CASE LAW NO. 11/2017/AL on Recognizing a Mortgage Contract of Land Use Rights Where the Land Contains Assets Not Owned by the Mortgagor

CASE LAW NO. 11/2017/AL

on Recognizing a Mortgage Contract of Land Use Rights Where the Land Contains Assets Not Owned by the Mortgagor

Approved by the Council of Judges of the Supreme People’s Court on December 14^th, 2017, and published under Decision No. 299/QD-CA dated December 28^th, 2017, by the Chief Justice of the Supreme People’s Court.

Source of the Case Law:

Cassation Decision No. 01/2017/KDTM-GDT dated March 1^st, 2017, by the Judicial Council of the Supreme People’s Court regarding the business and commercial case “Dispute over Credit Contract” in Hà Nội City between the plaintiff, Commercial Joint Stock Bank A (legally represented by Mr. Phạm Hữu P, and authorized representative Mrs. Mai Thu H), and the defendant, Limited Liability Company B (legally represented by Mr. Trần Lưu H1). The interested parties include: Mr. Trần Duyên H, Mrs. Lưu Thị Minh N, Mr. Trần Lưu H1, Ms. Phạm Thị V, Mr. Trần Lưu H2, Ms. Tạ Thu H, Mr. Nguyễn Tuấn T, Ms. Trần Thanh H, Mr. Trần Minh H, and Ms. Đỗ Thị H.

Location of the Case Law’s content:

Paragraphs 4 of the “Court’s Opinion” section.

Summary of the Case Law:

– Case Background 1:

One party mortgages land use rights and assets attached to the land that they own to secure the fulfillment of a civil obligation, but there are assets on the land owned by another person. The form and content of the contract comply with legal provisions.

– Legal Resolution 1:

In this case, the court must recognize the legal validity of the mortgage contract.

– Case Background 2:

The mortgagor and mortgagee agree that the mortgagee is entitled to sell the secured asset, which is the land use right, even though there is a house on the land that is not owned by the land user.

– Legal Resolution 2:

In this case, when adjudicating the matter, the court must give the house owner on the land the priority right to purchase the land use right if they so desire.

Relevant Legal Provisions:

Article 342 of the 2005 Civil Code (corresponding to Article 318 of the 2015 Civil Code); Articles 715 and 721 of the 2005 Civil Code; section 4, clause 19, Article 1 of Decree No. 11/2012/ND-CP dated February 22^nd, 2012, by the Government on amendments and supplements to some articles of Decree No. 163/2006/ND-CP dated December 29^th, 2006, by the Government on secured transactions (codified in clause 2, Article 325 of the 2015 Civil Code).

Keywords:

“Mortgage of land use rights”; “Assets on the land belonging to others”; “Recognition of mortgage contract of land use rights”; “Agreement on foreclosure of secured assets”; “Priority right to purchase”.

CASE DETAILS

In the lawsuit filed on October 6^th, 2011, and statements at the court, the plaintiff, Commercial Joint Stock Bank A (hereinafter referred to as the Bank), presented the following:

On June 16^th, 2008, the Bank and Limited Liability Company B (hereinafter referred to as Company B) signed Credit Contract No. 1702-LAV-200800142. Accordingly, the Bank loaned Company B VND 10,000,000,000 and/or an equivalent amount in foreign currency. The credit was intended to supplement the working capital for Company B’s registered business activities.

In the course of contract performance, the Bank disbursed a total of VND 3,066,191,933 to Company B under the Credit Contract and Debt Acknowledgments. As of October 5^th, 2011, Company B still owed a total of VND 4,368,570,503 in principal and interest from three Debt Acknowledgments (including VND 2,943,600,000 in principal and VND 1,424,970,503 in interest).

The collateral for the above loan includes the house and land [Plot No. 43, Map No. 5I-I-33 (1996)] at No. 432, Group 28, Ward E, District G, Hà Nội City, owned and used by Mr. Trần Duyên H and Mrs. Lưu Thị Minh N (according to the Certificate of House Ownership and Land Use Rights No. 10107490390 issued by the Hà Nội City People’s Committee on December 7^th, 2000).

Mr. Trần Duyên H and Mrs. Lưu Thị Minh N mortgaged the property under the Land and Attached Assets Use Rights Mortgage Contract dated June 11^th, 2008. This mortgage contract was notarized by Notary Office No. 6 of Hà Nội City on June 11^th, 2008, and registered with the Hà Nội Department of Natural Resources and Environment on June 11^th, 2008.

On October 30^th, 2009, the Bank and Company B signed another Credit Contract No. 1702-LAV-200900583. Under this contract, the Bank loaned Company B USD 180,000. The loan was intended for payment of transportation costs for an export shipment; the loan term was 9 months; the interest rate was 5.1% per annum; and the overdue interest rate was 150% of the interest rate.

In the course of contract performance, the Bank disbursed the full loan amount of USD 180,000 to Company B. Company B repaid the Bank USD 100,750 in principal and USD 1,334.50 in interest. As of October 5^th, 2011, Company B still owed USD 79,205 in principal and USD 16,879.69 in interest, totaling USD 96,120.69 in both principal and interest.

The collateral for the loan under Credit Contract No. 1702-LAV-200900583 includes:

– A fleet of 19 finished JMP trucks, each with a load capacity of 1.75 tons, valued at VND 2,778,750,000 (assembled by Company B using warehouse stock, with the Bank holding the vehicle quality inspection certificates). This was mortgaged by Company B under Mortgage Contract No. 219/2009/EIBHBT-CC dated October 29, 2009. This mortgage contract was registered with the Hà Nội Secured Transactions Registration Department on November 2^nd, 2009.

– A three-month term deposit account with a balance of VND 1,620,000,000 issued by the Bank. Since Company B partially fulfilled its debt obligations, the Bank released the mortgage on the VND 1,620,000,000 in the savings account corresponding to the repaid debt amount.

At the first-instance trial, the Bank’s representative confirmed the following details: Company B had fully repaid the principal amount of USD 180,000 for the loan. However, there remained an outstanding interest amount of USD 5,392.81. The collateral initially comprised 19 trucks, out of which 18 had already been sold. Consequently, only 1 truck remained as collateral. The Bank petitioned the court to facilitate the sale of this remaining truck to recover the outstanding loan balance.

The Bank requested the court to order:

– Company B to repay the principal and interest in VND under Credit Contract No. 1702-LAV-200800142, totaling VND 4,368,570,503;

– Company B to repay the interest of USD 5,392.81 under Credit Contract No. 1702-LAV-200900583.

In the event that Company B fails to repay or does not fully repay, the Bank requested the court to foreclose the collateral, including:

– The house ownership and land use rights at No. 432, Group 28, Ward E, District G, Hà Nội, owned and used by Mr. Trần Duyên H and Mrs. Lưu Thị Minh N;

– One finished JMP truck with a load capacity of 1.75 tons, assembled by Company B under Asset Mortgage Contract No. 219/2009/EIBHBT-CC dated October 29^th, 2009.

The defendant’s representative, Mr. Trần Lưu H1, General Director of Company B, acknowledged the outstanding principal, interest, and collateral as presented by the Bank but requested that the Bank allow for installment repayments.

The interested parties, Mr. Trần Duyên H and Mrs. Lưu Thị Minh N confirmed the following: They acknowledged signing the mortgage contract for the property located at No. 432 as mentioned above, securing a loan of up to VND 3,000,000,000 for Company B. This mortgage contract was duly notarized and registered as a secured transaction.

Additionally, Mr. Trần Duyên H and Mrs. Lưu Thị Minh N’s family supported Company B by contributing nearly VND 600,000,000 towards repaying the loan secured by their property. They requested the bank to extend Company B’s loan repayment period to allow the company sufficient time for production recovery and repayment arrangement to the bank. Furthermore, they appealed to the court not to summon their sons, daughters-in-law, daughters, and sons-in-law to the court proceedings.

Mr. Trần Lưu H2, on behalf of Mr. Trần Duyên H and Mrs. Lưu Thị Minh N’s children and grandchildren living at the house and land at No. 432, stated:

At the end of 2010, he learned that his parents had mortgaged the family house and land to secure Company B’s loan. After Mr. Trần Duyên H and Mrs. Lưu Thị Minh N were granted the certificate of ownership for the house and land in 2000, Mr. Trần Lưu H2 and Mr. Trần Minh H funded the construction of an additional 3.5-story house on the land. Sixteen family members currently live at the property at No. 432.

When the mortgage contract was signed, the bank did not consult him or the other residents. Therefore, he requested the court not to recognize the mortgage contract and to consider the VND 550,000,000 contributed by him and his siblings to repay Company B’s loan. He argued that the bank inappropriately deducted this amount from the foreign currency loan secured by 19 trucks.

In the First-instance Business and Commercial Judgment No. 59/2013/KDTM-ST dated September 24^th, 2013, the Hà Nội City People’s Court ruled:

– To accept Commercial Bank A’s claims against Limited Liability Company B.

– To order Limited Liability Company B to repay Commercial Bank A the remaining debt of Credit Contract No. 1702-LAV-200800142, including: principal debt of VND 2,813,600,000; in-term interest of VND 2,080,977,381; overdue interest as of September 23^rd, 2013, of VND 1,036,575,586; and late payment penalty interest as of September 23^rd, 2013, of VND 123,254,156; totaling VND 6,054,407,123.

– To order Limited Liability Company B to repay Commercial Bank A the overdue interest debt of USD 5,392.81 of Credit Contract No. 1702-LAV-200800583.

If Limited Liability Company B fails to pay or pay adequately the debt of Credit Contract No. 1702-LAV-200800142, Commercial Bank A reserves the right to petition the Hà Nội City Civil Judgment Enforcement Department to enforce the collateral as per the law, specifically the house and land at plot No. 43, map sheet No. 5I-I-33 (1996), according to the Certificate of house ownership and land use right No. 10107490390 issued by the Hà Nội  City People’s Committee on December 7^th, 2000, to Mr. Trần Duyên H and Mrs. Lưu Thị Minh N at 432, group 28, E ward, G district, Hà Nội, to recover the debt.

If Limited Liability Company B fails to pay or pay adequately the debt of Credit Contract No. 1702-LAV-200800583, Commercial Bank A reserves the right to petition the Hà Nội City Civil Judgment Enforcement Department to enforce the collateral of one 1.75-ton JMP truck assembled by Limited Liability Company B under Mortgage Contract No. 219/2009/EIBHBT-CC dated October 29, 2009, to recover the debt.

Additionally, the court also decided on the court fees and the rights of the litigants to appeal according to the law.

After the first-instance trial, the defendant and the interested parties all appealed the first-instance judgment.

In Appellate Business and Commercial Judgment No. 111/2014/KDTM-PT dated July 7^th, 2014, the Appellate Court of the Supreme People’s Court in Hà Nội ruled:

To uphold the First-instance Business and Commercial Judgment No. 59/2013/KDTM-ST dated September 24^th, 2013, of the Hà Nội City People’s Court regarding the credit contracts, loan amounts, and amounts Limited Liability Company B must repay to Commercial Bank A; to vacate the part of the First Instance Judgment No. 59/2013/KDTM-ST dated September 24^th, 2013, of the Hà Nội City People’s Court regarding the mortgage contract of third-party, specifically:

…Vacate the decision on the mortgage contract of land use rights and attached assets of a third party (house and land at No. 432, Group 28, E Ward, G District, Hà Nội City) signed on June 11^th, 2008, at Notary Office No. 6 in Hà Nội City and the registration of secured transactions at the Hà Nội Department of Natural Resources and Environment on June 11^th, 2008…

To remand the case file to the Hà Nội City People’s Court for reexamination, evidence collection, and retrial, determining the legitimate assets belonging to Mr. Trần Duyên H and Mrs. Lưu Thị Minh N as collateral to secure Company B’s loan from Commercial Bank A under Credit Contract No. 1702-LAV-200800142 dated June 16^th, 2008.

Additionally, the appellate court ruled on court fees.

After the appellate trial, the bank and the Hà Nội City People’s Court submitted a request for cassation review of the appellate judgment.

In Cassation Decision No. 14/2016/KDTM-KN dated April 12^th, 2016, the Chief Justice of the Supreme People’s Court appealed the Appellate Business and Commercial Judgment No. 111/2014/KDTM-PT dated July 7^th, 2014, of the Appellate Court of the Supreme People’s Court in Hà Nội, requesting the Judicial Council of the Supreme People’s Court to vacate the Appellate Business and Commercial Judgment No. 111/2014/KDTM-PT dated July 7^th, 2014, of the Appellate Court of the Supreme People’s Court in Hà Nội and First-instance Business and Commercial Judgment No. 59/2013/KDTM-ST dated September 24^th, 2013, of the Hà Nội City People’s Court, and to remand the case file to the Hà Nội City People’s Court for retrial in accordance with the law.

At the cassation hearing, the representative of the Supreme People’s Procuracy concurred with the appeal of the Chief Justice of the Supreme People’s Court, requesting the Judicial Council of the Supreme People’s Court to vacate the appellate judgment and remand the case file to the High People’s Court in Hà Nội for appellate retrial.

COURT’S OPINION:

[1] The case file shows that to secure the loan under Credit Contract No. 1702-LAV-200800142 dated June 16^th, 2008, at the bank for Company B, which was managed by Mr. Trần Lưu H1 as the Director, the son of Mr. Trần Duyên H and Mrs. Lưu Thị Minh N, the couple mortgaged their house and land at No. 432, group 28, E ward, G district, Hà Nội. This property was under their ownership and management as per the mortgage contract of land use rights and attached assets dated June 11^th, 2008. The mortgage contract was notarized and registered as a secured transaction according to legal requirements.

[2] According to the Certificate of house ownership and land use rights dated December 7^th, 2000, the house and land at No. 432, Group 28, E Ward, G District, Hà Nội City (hereafter referred to as house and land at No. 432), includes: 147.7 m² of land and 85 m² of housing with a concrete and brick structure; two floors plus one. When appraising the collateral, the bank knew that besides the registered two-floor house, there was also an unregistered 3.5-floor house on the 147.7 m² land.

However, the bank only valued the land use rights and the registered two-floor house at VND 3,186,700,000, without collecting information and documents to clarify the origin and ownership of the 3.5-floor house, which is a shortcoming that does not ensure the rights of the involved parties.

[3] During the case resolution, on June 6^th, 2012, the Hà Nội City People’s Court inspected and appraised the house and land at No. 432 on-site, determining: the property includes two buildings (the first with a land area of 37.5 m², length 5.9 m, width 6.35 m; the second is a three-floor concrete house with a balcony, area of 61.3 m²) with 16 people registered as permanent residents.

Before the first-instance trial, on September 21^st, 2013, Mr. Trần Lưu H2 (son of Mr. Trần Duyên H and Mrs. Lưu Thị Minh N) sent a petition to the Hà Nội City People’s Court stating that after being granted the Certificate of house ownership and land use rights in 2000, due to housing difficulties, in 2002, Mr. Trần Duyên H’s family agreed to let Mr. Trần Lưu H2 and other children of Mr. Trần Duyên H and Mrs. Lưu Thị Minh N fund the construction of an additional 3.5-floor house next to the old two-floor house on the said land. 

Therefore, the Hà Nội City People’s Court knew that the actual state of the land when mortgaged included two houses (the old two-floor house and the 3.5-floor house), which is inconsistent with the 2000 certificate of house ownership and land use rights and the mortgage contract dated June 11^th, 2008. While adjudicating the matter, although the Hà Nội People’s Court considered the request of Mr. Trần Lưu H2 and Mr. Trần Duyên H’s children regarding the 3.5-floor house, the court did not clearly rule whether to enforce the foreclosure on the 3.5-floor house, which is incorrect and does not ensure the legitimate rights and interests of the involved parties.

[4] According to Section 4, Clause 19, Article 1 of Decree No. 11/2012/NĐ-CP dated February 22^nd, 2012, amending and supplementing several articles of Decree No. 163/2006/NĐ-CP dated December 29^th, 2006, on secured transactions: “In cases where only the land use rights are mortgaged without mortgaging the assets attached to the land and the land user is not simultaneously the owner of the assets attached to the land, when handling the land use rights, the owner of the assets attached to the land is allowed to continue using the land as agreed between the land user and the owner of the assets attached to the land unless otherwise agreed.

The rights and obligations between the mortgagor and the owner of the assets attached to the land are transferred to the purchaser or transferee of the land use rights.” In this case, when the mortgage contract of land use rights and attached assets was signed, both the mortgagor (Mr. Trần Duyên H and Mrs. Lưu Thị Minh N) and the mortgagee (the bank) were clearly aware that besides the registered two-floor house, there was also an unregistered 3.5-floor house on Mr. Trần Duyên H and Mrs. Lưu Thị Minh N’s land. However, the parties only agreed to mortgage the assets including the land use rights and the two-floor house.

When there are multiple assets attached to the land, some owned by the land user and others by different individuals, and the land user mortgages only their land use rights and assets, the mortgage contract remains valid if it complies with legal requirements in both form and content. Therefore, the appellate court’s determination that the mortgage contract dated June 11^th, 2008, is partially invalid (the part concerning the 3.5-floor house); the vacatur of the first-instance judgment’s decision regarding the mortgage contract; and the remand the case file to the Hà Nội City People’s Court for reexamination and evidence collection to determine the legitimate assets of Mr. Trần Duyên H and Mrs. Lưu Thị Minh N and retrial is incorrect.

With the documents and evidence in the case file, the appellate court should have considered and ruled on enforcing the secured assets, which are the land use rights and the legally owned house of Mr. Trần Duyên H and Mrs. Lưu Thị Minh N according to the law. Upon retrial, the appellate court should direct all parties to furnish documents and evidence establishing the origin of the 3.5-floor house to ensure a just resolution that safeguards the rights and interests of those who financed its construction and current residents.

Furthermore, the appellate court should facilitate discussions between the involved parties, encouraging them to reach a mutually agreeable resolution regarding the disposition of the mortgaged assets. Should the mortgagor and mortgagee concur that the mortgagee may sell the secured assets, encompassing the land use rights with a house owned by a party other than the land user, the house owner should be granted the right of first refusal to purchase the property (transfer of ownership).

[5] Furthermore, the first-instance court relied on Clause 5.4, Article 5 of the Credit Contract, which stipulates late payment penalties for overdue interest (“late payment interest is over 10 days from the due date, the late payment interest rate is 2% on unpaid interest; over 30 days from the due date, the late payment interest rate is 5% on unpaid interest”), to grant the bank’s request for Company B to settle VND 123,254,156 in late payment interest. However, this decision is unlawful and cannot be accepted because it constitutes compound interest. Despite this error, the appellate court failed to identify the issue and upheld the first-instance judgment, which is also incorrect.

In light of the foregoing,

DECISION:

Pursuant to Clause 2, Article 337, Clause 3, Article 343, and Article 345 of the 2015 Civil Procedure Code; Resolution No. 103/2015/QH13 dated November 25, 2015, on the implementation of the Civil Procedure Code:

1. Accept the Cassation DecisionNo. 14/2016/KDTM-KN dated April 12^th, 2016, of the Chief Justice of the Supreme People’s Court.
2. Vacate the Appellate Business and Commercial Judgment Judgment No. 111/2014/KDTM-PT dated July 7^th, 2014, of the Appellate Court of the Supreme People’s Court in Hà Nội regarding the business and commercial case “Dispute over Credit Contract” between the plaintiff, Commercial Joint Stock Bank A, and the defendant, Limited Liability Company B, and interested parties including 10 people.
3. 3. Remand the case file to the High People’s Court in Hà Nội for retrial in accordance with the appellate procedure as prescribed by law.

CONTENT OF THE CASE LAW:

“[4]When there are multiple assets attached to the land, some owned by the land user and others by different individuals, and the land user mortgages only their land use rights and assets, the mortgage contract remains valid if it complies with legal requirements in both form and content…

… Should the mortgagor and mortgagee concur that the mortgagee may sell the secured assets, encompassing the land use rights with a house owned by a party other than the land user, the house owner should be granted the right of first refusal to purchase the property (transfer of ownership).”

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