Introduction of Our Work in the First Real Estate Commercial Trust Case of China

source：　 date：2014-05-12　 author：

[Key Points]

Our lawyers represented KunShan CG in the commercial trust dispute case against AnXin Trust, which is the first commercial trust case in China. The judgment of the appellate instance of Case was granted recently which upheld the judgment of the first instance. It is a good judgment in the aspect that the court decides that the legal relationship between the parties is commercial trust rather than financial loans, and that AnXin Trust earns money for itself by taking advantage of the investors’ fund and set forth huge amount of liquidated damages for its own benefits, and thus, the court denied the high interest rate and liquidated damages. It is a milestone case in this sense that will be a precedent for future similar cases. However, in our opinion, it is not good enough in the aspect that the principal of the trust is upheld and mortgage is upheld too.

[Basic Facts]

On Sept. 11, 2009, Kunshan CG as trustor and AnXin Trust as trustee concluded the Trust Contract which says the Trust is 62700 shares of beneficiary right issued to investors based on the trust property transferred by the trustor to the trustee. There were two types of beneficiary rights- preferential and ordinary types. During the term of the trust, the trust property which is a real estate under construction together with the land occupied by it, shall be kept and operated by the trustor. The trustor has the duty to pay a fixed amount of money out of revenue (in case revenue is not enough, the turstor shall pay out of its own money). As a guarantee to the performance of trust duties, the trustor agrees to mortgage the property to the trustee. Failing to pay on time, the liquidated damages is 0.021% per day.

On the same day, Kunshan CG as the debtor and Anxin Trust as the creditor signed the Trust Loan Contract which says a loan is granted for 3 years, from Sept. 18, 2009 till Sept. 18, 2012. Mortgage was established on the debtor’s property which is the same real estate and land as the trust property. High rates of liquidated damages and penalties were set forth in the Contract.

[Opinions and Judgment of the First Instance Court]

The first-instance court decides:

The key points in dispute in this case are: 1. Whether the underlying legal relationship is financial loan contract or commercial trust; 2. Whether KunShan CG is in default and the corresponding default liability if any; 3. Whether Anxin Trust can exercise its mortgagee’s right.

I.      The underlying relationship

On the one hand, the trust contract was established ahead of the loan contract. The foundation of the trust and the raising of money were made in public manner and have been completed. On the other hand, the money loaned was from the trust fund. The repayment term of the Trust Loan Contract was the same as the minimum balance amount in the trust special account as set forth in the Trust Contract, and thus, the loan contract was created as leeching on to the Trust Contract. In addition, AnXin Trust was in default under the Trust Contract by giving the loan. Therefore, it is improper that AnXin Trust transferred the money to KunShan CG as a loan and brought this case under the cause of default in repayment of loan. The court held that the cause of action of the case should be commercial trust dispute. The Trust Loan Contract was in conflict with the Trust Contract for the reason that the same fund raised from investors cannot serve as both the consideration for the beneficiary rights sold to the investors and the principal of loan. As for the reason why two contracts were signed on the same fund, the court accept the statements of KunShan CG that real estate registration authority does not allow Trust Contract as the proof of credit for the purpose of mortgage registration, and thus a loan trust was signed as proof of credit. AnXin Trust did not deny such reason. The court’s opinion is that the trust property concerned in this case is beneficiary rights, and the mortgage of the assets is an important means to protect the investors. Absent such mortgage, AnXin Trust cannot raise enough investment for KunShan CG. Therefore, registration of mortgage is important for AnXin Trust, KunShan CG and investors. …… The court decided that the Trust Loan Contract was a form to realize the purpose of registering the mortgage as set forth in the Trust Contract. As for the fact that AnXin Trust inserted the clauses of the penalties, compound interests and liquidated damages in the Trust Loan Contract, and claimed high amount of money against KunShan CG as default liabilities which would go to AnXin itself rather than investors, such act of AnXin Trust is for its own interest by taking advantage of investors’ property, which is in violation of the principle of honesty and credibility. Therefore, such default liability shall not be upheld. The rights, duties and liabilities between AnXin Trust and KunShan CG shall be pursuant to the Trust Contract.

II. Whether KunShan CG is in default and the corresponding liability if any

The court upheld the fact that KunShan CG failed to pay to the special trust account on time to keep the minimum balance as agreed in the Trust Contract. Therefore, KunShan CG was in default and shall bear relevant default liabilities. The default liabilities shall be determined pursuant to the Trust Contract.

III. The validity of the mortgage

The court held that the mortgage contract concerned in the case is valid. Though the mortgage contract says that the contract was made to guarantee the performance of the duties by KunShan CG under the Trust Loan Contract, KunShan CG and AnXin Trust also agreed in the Trust Contract that the supporting assets shall be mortgaged to AnXin Trust through a separate mortgage contract. As stated above, the Trust Loan Contract was a form for the purpose of registering the mortgage. The Parties have meeting of minds on the mortgage and its registration. Therefore, the mortgage is supported by the court.