G.R. No. 160732 - Metropolitan Waterworks and Sewerage System vs. Daway

Case Summary (G.R. No. 160732)

Petitioner

MWSS sought review by certiorari under Rule 65 of the Rules of Court to annul the RTC’s November 27, 2003 order declaring the process commenced by MWSS to draw US$98 million under a US$120 million Standby L/C violative of the RTC’s earlier Stay Order and ordering MWSS to withdraw its notice of draw or face contempt and void any payments to MWSS under that draw.

Respondent

Maynilad filed a petition for rehabilitation and obtained a Stay Order from the RTC dated November 17, 2003; it moved ex parte for clarification and enforcement of the stay against MWSS’s draw on the Standby L/C. The RTC issued the clarificatory Order of November 27, 2003 enjoining MWSS and declaring void any payment by the banks to MWSS if the notice of draw was not withdrawn.

Key Dates and Filings

Relevant filings and events include: Concession Agreement (February 21, 1997); Standby L/C issuance (July 14, 2000); Maynilad’s force majeure notices and Amendment No. 1 (2001); Notices of Termination and Early Termination (November–December 2002); Appeals Panel award (final November 22, 2003) directing Maynilad to pay concession fees; Maynilad’s petition for rehabilitation and RTC Stay Order (petition filed November 13, 2003; Stay Order issued November 17, 2003); MWSS notice of draw to Citicorp (November 24, 2003); RTC clarificatory Order (November 27, 2003); ensuing petition for certiorari to the Supreme Court.

Applicable Law and Legal Framework

The case was decided under the 1987 Philippine Constitution. Governing rules include the Interim Rules of Procedure on Corporate Rehabilitation (notably Sec. 1, Rule 3; Sec. 2 and Sec. 6(b), Rule 4; Sec. 5, Rule 3; Sec. 12, Rule 4). The Court also applied principles governing letters of credit and the Uniform Customs and Practice for Documentary Credits (UCP), and relied on Philippine jurisprudence distinguishing letters of credit from guarantees (cases cited: Feati Bank & Trust Co. v. CA; Prudential Bank; Bank of America; Insular Bank; Traders Royal Bank; Philippine Blooming Mills).

Facts and Contractual Background

Under the Concession Agreement MWSS granted Maynilad a twenty-year concession and required security for performance (Sec. 6.9). Maynilad procured a three-year facility and an Irrevocable Standby L/C for US$120,000,000 in favor of MWSS issued by a syndicate led by Citicorp. Maynilad later suspended payments and invoked force majeure, prompting negotiations, Amendment No. 1, and ultimately arbitration by the Appeals Panel which ruled against Maynilad and became final on November 22, 2003. MWSS thereafter sent a written notice of draw (November 24, 2003) demanding payment of approximately US$98.9 million under the Standby L/C.

Procedural History in the Rehabilitation Court

Maynilad filed a petition for rehabilitation before RTC Branch 90 which resulted in a Stay Order (November 17, 2003) staying enforcement of claims and prohibiting transfers and payments outside the ordinary course. Maynilad filed urgent ex parte motions; after hearings, the RTC issued an order (November 27, 2003) declaring MWSS’s notice of draw violative of the Stay Order, ordering MWSS to withdraw the notice, and declaring any payment void if not withdrawn.

MWSS’s Position (Petitioner’s Case)

MWSS argued the Standby L/C and the banks’ obligations are not property of Maynilad’s estate and thus not subject to the rehabilitation court’s in rem jurisdiction. MWSS contended a draw on the Standby L/C involved only the banks’ assets, not Maynilad’s, and therefore did not constitute an enforcement of claims against the debtor or its non-solidarily liable sureties under Sec. 6(b), Rule 4 of the Interim Rules. MWSS maintained the RTC acted without or in excess of jurisdiction and with grave abuse of discretion in enjoining enforcement against the banks.

Maynilad’s Position (Respondent’s Case)

Maynilad countered that the RTC’s clarificatory order was properly and precisely issued after considering submissions of parties and creditors and that the RTC did not treat the banks’ assets as part of Maynilad’s estate. Maynilad argued the relevant inquiry is whether MWSS’s act of commencing payment process under the Standby L/C was covered by the Stay Order’s prohibition on enforcement of claims against “the debtor, its guarantors and sureties not solidarily liable with the debtor,” asserting the banks were not solidarily liable and thus covered by the prohibition. Maynilad also invoked the RTC’s broad in rem jurisdiction acquired upon publication of the notice of commencement.

Legal Issues Presented

The Court identified and addressed whether (1) the RTC exceeded its jurisdiction in enjoining MWSS from drawing on the Standby L/C and treating the banks’ obligations as within the rehabilitation court’s jurisdiction; (2) the banks’ obligations under the Standby L/C are solidary with Maynilad’s obligations such that claims against the banks are excluded from the stay; and (3) related procedural and remedial issues, including the adequacy of alternative remedies and whether MWSS came to Court with unclean hands for allegedly violating an immediately executory RTC order.

Court’s Analysis on Jurisdiction over the Standby L/C

The Court examined Sec. 1, Rule 3 of the Interim Rules which acquires jurisdiction over “all those affected by the proceedings” upon publication and described rehabilitation as an in rem proceeding to secure assets of the debtor. The Court interpreted the phrase to encompass creditors and persons holding assets that belong to the debtor and are reflected in audited financial statements. Because the banks did not hold assets of Maynilad material to rehabilitation and Maynilad’s financial statements did not reflect the Standby L/C as an asset or liability, the Court concluded the RTC had not acquired jurisdiction over the Standby L/C or the banks on that basis; enjoining MWSS as to an asset not belonging to the debtor was an excess of jurisdiction.

Nature of Letters of Credit versus Guarantees

Relying on prior jurisprudence and the UCP, the Court reiterated that an irrevocable letter of credit is a primary, direct, absolute, and definite undertaking by the issuing bank to pay upon presentation of stipulated documents; it is not a mere guarantee or accessory obligation contingent on the principal debtor’s default. The Court cited Feati Bank and other cases to show that characterizing a letter of credit as a guarantee is inconsistent with its ind

Case Syllabus (G.R. No. 160732)

Procedural Posture

Petition for certiorari under Rule 65 of the Rules of Court filed by petitioner Metropolitan Waterworks and Sewerage System (MWSS) challenging the November 27, 2003 Order of the Regional Trial Court (RTC), Quezon City, Branch 90, and the actions of its presiding judge.
On November 17, 2003, the RTC determined that Maynilad Water Services, Inc.’s petition for rehabilitation conformed substantially to Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation and issued a Stay Order.
On November 27, 2003, after two urgent ex parte motions filed by Maynilad, the presiding judge issued a clarificatory Order enjoining MWSS from proceeding with the process to draw on an Irrevocable Standby Letter of Credit (LC) and ordering withdrawal of MWSS’s notice of draw to Citicorp, otherwise declaring any payment by the banks void.
MWSS sought relief in the Supreme Court asserting the RTC acted without or in excess of jurisdiction or with grave abuse of discretion.

Material Facts / Antecedents

On February 21, 1997, MWSS granted Maynilad a twenty-year Concession Agreement to manage and operate West Zone water delivery and sewerage services; Maynilad undertook to pay concession fees including payments corresponding to mostly foreign loans.
Section 6.9 of the Concession required Maynilad to provide 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 an Irrevocable Standby Letter of Credit in the amount of US$120,000,000 in favor of MWSS as security for Maynilad’s performance.
Maynilad sought a mechanism to recover foreign exchange losses in September 2000; after failing to obtain desired relief, it issued a Force Majeure Notice on March 8, 2001 and suspended concession fee payments.
On June 8, 2001, MWSS and Maynilad entered a Memorandum of Agreement permitting recovery of foreign exchange losses under an agreed formula.
In August 2001 Maynilad again filed a Force Majeure Notice; the dispute was referred to an Appeals Panel and resulted in Amendment No. 1 to the Concession Agreement dated October 5, 2001 (based on MWSS Board Resolutions No. 457-2001 and No. 487-2001), which included a foreign-exchange-loss recovery formula and Maynilad’s commitments (infuse US$80 million, resume fee payments, seek dismissal of pending appeals).
On November 5, 2002, Maynilad served a Notice of Event of Termination claiming MWSS failed to comply with adjustment mechanisms; on December 9, 2002, Maynilad filed a Notice of Early Termination which MWSS challenged; MWSS brought the matter before the Appeals Panel on January 7, 2003.
The Appeals Panel, on November 7, 2003, ruled there was no Event of Termination and ordered Maynilad to pay due concession fees; that award became final on November 22, 2003.
MWSS submitted a written notice on November 24, 2003 to Citicorp, as agent for the participating banks, drawing on the LC for US$98,923,640.15 due to Maynilad’s alleged failure to perform.
Maynilad filed for rehabilitation on November 13, 2003, precipitating the November 17 Stay Order and the contested November 27 clarificatory Order.

Stay Order and Clarificatory Order (RTC)

The November 17, 2003 Stay Order:
- Stayed enforcement of all claims (money or otherwise), whether by court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the petitioner.
- Prohibited the petitioner (Maynilad) from selling, encumbering, transferring or disposing of its properties except in the ordinary course of business.
- Prohibited the petitioner from making any payment of liabilities outstanding as at the date of filing of the rehabilitation petition.
The November 27, 2003 Clarificatory Order:
- Declared that MWSS’s commencement on November 24, 2003 of the process for payment by the banks of US$98 million out of the US$120 million standby LC violated sub-paragraph 2 of the November 17 Stay Order.
- Ordered MWSS, through its officers, to withdraw the written certification/notice of draw to Citicorp dated November 24, 2003 under pain of contempt, and declared any payment by the banks to MWSS void if the notice of draw was not withdrawn or if MWSS received payment by virtue of the standby LC.

Issues Presented by Petitioner (MWSS)

Whether the presiding judge gravely erred, acted without jurisdiction or in excess of jurisdiction, or with grave abuse of discretion by treating the performance bond or the assets of the issuing banks as property of Maynilad subject to rehabilitation.
Whether the presiding judge erred in holding that the performance bond obligations of the banks were not solidary in nature.
Whether the presiding judge gravely erred in permitting Maynilad, via the rehabilitation proceedings, to effectively seek review or appeal of the final and binding decision of the Appeals Panel.

Petitioner’s Arguments (Summary)

The US$120 million Standby Letter of Credit and performance bond