Objection to enforcement of a disguised loan agreement

Interest Limitation Act and lawsuit to object to claim

Under the current Interest Limitation Act (Korean Interest Limitation Act), the maximum interest rate is 24 percent per annum, and any portion exceeding the maximum rate is void.

For example, even if you borrow 100,000,000 Korean won at an annual rate of 30 percent, only the interest agreement up to 24 percent is valid, so the interest payable after one year is 24,000,000 Korean won, not 30,000,000 Korean won.

However, since the Interest Limitation Act applies only to monetary loan contracts, it is important to examine whether the nature of the contract in question is a monetary loan or not.

Meanwhile, a 'lawsuit to object to claim' is a lawsuit in which a debtor argues that the substantive claim, which is the content of an executory title, does not align with the current substantive state, and seeks to exclude the executory power of that executory title.

For example, if a creditor wins a lawsuit for a loan and the judgment becomes final, and even though the debtor has fully repaid the loan, the creditor attempts to enforce the judgment by compulsory execution, the lawsuit filed by the debtor is a lawsuit to object to claim.

We will introduce a case resolved by lawyer Joo Youngjae concerning the Interest Limitation Act and a lawsuit to object to claim.

Facts

In August 2018, the defendant (the client) entered into a partnership agreement with the plaintiffs for land development. Under the agreement, the defendant was to arrange the land to be developed and the business funds, while the plaintiffs were to handle the development and sales. The defendant immediately entered into a sales contract for the land to be developed in his sole name and paid the seller 180,000,000 Korean won as a deposit.

However, shortly thereafter, discord arose between the parties, making it difficult to continue the partnership. The defendant, having already invested a significant amount and seeing the potential for billions of Korean won in profit from developing the land, said he would continue the business alone. The plaintiffs, however, demanded that the defendant transfer to them the status as the buyer of the land, saying they would continue the business.

After some negotiation, the parties eventually agreed that the defendant would transfer the status of buyer to the plaintiffs, and the plaintiffs would pay the defendant 360,000,000 Korean won one year later, as compensation for the deposit the defendant had paid and for giving up the right to profit from the land development.

However, on the day the contract was to be written, the plaintiffs suddenly demanded that the defendant sign, not a partnership liquidation agreement, but a monetary loan contract with a principal of 180,000,000 Korean won and interest of 180,000,000 Korean won regarding the payment of the 360,000,000 Korean won. The defendant, who was not familiar with the law, thought the form of the contract was not important and agreed, instead receiving from the plaintiffs a cash custody receipt for 360,000,000 Korean won and an executory notarial deed for that amount.

One year later, when the promised repayment date arrived, the defendant demanded payment of 360,000,000 Korean won from the plaintiffs. The plaintiffs then argued that the contract was a monetary loan contract exceeding the maximum interest rate under the Interest Limitation Act, and filed a lawsuit to object to claim against the defendant to prohibit compulsory execution of the excess amount.

Lawyer Joo Youngjae's response

In response to the plaintiffs' claims, lawyer Joo Youngjae argued that even though the contract was titled a monetary loan contract and used the terms principal and interest, the substance of the contract was a partnership liquidation agreement, and therefore the Interest Limitation Act could not apply. He also submitted a number of pieces of evidence to prove the true nature of the contract.

The court's ruling

The court accepted lawyer Joo Youngjae's arguments and dismissed all of the plaintiffs' claims, ruling that the contract in question was not a monetary loan contract but a partnership liquidation agreement, and therefore the Interest Limitation Act could not apply.

This ruling became final upon the plaintiffs' waiver of appeal.