SECOND DIVISION

[G.R. No. 43191. November 13, 1935.]

PAULINO GULLAS, plaintiff-appellant, vs. THE PHILIPPINE

NATIONAL BANK, defendant-appellant.

Gullas, Lopez, Tuaño & Leuterio for plaintiff-appellant.

Jose Delgado for defendant-appellant.

SYLLABUS

1. BANKS AND BANKING; CIVIL CODE, ARTICLES 1195 et seq. AND

1758 et seq. CONSTRUED; RELATIONSHIP BETWEEN DEPOSITOR AND BANK.
— The relation existing between a depositor and a bank is that of creditor
and debtor.
2. ID.; ID.; ID.; BANK'S RIGHT OF SET OFF. — The general rule is
adopted for this jurisdiction that a bank has a right of set off of the deposit in
its hands for the payment of any indebtedness to it on the part of the
depositor.
3. ID.; NEGOTIABLE INSTRUMENTS LAW CONSTRUED; LIABILITY OF
INDORSERS OF NEGOTIABLE INSTRUMENTS. — Notice of dishonor is
necessary in order to charge an indorser, and the right of action against him
does not accrue until the notice is given.

DECISION

MALCOLM, J : p

Both parties to this case appealed from a judgment of the Court of First
Instance of Cebu, which sentenced the defendant to return to the account of
the plaintiff the sum of P509, with legal interest and costs, the plaintiff to
secure damages in the amount of P10,000 more or less, and the defendant
to be absolved totally from the amended complaint. As it is conceded that
the plaintiff. As it is conceded that the plaintiff has already received the sum
represented by the United States treasury warrant, which is in question, the
appeal will thus determine the amount, if any, which should be paid to the
plaintiff by the defendant.

The parties to the case are Paulino Gullas and the Philippine National
Bank. The first named is a member of the Philippine Bar, resident in the City
of Cebu. The second named is a banking corporation with a branch in the
same city. Attorney Gullas has had a current account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the
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 United States for the United States Veterans Bureau issued a warrant in the
amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino
Gullas and Pedro Lopez signed as indorsers of this check. Thereupon it was
cashed by the Philippine National Bank. Subsequently the treasury warrant
was dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of
the bank was P509. Against this balance he had issued certain checks which
could not be paid when the money was sequestered by the bank. On August
20, 1933, Attorney Gullas left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent
notices by mail to Mr. Gullas which could not be delivered to him at that time
because he was in Manila. In the bank's letter of August 21, 1933, addressed
to Messrs. Paulino Gullas and Pedro Lopez, they were informed that the
United States Treasury warrant No. 20175 in the name of Francisco
Sabectoria Bacos for $361 or P722, the payment for which had been
received has been returned by our Manila office with the notation that the
payment of his check has been stopped by the Insular Treasurer. "In view of
this therefore we have applied the outstanding balances of your current
accounts with us to the part payment of the foregoing check", namely, Mr.
Paulino Gullas P509. On the return of Attorney Gullas to Cebu on August 31,
1933, notice of dishonor was received and the unpaid balance of the United
States Treasury warrant was immediately paid by him.
As a consequence of these happenings, two occurrences transpired
which inconvenienced Attorney Gullas. In the first place, as above indicated,
checks including one for his insurance were not paid because of the lack of
funds standing to his credit in the bank. In the second place, periodicals in
the vicinity gave prominence to the news to the great mortification of Gullas.
A variety of incidental questions have been suggested on the record
which it can be taken for granted as having been adversely disposed of in
this opinion. The main issues are two, namely, (1) as to the right of the
Philippine National Bank to apply a deposit to the debt of a depositor to the
bank, and (2) as to the amount of damages, if any, which should be awarded
Gullas.
The Civil Code contains provisions regarding compensation (set off)
and deposit. (Articles 1195 et seq., 1758 et seq.) These portions of Philippine
law provide that compensation shall take place when two persons are
reciprocally creditor and debtor of each other (Civil Code, article 1195). In
this connection, it has been held that the relation existing between a
depositor and a bank is that of creditor and debtor. (Fulton Iron Works Co.
vs. China Banking Corporation [1930], 55 Phil., 208; San Carlos Milling Co.
vs. Bank of the Philippine Islands and China Banking Corporation [1933], 50
Phil., 59.)
The Negotiable Instruments Law contains provisions establishing the
liability of a general indorser and giving the procedure for notice of dishonor.
The general indorser of a negotiable instrument engages that if it be
dishonored and the necessary proceedings of dishonor be duly taken, he will
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 pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.)
In this connection, it has been held by a long line of authorities that notice of
dishonor is necessary in order to charge an indorser and that the right of
action against him does not accrue until the notice is given. (Asia Banking
Corporation vs. Javier [1923]. 44 Phil., 777; 5 Uniform Laws Annotated.)
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.
In Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held
that a bank has no right, without an order from or special assent of the
depositor to retain out of his deposit an amount sufficient to meet his
indebtedness. The basis of the Louisiana doctrine is the theory of
confidential contracts arising from irregular deposits, e. g., the deposit of
money with a banker. With freedom of selection and after full consideration,
we have decided to adopt the general rule in preference to the minority rule
as more in harmony with modern banking practice. (1 Morse on Banks and
Banking, 5th ed., sec. 324; Garrison vs. Union Trust Company, [1905], 111 A.
S. R., 407; Louisiana Civil Code Annotated, arts. 2207 et seq.; Gordon &
Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa, Comentarios al
Codigo Civil Español, 4th ed., 359 et seq.; 11 Manresa, pp. 694 et seq.).
Starting, therefore, from the premise that the Philippine National Bank
had with respect to the deposit of Gullas a right of set off, we next consider if
that remedy was enforced properly. The fact we believe is undeniable that
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. At his point recall that Gullas was merely an
indorser and had issued checks in good faith.
As to a depositor who has funds sufficient to meet payment of a check
drawn by him in favor of a third party, it has been held that he 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. (Callahan vs. Bank of
Anderson [1904], 2 Ann. Cas., 203.) The decision cited represents the
minority doctrine, for on principle it would seem that notice is not necessary
to a maker because the right is based on the doctrine that the relationship is
that of creditor and debtor. 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.
We accordingly are of the opinion that the action of the bank was
prejudicial to Gullas. But to follow up that statement with others proving
exact damages is not so easy. For instance, for alleged libelous articles the
bank would not be primarily liable. The same remarks could be made
relative to the loss of business which Gullas claims but which could not be
traced definitely to this occurrence. Also 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
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 in Gullas' finances, especially with reference to his insurance, which was
injurious to him. 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.
Agreeable to the foregoing, the errors assigned by the parties will in
the main be overruled, with the result that the judgment of the trial court will
be modified by sentencing the defendant to pay the plaintiff the sum of
P250, and the costs of both instances.
Villa-Real, Imperial, Butte, and Goddard., JJ., concur.

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