How to Challenge Fraudulent Lien Claims in South Korean Real Estate Auctions: A Practical Guide

1. What Is a Lien Non-Existence Confirmation Lawsuit in South Korea?

A lien non-existence confirmation lawsuit (yuchigwon bujonjae hwagin-ui so) is a negative declaratory action in which the plaintiff asks the court to confirm that a lien asserted by the opposing party does not, in fact, exist under South Korean law. In this type of lawsuit, once the plaintiff claims non-existence, the burden of proof shifts to the defendant, who must prove the factual prerequisites for establishing the lien.

How Is Standing Recognized in South Korea?

The Supreme Court of Korea has held that in negative declaratory actions, once the plaintiff specifies the claim and denies the facts giving rise to the right, the defendant bears the burden of proving the requisite factual elements (Supreme Court of Korea, Decision No. 97Da45259, March 13, 1998). In this case, since the defendants claimed to be lien holders, they bore the burden of proving the existence of secured claims related to the buildings and their actual possession thereof.

Notably, the court recognized the plaintiff’s standing even though the plaintiff was not the property owner but rather a mortgage holder. Since the defendants had filed lien claims and disputed the existence of those liens, the mortgage holder had a legitimate interest in eliminating the risk of reduced distributions resulting from depressed auction prices.

2. Why Are Fraudulent Lien Claims a Serious Problem in South Korean Auctions?

When lien claims are filed in South Korean real estate auctions, potential buyers face the burden of assuming the lien-secured debts. This dramatically reduces bidding participation and depresses winning bid prices, causing serious harm to mortgage holders’ expected distributions.

Overview of Lien Claims Filed in This Case

In this case, numerous defendants filed successive lien claims after the auction commenced. The scale and timing of these filings were as follows:

With total lien claims exceeding KRW 20 billion, the mortgage holder faced the very real possibility of receiving no distribution from the auction whatsoever. Under these circumstances, the lien non-existence confirmation lawsuit was the only viable legal remedy to preserve the client’s rights.

3. What Are the Four Requirements for Establishing a Lien Under South Korean Law?

Under Article 320(1) of the South Korean Civil Act, a right of retention (lien) is a statutory security interest that allows a party in possession of another person’s property to retain that property until a claim arising in connection with it is satisfied. All four of the following requirements must be met:

How Is the Nexus Requirement Evaluated Under South Korean Law?

One of the central issues contested in this case was the nexus requirement. The secured claim underlying a lien must have arisen specifically in connection with the subject property. For example, a construction payment claim for access road work on land is a claim related to the land, not to the building, and therefore cannot support a lien on the building. In this case, Defendant C (Engineering) performed access road construction on the land. The court held that this was not a claim related to the buildings and denied the lien.

4. Can a Lien Established After Seizure Registration Be Asserted Against Auction Buyers?

Where construction is completed and a construction payment claim arises only after the seizure registration for an auction has been recorded, the resulting lien cannot be asserted against the auction purchaser. This was the core legal principle that defeated multiple defendants’ lien claims in this case.

Supreme Court of Korea Precedent

According to Supreme Court of Korea Decision No. 2011Da55214 (October 13, 2011), even if a contractor received possession of a building from the debtor before the seizure registration was recorded, if the construction was completed and the construction payment claim was acquired only after the seizure registration took effect, the contractor cannot assert the resulting lien against the auction purchaser.

Application in This Case

The seizure registration in this case was recorded on September 10, 2019. Defendant A (General Contractor) claimed construction commencement on September 23, 2019—after the seizure registration—and the extension construction was completed around October 2020. Therefore, the construction payment claim for the extension work matured after the seizure registration, and the lien based on it could not be protected in the auction proceedings.

Similarly, Defendants E (Design), F, G (Engineering), H (Electrical Construction), I (Building Materials), J, and K (Construction) all participated in extension construction after the seizure registration and were subject to the same legal principle denying their lien claims.

5. Can a Construction License Lender Assert a Lien in South Korea?

A party that merely lends its construction license (known as a “name lender” or myeongui daeyeoja) does not actually perform the construction work, so no construction payment claim arises. Consequently, asserting a lien under the name lender’s identity fails because the underlying secured claim does not exist.

Court’s Ruling in This Case

The plaintiff argued that Defendant A (General Contractor) was merely a name lender that had lent its construction license to Defendant M and therefore held no construction payment claim. Rather than addressing this argument directly, the court rejected Defendant A’s lien claim on other grounds: the construction contract submitted listed work sites in different provinces rather than the actual building location, undermining its credibility; and Defendant A failed to prove exclusive possession of the buildings from before the seizure registration through the present.

6. Can a Waived Lien Be Reasserted Under South Korean Law?

Once a party executes a written waiver of a lien, it becomes extremely difficult to reassert a lien on the same building. Since waiver of a lien is a dispositive act, the lien is extinguished once the waiver takes valid effect.

Defendant M’s Lien Waiver History

One of the key reasons Defendant M’s lien claim was rejected was the documented history of lien waiver. According to the facts recognized by the court, Defendant M executed a written statement in April 2014 confirming that Company P held lien rights. After abandoning construction work on the buildings, Defendant M executed a further confirmation document in July 2015 verifying the authenticity of the earlier statement. Additionally, Company P waived its construction site lien rights in favor of the plaintiff in July 2015.

Based on these facts, the court concluded that Defendant M had released possession of the buildings and waived the lien that had secured the original construction payment claim.

Additional Grounds for Denial: Claim Immaturity and Possession Legitimacy

Beyond the lien waiver, the court also found that as of around June 2018, Defendant M did not appear to hold any matured construction payment claim that could serve as the basis for exercising a lien. The court further noted that the extension construction occurred after the seizure registration, making it difficult to conclude that Defendant M had possessed the buildings exclusively while excluding the property owner (a religious organization). Notably, Defendant M’s son had received a summary order for a KRW 1 million fine for cutting a lock installed on the building and trespassing. The court also observed that the plaintiff had been operating a memorial hall in the buildings with regular customer traffic. Taking all these circumstances into account, the court found it could not recognize lawful possession.

7. How Must Possession Be Proven to Support a Lien Claim?

A party asserting a lien must prove that it currently possesses the subject property. The mere fact of having performed construction work in the past is insufficient to establish present possession. The claimant must demonstrate exclusive and continuous possession at the current point in time.

Possession Findings in This Case

Regarding Defendant A (General Contractor), there was a claim that a banner asserting lien rights had been displayed. However, the court noted this occurred only in June 2020, after the seizure registration, and that it was difficult to conclude Defendant A had possessed the building exclusively while excluding the property owner. Video evidence alone was deemed insufficient to establish current possession.

Defendants B (Networks), D, I (Building Materials), K (Construction), and others had never possessed the buildings at all. They held no claims related to the buildings, and even if construction payment claims existed, those claims were either acquired after the seizure registration or had been extinguished through statute of limitations or payment. The court therefore found that their liens did not exist.

8. How Did the Court Rule on Each Defendant in This Case?

A distinctive feature of this case was that different legal principles were applied to each of the 12 defendants to deny their respective lien claims. The following table summarizes the key findings:

Dismissal of the Counterclaim

Defendant A (General Contractor) filed a counterclaim seeking confirmation that its lien existed over the basement through the third floor of the building. However, the court examined this ex officio and found that the second and third floors were not part of the plaintiff’s original claim, so Defendant A had no legal uncertainty requiring resolution. As for the basement and first floor, the counterclaim contained nothing beyond seeking dismissal of the principal action, providing no independent interest as a counterclaim (referencing Supreme Court of Korea Decision No. 2005Da40709/40716, April 13, 2007). The entire counterclaim was therefore dismissed as inadmissible.

9. FAQ

Atlas Legal, located in Songdo, Incheon, South Korea, provides comprehensive legal services in real estate auction disputes, lien litigation, and construction and real estate law. Drawing on our track record of achieving complete victories in complex litigation involving multiple fraudulent lien claims, we develop optimal strategies to protect our clients’ rights in South Korean auction proceedings.

* The legal information presented in this article is intended for general informational purposes only and may vary depending on the specific facts of individual cases. For actual legal matters, please consult with a qualified attorney.