METROPOLITAN WATERWORKS v. REYNALDO B. DAWAY

FACTS:

The case involves a petition for review filed by Manila Waterworks & Sewerage System (MWSS) questioning an order issued by the Regional Trial Court (RTC) of Quezon City, Branch 90. On November 17, 2003, the RTC issued a Stay Order in response to the Petition for Rehabilitation filed by Maynilad Water Services, Inc. (Maynilad). The Stay Order stayed the enforcement of claims against Maynilad and prohibited the company from selling or disposing of its properties. On November 27, 2003, the RTC issued an Order declaring that the actions taken by MWSS in relation to the payment of a standby letter of credit were violative of the Stay Order. MWSS filed the petition for review, arguing that the RTC acted without jurisdiction or with grave abuse of discretion. The case arose from a Concession Agreement between MWSS and Maynilad, wherein Maynilad undertook to manage water delivery and sewerage services in the West Zone Service Area. Maynilad had put up a standby letter of credit as security for its performance under the agreement. The parties entered into several agreements and went through arbitration to address issues related to foreign exchange losses. Maynilad eventually terminated the agreement, but the Appeals Panel ruled in favor of MWSS, requiring Maynilad to pay the concession fees.

The Metropolitan Waterworks and Sewerage System (MWSS) awarded a concession agreement to Maynilad Water Services, Inc. (Maynilad) for the operation and maintenance of the waterworks system in the West Zone of Metro Manila. However, Maynilad failed to pay the concession fees that had fallen due. An Appeals Panel ruled in favor of MWSS and directed Maynilad to pay the concession fees. The decision of the Appeals Panel became final on November 22, 2003.

Following the final decision, MWSS submitted a written notice to Citicorp International Limited, as agent for the participating banks, demanding payment in the amount of US$98,923,640.15 under the Irrevocable Standby Letter of Credit due to Maynilad's failure to perform its obligations under the Concession Agreement.

Prior to the notice from MWSS, on November 13, 2003, Maynilad had filed a petition for rehabilitation, resulting in the issuance of a Stay Order on November 17, 2003. Maynilad claimed that the obligations under the Standby Letter of Credit were not exempt from the coverage of the stay order and therefore, the payment demanded by MWSS violates the said order.

In its arguments, Maynilad claimed that the performance bond or assets of the issuing banks are not part of its estate subject to rehabilitation. Maynilad argued that the call made on the Standby Letter of Credit does not involve its assets but those of the banks. Maynilad also asserted that the obligations under the Standby Letter of Credit are not solidary and are not exempt from the stay order.

MWSS, on the other hand, maintained that the Standby Letter of Credit and Performance Bond are not part of Maynilad's estate and are not subject to the rehabilitation jurisdiction of the court. MWSS argued that the call made on the Standby Letter of Credit does not violate the stay order as it does not directly affect Maynilad's assets.

The court was tasked with resolving the issue of whether the call made on the Standby Letter of Credit and subsequent demand for payment by MWSS violated the stay order in the rehabilitation proceedings.

ISSUES:

  1. Did the rehabilitation court act in excess of its authority or jurisdiction when it enjoined the petitioner from seeking payment of the concession fees from the banks?

  2. Does Sec. 6 (b), Rule 4 of the Interim Rules on Corporate Rehabilitation prohibit the enforcement of a claim against guarantors and sureties who are not solidarily liable with the debtor?

  3. Whether the obligation of the banks issuing letters of credit are solidary with the person or entity requesting for its issuance.

  4. Whether the public respondent exceeded his jurisdiction in enjoining the petitioner from proceeding against the Standby Letters of Credit.

  5. Whether the remedy of certiorari is an adequate remedy in this case.

  6. Whether petitioner violated the stay order by commencing the process for payment under the Standby Letter of Credit.

  7. Whether the filing of the petition for certiorari pre-empts the original jurisdiction of the lower court.

RULING:

  1. The rehabilitation court acted in excess of its jurisdiction when it enjoined the petitioner from seeking payment of the concession fees from the banks. The Irrevocable Standby Letter of Credit is not part of respondent Maynilad's assets or liabilities, as confirmed by its own financial statements. Therefore, the banks do not hold any assets of Maynilad that would be material to the rehabilitation proceedings.

  2. Sec. 6 (b), Rule 4 of the Interim Rules on Corporate Rehabilitation does not prohibit the enforcement of claims against guarantors and sureties who are not solidarily liable with the debtor. The banks issuing the Standby Letter of Credit are solidarily liable with Maynilad, as the concept of guarantee and an irrevocable letter of credit are inconsistent with each other. The banks' obligation under the letter of credit is a primary obligation, not a mere collateral obligation like a guarantee.

  3. Yes, the obligations of the banks issuing letters of credit are solidary with the person or entity requesting for its issuance. Unless the letter of credit specifically stipulates otherwise, the obligation of the banks is a direct, primary, absolute, and definite undertaking to pay the beneficiary upon the presentation of the required documents.

  4. Yes, the public respondent exceeded his jurisdiction in enjoining the petitioner from proceeding against the Standby Letters of Credit. The Standby Letters of Credit are excluded from the jurisdiction of the rehabilitation court as they are considered solidary obligations. The public respondent, therefore, acted in excess of his jurisdiction.

  5. The remedy of certiorari is deemed adequate in this case because there is an inadequacy of all other legal remedies and the danger of failure of justice without the writ.

  6. Petitioner did not violate the stay order as the Standby Letter of Credit and the banks that issued it were not within the jurisdiction of the rehabilitation court.

  7. The filing of the petition for certiorari does not pre-empt the original jurisdiction of the lower court as the purpose of the initial hearing is to determine whether the petition for rehabilitation has merit or not.

PRINCIPLES:

  • Rehabilitation proceedings are in rem proceedings, where jurisdiction is acquired by publication and where it is necessary for the assets of the debtor to come within the court's jurisdiction for the benefit of creditors.

  • Claims against guarantors and sureties who are not solidarily liable with the debtor can be enforced in rehabilitation proceedings.

  • Irrevocable letters of credit are primary obligations and not accessory contracts of guaranty. They are governed by the provisions of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce.

  • The obligation of the banks issuing letters of credit are solidary with the person or entity requesting for its issuance, unless the letter of credit specifically stipulates otherwise.

  • Standby Letters of Credit are excluded from the jurisdiction of the rehabilitation court if they are considered solidary obligations. The rehabilitation court does not have the authority to enjoin the creditor from proceeding against the Standby Letters of Credit.

  • The remedy of certiorari must be an adequate remedy which is equally beneficial, speedy, and sufficient.

  • Adequacy, not mere absence, of all other legal remedies and the danger of failure of justice without the writ must determine the propriety of certiorari.

  • Violation of an immediately executory order of the court must be proven by considering the jurisdiction of the parties involved.

  • The filing of a petition for certiorari does not pre-empt the original jurisdiction of the lower court in determining the merit of a petition for rehabilitation.