The Duty to Explain in Specific Money Trusts, Preferential Beneficial Rights under Security Trusts, and Prepayment Fees on Loans: Interpretive Standards from Three Judgments on Financial Trusts and Loans

Question

This brief examines three judgments addressing, respectively, the duty of prior investigation and explanation owed by a trust company that recommended a specific money trust; the relationship governing the attribution of the secured claim and the preferential beneficial right under a security trust when the secured claim is the subject of an assignment order; and whether a prepayment fee on a project finance loan constitutes deemed interest.

The first issue is the question addressed in judgment 2013Da26425, namely: "How far must a trust company that recommended a KRW 1 billion specific money trust explain?" The second issue is the question addressed in judgment 2014Da225809: "When a KRW 22 billion loan claim and the preferential beneficial right under a security trust are separated by an assignment order, what becomes of the pledge?"

The third issue is the question addressed in judgment 2023Da221885: "Does the prepayment fee on a KRW 6.8 billion PF loan constitute deemed interest under the Interest Limitation Act?" All three judgments ask how, on the record, the boundaries of the text and the substantive factors for judgment are to be distinguished.

Material to check

First (2013Da26425), this decision addresses the trust company's duty to protect the customer through investigation and explanation where it recommended an investment with the management method fixed in advance, the liability for breach thereof, and questions of remuneration and expenses. In practice, one reviews the trust agreement and the trust remuneration agreement to confirm the management method fixed in advance, the characteristics and principal contents and risks of the trust contract, and the details of the agreed remuneration. By reviewing the explanatory materials provided to the customer and the evidence of trust expense outlays, one confirms whether comprehensible explanations were made and whether any costs were enlarged through negligence.

Second (2014Da225809), this decision addresses, depending on the method of contract interpretation, whether an indivisible-claim stipulation as to the loan claim was established, and whether the priority beneficial right and the pledge are attributed to and extinguished after the assignment order. In practice, one reviews the money loan agreement and the supplemental loan agreement, and the agreement and supplemental agreement, to confirm the stipulations on the loan structure, the provision of security, and the method of repayment. By reviewing the real estate security trust agreement and the special terms, the priority beneficial right certificate and the pledge creation agreement, the consent materials of the settlor and the trustee, and the written assignment order, one confirms whether the pledgee may exercise the priority beneficial right even after the party to whom it is attributed has changed.

Third (2023Da221885), this decision addresses whether the prepayment fee constitutes deemed interest under the Interest Limitation Act and is therefore subject to the maximum interest rate limitation. In practice, one reviews the money consumption loan agreement and the prepayment fee agreement to confirm the due date, the conditions bearing the fee, and the intent of stipulating liquidated damages. By reviewing the standard terms and conditions, the interest receipt records, and the materials on funding costs and reinvestment, one confirms whether there is consideration and whether there are grounds for reduction as unjustifiably excessive.

Possible readings

In case 2013Da26425, the issues were the duty of care of a trust company, where it had in substance recommended the investment in a specific money trust, to explain the characteristics of the contract, including the method of managing the trust property, and the extent of that duty, as well as liability for damages where a breach of that duty led the customer to enter into the trust contract.

In case 2014Da225809, the issues were the meaning of an "interest" in the outcome of the litigation, which is a requirement for intervention in support of a party, and the method of interpreting the intention of the parties as expressed in contractual documents.

In case 2023Da221885, the issue was whether a prepayment fee constitutes deemed interest under the Interest Limitation Act, such that the provisions on the maximum interest rate apply to it.

What the decisions held

In Supreme Court Judgment 2013Da26425 delivered on 28 February 2018, the Court held as follows: "In such a case, the extent of the explanation that the trust company must give to the customer shall be determined by comprehensively considering the specific content and level of risk of the method of managing the trust property, the customer's investment experience and ability, and other relevant factors." Under this judgment, where a trust company has determined the management method in advance and recommended it, the trust company is under a duty to investigate its characteristics and risks and to explain them so that the customer understands them. The extent of the explanation required is determined by weighing together the content of the management, the level of risk, and the customer's experience and ability. Where a breach of the duty of care has caused the customer to enter into a contract that the customer would not otherwise have concluded, the trust company is liable in tort, and the statutory commercial interest rate does not apply. As to remuneration, the agreed amount is in principle payable in full, but where there are special circumstances in which it is unreasonably excessive and contrary to the principle of good faith or the principle of equity, it may be reduced to the extent found reasonable, and costs increased through the trust company's own negligence cannot be claimed.

In Supreme Court en banc Judgment 2014Da225809 delivered on 22 June 2017, the Court held as follows: "The interpretation of a juristic act consists in clearly determining the objective meaning that the parties have given to their act of expression; where the interpretation of the parties' intention as expressed in contractual documents is in issue, it must be interpreted reasonably in accordance with logic and the rules of experience, by comprehensively considering the content of the text, the motive and circumstances in which the agreement was made, the purpose to be achieved by the agreement, the true intention of the parties, and other relevant factors." Under this judgment, the majority opinion, comprehensively considering the contractual text, motive and purpose, upheld the lower court's refusal to recognise an agreement making the loan claim an indivisible claim. The repayment wording in the agreement was regarded as a declaration of the method of raising funds, and the powers to manage the account and to request disposal were held not to extend to conferring a right to obtain satisfaction of the claim directly. The majority made clear that, absent special circumstances, the preferential beneficial right merely functions economically as security for the loan claim and is a separate right under the trust contract, independent of the loan claim. Even where the loan claim is transferred by an assignment order, that circumstance alone does not cause the preferential beneficial right to be transferred with it, nor is the preferential beneficial right extinguished merely because the loan claim and the preferential beneficial right have come to be held by different persons. The conclusion is that, by virtue of the special terms and the consent of the settlor and the trustee, the pledgee may exercise the preferential beneficial right irrespective of who holds the claim.

In Supreme Court en banc Judgment 2023Da221885 delivered on 18 September 2025, the Court held as follows: "However, since a prepayment fee is difficult to regard as consideration for a loan for consumption of money, it does not constitute deemed interest under Article 4(1) of the Interest Limitation Act." Under this judgment, Article 4(1) of the Interest Limitation Act is a provision intended to prevent evasion of the law, and recognises deemed interest where an amount can be regarded as consideration for a loan for consumption of money. The Court held that a prepayment fee is compensation for damage arising from repayment before the due date under Article 153(2) and Article 468 of the Civil Act, constitutes liquidated damages, and is therefore difficult to regard as such consideration. The Court emphasised that a strict interpretation is required because receiving amounts in excess of the maximum interest rate may lead to criminal punishment under Article 8(1) of the Interest Limitation Act. The Court held that debtors can be protected through reduction under Article 6 of the Interest Limitation Act, Articles 6 and 8 of the Act on the Regulation of Terms and Conditions, and the regulation under the Credit Business Act, and that precedents under the Credit Business Act reflect the particular nature of that Act and therefore do not automatically apply to the present case.

Practical checklist

First, how far must a trust company that recommended a specified money trust of KRW 1 billion explain? This is reviewed by gathering the trust agreement and the materials confirming the explanation and examining whether the management method fixed in advance and the guidance on characteristics and risks were provided in a manner the customer could understand, and whether the level of explanation was adequate in light of the contents of the management method, the level of risk, and the customer's experience and ability.

Second, when a loan claim of KRW 22 billion and the priority beneficial right under a security trust are separated by an assignment order, what becomes of the pledge? This is reviewed by gathering the agreement and supplemental agreement, the security trust agreement and the special terms, the priority beneficial right certificate and the pledge creation agreement, and the consent materials of the settlor and the trustee, and examining the interpretation based on the wording, circumstances, and purpose, and whether there is a stipulation permitting the pledgee to exercise the right even after the attribution is separated.

Third, does the prepayment fee on a PF loan of KRW 6.8 billion constitute deemed interest under the Interest Limitation Act? This is reviewed by gathering the loan agreement, the fee agreement, and the standard terms and conditions, and examining whether the fee is liquidated damages arising from repayment before the due date and thus not consideration, and whether there is room to argue for reduction or invalidity on grounds of unjust excess.

Glossary

Standard for determining the duty of investigation and explanation in a specific money trust recommended on the basis of a predetermined management method (2013Da26425): Where a trust company has determined the management method in advance and recommended it, the trust company is under a duty to investigate its characteristics and risks and to explain them so that the customer understands them. The extent of the explanation required is determined by weighing together the content of the management, the level of risk, and the customer's experience and ability. Where a breach of the duty of care has caused the customer to enter into a contract that the customer would not otherwise have concluded, the trust company is liable in tort, and the statutory commercial interest rate does not apply. As to remuneration, the agreed amount is in principle payable in full, but where there are special circumstances in which it is unreasonably excessive and contrary to the principle of good faith or the principle of equity, it may be reduced to the extent found reasonable, and costs increased through the trust company's own negligence cannot be claimed. The factors identified for the determination include the specific content of the management method, the level of risk, and the customer's investment experience and ability.

Standard for attributing the secured claim and the preferential beneficial right where a security trust and an assignment order of the claim conflict (2014Da225809): The majority opinion, comprehensively considering the contractual text, motive and purpose, upheld the lower court's refusal to recognise an agreement making the loan claim an indivisible claim. The repayment wording in the agreement was regarded as a declaration of the method of raising funds, and the powers to manage the account and to request disposal were held not to extend to conferring a right to obtain satisfaction of the claim directly. The majority made clear that, absent special circumstances, the preferential beneficial right merely functions economically as security for the loan claim and is a separate right under the trust contract, independent of the loan claim. Even where the loan claim is transferred by an assignment order, that circumstance alone does not cause the preferential beneficial right to be transferred with it, nor is the preferential beneficial right extinguished merely because the loan claim and the preferential beneficial right have come to be held by different persons. The conclusion is that, by virtue of the special terms and the consent of the settlor and the trustee, the pledgee may exercise the preferential beneficial right irrespective of who holds the loan claim, but only where the settlor fails to repay the loan principal and interest in full. The factors identified for the determination include the content of each contract and the circumstances of its conclusion, the content of the special terms, and the fact of consent to the creation of the pledge.

Standard for distinguishing prepayment fees from deemed interest (2023Da221885): Article 4(1) of the Interest Limitation Act is a provision intended to prevent evasion of the law, and recognises deemed interest where an amount can be regarded as consideration for a loan for consumption of money. The Court held that a prepayment fee is compensation for damage arising from repayment before the due date under Article 153(2) and Article 468 of the Civil Act, constitutes liquidated damages, and is therefore difficult to regard as such consideration. The Court emphasised that a strict interpretation is required because receiving amounts in excess of the maximum interest rate may lead to criminal punishment under Article 8(1) of the Interest Limitation Act. The Court held that debtors can be protected through reduction under Article 6 of the Interest Limitation Act, Articles 6 and 8 of the Act on the Regulation of Terms and Conditions, and the regulation under the Credit Business Act, and that precedents under the Credit Business Act reflect the particular nature of that Act and therefore do not automatically apply to the present case. The factors identified for the determination include the legal nature and economic substance of the fee, funding costs and the possibility of redeploying the funds, and the circumstances in which the agreed interest rate and the due date were set.

Sources and limitations

This white paper was prepared solely on the basis of the texts of Article 2, Article 32, and Article 39 of the Trust Act, Article 105 of the Financial Investment Services and Capital Markets Act, Article 17 and Article 19 of the Act on the Protection of Financial Consumers, Article 2 paragraph (1) and Article 4 paragraph (1) of the Interest Limitation Act, and Article 361 and Article 750 of the Civil Act, as disclosed on the Korea Law Information Center, and of the texts of the decisions in Supreme Court Decision 2013Da26425 decided February 28, 2018, Supreme Court Decision 2014Da225809 decided June 22, 2017, and Supreme Court Decision 2023Da221885 decided September 18, 2025.

This is an academic research material organizing general legal principles and standards for record review, and is not legal advice on an individual case or an opinion submitted to a court.

Points left open

2013Da26425: How do insufficient explanation at the recommendation stage and negligence in management at the operation stage divide to constitute the grounds of liability?

2014Da225809: Even where the claim and the security fall into different hands, how far is a stipulation permitting the pledgee to request realization of the trust property honored?

2023Da221885: Does the distinction between liquidated damages and consideration leave a gap in the regulation of the maximum interest rate?

When to reconsider

2013Da26425: If new materials concerning the customer's experience and the level of risk emerge, the scope of the explanation needs to be reviewed again.

2014Da225809: If the wording of the security trust special terms and the scope of consent appear differently, the determination on the attribution of the priority beneficial right may need to be reviewed again.

2023Da221885: If the circumstances of the stipulation, the funding costs, the possibility of reinvestment, and other grounds for calculating damages appear differently, the matter may need to be reviewed again.

Statutes referred to

• 신탁법 제2조, 제32조, 제39조
• 자본시장과 금융투자업에 관한 법률 제105조
• 금융소비자 보호에 관한 법률 제17조, 제19조
• 이자제한법 제2조 제1항, 제4조 제1항
• 민법 제361조, 제750조

Decisions referred to

• 대법원 2018. 2. 28. 선고 2013다26425 판결 · Decision ledger
• 대법원 2017. 6. 22. 선고 2014다225809 전원합의체 판결 · Decision ledger
• 대법원 2025. 9. 18. 선고 2023다221885 전원합의체 판결 · Decision ledger

Verification status

The cited provisions (Article 2, Article 32, and Article 39 of the Trust Act; Article 105 of the Financial Investment Services and Capital Markets Act; Article 17 and Article 19 of the Act on the Protection of Financial Consumers; Article 2 paragraph (1) and Article 4 paragraph (1) of the Interest Limitation Act; Article 361 and Article 750 of the Civil Act) and the decisions examined (Supreme Court Decision 2013Da26425 decided February 28, 2018; Supreme Court Decision 2014Da225809 decided June 22, 2017; Supreme Court Decision 2023Da221885 decided September 18, 2025) were checked against the current statutes on the Korea Law Information Center and the original texts of the Supreme Court decisions as of 2026-10-15. Articles 46 and 47 of the Financial Investment Services and Capital Markets Act were deleted on March 24, 2020 and no longer appear in the current text; accordingly, the suitability principle and the duty to explain were checked against the current Article 17 and Article 19 of the Act on the Protection of Financial Consumers as of 2026-10-21. This white paper cites only the three decisions listed among the decisions examined.