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.
The general rules as to the application of payments have no effect in case of involuntary payments, coerced by the law. Neither debtor1 nor creditor2 can direct the application of involuntary payments compelled by legal process. Even if a mortgage is given voluntarily, payment as the result of a foreclosure suit is not voluntary, and the debtor can not direct the payment.3 A payment of a claim by a receiver is treated as an involuntary payment in this sense.4
Involuntary payments have, in some jurisdictions, been applied to unsecured rather than to secured indebtedness.5 Under some circumstances the opposite rule has been applied. A payment by an assignee in insolvency will be applied to a debt secured by a mortgage in preference to one not so secured, since the assignee represents the creditors as well as the debtor.6 Another rule sometimes followed in such cases is to prorate the payment among the several debts, irrespective of the collateral security held for each.7
2 Woodward v. Brown, 119 Cal. 283, 63 Am. St. Rep. 108, 51 Pac. 2 [modified in banc, 51 Pac. 542].
3 Forbes v. Morehead (Ky.), 58 S. W. 082.
1 Van Buren County Savings Bank v. Rockwell, 154 Ia. 26, 134 N. W. 424; Kinkead v. Peet, 164 Ia. 65, 145 N. W. 313; Orleans County National Bank v. Moore, 112 N. Y. 543, 8 Am. St. Rep. 775, 3 L R. A. 302, 20 N. E. 357; Wetmore & Morse Granite Co. v. Ryle, - Vt. - , 107 Atl. 109.
2 Blackstone Bank v. Hill, 27 Mass. (10 Pick) 129; Cage v. Iler, 13 Miss. 410, 43 Am. Dec. 521; Bergdoll v Sopp, 227 Pa St. 363, 76 Atl 64; Herr v. Lancaster Trust Co., 237 Pa. St. 344, 85 Atl 443; Wetmore & Morse Granite Co. v Ryle, - Vt - , 107 Atl. 109.
3 Orleans County National Bank v. Moore, 112 N. Y. 543, 8 Am. St. Rep. 775, 3 L. R. A. 302, 20 N. E. 357.
4 Wetmore & Morie Granite Co. v. Ryle, - Vt. - 107 Atl. 109.
5 California National Bank v. Ginty, 108 Cal. 148, 41 Pac. 38; Small v. Older, 57 Ia. 326, 10 N W. 734; Hanson v. Manley, 72 Ia 48, 33 N. W 357; Citizens' Bank v. Whinery, 110 la. 390, 81 N. W. 694; Smith v. Moore, 112 Ia. 60, 83 N. W. 813; Wilson v. Allen, 11 Or. 154, 2 Pac. 91.
6 Bell & Coggeshall Co. v. Kentucky Glass Works Co, 106 Ky 7, 50 S. W 1092, 51 S. W. 180 [reversing on rehearing, 48 S W. 440].
7 Florida. Cohen v [Engle, 29 Fla 655 [sub nomine, Cohen v. Bank, 11 So. 44].
If a claim which is filed with a receiver consists of a note and an account, and a dividend is paid on the claim, such dividend should be prorated between the note and the account, although parties other than the creditor in question were interested in the note.8
Special questions may arise where a particular fund has been appropriated by the debtor in advance to the payment of a specific debt. Thus a debtor may give to his creditor a mortgage or lien on specific property. Since the law is often invoked to sell such property, the question of appropriation in advance is often complicated with questions of involuntary payments. The proceeds of property encumbered by a lien,9 or mortgage,10 should be applied to the payment of the debt secured thereby. Money paid to a mortgagee on account of loss of property secured by a chattel mortgage must be applied by him to the mortgage debt.11 A partnership borrowed money of A, secured in part by a first mortgage, in part by a second mortgage on improved realty and in part not secured; and insurance policies covering such realty were indorsed to A as collateral security. The building was destroyed by fire; and the insurance money was paid to A, who credited it so as to discharge the debt secured by the first mortgage and the balance upon unsecured debts. It was held that as against the heirs of a deceased partner, A must credit the balance upon the debt secured by the second mortgage.12 In some cases where the same security covers several debts, the creditor has a right to make application among such debts. Mortgagees in possession claiming under several mortgages may apply the rents and profits to the different mortgage debts as they please.13 So in case of foreclosure of a mortgage securing several debts, it was held that the mortgagee could apply the proceeds to such of said debts as were not otherwise secured.14 So if personal property is pledged to secure certain debts, some of which are not otherwise secured and others of which are secured also by personal security, the creditor may apply the proceeds of such pledge to the debts otherwise unsecured.15 According to some authorities, the law will apply the proceeds of mortgaged realty pro rata among the different debts secured thereby, irrespective of the order of their maturity16 or assignment.17 Other authorities apply the proceeds to the debts in order of their maturity.
Massachusetts. Commercial Bank v. Cunningham, 41 Mass. (24 Pick.) 270, 35 Am. Dec. 322; Browning v. Carson, 1C3 Mass. 255, 39 N. E. 1037.
Michigan. Shelden v. Bennett, 44 Mich. 634, 7 N. W. 223.
New York. Orleans County National Bank v. Moore, 112 N. Y. 543, 8 Am. St. Rep. 775, 3 L. R. A. 302, 20 N. E. 357.
Vermont. Wetmore & Morse Granite Co. v.. Ryle, - Vt. - , 107 Atl 100.
8 Wetmore & Morse Granite Co. v. Ryle, - Vt - , 107 Atl. 109
9 Strickland v. Hardie, 82 Ala. 412,
3 So. 40: Clements v. Draper, 108 Ala. 211, 10 So. 25.
10 Armstrong v. McLean, 153 N. Y. 490, 47 N. E. 912; Summer v. Kelly, 38 S. Car. 507, 17 S. E. 364.
11 Sherman v. Foster, 158 N. Y. 587, 53 N. E. 504. (A third person was surety for the mortgage debt.)
12 Burbank v. Buhler, 108 La. 39, 32 So. 201. (Under the civil law rule in force in this state probably any general payment should have been so applied.)
13 Leach v. Curtin, 123 N. Car. 85, 31 S. E. 296.