Petitioner Gullas maintains a current account with herein respondent PNB. He together with one Pedro Lopez signed as endorsers of a Warrant issued by the US Veterans Bureau payable to the order of one Francisco Bacos. PNB cashed the check but was subsequently dishonored by the Insular Treasurer. PNB then sent notices to petitioner which could not be delivered to him at the time because he was in Manila. PNB in the letter informed the petitioner the outstanding balance on his account was applied to the part payment of the dishonored check. Upon petitioner’s return, he received the notice of dishonor and immediately paid the unpaid balance of the warrant. As a consequence of these, petitioner was inconvenienced when his insurance was not paid due to lack of funds and was publicized widely at his area to his mortification.
Whether or not PNB has the right to apply petitioner’s deposit to his debt to the bank.
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 Civil Code contains provisions regarding compensation (set off) and deposit. The portions of Philippine law provide that compensation shall take place when two persons are reciprocally creditor and debtor of each other. In this connection, it has been held that the relation existing between a depositor and a bank is that of creditor and debtor. [General Rule]
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.
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. We accordingly are of the opinion that the action of the bank was prejudicial to Gullas.