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.
Other questions may arise where third persons are interested in one of two funds, either as principal or surety. In such cases the rights of third persons may override even the right of the debtor and creditor to apply a payment by mutual agreement or to change an application once made. Thus if A has given bond as a public officer with one set of sureties for one period of time, and with a different set of sureties for a subsequent period of time, money received and paid in by A during the second period cannot be applied to an indebtedness incurred by him during the first period, since the effect would be to transfer the burden from the sureties during the period in which he had become indebted to the sureties during the period in which he discharged his obligations punctually.1 Not even the specific agreement of the debtor and creditor can operate to apply money collected during the second period to the payment of a deficiency created during the first period.2 However, in the absence of a showing that the fund paid in was collected during the second period, it will be assumed that the payment is made from the private funds of the official.3 If a debtor has the specific fund for which another is surety he cannot even with the consent of the creditor apply it to a different debt.4 Thus if a surety is bound under an agreement that the loan thus made shall be used in paying for stored wheat, he is not liable to those having notice, if the fund is diverted from this purpose.5 If payment is made by a third person who is liable as indorser for the debtor on one of several notes held by the creditor, the creditor cannot apply such payment to such other notes.6 So the debtor and creditor cannot change the application of a payment to a debt secured by a lien so as to prejudice other lienholders,7 or a subsequent purchaser of mortgaged premises who buys afte" the original application of such payment to the mortgage debt.8
4 Frazier v. Lanahan, 71 Md. 131; 17 Am. St. Rep. 516; Neal v. Allison, 50 Miss- 175. In the language of the Louisiana courts, payment will be imputed to the debt bearing mortgage. New Orleans Ins. Co. v. Tio, 15 La. Ann. 174; citing Forstall v. Blanchard, 12 La. 6; Dunlap v. Tarkington, 5 La. Ann. 569.
5 Windsor v. Kennedy, 52 Miss. 164
6 "Scott v. Fisher, 4 T. B. Mon.
(Ky.) 387; Bussey v. Gant, 10 Humph. (Tenn.) 238.
7 Massachusetts v. Telegraph Co., 141 U. S. 40; Magarity v. Shipman, 82 Va. 784.
8 Calvert v. Carter, 18 Md. 73.
9 Johnston v. Succession of Rob-bins, 20 La. Ann. 569; 96 Am. Dee. 426.
1 Jones v. United States. 7 How. (U. S.) 681 (obiter) ; United States v. Eckford, 1 How. (U. S.) 250; United States v. January, 7 Cranch (U. S.) 572.