Case Summary (G.R. No. 160732)
Key Dates
- June 21, 2004: Decision date (applicable law: 1987 Philippine Constitution)
- Nov. 17, 2003: RTC issues stay of actions pursuant to Maynilad’s rehabilitation petition
- Nov. 24, 2003: MWSS draws US$98.9 million under standby letter of credit
- Nov. 27, 2003: RTC issues clarificatory order enjoining MWSS from drawing on the credit
- Petition for certiorari filed by MWSS under Rule 65
Applicable Law
- 1987 Philippine Constitution (corporate rehabilitation under judicial power)
- Rule 65, Rules of Court (certiorari jurisdiction)
- Interim Rules of Procedure on Corporate Rehabilitation (in rem jurisdiction; stay orders)
- Uniform Customs and Practice for Documentary Credits (UCP 500 and revisions)
- Relevant jurisprudence on letters of credit and guarantees
Factual Background
Maynilad, under Section 6.9 of the Concession Agreement, provided a standby letter of credit as security for concession fees. Following disputes over foreign-exchange losses and several force majeure notices, the parties executed Amendment No. 1 (Oct. 5, 2001) to adjust fees. Maynilad subsequently invoked events of termination and, after Appeals Panel rulings in favor of MWSS (final Nov. 22, 2003), ceased payments. MWSS then notified Citicorp to draw US$98.9 million under the letter of credit.
Procedural History
- Maynilad filed a petition for rehabilitation in RTC Quezon City, Branch 90.
- On Nov. 17, 2003, RTC declared the petition compliant with Rule 4, Sec. 2 of the Interim Rules and issued a stay order restraining enforcement of claims against Maynilad, its guarantors, and sureties not solidarily liable.
- MWSS drew on the letter of credit on Nov. 24, 2003.
- On Maynilad’s Urgent Ex Parte motions, the RTC on Nov. 27, 2003, declared MWSS’s draw violative of the stay order and enjoined further enforcement.
- MWSS sought certiorari relief in the Supreme Court, alleging excess of jurisdiction and grave abuse of discretion.
Issues Presented
- Whether the rehabilitation court erred in treating the standby letter of credit as part of Maynilad’s estate and enjoining its enforcement.
- Whether the banks’ obligations under the letter of credit are not solidary, thus subject to the stay order.
- Whether the rehabilitation court improperly reviewed the binding Appeals Panel award.
Analysis on Jurisdiction over the Letter of Credit
- Interim Rules define rehabilitation as an in rem proceeding acquiring jurisdiction over all assets of the debtor and “all those affected by the proceedings” upon publication.
- The letter of credit constitutes an independent bank obligation, not an asset of Maynilad, nor reflected in its audited statements as asset or liability.
- By enjoining enforcement of a third-party obligation over which it lacked in rem jurisdiction, the RTC acted in excess of its authority.
Nature of Letters of Credit under UCP and Jurisprudence
- A letter of credit is a primary, independent, absolute undertaking by the issuing bank to pay the beneficiary upon document presentation, governed by UCP (International Chamber of Commerce).
- Guarantees, by contrast, are accessory obligations contingent on debtor default. The two concepts are mutually inconsistent.
- Under Feati Bank & Trust Co. v. CA and subsequent rulings, an irrevocable letter of credit remains outside guarantee regulations and operates as a solidary obligation of the issuer.
Application of Interim Rehabilitation Rules to Solidary Obligations
- Rule 4, Sec. 6(b) of the Interim Rules prohibits enforcement of claims against debtor “guarantors and sureties not solidarily liable.”
- Here, the banks’ obligation under the letter of credit is solidary—primary and absolute—per its terms and banking practice.
- Being a solidary liability, the standby letter of credit is expressly excluded from th
Case Syllabus (G.R. No. 160732)
Procedural Background
- On November 17, 2003, RTC Quezon City, Branch 90 determined that Maynilad’s petition for rehabilitation conformed to Sec. 2, Rule 4 of the Interim Rules on Corporate Rehabilitation and issued a Stay Order.
- The Stay Order stayed enforcement of claims against Maynilad, its guarantors and non-solidarily liable sureties; prohibited disposition of assets outside ordinary business; and barred payment of liabilities existing at petition date.
- On November 27, 2003, the presiding judge issued a clarificatory Order declaring MWSS’s call on US$98 million under the US$120 million Irrevocable Standby Letter of Credit violative of the Stay Order; ordered withdrawal of the draw notice under pain of contempt; and declared any payment void if not withdrawn.
- Aggrieved, MWSS filed a Rule 65 petition for certiorari in the Supreme Court, alleging lack or excess of jurisdiction and grave abuse of discretion.
Antecedents of the Concession Agreement
- February 21, 1997: MWSS granted Maynilad a 20-year concession to operate West Zone water and sewerage services; Maynilad obliged to pay concession fees, largely foreign-currency loans.
- Section 6.9 of the contract required Maynilad to post a bond or bank guarantee; on July 14, 2000 Maynilad secured a three-year US$120 million Irrevocable Standby Letter of Credit from Citicorp International Limited and participating banks in favor of MWSS.
- March 8, 2001: Maynilad issued a Force Majeure Notice and suspended concession-fee payments, prompting a June 8, 2001 MOA allowing recovery of foreign-exchange losses under an agreed formula.
- August 2001: another Force Majeure Notice led to arbitration; October 5, 2001 Amendment No. 1 provided for additional equity infusion of US$80 million, resumption of fees, and dismissal of pending cases.
- November 5 and December 9, 2002: Maynilad served notices of termination and early termination, contested by MWSS and brought to the Appeals Panel.
- November 7, 2003: Appeals Panel ruled no Event of Termination and ordered Maynilad to pay due fees; award became final on November 22, 2003.
- November 24, 2003: MWSS, invoking the award, delivered draw notice to Citicorp for US$98,923,640.15 under the Standby Letter of Credit.
- November 13, 2003: Maynilad had already filed its rehabilitation petition leading to the November 17 Stay Order and the subsequent November 27 clarificatory Order.
Issues Raised by Petitioner MWSS
- Whether the rehabilitation court gravely erred or acted without jurisdiction in treating the Standby Letter of Credit and issuing banks’ assets as part of Maynilad’s estate.
- Whether the court erred in hol