MWSS vs. Daway

A rehabilitation court has no jurisdiction to enjoin a beneficiary from drawing on an Irrevocable Standby Letter of Credit issued by banks for the account of a debtor undergoing rehabilitation, because (1) the letter of credit is not an asset of the debtor subject to rehabilitation proceedings, and (2) the banks' obligation is solidary with the debtor, not merely that of a guarantor or surety, and thus falls outside the automatic stay provision that only covers non-solidary guarantors.

The case arose from a concession agreement between the Metropolitan Waterworks and Sewerage System (MWSS) and Maynilad Water Services, Inc., wherein Maynilad undertook to manage water and sewerage services and pay concession fees. To secure its obligations, Maynilad obtained an Irrevocable Standby Letter of Credit from a consortium of foreign banks. After disputes over concession fees and foreign exchange losses led to arbitration, MWSS sought to draw on the letter of credit following a favorable arbitration award. However, Maynilad had commenced corporate rehabilitation proceedings, prompting the rehabilitation court to issue a Stay Order and subsequently enjoin MWSS from drawing on the letter of credit.

• On February 21, 1997, MWSS and Maynilad entered into a Concession Agreement granting Maynilad a twenty-year period to manage, operate, and refurbish water delivery and sewerage services in the West Zone Service Area, with Maynilad undertaking to pay concession fees including payments for MWSS's foreign loans.
• Section 6.9 of the Concession Agreement required Maynilad to post a bond, bank guarantee, or other security acceptable to MWSS.
• On July 14, 2000, Maynilad arranged a three-year facility with foreign banks led by Citicorp International Limited for the issuance of an Irrevocable Standby Letter of Credit in the amount of US$120,000,000 to secure Maynilad's full and prompt performance under the Concession Agreement.
• Disputes arose regarding foreign exchange losses, leading to Force Majeure notices and arbitration before the Appeals Panel.
• On November 7, 2003, the Appeals Panel ruled that no Event of Termination existed and ordered Maynilad to pay concession fees; the award became final on November 22, 2003.
• On November 13, 2003, Maynilad filed a petition for rehabilitation before the RTC of Quezon City, Branch 90, which issued a Stay Order on November 17, 2003 staying enforcement of claims against Maynilad.
• On November 24, 2003, MWSS submitted a written certification to Citicorp International Limited drawing US$98,923,640.15 on the Standby Letter of Credit due to Maynilad's failure to perform its obligations.
• Maynilad's financial statements as of December 31, 2001 and 2002 did not show the Standby Letter of Credit as part of its assets or liabilities.
• On November 27, 2003, the RTC issued an Order declaring MWSS's act of drawing on the Letter of Credit violative of the Stay Order and directing MWSS to withdraw the certification under pain of contempt.

• The US$120 Million Standby Letter of Credit and Performance Bond are not properties of the debtor's estate and are therefore not subject to the in rem rehabilitation jurisdiction of the trial court.
• A call on the Standby Letter of Credit does not involve any asset of Maynilad but only assets of the issuing banks, and therefore cannot be considered a "claim" against the debtor's assets falling under the Stay Order.
• The obligation of the banks under the Standby Letter of Credit is solidary with Maynilad, not merely that of a guarantor or surety, because it is a primary, direct, and absolute undertaking to pay.
• The rehabilitation court acted in excess of jurisdiction in enjoining MWSS from drawing on the Standby Letter of Credit.
• Certiorari is the proper remedy because Section 5, Rule 3 of the Interim Rules provides that orders are immediately executory and appeals do not stay execution, leaving no adequate, speedy, or beneficial remedy.

• The rehabilitation court had authority to issue the clarificatory order after evaluating arguments from all parties, and its jurisdiction extends to "all those affected by the proceedings" upon publication of notice.
• The act of drawing on the Standby Letter of Credit constitutes enforcement of a claim prohibited by Section 6(b), Rule 4 of the Interim Rules because the banks are not solidarily liable with Maynilad.
• The Standby Letter of Credit is not part of Maynilad's estate, but the court's jurisdiction covers the act of enforcement against the banks.
• MWSS had a plain, speedy, and adequate remedy under Section 12, Rule 4 of the Interim Rules by filing a motion to modify or terminate the stay order.
• MWSS violated an immediately executory order and therefore comes to court with unclean hands, disqualifying it from relief.

• Procedural Issues:
  • Whether the petition for certiorari under Rule 65 is the proper remedy to assail the rehabilitation court's order enjoining the draw on the Standby Letter of Credit.
• Substantive Issues:
  • Whether the rehabilitation court has jurisdiction over the Irrevocable Standby Letter of Credit issued by banks for the account of the debtor.
  • Whether the obligation of the issuing banks under the Standby Letter of Credit is solidary with the debtor or merely that of a guarantor or surety.
  • Whether the prohibition under Section 6(b), Rule 4 of the Interim Rules on Corporate Rehabilitation applies to prevent the beneficiary from drawing on the Standby Letter of Credit.

• Procedural:
  • The petition for certiorari is proper. Although Section 12, Rule 4 allows motions to modify stay orders, the RTC had already ruled on the issue during hearings on Maynilad's urgent motions, rendering further opposition before the same court futile. Moreover, Section 5, Rule 3 states that orders are immediately executory and that petitions for review or appeals do not stay execution, making ordinary remedies inadequate. Certiorari is available when there is no adequate remedy that is equally beneficial, speedy, and sufficient.
• Substantive:
  • The rehabilitation court acted in excess of jurisdiction. The Standby Letter of Credit is not property of the debtor's estate subject to rehabilitation proceedings, as evidenced by its absence from Maynilad's audited financial statements.
  • The obligation of the issuing banks under an Irrevocable Standby Letter of Credit is solidary with the debtor. It is a primary, direct, definite, and absolute undertaking to pay upon presentation of documents, independent of the underlying contract between beneficiary and applicant.
  • Section 6(b), Rule 4 of the Interim Rules prohibits enforcement of claims against guarantors or sureties who are not solidarily liable with the debtor. Since the banks are solidarily liable with Maynilad, the prohibition does not apply, and the rehabilitation court cannot enjoin the beneficiary from drawing on the Letter of Credit.
  • The call on the Standby Letter of Credit is not a claim against the debtor's assets but against the banks' assets, and therefore not subject to the automatic stay.

• Nature of Letters of Credit — Letters of credit are definite undertakings by the issuing bank to pay the beneficiary upon presentation of stipulated documents. They are primary obligations, not accessory contracts, and while they serve as security arrangements, they are not converted into contracts of guaranty. The concept of guarantee is inconsistent with the independence of the bank's obligation under an irrevocable letter of credit.
• Solidary Obligation of Banks — Except when a letter of credit specifically stipulates otherwise, the obligation of banks issuing letters of credit is solidary with that of the person or entity requesting its issuance, being a direct, primary, absolute, and definite undertaking to pay the beneficiary upon presentation of required documents.
• Jurisdiction of Rehabilitation Courts — Rehabilitation courts have in rem jurisdiction over the assets of the debtor reflected in its audited financial statements, but not over assets held by third parties that are not part of the debtor's estate or over solidary obligors.
• Adequacy of Remedy for Certiorari — Certiorari is available when there is no adequate remedy, meaning one that is equally beneficial, speedy, and sufficient, not merely one that may offer relief at some future time. The inadequacy of all other legal remedies and the danger of failure of justice determine the propriety of certiorari.

• "Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter."
• "They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty."
• "Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein."
• "It is the inadequacy -- not the mere absence -- of all other legal remedies and the danger of failure of justice without the writ, that must usually determine the propriety of certiorari."

• Feati Bank & Trust Company v. Court of Appeals — Cited for the principle that the concept of guarantee is inconsistent with the concept of an irrevocable letter of credit, and that the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened.
• Bank of America NT & SA v. Court of Appeals — Cited for the definition of letters of credit and for accepting the application of the Uniform Customs and Practice for Documentary Credits (U.C.P.).
• Traders Royal Bank v. Court of Appeals — Cited for the rule that property of a surety cannot be taken into custody by the rehabilitation receiver and that a surety can be sued separately to enforce his liability.
• Philippine Blooming Mills, Inc. v. Court of Appeals — Reiterated the rule in Traders Royal Bank that solidary obligors can be pursued separately from and independently of the rehabilitation case.
• Silvestre v. Torres and Oben — Cited for the standard that it is not enough that a remedy is available, but that it must be adequate, equally beneficial, speedy, and sufficient to preclude certiorari.
• Jaca v. Davao Lumber Company — Cited for the principle that the inadequacy of other remedies, not mere absence, determines the propriety of certiorari.
• Prudential Bank v. Intermediate Appellate Court — Cited for the definition of letters of credit as engagements by a bank made at the request of a customer to honor drafts or demands of payment upon compliance with conditions.
• Insular Bank of Asia & America v. Intermediate Appellate Court — Cited for the principle that letters of credit are primary obligations, not accessory contracts.
• Bank of the Philippine Islands v. Nery — Cited for the application of the U.C.P. under Article 2 of the Code of Commerce.

• Section 1, Rule 3 of the Interim Rules on Procedure on Corporate Rehabilitation — Defines rehabilitation as an in rem proceeding and provides that jurisdiction over those affected is acquired upon publication of notice.
• Section 6(b), Rule 4 of the Interim Rules on Procedure on Corporate Rehabilitation — Provides for the automatic stay of enforcement of claims against guarantors or sureties not solidarily liable with the debtor.
• Section 12, Rule 4 of the Interim Rules on Procedure on Corporate Rehabilitation — Allows the court to terminate, modify, or set conditions for the continuance of the stay order.
• Section 5, Rule 3 of the Interim Rules on Procedure on Corporate Rehabilitation — States that orders are immediately executory and that appeals or petitions for review do not stay execution unless restrained by the appellate court.
• Article 2 of the Code of Commerce — Provides that acts of commerce are governed by the Code, in its absence by commercial usage, and in absence of both by civil law; basis for applying the U.C.P.
• Articles 2 and 9 of the Uniform Customs and Practice for Documentary Credits (U.C.P.) 1993 Revision — Define documentary credits/standby letters of credit and the liability of issuing banks as a definite undertaking to pay at sight if the credit provides for sight payment.