Fraudulent conveyance revocation, on appeal

Fraudulent transfer revocation

A 'fraudulent transfer' is an act that harms creditors, such as when a debtor gifts property to a third party (the beneficiary) to avoid paying debts.

In such cases, the creditor can preserve their claim by revoking the juridical act (such as a gift) between the debtor and the beneficiary and claiming restitution.

However, case law holds that 'if a debtor sells the real estate that is his or her only property and converts it into money that is easy to spend, this constitutes a fraudulent transfer unless there are special circumstances,' and thus recognizes fraudulent transfer even when the debtor sold the real estate for a fair price. This is because there is a high likelihood that the debtor will harm creditors by arbitrarily spending the proceeds without using them to repay the debt.

Meanwhile, in the case of revoking a real estate sales contract, the principle is to claim cancellation of the ownership transfer registration as restitution, but if a mortgage established before the sales contract is subsequently extinguished, the creditor can claim compensation of the value (money) from the beneficiary.

Recently, I will introduce a case in which attorney Joo Youngjae won entirely in an appeal trial of a fraudulent transfer revocation lawsuit.

Facts

The plaintiff (client) purchased farmland from Company A around December 2005 and paid approximately 100,000,000 Korean won as the purchase price.

However, Company A was not an agricultural company corporation and could not own farmland, and accordingly the plaintiff also could not acquire ownership.

Accordingly, the plaintiff filed a lawsuit against Company A for the return of the purchase price, and while the lawsuit was ongoing, around March 2015, Company A sold the land, which was its only property, to the defendant.

The plaintiff obtained a favorable judgment around December 2018, and that judgment became final around that time, but Company A had no remaining property that could be executed against.

The plaintiff, despite having won with difficulty, was unable to recover the purchase price, so he sought help from attorney Joo Youngjae. Attorney Joo Youngjae filed a fraudulent transfer revocation lawsuit against the defendant, seeking revocation of the real estate sales contract between Company A and the defendant and compensation of 123,817,809 Korean won including principal and interest.

After intense disputes between the parties, the first instance court determined that the above real estate sales contract was a fraudulent transfer, and issued a judgment partially accepting the claim, ordering the cancellation of the real estate sales contract and payment of that amount within the scope of 78,150,000 Korean won, which is the value of the real estate minus the secured debt amount of 100,000,000 Korean won under the mortgage.

Attorney Joo Youngjae's response

Regarding the above first instance judgment, the defendant appealed, arguing that since he paid an appropriate purchase price, the real estate sales contract was not a fraudulent transfer. Attorney Joo Youngjae also appealed, arguing that at the time of the fraudulent transfer, although the mortgage registration had not been cancelled, all secured debts had been repaid, so the first instance court's deduction of the secured debt amount was a misunderstanding of the legal principles regarding the scope of revocation of a fraudulent transfer.

Court's decision

The appellate court fully accepted the above arguments of attorney Joo Youngjae, reversed the first instance judgment, and ordered the revocation of the fraudulent transfer and compensation for the full amount sought by the plaintiff.