2 August 1933: The US Treasurer for the US Veterans Bureau issued Treasury Warrant

No. 20175 (for $361.00, or

P722.00) payable to the order of Francisco Sabectoria Bacos. Atty. Paulino Gullas,
resident of Cebu, and Pedro
Lopez signed as indorsers.
 It was cashed by Philippine National Bank (PNB). Subsequently, the treasury warrant was
dishonored.
 At that time, Gullas had an outstanding balance of P509.00 with PNB, against which he
issued certain checks.
 PNB sequestered Gullas’ money (Case says “prior to the mailing of notice of dishonor.”
See CAB below.). Consequences:
1. The checks Gullas issued, including one for his insurance, were not paid due to lack of
funds standing to his credit in PNB.
2. Periodicals in the vicinity gave prominence to the news, to the great mortification of
Gullas.
 20 August 1933: Gullas left his residence for Manila. (Case did not mention the date of
sequestration so I don’t know which happened first)
 PNB, after learning of the dishonor, sent notices by mail to Gullas, which could not be
delivered to him since he was
in Manila.
 PNB informed Lopez and Gullas, in a letter dated 21 August 1933, (1) that the treasury
warrant has been returned with
the notation that payment of the check has been stopped by the Insular Treasurer; and (2)
that they have applied the
outstanding balances of their PNB accounts to the payment of the check – Gullas’
P509.00.
 31 August 1933: Gullas returned to Cebu. He received the notice of dishonor and
immediately paid the unpaid balance
of the US treasury warrant.
 CFI-Cebu sentenced PNB to return the P509.00 to Gullas. Gullas, who already received
the P509.00 (but wanted to secure P10,000
for damages), and PNB (who wanted total absolution) appealed the decision.

(1) Whether PNB rightfully applied the P509.00 to the payment of the warrant; (2) Whether
damages should be awarded to Gullas
HELD:
1. No. Court recognized that 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 the depositor.

1 However, it held that that remedy was not enforced properly.

 The Negotiable Instruments Law (NIL) contains provisions establishing the liability of a
general indorser and
giving the procedure for notice of dishonor. 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 (Sec. 66).
 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 Corp. v. Javier).
 CAB: 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.
 In Callahan v. Bank of Anderson: As to a depositor who has funds sufficient to meet
payment of a check drawn by him
in favor of a third party, 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.
o This decision espouses the minority rule. 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. This is not
so in the case of an
indorser. Notice should actually have been given him in order that he might protect his
interests.

2. Gullas should be awarded nominal damages ( P 2 5 0 . 0 0 ) o n l y because of the

premature action of the bank against
which Gullas had no means of protection.
 On one hand, for the allegedly libelous articles and loss of business, PNB is not primarily
liable. Furthermore, having been
reimbursed the P509.00, Gullas lost little through the actual levy of the 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'
finances, especially with reference to his insurance, which was injurious to him.