Opinion ID: 426290
Heading Depth: 1
Heading Rank: 1

Heading: Reallocation of Proceeds from Chattel Sale

Text: 22 The district court found that FmHA was not precluded from reallocating the proceeds from the sale of the farm equipment after discovering the mistake in the initial application. Appellant argues that the court erred; she contends that a creditor cannot change the application of proceeds once an account has been credited. In support of her argument, appellant cites 60 AM JUR 2d PAYMENT Sec. 86 (1972): By mutual agreement, the debtor and creditor may change the application of a payment    but only if the rights of third parties are not prejudiced. In the case at bar, however, there is no risk of prejudice to any third party. The Bank of Newark originally contested the reallocation, but the district court rejected its claim, and the bank abandoned the claim on appeal. 23 A debtor desiring to avail himself of his right to direct the application of a payment must give the direction therefor either before or at the time of the payment; otherwise, the right is lost, because thereafter the money ceases to be his, and is no longer subject to his control. See St. Paul Fire & Marine Ins. Co. v. United States, 309 F.2d 22 (8th Cir.1962), cert. denied, 372 U.S. 936, 83 S.Ct. 883, 9 L.Ed.2d 767 (1963). Here, at the time the farm equipment was publicly auctioned, neither of the Wilsons requested that the FmHA appropriate the sale proceeds in any particular manner. A creditor can, absent clear direction otherwise, apply a payment from a debtor to any debt he chooses to maximize his security. Federal Deposit Ins. Corp. v. Freudenfeld, 492 F.Supp. 763, 770 (D.Wis.1980). 24 While it is often said that a creditor lacks the freedom to allocate involuntary payments made by a debtor that he has on receipt of a voluntary, unallocated payment, it is the right of the creditor to apply sums received from the debtor or for his account in such fashion as to give the creditor the utmost advantage of such security as the creditor may possess. And in the absence of any other creditor who would be prejudiced by such an allocation, the courts must respect this right of a secured creditor. 25 United States v. Pollack, 370 F.2d 79, 80 (2d Cir.1966). 26 We are mindful of the fact that reallocation is improper in some instances. Where an application of payment has been made and the debtor notified, the debt is discharged. Only assent of the parties can justify reapplication after the creditor has applied the payment and notified the debtor. Matter of S & W Exporters, Inc., 16 B.R. 941 (Bkrtcy.N.Y.1982). The district court pointed out, however, that the factor distinguishing the above case from the instant case is notice to the debtor. Here, the Wilsons had no notice of the misapplication and reallocation until after this litigation was commenced. In addition, Arkansas law recognizes a presumption that proceeds from a foreclosure sale will be applied to the indebtedness secured by the property sold: 27 When property is mortgaged to secure a debt, and afterwards this property is sold and the proceeds turned over to the mortgagee, the natural presumption is that both parties intend that the payment shall be applied on the mortgage debt, and the mortgagee has the right to apply the payment in that way, even though the mortgage debt be not due. 28 Lyon v. Bass, 76 Ark. 534, 89 S.W. 849 (1905). Furthermore, section III G of the security agreement involving the chattel and crops securing the $48,800.00 note provides in part: 29 Any payment made by Debtor may be applied on the note or any indebtedness to Secured Party secured hereby, in any order Secured party determines. (Emphasis added.) 30 The mere entry of a credit to a particular account is not conclusive evidence of an irrevocable application of the payment in the absence of notice to the debtor. In re Stacy, Wolf Hat Co., 99 F.2d 793 (2d Cir.1938); In re Automatic Equipment Mfg. Co., 103 F.Supp. 427 (D.Neb.1952). In the instant case the district court reasoned that the combination of the state law presumption, the creditor's contractual right and the absence of notice to the debtor provide the legal basis for FmHA's reallocation. We agree.