METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM VS. HON. REYNALDO B.

DAWAY AND MAYNILAD WATER SERVICES, INC.

G.R. No. 160732 June 21, 2004

Azcuna, J.:
FACTS: To secure Maynilad’s performance under a Concession Agreement, MWSS required
an opening of an Irrevocable Standby Letter of Credit (issued by Citicorp). MWSS called
upon the SLC (when Maynilad failed its obligations), but because of the rehabilitation
petition filed by Maynilad, MWSS was unable to collect because the funds is allegedly an
asset of Maynilad. And if under rehabilitation such funds cannot be touched.

ISSUES:
1. Is Citicorp solidarily liable with Maynilad?
2. Did the rehabilitation court acted in excess of its authority when it enjoined MWSS from
seeking the payment from Citicorp?

HELD:
1. YES. Maynilad insists that the SLC’s enforcement is prohibited because it is a claim
against the debtor, its guarantors and sureties not solidarily liable with the debtor and
Maynilad argues that Citicorp was not solidary with it. It is settled that the concept of
guarantee vis-a-vis the concept of an irrevocable LC are inconsistent with each other. The
guarantee theory destroys the independence of the banks responsibility in the LC.
Guarantee Irrevocable LC
Accessory contracts / obligations; Primary contract / obligations;
Guarantors’ obligation is merely collateral; Bank undertakes a primary obligation;
Arises only upon the default of the person Engagement by a bank at the request of a customer that
primarily liable; the issuer shall honor drafts of payment upon compliance
with the conditions specified in the credit;
Conditioned on the prior exhaustion of the Absolute undertakings to pay the amount on the faith of
debtor’s assets. the instrument.
Thus the prohibition does not apply to Maynilad because Citicorp’s obligation is
solidary with Maynilad in that it is a primary, direct, definite and an absolute undertaking
to pay. Therefore being solidary, the claims against them can be pursued separately from
and independently of the rehabilitation case.

2. YES. While it is true that the rehabilitation court has jurisdiction over those affected by
its proceedings, those affected means creditors, persons or entities holding assets
belonging to the debtor under rehabilitation should be reflected in its financial
statements. In this case, Maynilad’s financial statement do not show that the Irrevocable
SLC is part of its assets or liabilities. Moreover, being a solidary obligation, the LC is
excluded from the jurisdiction of the rehabilitation court and therefore in enjoining MWSS
from proceeding against the SLC to which it had a clear right under the law public
respondent acted in excess of his jurisdiction.

NOTE: Except when a letter of credit specifically stipulates that there is no solidary liability,
the obligations of the banks issuing LCs are solidary.