puted on the balance of principal remaining due. If the payment falls short of the interest, the balance of interest is not to be added to the principal so as to produce interest," but interest continues on the former principal until the period when the payments, taken together, exceed the interest due, and then the surplus is to be applied toward discharging the principal, and interest is to be computed on the balance as aforesaid. This is the most general rule, and in some states has been confirmed by statute, and it is equally applicable, whether the debt is one which expressly draws interest, or on which interest is given in the name of damages.9 113. Before Maturity.-A different rule is held to apply where the holder receives the money before it is due and in such a case a payment should be applied to the principal.10 But where a pay. ment is made before the principal sum is due the rule of computing interest must be such that the interest of money paid in before the time must be deducted from the interest of the whole sum due at the time appointed by the instrument for making the payment. Thus the interest must be computed on the principal for the entire term and added thereto and from that sum must be deducted the amount of the payment plus the interest thereon from the date of the obligation. to the date of the payment.11 But where by agreement the maker is given the option of making a partial payment before a note is due, the principal of the note becomes due pro tanto when the maker elects to exercise the right given him by the contract of making partial payment, and the payment will be applied first in discharging the interest on that part of the note he caused to mature by his own act.12 Where the interest on the debt is usurious, payments made Glaser, 82 Mich. 190, 46 N. W. 227, 21 A. S. R. 556; Dickson v. Stewart, 71 Neb. 424, 98 N. W. 1085, 115 A. S. R. 596; Connecticut v. Jackson, 1 Johns. Ch. (N. Y.) 13, 7 Am. Dec. 471; Anketel v. Converse, 17 Ohio St. 11, 91 Am. Dec. 115. Note: 96 A. S. R. 69, 70. 5. Connecticut v. Jackson, 1 Johns. Ch. (N. S.) 13, 7 Am. Dec. 471. Note: 96 A. S. R. 70. 6. Story v. Livingston, 13 Pet. 359, 10 U. S. (L. ed.) 200; United States v. McLemore, 4 How. 286, 11 U. S. (L. ed.) 977; Wallace v. Glaser, 82 Mich. 190, 46 N. W. 227, 21 A. S. R. 556; Dickson v. Stewart, 71 Neb. 424, 98 N. W. 1085, 115 A. S. R. 596; Connecticut v. Jackson, 1 Johns. Ch. (N. Y.) 13, 7 Am. Dec. 471; Anketel v. Converse, 17 Ohio St. 11, 91 Am. Dec. 115. Note: 96 A. S. R. 70. 7. Connecticut v. Jackson, 1 Johns. Ch. (N. Y.) 13, 7 Am. Dec. 471. Note: 96 A. S. R. 70. Ch. (N. Y.) 13, 7 Am. Dec. 471. 8. Connecticut v. Jackson, 1 Johns. Note: 96 A. S. R. 70. 9. Story v. Livingston, 13 Pet. 359, 10 U. S. (L. ed.) 200. 10. Starr v. Richmond, 30 Ill. 276, 83 Am. Dec. 189; National Park Bank v. Seaboard Bank, 114 N. Y. 28, 20 N. E. 632, 11 A. S. R. 612. Note: 96 A. S. R. 70. See also INTEREST, vol. 15, p. 32. 11. Tracy v. Wickoff, 1 Dall. 124, 1 U. S. (L. ed.) 65. 12. Jacobs v. Ballinger, 130 Ind. 231, 29 N. E. 782, 15 L.R.A. 169. generally will be applied to discharge the principal, the stipulation for interest having no binding force.13 The law will not presume that payment of a year's interest on a note six months after due is to be applied partly for past and partly for future interest.1 Rights of Third Person 14 114. In General. The right to apply payments is one strictly existing between the original parties, and no third person has any authority to insist on an appropriation of the money in his own favor, where neither the debtor nor the creditor has made or required any such appropriation.15 But it has been contended that the right of a creditor to make an application is subject to the condition that it shall not be inequitable 16 In accordance with the general rule subsequent purchaser of property subject to a lien cannot control a payment made by his vendor to the creditor.17 Neither can a mortgagee of previously encumbered property control the application of payments made by his mortgagor.18 And one of two joint debtors. cannot control the application of a payment made by the other to the creditor who also has a claim against the other debtor individually.19 Notwithstanding the generally accepted principle of the absolute right of a debtor or creditor to apply a payment, some authorities hold that the rules regarding the application of payments cannot be enforced to the prejudice of third persons.20 Accordingly it has been held where neither party makes appropriation of payments, until the right of third persons holding under the debtor are such as might be enforced against him, the creditor cannot thereafter so appropriate payments as to affect such rights, if, by a different appropriation, they can be protected.1 Likewise it has been held that one whose fraud induced another to lend money to a third to a specified amount may, in case such other largely increases the loan at his own instance and the borrower repays a portion of the loan, insist that the payment be applied in satisfaction of the portion of 13. Richmond Second Nat. Bank v. Fitzpatrick, 111 Ky. 228, 63 S. W. 459, 62 L.R.A. 599. Note: 96 A. S. R. 71. 14. Davies County Bank, etc., Co. v. Wright, 129 Ky. 21, 110 S. W. 361, 17 L.R.A. (N.S.) 1122. 15. Wyandotte Coal, etc., Co. v. Wyandotte Pav., etc., Co., 97 Kan. 203, 154 Pac. 1012, Ann. Cas. 1917C 580 and note. Notes: 96 A. S. R. 52, 74; Ann. Cas. 1917C 582. 16. Note: 96 A. S. R. 52. 17. Note: Ann. Cas. 1917C 583. 18. Ketchum v. St. Louis, 101 U. S. 306, 25 U. S. (L. ed.) 999. Note: Ann. Cas. 1917C 583. 19. Note: Ann. Cas. 1917C 583. 20. Pickering v. Day, 3 Houst. (Del.) 474, 95 Am. Dec. 291; Willis v. McIntyre, 70 Tex. 34, 7 S. W. 594, 8 A. S. R. 574. Note: 96 A. S. R. 75. 1. Willis v. McIntyre, 70 Tex. 34, 7 S. W. 594, 8 A. S. R. 574. the debt for which he is liable. When an agent or trustee receives money generally, and he holds claims of different persons, to each of whom he is under the same obligations, he should apply the money ratably to the discharge of all the claims, and this obligation would be in no way affected by the circumstance that if the debts were all his own, he would have the undoubted right to apply the money to either of them at his election.3 Where an agent receives money from his principal for the purpose of paying a debt, and uses it for the purpose of paying a debt of his own due to the creditor, it is said that the application of the payment is binding on the principal in the absence of knowledge on the part of the creditor that the money belongs to the principal, though there is also authority to the contrary. 115. Surety Generally.-While the authorities are not entirely in accord third persons, such as guarantors, sureties, indorsers, and the like, secondarily liable on one of several debts, cannot control the application which either the debtor or the creditor makes of a payment, and neither the debtor nor the creditor need apply the payment in the manner most beneficial to such persons.5 This rule applies as well to a corporation engaged in the business of writing surety bonds for a compensation as to an ordinary accommodation surety. Accordingly it has been held that where a creditor has several demands against the same debtor, one of which is secured by an indorsement, and he has procured attachments to be issued and levied on all the demands, he has the right to apply the proceeds of the attachment to the satisfaction of the demands not secured by the indorsement, and then seek satisfaction, if necessary, from the indorser. Still where there is a guaranty of a limited part of a debt, any payments made by the debtor must be applied to discharge that portion. The rule is otherwise, however, where the guaranty is for the unpaid balance of a debt.8 2. Farmer's Sav. Bank v. Jameson, Bross v. McNicholas, 66 Ore. 42, 133 175 Ia. 676, 157 N. W. 460, L.R.A. Pac. 782, Ann. Cas. 1915B 1272; 1916E 362. 3. Richmond, etc., Constr. Co. v. Richmond, etc., R. Co., 68 Fed. 105, 31 U. S. App. 704, 15 C. C. A. 289, 34 L.R.A. 625; McLeod v. Despain, 49 Ore. 536, 90 Pac. 492, 92 Pac. 1088, 124 A. S. R. 1066, 19 L.R.A. (N.S.) 276. Notes: 96 A. S. R. 52; Ann. Cas. 1917C 584. 4. Note: Ann. Cas. 1917C 584. 5. Cain v. Vogt, 138 Ia. 631, 116 N. W. 786, 128 A. S. R. 216; Wyandotte Coal, etc., Co. v. Wyandotte Pav., etc., Co., 97 Kan. 203, 154 Pac. 1012, Ann. Cas. 1917C 580 and note: Pardee v. Markle, 111 Pa. St. 648, 5 Note: 96 A. S. R. 52, 74. 6. Wyandotte Coal, etc., Co. v. Wyandotte Pav., etc., Co., 97 Kan. 203, 154 Pac. 1012, Ann. Cas. 1917C 580. 7. Morrison v. Citizens' Nat. Bank, 65 N. H. 253, 20 Atl. 300, 23 A. S. R. 39, 9 L.R.A. 282. 8. United States v. Giles, 9 Cranch 212, 3 U. S. (L. ed.) 708. Note: Ann. Cas. 1917C 587. 116. Source of Funds as Material.-The general rule that a surety cannot control the application of a payment is applicable solely in those cases where the principal makes the payment from funds which are his own and are free from any equity in favor of the surety to have the money applied in payment of the debt for which the surety is liable, but where the specific money paid, or property delivered to the creditor, is the identical money or property for the payment or delivery of which the debtor and his sureties have obligated themselves by the contract and undertaking, the surety is not bound by an application thereof to some other debt for which the surety is not liable. He is entitled to have the money or property applied to the payment of the debt for which he is liable.10 While the decisions recognize the right of a surety to have a payment made from funds in which it has an equity applied to the debt for which it is surety, the great weight of authority qualifies the surety's rights in this regard to the extent of confining the exercise or claim of such right to the time of the making of the payment, as the right of the original debtor is so confined, where the creditor receives the payment from his debtor without knowledge of the source of the money or of the surety's equity therein, and in good faith exercises his right of applying the payment to any one of the debts owing to him by the one making the payment. And want of knowledge or failure of direction secures to the creditor, even as against the claims of sureties, the right to have his application of the payment which he has made, in the absence of such knowledge and in good faith, remain undisturbed.11 117. Sureties on Bonds.-In instances of official bonds executed by the principal at different times, with separate and distinct sets of sureties, the responsibility of the separate sets of sureties must have reference to, and be limited by, the periods for which they respectively undertake by their contract, and neither the misfeasance or nonfeasance of the principal, nor any cause of responsibility occurring within the period for which one set of sureties have undertaken, can be transferred to the period for which alone another set have made themselves answerable.12 From this it follows that moneys collected and 9. Bross v. McNicholas, 66 Ore. 42, 133 Pac. 782, Ann. Cas. 1915B 1272. 10. Bross v. McNicholas, 66 Ore. 42, 133 Pac. 782, Ann. Cas. 1915B 1272; Sturtevant Co. v. Fidelity, etc., Co., 92 Wash. 52, 158 Pac. 740, L.R.A. 1917C 630. Notes: 96 A. S. R. 52; Ann. Cas. 1917C 583, 587. And see CHATTEL MORTGAGES, vol. 5, p. 456. 11. Sturtevant Co. v. Fidelity, etc., Co.. 92 Wash. 52, 158 Pac. 740, L.R.A. 1917C 630. 12. Jones v. United States, 7 How. 681, 12 U. S. (L. ed.) 870; State v. Smith, 26 Mo. 226, 72 Am. Dec. 204 and note. See PRINCIPAL AND SURETY, post. paid over during a second term and under a different set of sureties. cannot be applied to extinguish obligations arising in the prior term. and thereby relieve the sureties under the first bond at the expense of the sureties under the second; 13 and the government cannot by the mere fact of keeping an account current in which debts and credits are entered as they occur, and without any express appropriation of payments, affect the rights of sureties. 14 These rules are not to be regarded as resting on any particular public policy, nor as applicable only to the bonds given by public officers, but extend to fidelity bonds generally. The fundamental idea is that the rights and interests of independent sets of sureties for distinct periods of time would be unjustly sacrificed by applying payments arbitrarily to the oldest debt.15 However, it has been held that it is only when the law makes the application of the payments that a particular set of securities is entitled to credit for the sums that may be shown to have been received under their bond; 16 and when an official has held several successive terms under bonds with different sets of sureties, he may apply the revenue arising in one term to the payment of a balance due under a former term, and thus exonerate one set of sureties at the expense of another.17 Although there may have been no application of the payment when made, yet the law, in making the application between two sets of sureties, will not presume that all the revenue received after the date of the last bond was received in discharge of the liability incurred by reason of such bond, and inflexibly appropriate it accordingly. The circumstances under which a payment is made may show the year for which the money was received with which the payment was made. If, after an officer is properly chargeable with money for a term, he makes a payment, it may be presumed that it was on account of the indebtedness for that term; yet it may be shown to be otherwise, and the circumstances under which it was made may indicate the source whence the money was obtained.18 The rule is somewhat different, however, where there is only one bond and one surety. In such a case, although the account of the principal is balanced at stated intervals and the debtor is charged or credited with the balance, as may be, on the next interval, still as the whole transaction represents but one continuous account, 13. United States v. January, 7 16. State v. Smith, 26 Mo. 226, 72 Cranch 572, 3 U. S. (L. ed.) 443; Am. Dec. 204. United States v. Irving, 1 How. 250, 11 U. S. (L. ed.) 120. Note: 96 A. S. R. 73. 17. Nashville First Nat. Bank v. National Surety Co., 130 Fed. 401, 64 C. C. A. 601, 66 L.R.A. 777 (stating 14. United States v. Irving, 1 How. rule); State v. Smith, 26 Mo. 226, 72 250. 11 U. S. (L. ed.) 120. 15. Nashville First Nat. Bank v. National Surety Co., 130 Fed. 401, 64 C. C. A. 601, 66 L.R.A. 77. Am. Dec. 204. 18. State v. Smith, 26 Mo. 226, 72 Am. Dec. 204; St. Joseph v. Merlatt, 26 Mo. 233, 72 Am. Dec. 207 |