In a lawsuit filed by an ex-wife who argued that "it is invalid for an ex-husband who failed to pay the property division to borrow money by using his only asset, real estate, as collateral," the Supreme Court ruled that "if the lender did not know of such circumstances, the security interest cannot be canceled." The court determined that if a creditor executed a promissory note without knowing the debtor's situation and engaged in a customary transaction, including receiving interest, it cannot be deemed an act that harms other creditors.
The Supreme Court's Second Division (Presiding Justice Kwon Young-jun) overturned the appellate ruling that had found "the contract must be canceled" in the appeal filed by the debtor's ex-wife, A, who sought to cancel the contract establishing a revolving mortgage on the ex-husband's real estate against another creditor, B, and remanded the case to the Uijeongbu District Court.
In a 2014 divorce suit, A was to receive 439 million won in property division from her ex-husband (the debtor), but she subsequently did not receive about 320 million won. In 2022, the ex-husband set up a revolving mortgage when he borrowed 200 million won from B by using a house and land he owned in Paju as collateral. It is said the ex-husband used part of this money to return a jeonse deposit to a tenant. The property later went to auction, and following the bank as the senior lienholder, B received a distribution of about 155 million won.
A then filed suit, arguing that "the contract establishing the revolving mortgage between B and the ex-husband must be canceled." A claimed, "The ex-husband, who did not even pay the property division, offering his only asset, real estate, as collateral to a specific creditor is an act that harms other creditors."
The lower court and the appellate court ruled in favor of A. The bench found that "offering the only asset as collateral while already in a state of excess debt harmed other creditors."
But the Supreme Court saw it differently. The court determined that "there is room to view B as a 'good-faith beneficiary' who did not know that other creditors were being harmed." The court said, "B was not in a special relationship that would allow specific knowledge of the debtor's financial situation." It also said, "The two used a promissory note in the course of the transaction, and interest was paid," adding, "This transaction cannot be regarded as irrational or unusual."
The Supreme Court also said, "At the time of the contract, the objective collateral value of the real estate was sufficient to secure the loaned amount," and added, "It is also difficult to see that there were circumstances for B to suspect the debtor's excess debt status, so the appellate court erred in rejecting B's defense of being a 'good-faith beneficiary.'"