Gullas vs. The Philippine National Bank

A bank has a general right of set-off over a depositor’s funds to answer the depositor’s indebtedness, but when the depositor is merely an indorser of a dishonored negotiable instrument, the bank must give notice before applying the deposit; premature application without notice is prejudicial and warrants nominal damages.

Paulino Gullas was a member of the Philippine Bar resident in Cebu City and maintained a current account with the Philippine National Bank, a banking corporation with a branch in the same city. The dispute required the application of the Civil Code provisions on compensation (set-off) and deposit, as well as the Negotiable Instruments Law provisions on the liability of a general indorser and the procedure for notice of dishonor. The case thus implicated the legal relationship between a depositor and a bank and the bank’s remedies against a depositor who is also an indorser of a dishonored instrument.

Paulino Gullas, a member of the Philippine Bar resident in Cebu City, maintained a current account with the Philippine National Bank, which operated a branch in the same city. On August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a warrant in the amount of $361 payable to the order of Francisco Sabectoria Bacos. Gullas and Pedro Lopez signed as endorsers of the warrant, and the Philippine National Bank cashed it. The treasury warrant was subsequently dishonored by the Insular Treasurer.

At the time of the dishonor, Gullas had an outstanding balance of P509 on the bank’s books. Against that balance he had issued certain checks which could not be paid when the money was sequestered. On August 20, 1933, Gullas left his residence for Manila. The bank, upon learning of the dishonor, sent notices by mail to Gullas, but these could not be delivered to him because he was in Manila. In its letter of August 21, 1933, addressed to Messrs. Paulino Gullas and Pedro Lopez, the bank informed them that United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos for $361, or P722, the payment for which had been received, had been returned by its Manila office with the notation that payment had been stopped by the Insular Treasurer. The bank stated that, in view of this, it had applied the outstanding balances of their current accounts with it to the part payment of the check, namely, P509 from Gullas. When Gullas returned to Cebu on August 31, 1933, he received notice of dishonor and immediately paid the unpaid balance of the United States Treasury warrant.

The bank’s action caused checks drawn by Gullas, including one for his insurance, to be unpaid for lack of funds standing to his credit. Periodicals in the vicinity also gave prominence to the news, to his great mortification. The bank had applied the funds before mailing the notice of dishonor and without waiting for any action by Gullas. Gullas was merely an indorser of the warrant and had issued in good faith.

• Right of Set-off: Whether the Philippine National Bank had the right to apply the deposit of Paulino Gullas to the debt arising from the dishonored treasury warrant.
• Damages: Whether Paulino Gullas is entitled to damages, and in what amount, for the bank’s application of his deposit.

• Right of Set-off: Yes, in general, but improperly exercised. A bank has a right of set-off over deposits for the depositor’s indebtedness, but as to an indorser, notice must be given before applying the deposit; the bank’s premature application was prejudicial.
• Damages: Yes, nominal damages. Gullas was entitled to nominal damages because of the bank’s premature action against which he had no means of protection; the amount was fixed at P250.

• Right of Set-off: The Civil Code provides for compensation (set-off) and deposit. Compensation takes place when two persons are reciprocally creditor and debtor of each other. The relation between a depositor and a bank is that of creditor and debtor, as held in Fulton Iron Works Co. vs. China Banking Corporation. Thus, as a general rule, a bank has a right of set-off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. The Court noted the Louisiana minority rule denying such right, but proceeded from the premise that the Philippine National Bank had a right of set-off over Gullas’s deposit. The remedy, however, had to be enforced properly. The Negotiable Instruments Law provides that a general indorser engages that if the instrument be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. Notice of dishonor is necessary to charge an indorser, and the right of action against him does not accrue until notice is given, as held in Asia Banking Corporation vs. Javier. Prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. Gullas was merely an indorser and had issued in good faith. As to an indorser, the situation is different, and notice should actually have been given him in order that he might protect his interests. The Court cited Callahan vs. Bank of Anderson, where it was held that a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against him. Although that decision represented the minority doctrine, the Court explained that as to an indorser, notice should be given. The action of the bank was therefore prejudicial to Gullas.
• Damages: The Court found it difficult to prove exact damages. For alleged libelous articles, the bank would not be primarily liable. The loss of business claimed by Gullas could not be traced definitely to the occurrence. Gullas, having eventually been reimbursed, lost little through the actual levy by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all good faith, then leave for Manila, and on return find that those checks had not been cashed because of the action taken by the bank. That caused a disturbance in Gullas’s finances, especially with reference to his insurance, which was injurious to him. All facts and circumstances considered, Gullas should be awarded nominal damages because of the premature action of the bank against which Gullas had no means of protection, and the amount was fixed at P250.

• Bank’s right of set-off — A bank generally has a right of set-off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. The relation between a depositor and a bank is that of creditor and debtor. In this case, the Philippine National Bank had such a right over Gullas’s deposit. However, the right must be exercised properly; as to an indorser, notice should be given before applying the deposit so that he may protect his interests.
• Notice of dishonor to an indorser — A general indorser of a negotiable instrument engages that if the instrument be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. Notice of dishonor is necessary to charge an indorser, and the right of action against him does not accrue until notice is given. The bank applied the deposit before notice, thereby prejudicing Gullas.
• Nominal damages for premature set-off — Where a bank prematurely applies a deposit without notice to an indorser, nominal damages may be awarded because of the prejudicial action against which the depositor had no means of protection. The amount fixed in this case was P250.

• "As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor." — States the general rule on a bank’s right of set-off, which the Court recognized as the starting point before examining how the Philippine National Bank exercised that right against Gullas.
• "However this may be, as to an indorser the situation is different, and notice should actually have been given him in order that he might protect his interests." — Articulates the ratio for requiring notice before a bank applies a deposit belonging to an indorser of a dishonored instrument.
• "We accordingly are of the opinion that the action of the bank was prejudicial to Gullas." — Concludes that the bank’s premature application of Gullas’s deposit was prejudicial, supporting the award of damages.
• "All facts and circumstances considered, we are of the opinion that Gullas should be awarded nominal damages because of the premature action of the bank against which Gullas had no means of protection, and have finally determined that the amount should be P250." — States the basis and amount of nominal damages awarded.

• Fulton Iron Works Co. vs. China Banking Corporation, 59 Phil. 59 (1933) — Cited for the rule that the relation between a depositor and a bank is that of creditor and debtor, which supports the bank’s right of set-off.
• Asia Banking Corporation vs. Javier, 44 Phil. 777 (1923) — Cited for the rule that notice of dishonor is necessary to charge an indorser and that the right of action against him does not accrue until notice is given.
• Callahan vs. Bank of Anderson, 2 Ann. Cas. 203 (1904) — Cited for the minority doctrine that a depositor with sufficient funds has a right of action against a bank for refusing to pay his check absent notice that the bank applied the funds to past due claims; the Court noted that as to an indorser, notice should be given.

• Civil Code, Article 1195 — Provides that compensation shall take place when two persons are reciprocally creditor and debtor of each other. Cited to support the bank’s right of set-off because the depositor-bank relationship is one of creditor and debtor.
• Civil Code, Articles 1195 et seq. and 1758 et seq. — Provisions on compensation (set-off) and deposit. Cited as the statutory framework governing the bank’s right to apply Gullas’s deposit.
• Negotiable Instruments Law, Section 66 — Provides that the general indorser engages that if the instrument be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. Cited to establish Gullas’s liability as an indorser and the necessity of notice.
• Negotiable Instruments Law (notice of dishonor provisions) — The law contains provisions establishing the liability of a general indorser and giving the procedure for notice of dishonor. Cited to require notice to an indorser before the bank could charge him or apply his deposit.

Villa-Real, Imperial, Butte, and Goddard, JJ., concurred.