 a purchaser, and nolegislation associates the possibility of canceling a fraudulent trust withthe subjective condition of trustee, they argued.25 After lengthy discussions, a midway solution was adopted by Sec. 3 of Art. 8: The right tocancelation and restoration may be exercised even 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 new provision tried to compromise conflicting interests between
trustee companies and settlor’s creditors. While the trustee companies
are professional, it is not always easy for them to investigate whether
the creation of trust is detrimental to creditors of settlor. From thatperspective the protective device adopted by the new provision looks
reasonable.
3. Exception (2): For Beneficiaries
Before the 2011 reform, the old Trust Act allowed the cancelationof a fraudulent trust whether the beneficiary was in good faith or not(the old Sec. 1 of Art. 8). While a beneficiary with good faith may keep
the benefit already obtained from the trust even after the nullificationof 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 faith and 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
24 See id. at 81.
25 The Ministry of Justice, supra note 23, at 82.

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信託法研究第40号（2015）

beneficiary with good 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 those beneficiaries in good faith, creditors should not be allowed to cancel the trust and restore the trust property. Instead, the creditors may nullify the trust as far as the beneficiaryin 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 the settlor 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 trust property to theextent of the trust property so reinstated. This is a new article adopted
in 2011 in order to protect those obligees who lent or invested money tothe trustee concerning the operation of the trust property. The article,
however, is not meant to give obligees any exclusive or prior right overother creditors of the settlor.27
If the trustee reimbursed the obligee’s claim over the trustee property and, by application of Art. 481 of the Civil Act, automatically entered into the obligee’s shoes, he may argue the obligee’s right underSec. 4 of Art. 8 of the Trust Act. What if the trustee in good faithhimself 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 thetrust property? While not closely examined in academia or in the courts
26 The Ministry of Justice, supra note 23, at 84-85.
27 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.

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of Korea, the obligee here should imply a third party other than the parties to the trust instrument.28 A possible alternative for protecting sucha trustee in good faith should be, instead of returning (improved) trust
property itself, to make the trustee return the cash equivalent to thevalue of trust property after the trustee has written off his investment.
Such alternative reinstatement（價額返還）is acknowledged by the interpretation of Art. 406 of the 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 theowner of real estate is to establish a mortgage right on the estate. Morecomplicated 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’screditors may not enforce their claims against trust properties. Amongothers, the major possible schemes under the Trust Act are as follows:[Diagram 1] Real Estate Trusts with Security Function Type (1)2. Creation of a self-interest trust

Debtor(Settlor/Benefi
ciary)

3. Issue of certificates

1. Loan
4. Pledge on beneficial interest

Creditor

28 See id. at 15-16.
29 2004Da54978, Dec. 7, 2006 (the Supreme Court of Korea).

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Trustee信託法研究第40号（2015）

First, as in Diagram 1, a self-interest trust may be used to servea security function: Asked by a lender (creditor) to provide security
interest, the borrower (debtor/settlor) may create a trust 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 the property. If the settlor
fails to discharge his debt, the lender may satisfy his claim by executing
his pledge right.

[Diagram 2] Real Estate Trusts with Security Function Type (2)2. Creation of a Trust for
Security Purpose

Debtor(Settlor)

1. LoanTrustee

3. Issue of certificates

Creditor(Beneficiary)

Secondly, a trust for another’s interest may also be used as in
Diagram 2: Under the structure, a borrower/settlor creates a trust, thebeneficiary of which is the lender. In most cases the settlor receives secondary beneficial interest that is inferior to preferred beneficial interest belonging to the preferred beneficiary (i.e. settlor’s creditor). Like amortgage, a creditor with such beneficial interest may secure his claim
against the settlor.

30 The beneficiary may create a pledge over his beneficial interest (Sec. 1 of Art. 66).

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[Diagram 3] Real Estate Trusts with Security Function Type (3)2. Creation of a Security Trust(on mortgage right)

Debtor(Settlor)

1. LoanTrustee

3. Issue of certificates

Creditor(Beneficiary)

The third type has become plausible in 2011 via Art. 2 of the Trust
Act: The trust may be created by transferring security rights (including mortgage right and pledge right). Before the revision, a structurein which the claim is owned by a beneficiary while its backing security
interest is enjoyed by a trustee was not allowed31 under the traditional
theory that a claim and the security right should belong to the same
person. Now that the separation of claim and the security right are possible under the new Trust Act, so-called security trust（擔保權信託）asin Diagram 3 can be established. In the diagram, the borrower/settlor
creates a security trust by establishing a mortgage right to trustee, thebeneficiary of which is the lender/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 this type so popular in Korea? The
strength of type (2) is based upon its complete bankruptcy remotenessand regulatory arbitrage, as shown below.

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

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信託法研究第40号（2015）

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 Trust for 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 establishmentof a Trust for Security Purpose, while entailing the commission to thetrustee, costs a lot less thanks to tax exemptions.32 ② The enforcement
under a Trust for Security tends to be quite efficient and produce more
proceeds. Unlike a public auction by the courts, such enforcement ispresided over by a trustee company that has business networks and canmake quick and flexible decisions.

[Table 5] M ortgage vs. Trust for Security Purpose: In Case of Borrower’sSolvency33
Mortgage
Trust for Security PurposeHigh
Low- Acquisition tax and education - Acquisition tax and educationtax: 0.24% of the maximum
tax: exempt34
Cost to create andsecured amount- Mandatory purchase of state/
operate- Mandatory purchase of state/national bond: not applicablenational bond: 1% of the maxi- - Trust commission: less thanmum secured amount
0.5% of the beneficial interest
Difficult
Easy- Sale through auction by the
Difficulty of enforcing- Sale by the trustee company
court
claim
- Simple (negotiated sale is pos- Complicated and time consible)
sumingLow
High
Expected proceeds- In auction process, no effort- Trustee companies tend tofrom enforcement
for encouraging sale is madebe professional and active inby the court
sales

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

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Table 5, which assumes borrower’s solvency, however, misses one
major point that lenders consider most: What if the borrower gets insolvent and enters into a rehabilitation process (similar to the U.S. Chapter
11 process) under the Debtor Rehabilitation and Bankruptcy Act (theDRBA)? From that perspective, a Trust for Security Purpose provides
almost complete bankruptcy remoteness from settlor’s other creditors,
a goal that cannot be achieved by other devices.
If a borrower enters into the rehabilitation process, the court will
reduce and reschedule the claims 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 tosecurity if the security has been provided by any person other thanthe 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 another mortgage on Q’s property for Z. In thiscase, Q, X’s friend who was asked to provide his property for X, is aperson 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 explained35“The:purpose of the corporation rehabilitation process is to assist in reorganizing and reconstructing a corporation that is facing bankruptcy due to financial distress. To achievethis, the process reduces the corporation’s debts or obligations, so thatthe corporation may continue its business operations and gain profit....
However, reducing the obligation of a third party including a grantor
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.

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信託法研究第40号（2015）

for the debtor corporation is unrelated to the purpose of the corporation
rehabilitation process.”
In applying Sec. 2 of Art. 250 of the DRBA, how will a trust withsecurity function be treated? 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 interestand has established a pledge by transferring them to the trustee. Accordingly, the pledged creditor shall be subject to the rehabilitation plan.
It’s unlikely he may get fully repaid if the debtor/settlor enters into therehabilitation 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 the security interest through mortgage or pledge is
given to a trustee, it is the debtor/settlor who owns the property andprovides 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 thetrust property shall be regarded as unassociated with the rehabilitation
process on the settlor. Under Sec. 2 of Art. 250, the lender, unaffectedby 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 Trustfor Security Purpose if other devices like mortgage, self-interest trust,and security trust provide imperfect bankruptcy remoteness.
36 2001Da9267, Jul. 13, 2001; 2002Da49484, Dec. 26, 2002; 2003Da18685 May 30, 2003 (the Supreme
Court of Korea).

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3. Analysis
The case law that provides complete bankruptcy remoteness often
invites criticism from academia: (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 remotenessover 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 therefore not associated with a debtor’s financial capacity. However, it is difficult to say thata trust property stands totally independent from debtor/settlor’s assets,
especially in economic substance.
The Court, however, reiterated its jurisprudence over the Trustfor 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 thetrust 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 underwhich a creditor enjoys complete bankruptcy remoteness. The more
important thing is to keep the jurisprudence 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 rightsfrom economic substance: While the trustee has legal ownership of
the trust property under the Korean civil law system, the beneficiaryhas 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 cor― 207 ―信託法研究第40号（2015）

poration, the corporate tax) 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, a beneficiary is also responsible for the value-added
tax arising from sale and purchase of the trust property.37 On the other
hand, a trustee is liable for the registration tax from the transfer ofproperty between the settlor to the beneficiary.38, 39
One of the most controversial issues is who will bear the burden of
the property tax on the trust 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 the property tax under Sec 2 of Art. 107 of the Local
Tax Act. The Supreme Court stated that while the ownership of a trust
property is transferred to trustee on the title and the settlor may notargue 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 provisionsof 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.
Sec. 1 of Art. 22 of the Trust Act prohibits an enforcement upon
the trust property with limited exceptions: One of the major exceptions
37 99Da59290, Apr. 25, 2003 (the Supreme Court of Korea).
38 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 asshown by Table 5.
40 The same logic shall be applied to the gross real estate tax because it adopted the same provision as the property 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).

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is where the right on which the enforcement is made has arisen in thecourse 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 in over this issue: In the case, the settlor/beneficiary
went bankrupt and the tax authority tried to satisfy its property tax
claim by the enforcement against the trust property. The lower court
stood by the tax authority.42 The right which has been obtained in thecourse of the trust’s operation under Sec. 1 of Art. 22 includes, ① a rightbased upon the management and the sale 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 be originated from the trust property, the lower court stated. Thus
the trust property shall be subject to the enforcement based upon aproperty 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 forproperty 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 the claim is owed by the trustee.
Criticisms have been raised against this ruling. The most important
one is about the inequality. Generally speaking, the tax law gives privilege to the property tax claim in the process 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 the interested parties including secured creditors were able toexpect the imposition and amount of the tax. The same logic should beapplied to the secured and non-secured creditors on the trust property,
the critics argued.
42 2010Na5172, Jul. 9, 2010 (the Suwon District Court).
43 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.

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信託法研究第40号（2015）

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 aperson to be responsible for the property tax.45 It is also notable that theproperty tax shall be imposed only upon the trust property, separated
from the trustee’s inherent assets, and thus the failure to pay such property 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 the trustee 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 that the trustee is not more than a nominal titleholder and the enforcement against trust property shall threaten thestable 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 is thatsuch imposition or enforcement looks fair: Because the cost is derived
from the operation of 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 a property. The
revision of 2013, which enables the enforcement of tax authority, shallbe viewed as filling a loophole.
What is the impact of the revision on the trust business? Under
the old provision, the independence of the trust property was strongly
protected: A settlor and trustee might create a trust dissociated with45 Sec. 1 of Art. 107 of the Local Tax Act.

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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 the enforcement against the trust property; general creditors of the settlor should be subordinated to the property tax
authority as a settlor’s creditor. The new regime, on the contrary, shallbe 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 of duty 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 thatare prohibited by the law, 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, thetrustee may execute such transactions only under the approval by thebeneficiaries or the court (Sec. 2 of Art. 34). What if a trustee ignores therule and proceeds with the prohibited transaction? While the Act does
not stipulate the validity of such transaction, the Korean courts andscholars opined that a transaction between the trust property and thetrustee’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 theTrust Act has become controversial. Real estate trustee companies forland development tend to serve as trustees for multiple development― 211 ―

信託法研究第40号（2015）

projects at the same time. Those companies have“inherent accounts（固有口座）”that manage their own assets. Undoubtedly, the inherent
account shall be separated from each“trust account（信託口座）”thatadministers the trust property. Instead of financing necessary funds foreach project when required and then supplying it to a trust account,many trustee companies raise money in advance based upon their credit and keep it in their inherent accounts. When a development projectprogresses 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 accountand the 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 wasmade 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 accountand 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 the principal and the interest promised in the loan
agreement. The conclusion shall not be affected by the fact that thetransaction 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 underSec. 2 of Art. 46 of the Trust Act48: Where a trustee has paid expenses
incurred in relation to the performance of trust administration from theinherent property, he is entitled to imbursement by the trust property
for the expenses paid and the interest accrued from the date of pay46 2011Da18482, Jun. 10, 2011 (the Supreme Court of Korea).
47 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 old trust law.

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ment. Under this clause a trustee may recover the principal paid to thetrust property. But what about the interest borne by the loan agreement? For example, while the market interest rate is 4% a year, thetrustee, based upon his reputation and higher credit rating, financed$10m cheaply at 3%. Then he loaned to the trust property the $1m alongwith $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
the loan agreement but upon Sec. 2 of Art. 46? The court took a different stance according to the sources of the fund: funds from an outside
source ($10m in the example) and from an inside source ($5m in theexample). 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 same interest 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 the actuallevel of financing applied to him. That is, the Court denied any profit by
the trustee from the transaction between the inherent property and thetrustee 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 the interest rate of 3% in the real deal benefitted the trust property without
legitimate cause. The Court responded, however, that the reputationand higher credit rating is the reason that the settlor 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 thecost of financing, thereby claiming the interest, it largely denied any
interest claim from such a fund. Overturning the Seoul Higher Court’sdecision that funds from an inside source should be treated equally as
those from an outside source, the Supreme Court treated the former dif― 213 ―信託法研究第40号（2015）

ferent from the latter. If the trustee is to 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 thetrustee was not sufficient. Actually, it seems almost implausible to claim
the interest on the fund paid 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 oftransaction between the inherent 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 fromthe inside-sourced fund, however, is subject to criticism, especially in thecontext of a commercial trust. As mentioned above, real estate trustee
companies tend to operate multiple real estate development projects
and to raise outside funds in advance. Such outside-sourced funds, together with trustees’own funds, shall be operated in trustees’inherent
accounts. Following the Supreme Court decision, the trustee companies
should specify the source of funds in an inherent account so that they
can identify the nature of funds transferred to a trustee account. It’sdoubtful that the imposition of 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 reserveis different from that from the outside source and shall not be entitled tothe interest borne during the loan period. The beneficiaries for the realestate development projects are investors rather than seniors or minors
requiring special protection, because the project is planned and executed 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.

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B. Reimbursement against Beneficiary – the Possibility of Waiving
Beneficiary Rights
While the reimbursement of the legitimate expenses paid by thetrustee against“trustee property”is allowed in most jurisdictions, thelegislations 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, made some 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. 42 of theold Act); ② the reimbursement against beneficiaries is allowed where
trust property is insufficient for indemnifying a trustee’s payment (ascompared to the old act, which did not have explicit priority provision
between reimbursement against beneficiaries and the trust property).
The two modifications by the new Act were made to balance theinterest of beneficiaries and trustees. The financial status of a real estate trust that has been quite strong in its initial stage may turn bad
as its operation goes. In such surroundings it might be harsh to impose
the cost and expenses for the management of the trust property only
on a trustee even though the nature of trust is commercial. In orderto protect the trustee, the new Act allows reimbursement against thebeneficiary, 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 thebeneficiary as a last resort. One might think a beneficiary who is also asettlor and has enjoyed the upside of the trust should be responsible forthe downside, whatever the amount is. But a trustee is not just an agentof the settlor/beneficiary but a prudent person who can estimate therisk and cost from the real estate project. Even though the settlor/beneficiary has substantial residual interest in the trust property, it is notalways 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― 215 ―

信託法研究第40号（2015）

believes that more liability should be put on the beneficiary/settlor, heshould have negotiated for it in the trust instrument.
What if a beneficiary waives his beneficial interest? For example,
a beneficiary who already 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 forthe benefit he received. However, having waived his beneficial interest,
he needs not reimburse anything because the waiver shall nullify thetrust instrument retrospectively and, under the Korean unfair enrichment jurisprudence, he is obliged to return only what he currently has.
While some legislations deal with the possibility of waiver according to
the type of trust,49 the Korean Trust Act generally allows the waiver nomatter 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 atrustee 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 of waiving beneficial interest
comes with the range of third parties under Sec. 2 of Art. 57. As statedabove, 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 upon a beneficiary’s beneficial interest, such as a pledgee of the beneficial interest. Is a trustee qualified asa 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
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 the beneficiary 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).

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party of the disputed arrangement and is under the risk of being negatively influenced by nullification of the arrangement. By waiving thebeneficial interest, a beneficiary is intended to actually nullify the act oftrust to which the trustee was a party. Therefore it is the trustee that is
supposed to receive the notification of waiver by the beneficiary. Thus atrustee cannot be regarded as a third party in the literal interpretationof 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 fromtwo 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 nominal transformation of
settlor/beneficiary’s property and trustee is designated to serve only
the benefit of settlor/beneficiary, one may legitimately argue that trust
properties, for the eyes of settlor’s creditors, should be regarded as settlor/beneficiary’s assets. From this reasoning, (1) 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 a custodian 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 by mortgage, because in two structures the nature of a property owner’s behaviors, which is to provide 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 aproperty is owned directly or indirectly by trust, the settlor/beneficiary
actually owns the property.
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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 belimited to the existing trust property as of the timing of the cancelation.
Second, for a Trust for Security Purpose, the Court provided perfectbankruptcy 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 theenforcement possible.
The first and second jurisprudences above will strengthen the commercial advantage of trust 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 as reasonable
alternative to mortgage. Regarding the issue of property tax, the oldprovision was quite advantageous to those investors who transactedwith the trust business because they did not have to worry about theirclaim being subordinate to tax authority’s property tax claims. Downsides of those jurisprudences are the sacrifice of settlor’s creditors. By
providing a trust with the structure of independence and separateness,
the jurisprudences could be estimated as“commercial trust friendly”atthe cost of settlor’s creditors. From that perspective, the new provisionon 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 thereimbursement by a trustee. 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 aloan from a trustee’s inherent account to the trust account, and denied
any profit by the trustee from the transaction between the inherent― 218 ―

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 the trustee 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, for a commercial trust to flourish, the conceptualand 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, andusually has, the ability and capacity to estimate the inherent risk andprepare the safeguard in advance. Thus it makes sense that the Koreanjurisprudences applied a rather harsh standard to trustees who claim
reimbursement, even in the case of commercial trust.

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