#### Charles H. Smith, Respondent, *v.*Mine Ettenberg, Appellant.

(Supreme Court, Appellate Term,

February, 1912.)

Negotiable instruments — Actions — Possession of note'—Collateral security held by plaintiff—Appeal.

Chattel mortgages—What constitutes a chattel mortgage.

Where a series- of notes, maturing in successive months and given to plaintiff and another by defendant’s husband on a sale to him of all the stock of a lunch company, was secured by a chattel mortgage upon its fixtures and by the deposit of certain shares of its stock with a trustee under an agreement providing that if default occurred on any note all should become due and that the trustee should forthwith sell the shares held by him and apply the proceeds in payment of said notes and turn over any surplus to the defendant’s husband, and the notes not having been paid the combined proceeds of the sale of the shares of stock and the fixtures were turned over to plaintiff pursuant to the trust agreement, and plaintiff, in an action on one of the notes indorsed by defendant, recovers judgment for the full amount, it will not be reversed on the ground that the proceeds of the stock were intended to be in full satisfaction of the maker’s liability on all the notes.

But, inasmuch as the entire debt was due and the maker of the note in suit had given security by way of defendant’s indorsement, and it not appearing that plaintiff held security for any of the other notes, the moneys received from the sale of the shares of stock should be applied so as to extinguish first the note in suit, as such proceeds were not voluntary payments and no method for their application was provided for in the trust agreement.

Appeal by defendant from a judgment of the municipal court of the city of Rew York, borough of Manhattan, seventh district, rendered in favor of the plaintiff.

Jacob Bernstein, for appellant..

Edward J. Rowe, for respondent.

*459Hotchkiss, J*.

The case was submitted to the court below on an agreed statement of facts, which are briefly as follows:

Plaintiff and one McDermont, in February, 1911, sold to ■defendant’s husband, Morris Ettenberg, twenty shares of the stock of the *“*Stamford Lunch,” being all of the stock of the corporation. . Besides a cash payment, Morris Ettenberg gave thirty-one notes payable to plaintiff for a total sum of $2,350, maturing in successive months, secured by.deposit of said twenty shares with a trustee. The second note to mature, the one here involved, was indorsed by defendant. What other notes, if any, were indorsed is not shown. The trus- , tee agreement provided that, if default occurred on any note, all should become due, and that upon such default the shares held by the trustee should forthwith be sold and the proceeds applied *“*in payment of the said notes and if there ,be a surplus, turn the same over to the party of- the second part.” At the time the agreement between plaintiff and Morris Ettenberg was executed, the lunch company executed to plaintiff and McDermont' a chattel mortgage on its fixtures to further secure said series of notes. Morris Ettenberg failed to pay the aforesaid notes, and the trustee sold the stock for $490; subsequently, plaintiff, under said chattel mortgage, sold the fixtures for $441. The total sum of $931 thus obtained was turned over to plaintiff pursuant to the aforesaid agreement.

This action is brought on the second of the above series ,of notes, and judgment went in plaintiff’s favor for the full amount thereof. We are asked to reverse the judgment on two grounds: (1) The proceeds of the sales of the stock

were intended to be in full satisfaction of the maker’s liability on all the notes, and (2) plaintiff was bound to apply the moneys received from the sale of the shares of stock and the fixtures to the payment of the notes first falling due, according to their respective due dates, in either of which events the note in suit would be satisfied.

The first point urged has no merit whatever. The fact that . the trustee agreement provides that the proceeds of sale should be applied to the *“*payment ” of the notes and that *460provision is made for the payment of any surplus to the debtor, without express words preserving his liability on the notes in the event of a default, is unimportant. The phrases of the agreement are substantially in the traditional form of such instruments, and suggest nothing to support the construction sought to be put upon them, or to contradict the Unqualified obligations of the maker ■ as expressed in the notes.

The second point is more serious. The proceeds of the sale were not' voluntary payments, and no method for their application was provided for in the contract. Under such circumstances, the law, as between debtor and creditor, will apply them upon equitable principles. Orleans County National Bank v. Moore, 112 N. Y. 543. In this case, inasmuch as all the notes became due on default upon any, the entire debt was due, and no particular equity intervening, as between the debtor and Creditor, the payments would be applied *pro rata*on all of the notes constituting such debt. On the record as it stands, the debtor has given security by way of defendant’s indorsement for one note only, to wit, the note in suit; and it does not appear that the creditor holds, by way of defendant’s indorsement or otherwise, security for any of the other notes. Under such circumstances, the rule in this State seems to be that the payments should be applied so as to extinguish first the note on which defendant is indorser. Pond v. Harwood, 139 N. Y. 111. The foregoing views lead to a reversal of the judgment.

Seaburt ' and Girard, JJ., concur.

Judgment reversed and new trial ordered, with costs to appellant to abide event.