MWSS vs. Daway

An irrevocable standby letter of credit is a primary, direct, absolute, and definite undertaking by the issuing bank, making its obligation solidary with the debtor; therefore, claims against the issuing bank are not stayed by a corporate rehabilitation stay order, which only applies to guarantors or sureties not solidarily liable.

MWSS granted Maynilad a 20-year Concession Agreement to manage water and sewerage services in the West Zone. To secure Maynilad's performance and payment of concession fees, Maynilad arranged for an Irrevocable Standby Letter of Credit from a consortium of foreign banks led by Citicorp. After Maynilad defaulted on its fees and failed in its arbitration bid, MWSS sought to draw on the letter of credit, but Maynilad filed for corporate rehabilitation and secured a court order stopping the draw.

• Original Filing: Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings, RTC of Quezon City, Branch 90
• Lower Court Decision: November 17, 2003 — RTC issued a Stay Order suspending all claims against Maynilad; November 27, 2003 — RTC issued a Clarificatory Order declaring MWSS's call on the letter of credit a violation of the Stay Order and enjoining MWSS from proceeding.
• Appeal: Directly to the SC via Petition for Certiorari under Rule 65, alleging grave abuse of discretion amounting to lack or excess of jurisdiction.
• SC Action: Granted the Petition for Certiorari.

• The Concession Agreement: On February 21, 1997, MWSS granted Maynilad a 20-year concession to manage the West Zone water system. Maynilad was required to pay concession fees, mostly covering MWSS's foreign loans.
• The Standby Letter of Credit: To secure its performance, Maynilad arranged a US$120,000,000 Irrevocable Standby Letter of Credit from foreign banks led by Citicorp International Limited, issued in favor of MWSS.
• Default and Arbitration: Maynilad suspended fee payments due to forex losses, leading to arbitration. On November 7, 2003, the Appeals Panel ruled no Event of Termination existed and ordered Maynilad to pay concession fees. The award became final on November 22, 2003.
• The Call on the LC: On November 24, 2003, MWSS submitted a written notice to Citicorp to draw US$98.9 million under the Letter of Credit due to Maynilad's default.
• The Rehabilitation Petition: Prior to the call, on November 13, 2003, Maynilad filed for corporate rehabilitation.
• The Stay Order: On November 17, 2003, the RTC issued a Stay Order staying enforcement of all claims against Maynilad and its guarantors/sureties not solidarily liable, and prohibiting Maynilad from disposing properties or paying liabilities.
• The Clarificatory Order: On November 27, 2003, acting on Maynilad's urgent motions, the RTC declared MWSS's call on the Letter of Credit a violation of the Stay Order and ordered MWSS to withdraw the draw notice under pain of contempt.

• The Standby Letter of Credit is not property of Maynilad's estate; a call on it involves the assets of the issuing banks, not the debtor, and thus falls outside the in rem jurisdiction of the rehabilitation court.
• A call on the Letter of Credit is not a "claim" against Maynilad's assets covered by the stay order.
• The obligations of the issuing banks under the Letter of Credit are solidary in nature, and therefore not exempt from enforcement under the Interim Rules, which only stay claims against guarantors or sureties not solidarily liable.
• The RTC acted with grave abuse of discretion in effectively allowing Maynilad to review the final and binding decision of the Appeals Panel.

• The RTC had jurisdiction over "all those affected by the proceedings" upon publication, which includes the issuing banks.
• The relevant issue is not whether the Letter of Credit is part of Maynilad's estate, but whether the act of calling the Letter of Credit is prohibited by the Stay Order.
• The obligations of the banks under the Letter of Credit are not solidary, making the call an enforcement of a claim against a surety not solidarily liable, which is prohibited by Sec. 6(b), Rule 4 of the Interim Rules.
• MWSS violated an immediately executory order and comes to court with unclean hands.
• MWSS had an adequate remedy under Sec. 12, Rule 4 of the Interim Rules (motion to modify/set conditions for the stay order) rather than filing a certiorari petition.

• Procedural Issues:
  • Whether MWSS had a plain, speedy, and adequate remedy under the Interim Rules such that certiorari is improper.
  • Whether MWSS comes to court with unclean hands for violating an immediately executory order.
  • Whether the petition pre-empts the original jurisdiction of the rehabilitation court.
• Substantive Issues:
  • Whether the rehabilitation court acted in excess of jurisdiction in enjoining MWSS from drawing on the Standby Letter of Credit, considering whether the Letter of Credit is part of the debtor's estate and whether the banks' obligations are solidary.

• Procedural:
  • Certiorari is proper because MWSS lacked an adequate, speedy remedy. Sec. 5, Rule 3 of the Interim Rules makes rehabilitation orders immediately executory, and the RTC had already ruled against MWSS on the same arguments during the hearing on the urgent motions. Pursuing a motion to modify before the same judge would be futile.
  • MWSS does not come with unclean hands because the Letter of Credit was outside the rehabilitation court's jurisdiction; thus, the call could not be considered a violation of the Stay Order.
  • The petition does not pre-empt the RTC's jurisdiction. The issue of the Letter of Credit's coverage by the stay order is distinct from whether Maynilad's rehabilitation has merit.
• Substantive:
  • The RTC acted in excess of jurisdiction. The Standby Letter of Credit is not an asset of Maynilad's estate (as even Maynilad's financial statements do not list it as an asset or liability).
  • The issuing banks' obligations under the Letter of Credit are primary, direct, absolute, and definite undertakings to pay upon presentation of documents. These are characteristics of a solidary obligation, not a contract of guaranty.
  • Under Sec. 6(b), Rule 4 of the Interim Rules, only claims against guarantors or sureties not solidarily liable are stayed. Because the banks are solidarily liable, the stay order does not apply to them, and they can be pursued separately from the rehabilitation case.

• Independence Principle of Letters of Credit — The bank's obligation in a letter of credit is independent of the underlying contract between the beneficiary and the applicant. The bank undertakes a primary obligation to pay upon presentation of compliant documents, distinct from a contract of guaranty where the obligation is merely collateral.
• Nature of Standby Letters of Credit vs. Guaranty — The concept of guarantee is inconsistent with an irrevocable letter of credit. A guarantee is collateral and arises only upon default of the principal debtor; a letter of credit is a primary, direct, and absolute undertaking. Except when a letter of credit specifically stipulates otherwise, the issuing bank's obligation is solidary with that of the person requesting its issuance.
• Scope of Rehabilitation Stay Orders — A stay order under the Interim Rules on Corporate Rehabilitation covers claims against the debtor and its guarantors or sureties not solidarily liable with the debtor. It does not cover claims against solidary obligors, such as issuing banks of letters of credit, whose property cannot be taken into custody by the rehabilitation receiver.

• Sec. 2, Rule 4, Interim Rules of Procedure on Corporate Rehabilitation — Enumerates the contents of the Stay Order, including staying enforcement of all claims against the debtor and its guarantors/sureties not solidarily liable. Applied to show that the stay order's coverage excludes solidary obligors like the issuing banks.
• Sec. 6(b), Rule 4, Interim Rules — Stays enforcement of claims against guarantors and sureties not solidarily liable with the debtor. Interpreted by the SC to mean that claims against solidary obligors (like issuing banks of letters of credit) are not stayed.
• Sec. 1, Rule 3, Interim Rules — Provides that jurisdiction over those affected by rehabilitation proceedings is acquired upon publication. Interpreted by the SC to cover only persons or entities holding assets belonging to the debtor, which the issuing banks do not.
• Sec. 12, Rule 4, Interim Rules — Allows the court to terminate, modify, or set conditions for the stay order. Considered by the SC but found to be an inadequate remedy for MWSS given the RTC's prior rulings and the immediately executory nature of the orders.
• Sec. 5, Rule 3, Interim Rules — States that rehabilitation orders are immediately executory and appeals do not stay execution. Cited to prove MWSS lacked an adequate, speedy remedy other than certiorari.
• Art. 2, Code of Commerce — States that acts of commerce are governed by the Code, then usages of commerce generally observed, then civil law. Cited to justify the application of the international UCP in Philippine jurisdiction.
• Uniform Customs and Practice for Documentary Credits (UCP), 1993 Revision, Arts. 2 & 9 — Defines documentary credits and the issuing bank's definite undertaking to pay. Applied to affirm the primary and solidary nature of the banks' obligations.