Application of Payments

Where a person owes several debts to another, or owes on an account consisting of several
different items, and makes a part payment, the question arises as to which debt is discharged. As
a rule, the debtor has a right to say which debt he will pay, and he may show his intention in this
respect by his conduct, or it may otherwise be inferred from the circumstances.5 If the creditor
receives the payment, he is bound to apply it as expressly or impliedly directed.6
If the debtor does not direct the application, at the time of the payment,7 the creditor, as a rule,
may apply it as he may see fit.8 He may apply it, for instance, to a debt which is barred by the
statute of limitations, in preference to another which is not barred.9 Having once made the
application, he cannot change it without the debtor's consent.
If neither party makes an appropriation of the payment, the law will apply it. According to the
civil law, the presumable intention of the debtor was resorted to as the rule to determine the
application, and, in the absence of express declaration by either party, the payment was applied
in the way that would be most beneficial to the debtor. "The payment was consequently applied
to the most burdensome debt - to one that carried interest, rather than to that which carried none;
to one secured by a penalty, rather than to that which rested on a simple stipulation; and, if the
debts were equal, then to that which had been first contracted." 11 This rule has been adopted in
a number of cases both in England and in this country. In a well-considered New York case the
rule was approved after a full review of the authorities, and a payment was applied to a mortgage
and a judgment debt in preference to an account, because the former would bear most heavily on
the debtor.12 Many of the courts, on the other hand, have adopted a rule to some extent directly
opposed to the civil-law rule. "If the application is made by neither party,", it has been said by
the supreme court of the United States, "it becomes the duty of the court, and in its exercise a
sound discretion is to be exercised. It cannot be conceded that this application is to be made in a
manner most advantageous to the debtor. * * * It would seem reasonable that an equitable
application should be made; and, it being equitable that the whole debt should be paid, it cannot
be inequitable to extinguish first those debts for which the security is most precarious." In this
case the payment was applied to other demands rather than to a judgment debt, on the ground
that the former were not so well secured.13 Probably most of the courts in this' country follow
the rule just stated, though with some qualification. It is very generally said that an equitable
application will be made; that is,