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.
Different questions arise where third persons are interested in one of two obligations, either as principal or surety. In such cases the rights of third persons must be considered and they may override even the right of the debtor and creditor to apply a payment by mutual agreement or to change an application once made.1 If a landlord has a lien upon certain personalty belonging to his tenant which is also encumbered by a mortgage, and the mortgage is prior to the lien of the landlord for the second year of the tenancy, and if the landlord takes possession of certain personalty which is subject to both liens, the value of the property thus taken should be applied in the first instance to the rent for the first year of the tenancy, for which the lien of the landlord was superior to that of the mortgagee, even if the landlord has obtained a judgment for the rent due for both years. In an action by the landlord against the mortgagee for the value of property taken by the mortgagee in satisfaction of his lien, the landlord has no right to have the amount of property taken by the landlord prorated between the two years or applied to the.second year.2 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 can not 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.3 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.4 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.5 If a debtor has the specific fund for which another is surety and the creditor knows the source of such fund, the debtor can not, even with the consent of the creditor, apply it to a different debt.6 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.7 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 can not apply such payment to such other notes.8 If A has been induced to lend money to B through C's fraud, and A subsequently lends an additional amount to B without being induced by C's fraud, and B makes a general payment to A, as between A and C, C may insist that such payment should be applied to the part of the debt which was induced by his fraud.9 If money is deposited in a bank in the name of one who is not the true owner thereof, the bank can not apply such deposit to the payment of the debt of the nominal depositor so as to deprive the real owner of his interest in such fund.10
10 Parker v. Dantzler Foundry & Machine Works, 118 Miss. 126, L. R. A. 1918F, 795, 79 So. 82.
11 Johnston v. Succession of Robbins, 20 La. Ann. 569, 96 Am. Dec 426.
1 Hudson v. Wilson, - Ala. - , 79 So. 378; McLennan v. Farmers' Savings Bank, 131 la. 696, 117 Am. St. Rep. 439, 109 N. W. 291.
See also, Farmers' Savings Bank v. Jameson, 175 la. 676, L. R. A. 1916E, 362, 157 N. W. 460. 2 Hudson v. Wilson, - Ala. - , 79 So. 378.
The right of a third person to insist upon the application of payments so as to protect his interests is subordinate to the provisions of the original contract under which the obligation was incurred.11 If a number of notes have been given, secured by a chattel mortgage, and the mortgage contains a provision which authorises the mortgagee to apply the proceeds of the mortgage to such notes as he may elect, a third person who is a surety upon two of such notes can not insist on a pro rata distribution of the proceeds among the different notes secured by the mortgage if the creditor elects to apply the proceeds of the mortgage to the notes upon which such third person is not a surety.12 If a mortgagor borrows money under a contract by which such loan is to be applied to the discharge of certain debts which were not secured, and also to the discharge of one of the mortgages by which the realty was already encumbered, the fact that such mortgagor has agreed with one to whom he has sold the loan to apply the proceeds of such loan to the discharge of both of the mortgages upon such land, does not entitle the purchaser to treat such mortgages as paid by reason of such application as against the mortgagee.13
3United States v. January, 11 U. S. (7 Cranch) 572, 3 L. ed. 443; United States v. Eckford, 42 U. S. (1 How.) 250, 11 L. ed. 120; Jones v. United States, 48 U. S. (7 How.) 681, 12 L. ed. 870 (obiter).
4 United States v. January, 11 U. S. (7 Cranch) 572, 3 L. ed. 443.
5 Pratt's Appeal, 41 Conn. 101; Helm ▼. Commonwealth, 79 Ky. 67.
6 Colerain v. Bell, 50 Mass. (9 Met.) 499; Merchants' Ins. Co. v. Herber, 68 Minn. 420, 71 N. W. 624 [criticising,
Pine County v. Willard, 39 Minn. 125, 12 Am. St. Rep. 622, 1 L. R. A. 118, 39 N. W. 71].
7Crossley v. Stanley, 112 la. 24, 84 Am. St. Rep. 321, 83 N. W. 806.
8 Memphis City Bank v. Smith, 102 Tenn. 467, 52 S. W. 149.
9 Farmers' Sayings Bank v. Jameson, 175 la. 676, L. R. A. 1916E, 362, 157 N. W. 460.
10 McLennan v. Farmers' Sayings Bank, 131 Ia. 696, 117 Am. St. Rep. 439, 109 N. W. 291.