Opinion
September 7, 1965 —
October 5, 1965.
APPEAL from a judgment of the county court of Milwaukee county: ELLIOT N. WALSTEAD, Judge. Affirmed.
For the appellant there was a brief by Irving D. Gaines, attorney, and Paul E. Sicula of counsel, both of Milwaukee, and oral argument by Mr. Gaines.
For the respondent there was a brief and oral argument by Albert R. Franz of Milwaukee.
Action to enforce a written guaranty against defendant Lydia Wahlgren.
Prior to January 26, 1962, one Surfus had acted as a distributor of plaintiff's dairy products in the Sturgeon Bay area but desired to retire from business for reasons of health. Plaintiff interested one Ehrhardt, brother of defendant, in taking over this distributorship by purchasing from Surfus his equipment and accounts receivable. In order to complete the transaction Ehrhardt executed his $15,500 promissory note dated January 26, 1962, payable to the order of Surfus in monthly instalments and guaranteed by defendant to the extent of $6,000. This guaranty by defendant consisted of a separate instrument signed by defendant and expressly provided that "if at any time the principal amount of said note is reduced by Six Thousand ($6,000.00) Dollars this guarantee shall be null and void." Surfus assigned the note and guaranty to plaintiff.
Ehrhardt was unsuccessful in the operation of the distributorship and on May 21, 1963, he executed a bill of sale to plaintiff whereby he transferred to it his equipment, accounts receivable and list of customers for an agreed amount of $16,452.45, of which amount the equipment comprised an agreed value of $8,372.67. This bill of sale contained a statement that the bill of sale "is in no way to be construed as or to be considered a release of any liability on the part of Lydia Wahlgren" on the guaranty. On June 30, 1963, plaintiff issued a statement of its account with Ehrhardt showing a total indebtedness of $28,542.39 prior to crediting the assets transferred to it by the bill of sale. Fourteen Thousand Nine Hundred Fifty-two Dollars and sixty-four cents of this total indebtedness represented the balance owing on the $15,500 note. Plaintiff applied the bill-of-sale credit and other credits first to the indebtedness other than the note, and the small remaining balance to the note, so that as of June 30, 1963, its records showed the balance owing on the note to be $12,126.64.
Thereafter plaintiff instituted the instant action to recover $6,000 on the guaranty from defendant. The action was tried to the court without a jury. By memorandum decision the county court held that defendant was entitled to have had the $8,372.67 credit for equipment received by plaintiff under the bill of sale from Ehrhardt applied on the promissory note originally given in part for the purchase of such equipment. The court expressly found that this equipment constituted the identical property for which the $15,500 note had in part been given in payment. Judgment was entered March 10, 1965, dismissing the complaint and awarding defendant costs. Plaintiff has appealed.
The issue presented by this appeal is whether plaintiff owed a legal duty to defendant to have applied on the $15,500 note a sufficient part of the $8,372.67 credit given the principal debtor Ehrhardt for the equipment transferred to plaintiff by the May 21, 1963, bill of sale so as to have extinguished defendant's liability on the guaranty, rather than have applied most of such credit to other indebtedness of Ehrhardt.
It is a general rule that in the absence of an agreement or superior equity requiring application in the interest of a guarantor, the fact alone that a guarantor is liable for one of several debts does not affect the rights of the debtor or creditor to designate the debt to which a voluntary payment by the debtor from his own funds shall be applied. Plaintiff relies on this general rule in seeking reversal of the judgment below inasmuch as it had been agreed upon between Ehrhardt and plaintiff that the credits arising from the transfers under the bill of sale would be applied in such manner as not to extinguish defendant's liability on the guaranty.
Will of Stone (1933), 211 Wis. 518, 248 N.W. 446; Mid-Continent Supply Co. v. Atkins Potter Drilling Corp. (10th Cir. 1956), 229 F.2d 68; United States for Use of Carroll v. Beck (6th Cir. 1945), 151 F.2d 964; Sipes v. John (1936), 177 Okla. 299, 58 P.2d 854; Anno. 57 A.L.R.2d 855, 858.
This general rule, however, is subject to certain well-recognized exceptions. One of these is the "identical property" exception where, as in the instant case, the debt guaranteed is the acquisition of certain property and later this identical property, or the proceeds from the sale of the same, is delivered by the principal debtor to the creditor. Although this exception seems not to have been heretofore applied by this court, many other courts have recognized it and have held that payments made with the identical money or property for the payment of which a guarantor is bound cannot be applied to a debt other than that for which the guarantor is bound.
United States, for Use and Benefit of Crane Co. v. Johnson, Smathers Rollins (4th Cir. 1933), 67 F.2d 121; Sipes v. Ardmore Book News Co. (1929), 138 Okla. 180, 280 P. 805; Mid-Continent Supply Co. v. Arkins Potter Drilling Corp. (10th Cir. 1956), 229 F.2d 68; Bross v. McNicholas (1913), 66 Or. 42, 133 P. 782; Anno. 57 A.L.R.2d 855, 872; 40 Am. Jur., Payment, p. 815, sec. 148.
In Sipes v. Ardmore Book News Co. certain school books were consigned to defendant news company to be sold by the company and the proceeds remitted to plaintiff. A bond was executed with certain other individuals as sureties, who were also defendants in the action, to recover proceeds arising from the sale of said school books. At the time of the agreement and execution of the bond defendant news company owed plaintiff a sum of money. Some time later defendant news company became bankrupt. Upon the return of school books and proceeds consigned to defendant under the agreement in question, plaintiff applied this property to the antecedent debt and contended that the sureties were still liable on their bond. The sureties contended that they could not be held liable for proceeds arising from the sale of books consigned to the news company prior to the execution of the later agreement and bond, with no such express provision in the consignment contract or bond. Plaintiff attempted to invoke the general application of payments rule, but the court concluded that it had no relevance to the case, saying (p. 181):
(1929), 138 Okla. 180, 280 P. 805.
"`The general rule that a surety cannot control the application of a payment is applicable solely in those cases where the principal makes the payment from funds which are his own and are free from any equity in favor of the surety to have the money applied in payment of the debt for which the surety is liable, but where the specific money paid, or property delivered to the creditor, is the identical money or property for the payment or delivery of which the debtor and his sureties have obligated themselves by the contract and undertaking, the surety is not bound by an application thereof to some other debt for which the surety is not liable.'
"Under the above rule, plaintiff had no right, as against the sureties, to apply the money arising from the sale of books consigned under the contract to another debt of the principal."
The "identical property" exception is especially applicable when the source of the property or funds is known to the creditor. It is clear that in the case before us plaintiff knew of the source of the property. In United States, for Use and Benefit of Crane Co. v. Johnson, Smathers Rollins a supplier sued a subcontractor and his surety for a balance claimed to be due for materials furnished in connection with the construction of a post office. The surety's bond included payment for all materials furnished under the subcontract for the post-office building. It appeared that the general contractor had made payments to the subcontractor for this job, and the subcontractor contended he had in turn paid the supplier in full for all the materials furnished. However, even though the supplier knew the source of this payment, he applied part of it to a previous debt which the subcontractor owed for materials furnished on another construction job. The court concluded that the supplier was required to apply this payment to the account for materials furnished in connection with the post-office job. In reaching this result the court said:
Id. at page 181.
St. Paul Fire and Marine Ins. Co. v. United States for the Use of Dakota Electric Supply Co. (8th Cir. 1962), 309 F.2d 22; United States, for Use and Benefit of Crane Co. v. Johnson, Smathers Rollins (4th Cir. 1933), 67 F.2d 121; United States for the Use of Carroll v. Beck (6th Cir. 1945), 151 F.2d 964; 40 Am. Jur. Payment, p. 815, sec. 148.
(4th Cir. 1933), 67 F.2d 121.
"We are in accord with these decisions in so far as they hold that when a surety is bound on one of several debts of the principal debtor to a creditor, and a payment is made by the debtor to the creditor with the identical money for the payment of which the surety is bound, or with the proceeds or fruits of the very contract, business, or transaction covered by the obligation of the surety, the application of the payment to some other debt, with or without the direction or consent of the debtor, does not bind the surety; at least if the source the funds is known to the creditor or person receiving the payment. The surety in such case is entitled to have the payment applied to the debt for which he is bound." (Emphasis supplied.)
Id. at page 123.
Plaintiff stresses the fact that the debtor in the instant case expressly included in the bill of sale that the amount paid to plaintiff was not to extinguish defendant's guarantee. This factor alone, however, is not sufficient to defeat the equity of defendant in a situation such as we have before us. Despite the debtor's contrary direction, if the creditor is aware of the source of the payment, he should apply it to the note guaranteed by the surety.
United States for the Use of Carroll v. Beck (6th Cir. 1945), 151 F.2d 964; St. Paul Fire and Marine Ins. Co. v. United States for the Use of Dakota Electric Supply Co. (8th Cir. 1962), 309 F.2d 22; United States, for Use and Benefit of Crane Co. v. Johnson, Smathers Rollins (4th Cir. 1933), 67 F.2d 121.
Plaintiff cites the cases of Sipes v. John and Bank of Georgia v. Card as repudiating the identical-property exception to the general rule of application of payments. Our examination of these two authorities discloses that the courts there did not expressly repudiate this exception to the general rule, but rested their decisions upon the particular facts presented. In the first-cited case the Oklahoma court held that there was no showing that the funds giving rise to the credit were the identical moneys which the sureties had obligated themselves by their undertaking to pay. In the Georgia Case the note signed by the guarantor expressly provided that a lien was granted to the payee bank as security for payment of any other sums which the maker of the note might owe the bank in addition to the note.
(1936), 177 Okla. 299, 58 P.2d 854.
(1951), 84 Ga. App. 142, 65 S.E.2d 841.
We deem the identical-property exception to the general rule of application of payments rests on sound equitable principles and the county court properly applied it to the facts of this case.
By the Court. — Judgment affirmed.