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Jipyong Successfully Defends Asset Manager at All Three Court Levels in Overseas Real Estate Mezzanine Fund Dispute over U.S. Deed-in-Lieu Disclosure

2026.07.16

Jipyong represented an asset manager and prevailed at all three court levels in an action brought by a listed company investor seeking restitution of unjust enrichment and other relief (Supreme Court Decision 2025Da212617 dated July 16, 2026; Seoul High Court Decision 2024Na2010769 dated April 11, 2025; Seoul Central District Court Decision 2021Gahap541740 dated January 18, 2024). 
 
Defendant C, an asset manager represented by Jipyong, is a collective investment business entity under the Financial Investment Services and Capital Markets Act (the “FSCMA”).  C established and managed two private investment funds for professional investors (the “Funds”) whose underlying investment assets were mezzanine loan receivables relating to the development of a resort complex, including a 68-story hotel, in Las Vegas, Nevada (the “Project”).  Defendant B, an investment broker, sold beneficiary certificates in the Funds under a distribution agreement with C.  Plaintiff A, a listed company and a professional investor under the FSCMA, purchased the certificates through B. 
 
The Project’s financing structure comprised senior and mezzanine loans.  The intercreditor agreement between the senior and mezzanine lenders included provisions concerning a deed in lieu of foreclosure (“DIL”), an enforcement mechanism recognized under U.S. law. 
 
A DIL is an agreement between a lender and a borrower under which title to real estate is transferred to the lender in lieu of a foreclosure sale.  Under the intercreditor agreement, if an event of default occurred under the senior loan, the senior lender could acquire title through a DIL by agreement with the borrower, provided that the mezzanine lenders were first given an opportunity to exercise their right to purchase the senior loan. 
 
The COVID-19 pandemic subsequently halted the Project, triggering an event of default.  When the mezzanine lenders did not exercise their purchase option, title to the property was transferred to the senior lender through a DIL.  The property was then sold at a price that left even the senior lender with a loss, resulting in a total loss on the mezzanine debt.  A was consequently unable to recover its investment. 
 
A alleged that B and C had deceived it or induced it to invest based on a mistaken understanding by failing to disclose the existence and risks of the DIL provisions when soliciting the investment and by presenting the Funds as investments in ordinary loans secured by real estate.  A sought restitution of unjust enrichment from B on the basis of rescission for fraud or mistake as its primary claim and, in the alternative, damages for breaches of the FSCMA and tortious conduct.  It sought damages from C on the same statutory and tort grounds. 
 
On behalf of C, Jipyong argued that: (i) DIL is a generally available enforcement method in U.S. real estate mezzanine financing, even without an express DIL provision in the intercreditor agreement, and the provisions in question actually protected the mezzanine lenders by granting them the right to purchase the senior debt; (ii) where the value of the collateral property falls below the amount of the senior debt, a mezzanine lender has the same prospects of recovering principal regardless of whether enforcement proceeds through a DIL or a foreclosure sale, meaning that the presence or absence of the DIL provisions could not be regarded as material to a reasonable investment decision; (iii) A’s inability to recover its investment stemmed not from the DIL provisions but from the suspension of the Project and the sharp decline in the property’s value caused by the COVID-19 pandemic, both of which would have been difficult for anyone to foresee; (iv) the information memorandum (IM) prepared by C provided a thorough description of the risks inherent in mezzanine lending, including the risk of loss of principal, overseas investment risk, exit risk, and real estate market risk; and (v) as a professional investor, A had sufficient investment experience to understand the structures of mezzanine and bridge loans. 
 
The trial court accepted Jipyong’s arguments and dismissed all of A’s claims against C, as well as those against B.  The Seoul High Court upheld the trial court’s decision and dismissed A’s appeals.  The court further explained that the presence or absence of the DIL provisions did not affect the mezzanine lenders’ prospects of recovering principal or the reliability of the collateral valuation.  It also noted that such purchase rights had been exercised in other transactions.  The Supreme Court also dismissed A’s appeal, finding no error in the lower court’s application of the legal principles governing rescission for fraud or mistake and investor protection duties under the FSCMA.  The judgments in favor of the defendants therefore became final. 
 
The case directly addresses the legal nature of DIL in mezzanine investments in overseas real estate development projects, and whether information about DIL constitutes material information falling within asset managers’ and investment brokers’ duties to explain investment information or otherwise protect Korean investors.  The decisions at all three levels distinguish the risks inherent in a financial investment product’s structure from the question of whether a particular enforcement procedure is expressly provided for.  They also confirm that, in the circumstances of this case, losses attributable to unforeseeable external events arising after the investment, such as the COVID-19 pandemic, are investment risks borne by the investor and do not, in themselves, establish a breach of the duty to explain material investment information.

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