This section is from the book "Canadian Banking Practice", by John T. P. Knight.
Question 293. - M & Co. are in the habit of discounting with their bankers sight drafts against shipments of produce to the Tinted States. One of the drafts for $75, was returned dishonoured and charged to the account of M & Co., increasing their overdraft to $150. Some time afterwards the firm sent the bank for discount their note for $100, endorsed by another party, and the proceeds of this note were remitted by the bank to M & Co. When the note fell due the firm sent the bank $100 to take it up, but the bank credited the amount instead to the overdrawn account and protested the note. Would the bank have recourse to the endorser?
Answer. - Upon the statement that the $100 was sent the bank to pay the note, the bank would have no right to apply it upon the other debt. The debtor has the right, when pn\ -ing money, to appropriate it to any indebtedness which he may specify, and the creditor cannot change the appropriation without the debtor's consent. Therefore the note of $100 must be regarded as paid and the endorser discharged.
On the general subject of appropriation of payments the case In re Exchange Bank; The Queen v. Ogilvy, will be found instrnctive. (Journal, Vol. 5, p. 258).