Metropol Financing and Investment Corp. vs. Sambok Motors Co., Ltd.

An indorsement "with recourse" does not make the indorser a qualified indorser; it makes him a general indorser who is secondarily liable, and upon dishonor by non-payment he becomes a principal debtor, so the holder need not first proceed against the maker.

Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd. Sambok Motors Company, a sister company of Ng Sambok Sons Motors Co., Ltd. and under the same management, negotiated and indorsed the note to Metropol (Bacolod) Financing & Investment Corporation. The Negotiable Instruments Law supplies the governing rules on indorsement and the liability of indorsers.

On April 15, 1969, Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd. in the amount of P15,939.00, payable in twelve (12) equal monthly installments beginning May 18, 1969, with interest at the rate of one percent per month. The note further provided that in case of non-payment of any installment, the total principal sum then remaining unpaid would become due and payable with an additional interest equal to twenty-five percent of the total amount due.

On the same date, Sambok Motors Company, a sister company of Ng Sambok Sons Motors Co., Ltd. and under the same management, negotiated and indorsed the note in favor of Metropol (Bacolod) Financing & Investment Corporation. The indorsement read: "Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived. SAMBOK MOTORS CO. (BACOLOD) By: RODOLFO G. NONILLO Asst. General Manager."

The maker, Dr. Villaruel, defaulted in the payment of his installments when they became due. On October 30, 1969, Metropol formally presented the promissory note for payment to the maker. Dr. Villaruel failed to pay the promissory note as demanded, so Metropol notified Sambok as indorsee of the note that the same had been dishonored and demanded payment. Sambok failed to pay.

On November 26, 1969, Metropol filed a complaint for collection of a sum of money before the Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but contended that it could not be obliged to pay until after its co-defendant Dr. Villaruel had been declared insolvent.

• Qualified Indorsement: Appellant Sambok argued that by adding the words "with recourse" in the indorsement of the note, it became a qualified indorser; that being a qualified indorser, it did not warrant that if the note was dishonored by the maker on presentment, it would pay the amount to the holder.
• Warranties Only: Appellant maintained that as a qualified indorser it only warranted, pursuant to Section 65 of the Negotiable Instruments Law, that (a) the instrument is genuine and in all respects what it purports to be; (b) it has a good title to it; (c) all prior parties had capacity to contract; and (d) it has no knowledge of any fact which would impair the validity of the instrument or render it valueless.
• Secondary Liability: Appellant contended that the trial court erred in not dismissing the complaint by finding it as assignor and qualified indorsee of the promissory note and in not holding it only secondarily liable.

• Nature of Indorsement: Whether Sambok, by indorsing the promissory note "with recourse," became a qualified indorser or mere assignor, rather than a general indorser secondarily liable.
• Liability After Dishonor: Whether Sambok remained only secondarily liable after the note was dishonored by non-payment, such that Metropol had to proceed first against the maker before suing Sambok.
• Dismissal of Complaint: Whether the trial court erred in not dismissing the complaint on the ground that Sambok was only a qualified indorsee and secondarily liable.

• Nature of Indorsement: No. An indorsement "with recourse" does not make the indorser a qualified indorser; it makes him a general indorser secondarily liable. A qualified indorsement requires words such as "without recourse" or similar import.
• Liability After Dishonor: No. After dishonor by non-payment, a person secondarily liable ceases to be such and becomes a principal debtor; the holder need not proceed against the maker before suing the indorser.
• Dismissal of Complaint: No. The trial court correctly did not dismiss the complaint, because Sambok's indorsement made it a general indorser and, upon dishonor, a principal debtor.

• Nature of Indorsement: Under Section 38 of the Negotiable Instruments Law, a qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement relieves the indorser of the general obligation to pay if the instrument is dishonored, but not of the liability arising from warranties on the instrument under Section 65 of the Negotiable Instruments Law. Sambok's indorsement used the words "with recourse," not "without recourse." "Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily liable. By indorsing the note "with recourse," Sambok agreed that if Dr. Villaruel failed to pay the note, Metropol could go after Sambok. The waiver of notice of demand, dishonor, protest, and presentment made the unqualified nature of the indorsement even more apparent. The words added by Sambok did not limit its liability but confirmed its obligation as a general indorser. A person who indorses without qualification engages that on due presentment the note shall be accepted or paid, or both, and that if it is dishonored, he will pay the amount thereof to the holder.
• Liability After Dishonor: The lower court did not err in not declaring Sambok only secondarily liable because after an instrument is dishonored by non-payment, the person secondarily liable thereon ceases to be such and becomes a principal debtor. His liability becomes the same as that of the original obligor. Consequently, the holder need not even proceed against the maker before suing the indorser.
• Dismissal of Complaint: Because Sambok was a general indorser and, after dishonor, a principal debtor, the trial court properly refused to dismiss the complaint. The appeal was without merit.

• Qualified Indorsement — Under the Negotiable Instruments Law, a qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. It relieves the indorser of the general obligation to pay if the instrument is dishonored, but not of the warranties under Section 65. In this case, the words "with recourse" did not create a qualified indorsement.
• General Indorser — A person who indorses without qualification engages that on due presentment the note shall be accepted or paid, or both, and that if it is dishonored, he will pay the amount thereof to the holder. By indorsing "with recourse" and waiving notice of demand, dishonor, protest, and presentment, Sambok became a general indorser secondarily liable.
• Recourse — Recourse means resort to a person who is secondarily liable after the default of the person who is primarily liable. The indorsement "with recourse" signified Sambok's agreement that Metropol could go after Sambok if Dr. Villaruel failed to pay.
• Liability of Secondary Party After Dishonor — After an instrument is dishonored by non-payment, the person secondarily liable ceases to be such and becomes a principal debtor. His liability becomes the same as that of the original obligor, and the holder need not proceed against the maker before suing the indorser.
• Warranties of a Qualified Indorser — Section 65 of the Negotiable Instruments Law provides that a qualified indorser warrants that (a) the instrument is genuine and in all respects what it purports to be; (b) he has a good title to it; (c) all prior parties had capacity to contract; and (d) he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. These warranties apply even when the qualified indorser is relieved of the general obligation to pay upon dishonor.

• "A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import." — Defines a qualified indorsement and supplies the basis for rejecting Sambok's claim that "with recourse" made it a qualified indorser.
• "However, appellant Sambok indorsed the note "with recourse" and even waived the notice of demand, dishonor, protest and presentment." — Contrasts Sambok's indorsement with a qualified indorsement and shows the indorsement was unqualified.
• "Appellant, by indorsing the note "with recourse" does not make itself a qualified indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant." — States the ratio decidendi on the nature of the indorsement.
• "Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument is dishonored by non-payment, the person secondarily liable thereon ceases to be such and becomes a principal debtor." — States the rule on the liability of a secondarily liable indorser after dishonor.

• Ang Tiong vs. Ting, 22 SCRA 715 — Cited for the rule that a person who indorses without qualification engages that on due presentment the note shall be accepted or paid, and that if it is dishonored, he will pay the amount thereof to the holder.
• Industrial Bank and Trust Company vs. Hesselberg, 195 S. W. (2d) 470 — Cited in the definition of "recourse" as resort to a person secondarily liable after the default of the person primarily liable.
• Pittsburg Westmoreland Coal, Co. vs. Kerr, 115 N.E. — Cited for the rule that after dishonor by non-payment, the person secondarily liable ceases to be such and becomes a principal debtor.
• American Bank vs. Macondray & Co., 4 Phil. 695 — Cited for the rule that the liability of the secondarily liable indorser after dishonor becomes the same as that of the original obligor.

• Section 38, Negotiable Instruments Law — Defines a qualified indorsement as one that constitutes the indorser a mere assignor of the title and may be made by adding "without recourse" or words of similar import. The Court applied this provision to hold that "with recourse" is not a qualified indorsement.
• Section 65, Negotiable Instruments Law — Lists the warranties of a qualified indorser: that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. The Court noted that a qualified indorsement relieves the indorser of the general obligation to pay upon dishonor but not of these warranties.
• Section 21, Rule 3, Rules of Court — Provides that when an action is for recovery of money, debt, or interest thereon, and the defendant dies before final judgment in the Court of First Instance, the case shall be dismissed to be prosecuted in the manner especially provided in the rules. The lower court applied this provision to dismiss the case against Dr. Villaruel after his death.

Makasiar (Chairman), Concepcion Jr., Guerrero, and Escolin, JJ., concurred. Abad Santos, J., concurred and added the observation that the appeal could have been treated as a petition for review under R.A. 5440 and dismissed by minute resolution. Aquino, J., was on leave.