G.R. No. 43191 ; November 13, 1935
PAULINO GULLAS, plaintiff-appellant, vs. THE PHILIPPINE NATIONAL BANK, defendant-appellant.

FACTS

Paulino Gullas, a lawyer with a current account at the Philippine National Bank (PNB), endorsed a U.S. Treasury warrant. PNB cashed the warrant, but it was later dishonored. Without prior notice to Gullas, who was out of town, PNB applied the balance (P509) in his deposit to partially cover the dishonored warrant. This caused checks drawn by Gullas, including one for insurance, to bounce. Upon his return, Gullas received notice of dishonor and paid the remaining balance. He sued PNB for damages, citing inconvenience, injury to his reputation from newspaper reports, and financial disturbance.

ISSUE

1. Whether PNB had the right to set off (apply) Gullas’s deposit to his indebtedness arising from the dishonored warrant.
2. Whether Gullas is entitled to damages and in what amount.

RULING

1. Yes, as a general rule, a bank has a right of set off or compensation under the Civil Code, as the relationship between a bank and depositor is that of creditor and debtor. However, this right was improperly exercised in this case because Gullas was merely an indorser of the warrant. Notice of dishonor is necessary to charge an indorser under the Negotiable Instruments Law. PNB’s premature set off without first giving notice deprived Gullas of the opportunity to protect his interests.
2. Yes, Gullas is entitled to nominal damages. While the bank is not primarily liable for libelous newspaper articles or unproven loss of business, its premature action caused financial disturbance and inconvenience, particularly with his insurance. The Court awarded nominal damages of P250. The trial court’s judgment was modified accordingly.

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