#### THE STONE COMPANY v. A. D. RICH et al.

(Filed 16 October, 1912.)

1. Debtor and Creditor — Different Classes of Debt — Application of Payment.

When a payment is made by a debtor to bis creditor, wbo bolds both a secured and unsecured debt against bim, tbe debtor must direct tbe application of tbe payment either before, or at tbe time of making it; upon bis failure to do so, tbe creditor may make the application within a reasonable time, and upon his not doing so, the law will make tbe application to the unsecured debt.

*1622. Same — Notice to'Creditor — Book Entries.

The debtor who owes his creditor both a secured and unsecured debt must signify to the creditor in some manner his intention as to how a payment made to him must be applied, and an ■entry on the debtor’s book showing the application of the payment is insufficient unless it is shown to have been brought to the creditor’s attention at the time of the payment.

3. Same — Application by the Law.

In this case, it appearing that the debtor owed his creditor both a secured and unsecured debt, and made a payment without directing its application at the time, except by entry on his own books subsequently brought to the creditor’s attention and objected to by him, and that the application was made at the time of commencing this action, it is Held that the law applied the payment to the unsecured debt.

4. Debtor and Creditor — Different Classes of Debt — Payment—Application Directed — Burden of Proof.

The burden of proof is on the debtor to show that he has directed the application of a ixayment he has made to his creditor, to whom he owed both a secured and unsecured debt.

5. Appeal and Error — Debtor and Creditor — Application of Payment —Judgment—Merits—Right of Appeal.

It appearing in this case that the plaintiff owed the defendant two debts, one of them secured and one unsecured, and made a payment under such circumstances that the law would apply it to the unsecured claim, but which was erroneously applied by the judgment of the lower court to the secured claim, and judgment dismissing the action against defendant was entered, it is Held, that the defendant’s appeal would lie upon the merits of the case so as to relieve the plaintiff from the effect of the judgment applying the payment upon his unsecured debt, and that as that part of the judgment below dismissing the action against the defendant was proper, the judgment is modified and the action is dismissed.

Appeal by defendants from O. U. Allen., J., at February Term, 1912, of SampsoN.

Tbe facts are sufficiently stated in tbe opinion of tbe Court by Mr. Justice Walker.

U. A. Grady for plaintiff.

Faison & Wright for defendant.

*163"Walker, J.

Tbis case was before us at a former term, under tbe title of Stone Co. v. McLamb & Co., A. D. Rich, and others, 153 N. C., 378. "We tben beld tbat Mrs. M. M. Yann, a feme covert, was liable for tbe debts of tbe firm of McLamb & Go., under tbe statute, Eevisal, sec. 2118, and tbat tbe order appointing a receiver of tbe partnership effects was erroneous and should be vacated, and tbe property, which was under mortgagee to A. D. Eicb, should be restored to him. Tbe ease was remanded for tbe settlement of tbe other matters involved. Tbe parties thereupon agreed tbat an issue be submitted to a jury to ascertain if a paymnet of $333, made by McLamb & Go. to Eicb, should be applied to tbe debt' of tbe firm, amounting to $1,650, which is secured by bis mortgage, or to an unsecured debt of $300 beld by him against McLamb & Go. Tbe jury returned tbe following verdict: “Should tbe $333-credited to A. D. Eicb on page 453 of tbe ledger be appliéd to the mortgage debt of McLamb & Co. to A. D. Eicb? Answer: Yes.” Tbe court adjudged, upon tbe verdict, tbat tbe payment be so applied.

Tbe defendant’s exception raises tbe question whether there was any evidence to show tbat be bad been instructed by tbe" firm to so apply tbe payment, be having requested tbe court to charge substantially tbat there was none. We have examined tbe testimony carefully, and have failed to find any evidence to sustain tbe charge of tbe court or tbe verdict of tbe jury. Tbe most tbat can be made of it, when considered favorably to McLamb & Go. and tbe other interested.parties, is tbat tbe firm made some payments, at different times, aggregating $333 and entered them upon its books as credits on the mortgage notes, but did not direct Eicb bow to apply them, and Eicb did not know of tbe entries until some time after they were made, when be promptly objected to them. It was tben agreed tbat they should be applied to tbe unsecured debt. It is admitted tbat Eicb did not apply tbe payments to either of tbe debts.

There is no rule in tbe law better settled than tbe one in regard to tbe application of payments:

1. A debtor owing two or more debts to tbe same creditor, and making a payment, may, at tbe time, direct its application *164to any one o£ the debts. The right is lost if the particular application is not directed- at the time of the payment.

2. If the debtor fails to make the application at the time of the payment, the right to apply it belongs to the creditor.

3. If neither debtor nor creditor makes it, the law will apply it to the unsecured debt or the one for which the creditor’s security is most precarious, or, as sometimes expressed, according to its own view of the intrinsic justice and equity of the case. Sprinkle v. Martin, 72 N. C., 92, and cases cited; Vick v. Smith, 83 N. C., 80; Moss v. Adams, 39 N. C., 42 (Anno. Ed.); Jenkins v. Beal, 70 N. C., 440; Ramsour v. Thomas, 32 N. C., 165; Wittkowski v. Reid, 84 N. C., 21; Long v. Miller, 93 N. C., 233; Lester v. Houston, 101 N. C., 605; Pearce v. Walker, 103 Ala., 250.

The weight of authority is that the debtor must direct the application at or before the time of his payment, and that he cannot do so afterwards. 30 Oye., p. 1230, and cases in note. A direction by the debtor as to the application of payments may be shown by an express agreement with the creditor, by the declaration of the debtor, or it may be implied from circumstances showing the debtor’s intention at the time of payment. 30 Cyc., p. 1230. Again: The communication need not be expressed in writing, nor in any technical‘or formal words, nor the instruction delivered in any particular manner., It will be sufficient if the intention is manifest, and that it comes to the knowledge of the other party at the proper time. 2 Am. and Eng. Ene. of Law (2d Ed.), 448. “It is certainly too late for either party to claim a right to make an appropriation after the controversy has arisen, and a fortiori at the time of the trial.” U. S. v. Kirkpatrick, 9 Wheaton (U. S.), 721, 737.

When a party, indebted to another on more than one account, makes a partial payment, the burden of proving that at or before the time of such payment he directed its application to a particular debt, as pleaded by him, and that this direction was made known to his creditor, is upon the debtor. Pearce v. Walker, supra.

Coming to the special facts of this case, it is said in Parsons on Contracts (6 Ed.), sec. 630: “It is not necessary that the *165appropriation of the payment should be.made by an express declaration of the debtor; for if his intention and purpose can be clearly gathered from the circumstances of the case, the. creditor is bound by it. If the debtor, at the time of making a payment, makes also an entry in his own book, stating the payment to be on a particular account, and shows the entry to the creditor, this is sufficient appropriation by the debtor. But the right of election of appropriation is not conclusively exercised by entries in the books of either party until those entries are communicated to the other party.” But the cases nearest to the present in matters of fact are the following: Manning v. Westerne, 2 Vernon, Ch., 606 (23 Eng. Reprint, 996), where it appeared that defendant, being indebted to plaintiff on specialty and also by simple contract, or a running account, made several payments of sums in gross, and entered them in his own book as paid upon the specialty. It was be.tter for the debtor that the payment should go to the simple contract, which did not bear interest. The Lord Chancellor said: “Although the rule of law is that quicquid1 solvitur, solvitur secundum, modum solventis; yet that is to be understood, when at the time of payment he that pays the money declares upon what account he pays it; but if the payment is general, the application is in the party who receives the money, and the entries in the defendant’s books are not sufficient to make the application.” So in Frazer v. Bunn, 8 Carr, and P., 704 (34 E. C. L., 592), where a performer at a theater had arrears of salary due to him, and a payment was made to him without any direction at the time as to its application, it was held that an entry by the debtor in his books was not a sufficient direction unless brought to the creditor’s knowledge at the time; otherwise, if he had stated for what specific portion of the indebtedness it was intended, or had the entry been made known to the creditor, in which case it would have been evidence of such an appropriation as would be binding on the creditor. Lord Abinger said: “If Mr. Jones had expressly paid this for what was due to the plaintiff between February and June, the plaintiff would have been out of court; but so far from that, he states that he did not tell the plaintiff on what account he paid it, neither did he show him *166tbe book. If be bad. shown tbe plaintiff tbe book in wbicb be bad entered it as for a particular period, that would be evidence of appropriation; but tbat was not so, and I tbink tbat tbe plaintiff is at liberty to apply those payments to tbe other parts of what bad been due to him, and tbat, therefore, be may recover for tbe rest of bis claim, wbicb is within tbe dates stated in tbe particulars.”

In a case with substantially tbe same facts, Terhune v. Colton, 12 N. J. Eq. (1 Beasley), 232, tbe Court, after stating tbe general rule as to tbe appropriation of payments, held tbat while tbe intention of tbe debtor to apply tbe payment to a particular debt or part of a debt may be shown by circumstances attending tbe act of payment, they must be known to the creditor, or tbe intention to do so must be signified to him in some way, and tbat an entry in bis own books of account by tbe debtor is insufficient to determine tbe application in bis favor, as be bad not, by showing tbe entry to tbe creditor, or otherwise, indicated bis intention as to bow tbe money should be applied.

Tbe result of tbe cases ■ is tbat an undisclosed intention to apply tbe payment will not do. Tbe right of tbe creditor to apply tbe payment, when tbe debtor by bis silence has lost control of it, is stated more in detail by Justice Rodman in Jenkins v. Beal, supra: “Tbe rule is tbat where a debtor owes several debts to a creditor and makes payments, be may appropriate the payments to any of the debts be may please; but if be fails to do so at tbe time, tbe creditor may appropriate them as be pleases (subject to some exceptions not material here) at any time before be brings suit for tbe balance.” And in another case tbe Court held: “Although as between tbe immediate parties tbe creditor has a right to appropriate when the debtor has failed to do so, yet this right must be exercised within, at tbe furthest, a reasonable time after the payment, and by tbe performance of some act wbicb indicates an intention to appropriate. It is too late to attempt it at tbe trial.” Harker v. Conrad, 12 S. and R. (Pa.), 301; Reiss v. Scherner, 87 Ill. App., 84.

Where neither party has exercised bis right of appropriation, and a dispute subsequently arises, tbe court will make tbe appli*167cation, as we have seen, and in doing so will, as a general rule, apply the payment to the debt which is unsecured or the least secured, upon the assumption that the debtor would desire to pay all his debts, and this disposition of the credit most nearly accomplishes that result, or, in other words, the law pursues this course, as it intends that all men shall be honest and fully perform their just obligations, and adopts this method as the one which an honest man would unselfishly choose, if left to himself to act in the premises. It simply does what the debtor should have done if prompted by just motives. Leeds v. Gifford, 41 N. Y. Eq., 464; Turner v. Hill, 56 N. J. Eq., 293; Terhune v. Cotton, 1 Beasley (12 N. J.), 238, in which cases the law upon this subject is clearly stated with peculiar reference to the same state of facts as are presented in this case.

As the burden was upon McLamb & Co. to show that they had directed how the "payment should be applied at the time it was made, and as the mere entries, without the knowledge of A. D. Eieh, were, in law, insufficient to show such an appropriation of the money, the court should have instructed the jury that there was no evidence of an ’appropriation by the debtor, McLamb & Co., and to answer the issue “No,” as the law applied the payment to the unsecured debt or open account. For this error, the verdict and judgment thereon are set aside.

It appears that while the issue was found against the defendant A. D. Rich, and judgment entered thereon that the .payment, $333, be applied to the mortgage debt, the Court has given á final judgment in favor of A. D. Rich, by dismissing the action as to him and taxing the plaintiff with the costs of said defendant. As our decision disposes of the principal question in the case and is given upon facts virtually admitted, or at least uncontroverted — that is, the book of McLamb & Co., and the oral testimony, which the parties agreed should be decisive of their rights, so far as the application of the payment is concerned — the defendant A. D. Rich would seem to be entitled to the final judgment. It will, therefore, be allowed to stand, and the action is dismissed as to him.

The plaintiffs have called our attention to the anomaly presented in this case, of a verdict against Rich and judgment on *168tbe same, and tben a, final judgment in bis favor. Witb tbis before bim, be expresses a doubt as to Bicb’s right of appeal and some wonder at tbe course of tbe proceeding. We bave decided tbe question, as to tbe payment, to prevent any prejudice to the defendant A. D. Rich likely to grow out of the verdict and judgment thereon, which be should bave tbe right to review by appeal, and by bolding that our decision disposes of tbe merits of tbe case in so far as Rich is affected. We thus sustain tbe final judgment, as consistent witb our decision upon tbe payment, and thus reconcile what was done witb orderly procedure. Appellees will pay tbe costs of tbis Court.

Action dismissed.