This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
If a debtor is indebted to his creditor upon two or more distinct debts, and a payment is made by the debtor or upon his behalf to the creditor, it often is important to determine upon which of such debts such payment applies. If the debtor makes the payment voluntarily and out of his own funds, he has the right to direct the application of such payments.1 He may direct the payment to be applied to an illegal demand in preference to a legal one,2 or to a debt secured by mortgage,3 or by personal security of others,4 in preference to an unsecured debt, or conaffirming in banc, trary to equitable principles.5 The payment is in law regarded as being applied as the debtor directs, even if the creditor has in fact made a different application thereof.6 If the debtor and creditor have once agreed upon an application of a payment, the creditor cannot afterwards change it.7 If the debtor directs a payment to be appropriated to a debt not yet due, the creditor may refuse to accept such payment; but if he accepts it, it must be appropriated as directed.8 So if it is understood that payments by one person are to be applied to an account due from another, payments made on such account cannot be subsequently applied by the creditor to another account, though he might at the outset have refused to accept payment from any person except from the original debtor.9 If a payment has been made on an entire contract, it cannot afterwards be applied to specific items.10 If the debtor intends a specific application of a payment made by him, he must notify the creditor of his intention.11 An entry or memorandum made by the debtor and not brought to the attention of the creditor is not a sufficient application.12 Whether the creditor must notify the debtor of an application made by himself is a question on which there is some conflict of authority, though the weight of authority is that such notice must be given to constitute an appropriation.13 If the creditor enters the payments on a general account with the debtor so as, in law, to amount to an application to the earliest items, his secret and uncommunicated intention to apply each payment to a specific item is without effect.14
1 The Mecca (1897), App. Cas. 286; National Bank v. Bank, 94 U. S. 437; Tayloe v. Sandiford, 7 Wheat. (U. S.) 13; Turrentine v. Grigsby, 118 Ala. 380; 23 So. 666; Pearce v. Walker, 103 Ala. 250; 15 So. 568; Murdock v. Clarke. SS Cal. 384; 26 Pac. 601; Perot v. Cooper, 17 Colo. 80; 31 Am. St. Rep. 258; 28 Pac. 391; Lodge v. Ainscow, 1 Penne. (Del.) 327; 41 Atl. 187; First National Bnnk v. Hollins-worth, 78 la. 575; 6 L. R. A. 92; 43 N. W. 536; Howard v. Mfg. Co. (Ky.), 72 S. W. 771; Haynes v. Wilson (Ky.), 55 S. W. 209; Mc-Daniel v. Barnes, 5 Bush. (Ky.) 183; Richardson v. Woodbury, 12 Cush. (Mass.) 279; Hall v. Mars-ton. 17 Mass. 575; Grasser, etc., Co. v. Rogers, 112 Mich. 112: 67 Am. St. Rep. 389; 70 X. W. 445: Berk v. Haas. Ill Mo. 264; 33 Am. St. Rep. 516; 20 S. W. 19; City of Lincoln v. Ry., - Neb. - : 93 N.
W. 766; Murray v. Schneider. 64 Neb. 484; 90 N. W. 206; Leeds v. Gifford, 41 N. J. Eq. 464; 5 Atl. 795; Stewart v. Hopkins, 30 O. S. 502; Trullinger v. Kofoed. 7 Or. 228; 33 Am. Rep. 708; Stebbins v. Lardner, 2 S. D. 127; 48 N. W. 847; Phillips v. Herndon. 78 Tex. 378; 22 Am. St. Rep. 59; 14 S. W. 857; Pope v. Ice Co.. 91 Va. 79; 20 S. E. 940; Hassard v. Tomkins. 108 Wis. 186; 84 N. W. 174.
2 Smith v. Coopers. 9 la. 376: Richardson v. Woodbury. 12 Cush. (Mass.) 279; Feldman v. Gamble. 26 N. J. Eq. 494.
3 Massengale v. Pounds. 108 Ga. 762; 33 S. E. 72: Plain v. Roth. 107 111. 588; First National Bank v. Prior, 10 N. D. 146; 86 N. W. 362; Stewart v. Hopkins, 30 O. S. 502; Patterson v. Van Loon, 186 Pa. St. 367; 40 Atl. 495.
4 Eppinger v. Kendrick. 114 Cal. 620; 46 Pnc. 613;
44 Pac. 234; Huntington, etc., Association v. Cast, 160 Ind. 701; 67 N. E. 921.
5 (City of) Lincoln v. Ry., - Neb. - ; 93 N. W. 766.
6 Reid v. Wells, 56 S. C. 435; 34 S. E. 401; rehearing denied, 34 S. E. 939.
7 Miller v. Womble, 122 N. C. .35; 29 S. E. 102; Reid v. Wells, 56 S. C. 435; 34 S. E. 401.
8 Wetherell v. Joy, 40 Me. 325.
9 National Cash Register Co. v. Bonneville. 119 Wis. 222; 96 N. W. 558.
10 Scannell v. Brewing Co., 178 Mass. 288; 59 N. E. 628.
11 Long v. Miller, 93 X. C. 233; Hill v. Southerland. 1 Wash. (Va.) 128.
12Terhune v. Colton. 12 X. J. Eq. 232; Brice v. Hamilton, 12 S. C. 32.
13 Schoonover v. Osborne. 117 la. 427: 90 X. W. 844: Capen v. Alden, 5 Met. (Mass.) 268; Sawyer v. Tap-pan, 14 X. H. 352.