The treatment of creditors with equal priority under a joint mortgage - With a focus on the fundamental structure of joint mortgages and the concept of auction proceeds -

The Korean Supreme Court decision at issue(2020Da258893, rendered on June 13, 2024) addresses the treatment of creditors of equal priority in the context of a joint mortgage. On this matter, there has traditionally been a theoretical divide between the “enforceable claim theory” and the “apportioned real estate value theory”, and the decision in question can be assessed as adopting a position closer to the latter. This article begins from the premise that the choice between these competing theories is not merely a practical issue, but rather one that is fundamentally connected to the essential nature and basic structure of the joint mortgage system. A joint mortgage is characterized by its economic unity: while mortgages are registered over multiple properties to diversify risk, they ultimately secure a single claim. Consequently, the joint mortgagee is entitled to freely enforce the mortgage against any individual property. The “apportionment” referred to in Article 368(1) of the Korean Civil Code should be understood not as a division of the secured claim itself, but rather as an allocation of liability based on the collateral value of each property—an allocation that should be made at the final stage of the distribution process. Furthermore, the “proceeds of auction” under Article 368(1) must function as an independent and substantive collateral value. This foundational structure of the joint mortgage and the meaning of “auction proceeds” must be reflected in how creditors of equal priority are treated. Nevertheless, the enforcement-claim theory, which artificially divides the enforceable claim of the joint mortgagee, not only infringes upon the mortgagee’s freedom of choice but also contradicts the principle of proportional distribution presupposed by Article 368(1) of the Civil Code. In contrast, the apportioned real estate value theory appropriately reflects the independently ascertainable collateral value by deducting the amounts to be distributed to co-equal ranking creditors from the sale proceeds of each property. Therefore, the apportioned real estate value theory, as adopted in the decision at issue, is the more reasonable approach.