Supreme Court, Grand Bench, 平成8(オ)1697, November 24, 1999, appeal from Nagoya High Court


Disposition

  • The appeal is rejected.
  • Costs to be born by Appellant.

Reasons

Counsel for Appellant sets for the reasons for appeal as follows.

  1. Facts confirmed in the proceeding below are in outline as follows.

    1. On November 10, 1989, Appellee entered into an agreement with E in respect of the land and building recorded in the trial court record (hereinafter "the property"), under which E as debtor offered a root-hypothec in the property to secure loans from Appellee, to a maximum value of 35,000,000 yen.

    2. On November 17, 1989, Appellee lent 28,000,000 yen to E, to be repaid in monthly installments of 117,000 plus interest on the 15th of each month from February 15, 1990 (hereinafter "the obligation").

    3. Appellant has been in occupation of the building without right since May 5, 1993.

    4. When advances ceased producing a return, Appellee petitioned in the Nagoya District Court on September 8, 1993 to commence auction proceedings against the property, and the court initiated proceedings on that date. The opening date for bids was fixed at May 17, 1995, due to occupation of the property by Appellant, prospective bidders were discouraged, bids did not materialize, and auction proceedings did not move forward.

  2. In this case, possession of the building without right by Appellant is obstructing auction proceedings against the property, with the result that the obligation owed to Appellee cannot be satisfied. On this basis, Appellee has petitioned to remove the obstruction by exercising E's right [to possession] by subrogation, with a view to realizing its secured claim under the root hypothec.

    The trial court approved the petition of Appellee, reasoning
    as follows.

    1. Auction proceedings in this case are not moving forward because of the possession of the property by Appellant, which is discouraging potential purchasers with the result that the Appellee is unable to obtain satisfaction of the obligation owed to it. Therefore, to protect the value of its right, a petition by Appellee to remove the obstruction, based on subrogation of E's right of ownership, can be recognized.

    2. The rights that can be exercised by Appellee extend beyond the eviction of E, to include a right to remove the Appellant, as necessary to protect Appellee's interest.

  3. The hypothec interest grants to its holder a priority right over other creditors in the auction proceeds of the hypothecated immoveable. The interest is created without transfering possession to its holder, and in principle the holder is not entitled to interfere in the use of or returns from the property.

    However, in circumstances of illegal occupation of the property by a third party that disrupts the auction process in a way that threatens to reduce the sale value of the property, and so blocking realization of the collateral and making it difficult for the hypothec holder to exercise its right to repayment, this must unavoidably be assessed to be injurious to the hypothec right.

    It is anticipated that the hypothecated borrower will appropriately maintain the property so as to avoid damage to the hypothec right. When such a situation arises, it an attribute of the hypothec right that its holder may petition the owner of the property to correct the situation and appropriately manage and preserve the collateral. Accordingly, when necessary to secure its interest, the hypothec holder may invoke Civil Code sec. 423, and petition for removal of the obstruction, in subrogation to the owner's interest.

    However, it should also be understood that, where a third party is in illegal occupation of hypothecated property and this is interfering with realization of the collateral to the end that satisfaction of priority claim of the hypothec holder is difficult, a petition by the holder to remove this obstruction to its interest.

    To the extent that the previous decision of Supreme Court, Second Petty Bench, 平成元年(オ)1209, 45(3) Minshū 268 conflicts with this judgement, it is overruled.

  4. In this case, the advances secured by the property in this case have come due, Appellee has petitioned for execution of its hypothec, and the occupation of the property without right by Appellant is preventing auction proceedings from moving forward. The connection between the barrier this poses to realization of the collateral and its adverse impact on Appellee's priority right to repayment is obvious.

    Based on the facts above, Appellee a right as against E to demand remediation of the conditions that are blocking realization of the collateral and satisfaction of its secured claim. It is correct to find that Appellee, in order to protect its interest, may stand in the shoes of E in a claim for removal of the obstruction, and for the purpose of managing the property on E's behalf, petition directly for eviction of Appellant.

  5. The petition in this case is for subrogation on the basis of the right to payment secured by the root hypothec [the former being an obligation], but this should be interpreted to encompass a claim of subrogation of the security itself to the ownership interest [the latter two being property rights] in order to evict Appellant for the purpose of facilitating realization of collateral on which the value of the hypothec depends. On that basis, approval of Appellee's petition in the court below is correct in the result, and the claim on appeal cannot be accepted.

    Accordingly, with the concurring opinion of Justice Okuda Masamichi, the disposition in this case is the unanimous decision of this Court.


Concurring opinion of Justice Okuda Masamichi

I am in agreement with the Court in this case, but I would like to add a few supplementary comments on the remedies available to a hypothec holder against illegal occupants of hypothecated property.

  1. Damage to the hypothec interest through actions by a third party

    The hypothec is an exclusive right to value, realized by a right to auction proceeds in priority over other creditors for the satisfaction of a secured obligation. In principle, the hypothec interest carries with it no right to physical control over the property. It is limited to a purely abstract, conceptual form of control, and multiple hypothec interests may attach to a single piece of property. In this respect, the hypothec differs from other limited interests, such as the pledge, the bailment, or the superficies, that are accompanied by possession.

    The authority to claim the exchange value of the target asset that is the essence of the hypothec interest is most acute at the point of enforcement, but the exclusive right to exchange value is one the persists continuously from the point of creation to the interest to its realization. Third-party actions that reduce the value of the collateral or make its realization difficult may occur at any time from the creation to the point of enforcement, and it is therefore necessary to provide the hypothec holder with legal means to protect its interest across this interval.

    Further, as the value of the hypothec is realized through auction proceedings, the determination of whether action by a third party reduces the value of the asset or makes realization difficult must take account not only on the action itself, but of its impact on the value of the hypothec holder's specific interest. We should not treat all hypothec holders as having an equal claim to relief in this regard, but also keep in view the need to forestall abusive demands for relief by lower-tier hypothec holders that have no possibility of receiving a return on their interest.

  2. Petition for removal of obstruction based on the hypothec interest

    Where a property interest is obstructed or threatened with obstruction, the power of the holder of the interest to challenge the obstructing party in an action to remove or forestall the obstruction (a "suit on the property") is well established. Where the obstruction or threat of obstruction is to actual control over the property subject to the interest (i.e. possession), this is been understood as a means of restoring the status quo ante. The hypothec right is not accompanied by a right of actual control (possession), but where, as in this case, a third party has taken possession of the property without legal right, and this interferes with the auction process, with the result that the value of the collateral cannot be realized for satisfaction of the debt owed to the hypothec holder, the right of the holder to remove the obstruction through a suit for eviction must be recognized. Of course, in this instance, the question of whether the suit is one for eviction in favor of possession by the hypothec holder itself, or in favor of possession by the owner of the property, remains to be considered.

  3. Hypothec holder's exercise by subrogaton of the owner's right to remove obstruction

    If a right to relief from interference with a hypothec interest is recognized on the basis of the hypothec itself, there is scope for objection to recognition of additional rights of the owner that the hypothec holder might exercise by subrogation. The first of these is the question of what constitutes "protection of rights owed to oneself," where the party concerned is the holder of a hypothec. The second is that under related precedent concerning transferred interests (where ownership of immoveable property is transferred in succession, the right to register is exercise by subrogation to the rights of an intermediate transferee, or where a lessee exercises rights in subrogation to the owner), a right of subrogation is recognized of necessity due to the lack of other adequate mechanisms for relief, and the objection might be raised that the grounds for subrogated exercise of a right of removal are not present in a case of obstruction to a hypothec interest.

    On the first point, the following analysis can be applied. The hypothecator or a party that takes from them, as the party positioned to actually manage the property subject to security (the hypothec), is expected by law to manage the asset in such a way that its value as security is not reduced and that enforcement of the security is not ostructed. On the other hand, the hypothecatee has a right to petition the owner to preserve the value of the property (a right to preservation of security).

    This right to preservation of security persists from the creation of the interest to its realization, and when the owner takes no action to address a third party that damages the property or occupies it to the detriment of the value of the secured claim, this constitutes an obstruction or interference with the hypothecatee's right, and therefore the hypothecatee, in order to protect its right to preservation of its secured claim against the owner may exercise a right to removal of the obstruction by subrogation.

    On the second point concerning support from the line of authority on transferred interests (and the question of whether adequate alternative remedies are available), it would be hard to say that discussion of the requirements and effect (the content) of a right to petition of remove of obstruction based on a hypothec has been exhausted, and at the current stage it would certainly not be appropriate to close the door on the issue of relief by subrogation.

    Now, with respect to whether the effect of exercise by subrogation is eviction of the occupier in favor of direct possession by the hypothecatee, if a petition for eviction "in the stead of the owner" is understood to be a petition to secure occupation by the owner, this may appear to be identical to the hypothecatee's exercise of the same right by subrogation. However, where the owner has refused cooperation or where such cooperation cannot be expected, it is fit to understand "in the stead of the owner" to mean eviction in favor of direct possession by the hypothecatee. In a case like the one at hand, as a general rule, eviction in favor of direct possession by the hypothecatee is appropriate. Possession so obtained by the hypothecatee should be considered to be for the purpose of managing the property on behalf of the owner.

    All this being said, on the issue of circumstances in which subrogation [in this category of cases] can be approved, while there are issues that remain for consideration with respect to the rule applied, in a case where, as here, the hypothecatee has petitioned for auction of the property, I see no problem with the exercise of a right by subrogation.