The debtor and creditor have ordinarily the exclusive power to determine the application of a payment and in exercising this power are not obliged to consider the interests of third persons such as sureties,47 unless the source from which the paymeat is derived (and perhaps the creditor's knowledge of that derivation) imposes a duty on the debtor or creditor or both. In this connection several situations must be differentiated.
45 1 Evans' Pothier on Obligations (2d Am. ed.), 285.
46 The provisions of the code of Louisiana which are a free translation from the French Code and are in substance identical with corresponding provisions of the code of Lower Canada are as follows:
Art. 2164 (2160). The debtor of a debt which bears interest or produces rents, cannot, without the consent of the creditor, impute to the reduction of the capital any payment he may make, when there is interest or rent due.
Art. 2165 (2161). When the debtor of several debts has accepted a receipt, by which the creditor has imputed what he has received to one of the debts specially, the debtor can no longer require the imputation to be made to a different debt, unless there have been fraud or surprise on the part of the creditor.
Art. 2166 (2162). When the receipt bears no imputation, the payment must be imputed to the debt, which the debtor had at the time most interest in discharging, of those that are equally due, otherwise to the debt which has fallen due, though less burdensome than those which are not yet payable.
If the debts be of a like nature, the imputation is made to the less burdensome; if all things are equal, it is made proportionately.
47 Kirby v. Marlborough, 2 M. & S. 18; Wright v. Hickling, L. R. 2 C. P. 199; In re Sherry, 25 Ch. D. 692; Turner v. Yates, 16 How. 14,14 L. Ed. 824; Boyd v. Watertown Agricultural Ins. Co., 20 Colo. App. 28, 76 Pac. 986; Hansen v. Rounsavell, 74 11I. 238; Graff v. Fox, 204 11I. App. 598; Wyandotte Coal Ac. Co. tr. Wyandotte Paving etc. Co., 97 Kan. 203,154 Pac. 1012, Ann. Cas. 1917 C. 580; Robson v. McKoio, 18 La. Ann. 544; Irving v. Mutual Trust Co., 82 N. J. Eq. 629, 90 Atl. 274; State v. Sooy 39 N. J. L. 539; Allen v. Culver, 3 Denio, 284; Harding v. Tifft, 75 N. Y. 461, 464; Woods v. Sherman, 71 Pa. 100; Philadelphia v. Tradesmen's Trust Co., 38 Pa. Super. 286; Pope v. Transparent Ice Co., 91 Va. 79, 20 S. E. 940; Kline v. Miller's Adm., 107 Va. 453, 59 S. E. 386. See also Wetmore & Morse Granite Co. v. Ryle, (Vt. 1919), 107 Atl. 109, and cases cited infra, n. 50. Cf. Drake v. Sherman, 179 HI. 362, 53 N. E. 628; and Farmers' Sav. Bank v.
1. The payment may be made with money impressed with a trust in favor of the third person, as where a trustee, or a partner pays one to whom he owes money both individually and in his fiduciary capacity with trust or partnership funds; or money may be paid to a debtor for the express purpose of satisfying a particular claim and he may pay it to the creditor without indicating that one claim rather than another is to be satisfied.
2. Where a payment is made from funds in the hands of a principal debtor, to which a surety would be subrogated on payment of the debt; and where, therefore, a destruction of this right by the creditor's application of the fund with knowledge of its derivation to other debts of the principal than that in which the surety is interested will discharge the latter.48
3. The case must also be distinguished where, though there is no trust in favor of a third person affecting the money paid, the obligation of a surety by its very terms when fairly construed guarantees only that the principal debtor shall pay over certain sums collected by him. This obligation is fulfilled if these sums are paid over, however the debtor and creditor may agree to apply them.49
Jameson, 175 la. 676, 157 N. W. 460, L. R. A. 1916 E. 362. In the latter case the court held that where a bank was induced by fraudulent misrepresentation to lend a certain amount to another, and the bank afterwards largely increased the loan of its own motion, a payment in excess of the amount first lent must be applied to the sum first lent and that the fraudulent person was freed from liability.
48 See supra, Sec. 1232.
49 In Merchants' Ins. Co. v. Herber, 68 Minn. 420, 426, 71 N. W. 624, the action was brought by an insurance company against an agent, Herber, and his surety for failure to pay over premiums. The court held an agreement to apply these premiums to other indebtedness ineffectual, saying: "All moneyB received by Herber in payment of premiums, less commissions and charges, were the property of the plaintiff, and for their payment the surety, Wright, was bound. He was therefore equitably entitled to have all money received for premiums for which he was liable applied in extinguishment of such liability, notwithstanding the agreement of the creditor and his principal to apply them on the latter's prior indebtedness." See also Drake v. Sherman, 179 111. 362, 53 N. E. 628; Ida County Savings Bank v. Seidens-ticker, 128 la. 54, 64, 102 N. W. 821, 111 Am. St. 189. Cf. Boyd v. Water-town Agricultural Ins. Co., 20 Colo. App. 28, 76 Pac. 986.
4. The money with which the payment is made may be obtained from one who is interested in having it applied to one debt rather than another, but makes no bargain that it shall be. This has frequently happened where a contractor owing a subcontractor or material man on various accounts has received from the owner of a building money with all or a part of which he pays the sub-contractor or material man, who seeks to apply the payment to a debt less well secured and to enforce a lien against the building from whose owner the money came.
With cases involving such facts should be compared decisions holding that money received from a tax collector by a municipality in ignorance of the taxes from which it was derived and without special direction, may be applied by the municipality to the payment of any indebtedness due from him, though this is detrimental to sureties on his bond for the year in which the taxes that were the source of the payment were assessed.50
The first and last of the four classes enumerated above need particular examination in view of the decisions.