[비즈한국] Companies sometimes make decisions that are difficult to explain solely in terms of money. Knowing the laws and systems hidden within those decisions allows for a deeper understanding of the inner workings. 'Useful Business Law' introduces clues that help in understanding the flow of business.
Do you face criminal punishment if you fail to pay back money or make a bad investment? If you are subject to criminal punishment, what kind of crime would be established? This is a question I have had since my undergraduate days.
There is no disagreement that if there is clear deception, such as in voice phishing, it is criminally punishable as fraud. However, the mere fact that one cannot repay money or fulfill a contract does not constitute grounds for criminal punishment. This is because these are matters of civil liability rather than criminal liability, a point that seems slightly different from common sense. When providing legal consultations, I often receive inquiries like, "Can I sue the other party for fraud because they are intentionally avoiding repayment or failing to fulfill the contract?"
Legally speaking, if there was no intention or ability to repay from the start, the intent to deceive is recognized, and the crime of fraud is established. However, it is not easy to prove that there was no intent or ability to repay from the beginning. In actual cases, it is rare for someone to be indicted for fraud, and in criminal cases, nine times out of ten, the suspect or defendant will claim innocence.
A recent case where there was fierce debate over whether it was merely a civil breach of contract or fraud subject to criminal punishment is 'Jeonse fraud'. 'Gap investment'—the practice of selecting a house with a small difference (gap) between the purchase price and the Jeonse deposit, and finding a Jeonse tenant simultaneously with the purchase for the purpose of market gain—has been a common investment method for a long time.
When I was young, there was a saying: "Move ten times, and you'll own a house." It meant that if you kept buying and selling houses with Jeonse (key money) in between, you would eventually own a house. We didn't use the term "leverage" then, but everyone knew experientially that you could buy a home using other people's money.
Therefore, when someone said, "I bought a house through gap investment," it was seen as a success to be praised, not a behavior to be criticized for misusing the tenant's money. Considering the reality of our country, where real estate prices are constantly rising, and the past practices of purchasing homes with tenants' money, gap investment is perceived as a natural investment method.
But what happens if you take on too much leverage and the gap investment fails? It is natural to suffer losses for making a poor investment, but furthermore, is there room for it to be considered fraud in relation to the tenant?
Expecting house prices to rise, one might take out loans from multiple sources and receive Jeonse deposits. Since the loan repayment period and the lease period were still ongoing, they used that money to buy other houses, and this behavior was repeated. However, contrary to expectations, if house prices do not rise, or if too much debt or too many deposits were received, the debt exceeds the actual value of the house; this is called a 'tin-can house' (깡통주택). Tin-can houses have been common in the past as well.
The Housing Lease Protection Act recognizes the right to priority repayment for small-scale tenants and grants them the right to hold and the right to priority repayment once they move in and complete the resident registration. The fact that a special act was enacted to protect tenants shows that there have been many cases in the past where tenants lost their Jeonse deposits after moving into tin-can houses.
In the past, when a tenant lost their Jeonse deposit in a tin-can house, it was viewed only as a civil liability, not as a target for criminal punishment. Many of the civil cases I handled while working at the Korea Legal Aid Corporation over a decade ago were lawsuits for the return of Jeonse deposits and related enforcement cases, but at that time, it was rare to see a criminal complaint for fraud against a landlord who created a tin-can house. I had never seen anyone handle cases that way back then.
What are recently called Jeonse fraud cases are no different from tin-can houses (excluding clear fraud, such as forging documents or setting up a fictitious person or a homeless person as a landlord to avoid returning the deposit after concluding a lease contract).
The prosecution described Jeonse fraud cases in a press release as follows. Looking at this, there is no difference from the 'gap investment through Ponzi-like maneuvering' that has been happening all along, except that the scale has grown.
- In the process of expanding their business, 'A' indiscriminately used a portion of the deposits as business funds for things like new villa construction without any repayment plan, and while trying to manage the Jeonse deposit returns through a chain of new deposits (Ponzi-like), they could no longer respond to the sequential requests for deposit returns, leading to a collective lawsuit from tenants and the current case.
Suspects and defendants argue that they were just engaged in legitimate gap investment and that their business simply failed, and that they did not deceive the tenants. In such matters, rulings such as Daejeon District Court 2023Godan1976 distinguished between 'normal gap investment' and 'Jeonse fraud using gap investment,' ruling that the latter is subject to criminal punishment for fraud:
- This Jeonse fraud crime does not qualify as a normal 'real estate gap investment.' Usually, real estate gap investment involves purchasing a house on the premise that a Jeonse tenant already exists or will be found before the balance is paid, replacing or covering part of the purchase price with the Jeonse deposit, and buying the house with only the remaining amount—the difference between the sale price and the Jeonse price. This is predicated on the rise in real estate prices; therefore, if prices fall and become lower than the total Jeonse deposit amount, there is a risk that the owner (landlord) may not be able to return all or part of the Jeonse deposit due to a lack of solvency.
- On the other hand, Jeonse fraud using real estate gap investment, unlike this, buys property using the gap investment method but does not wait for a normal rise in house prices; instead, it makes the total Jeonse deposit amount higher than the house price from the very beginning to swindle the entire Jeonse deposit.
Because the harm that Jeonse fraud inflicts on young adults and others is immeasurably large, there is a need to punish it. From an economic perspective, it is unreasonable that the landlord takes all the profits if the gap investment succeeds, but passes the losses and risks onto the tenant if it fails. However, legally speaking, distinguishing between 'legitimate gap investment' and 'Jeonse fraud that constitutes the crime of fraud' is not easy, and the view that Jeonse fraud should be recognized broadly is bound to conflict with the principle of legality (nullum crimen, nulla poena sine lege).
The reason I examined the legal principles, prosecution, and court judgments regarding Jeonse fraud in this column is as follows: The essence of the recent settlement delay/non-payment crisis of online platforms is no different from Jeonse fraud, which is 'gap investment through Ponzi-like maneuvering.' It is expected that as legal discussions regarding the platform settlement delay crisis unfold, existing discussions on Jeonse fraud will be cited again.