Leca vs. Manuela Corp.

LECA REALTY CORPORATION vs. MANUELA CORPORATION G.R. No. 166800 September 25, 2007 FACTS: 1. Manuela Corporation (Manuela) is a duly registered domestic corporation, corporation, principally engaged in the business of leasing commercial spaces in shopping malls to retailers. At the time, respondent owned and operated M Star One, M Star, Starmall, Metropolis Star, and Pacific Mall. 2. Manuela obtained several several loans from two syndicates of lenders to finance finance the costs of of two of its buildings. Aside from its Php2.174 billion loan from banks, the company also had Php1.476 billion indebtedness to Hero Holdings, Inc. and its trade suppliers, and other parties. 3. The region was then beset by the 1997 1997 Asian financial crisis crisis which prompted banks banks to stop their lending activities. This severely affected Manuela whose malls did not operate sufficiently, causing serious losses to the company. The adjusted interest rates on Manuela‟s loans were around 18% to 30%, which contributed to its liquidity problems. 4. The company, company, however, exerted all efforts efforts to cushion cushion the financial blow by “closing down nonincome generating businesses, concentrating on its business of leasing commercial spaces, intensifying collection efforts, reducing personnel, negotiating for restructuring of loan with creditors, and working out a viable payment scheme without giving undue preference to any creditor.” In spite of all these initiatives, initiati ves, Manuela still failed to pay its financial obligations. 5. This forced the company company to ask the court to issue a Stay Order and approve its proposed Rehabilitation Plan, which if successfully implemented will “enable it to settle its remaining obligations in an orderly manner, restore its financial viability, and allow it to resume its normal operations.” The trial court subsequently issued the Stay Order, which stated:‟ a) a stay in the enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against petitioner MANUELA, its guarantors and sureties not solidarily liable with it; … e) directing the payment in full of all administrative expenses incurred after the issuance of this Stay Order.

6. The trial court appointed appointed Marilou Adea as rehabilitation receiver. Adea recommended recommended the approval of Manuela‟s Rehabilitation Plan and convened with Manuela‟s creditors for the latter to air their concerns. 7. Leca Realty Corporation (Leca) filed its Comment Comment and/or Formal Claim against against Manuela amounting to Php193.7 million, comprised of unpaid rentals, security deposits, interests, and penalty charges. After Leca‟s receipt of Adea‟s Report and Recommendation, petitioner questioned the reduction of Manuela‟s liability, “considering its contractual nature which cannot be impaired during the process of rehabilitation.” The trial court eventually approved the Rehabilitation Plan. Leca‟s appeal to the Court of Appeals was dismissed for lack of merit. 8. The disagreement is grounded grounded on the fact that the rental rates agreed agreed upon by Leca and Manuela were reduced in the Rehabilitation Plan. There was a gross discrepancy between the amounts of rent agreed upon by the parties and those provided in the Rehabilitation Plan. 9. Leca filed another another petition before the the appellate court court alleging violation of its constitutional right to non-impairment contract and the Interim Rules of Procedure on Corporate Rehabilitation. The Court of Appeals, in denying the petition, ruled: The pendency of the rehabilitation proceedings cannot be interpreted to impair the contractual obligations previously entered into by the contracting parties because the automatic stay of all actions is sanctioned by P.D. [No.] 902-A which provides that “all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly.” 10. Thus, Leca filed a petition for review on certiorari before the Supreme Court. ISSUE:

Whether the pendency of the rehabilitation proceedings can justify impairment of contractual obligations previously entered into by the parties? HELD: No, the pendency of the rehabilitation plan can no justify the impairment of contractual obligations. The amount provided in the rehabilitation plan is null and void. RATIO: Petitioner, in support of its contention, cites in its Memorandum the treatises of Ateneo Law Dean Cesar L. Villanueva and former SEC Commissioner Danilo L. Concepcion, both known authorities on Corporation Law. In his Article which appeared in the Ateneo Law Journal, Dean Villanueva said: The nature and extent of the power of the SEC to approve and enforce a rehabilitation plan is certainly an important issue. Often, a rehabilitation plan would require a diminution, if not destruction, of contractual and property rights of some, if not most of the various stakeholders in the petitioning corporation. In the absence of clear coercive legal provisions, the courts of justice and much less the SEC would have no power to amend or destroy the property and contractual rights of private parties, much less relieve a petitioning corporation from its contractual commitments.

On the other hand, Professor Concepcion stated that what is allowed in rehabilitation proceedings is o n l y t h e s u s p e n s i o n o f p a y m e n t s , o r t h e s t ay o f a l l ac t i o n s f o r c l a i m s o f d i s t r e s s e d c o r p o r a t i o n s , an d u p o n i t s s u c c e s s f u l r e h a b i l i t at i o n , t h e c l ai m s m u s t b e s e t t l ed i n f u l l .

The Supreme Court, in agreeing with Leca, cited its ruling in The Insular LifeAssurance Company, Ltd. v. Court of Appeals, which provides: When the language of the contract is explicit leaving no doubt as to the intention of the drafters thereof, the courts may not read into it any other intention that would contradict its plain import. The Court would be rewriting the contract of lease between Insular and Sun Brothers under the guise of construction were we to interpret the „option to renew‟ clause as Sun Brothers propounds it, despite the express provision in the original contract of lease and the contracting parties‟ subsequent acts. As the Court has held in Riviera Filipina, Inc. vs. Court of Appeals, „a court, even the Supreme Court, has no right to make new contracts for the parties or ignore those already made by them, simply to avoid seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract of an obligation not assumed. The Court voided the Rehabilitation Plan insofar as it amends the rental rates agreed upon by the parties. It opined that the change is not justified as the amount of rent is an “essential condition of any lease contract;” thus, any alteration on the rate is tantamount to impairment of stipulation of the parties.