Opinion ID: 1989216
Heading Depth: 1
Heading Rank: 1

Heading: Midland's Application of the Community Newspapers, Inc., Payment

Text: The $48,471.20 check received by Midland was its share of the proceeds of the multiple transactions between Polka, Frey, North Shore, and Community Newspapers, Inc. Both sides agree that, if Midland had applied this payment to the outstanding debt of North Shore rather than to the outstanding debts of Polka and Frey, then North Shore's debt to Midland would have been completely satisfied by the time of the commencement of the garnishment actions, and Moser could have been free to recover part of its judgment against North Shore out of the garnisheed accounts receivable. Moser contends that in applying the $48,471.20 as it did Midland violated the rules for the application of payments. Where a debtor owes a creditor multiple debts, a payment by the debtor should be applied to one or another of the debts as the debtor directs. F. A. Patrick & Co. v. Deschamp, 145 Wis. 224, 129 N.W. 1096 (1911). Where the debtor fails to direct the application of the payment to a particular debt, the creditor may apply the payment as he chooses. Earl v. Napp, 218 Wis. 433, 261 N.W. 400 (1935); Debelak Bros., Inc. v. Mille, 38 Wis.2d 373, 157 N.W.2d 644 (1968). If neither the creditor nor the debtor applies the payment, then the court makes the application in accordance with equitable principles. Theiler v. Consolidated Indemnity & Ins. Co., 213 Wis. 171, 250 N.W. 433 (1933). These well-accepted rules regarding the application of payments are subject to an equally well-recognized exception, the so-called identical property exception. Sorge Ice Cream & Dairy Co. v. Wahlgren, 28 Wis.2d 220, 223, 137 N.W.2d 118 (1965). This rule is that, when a payment made to a creditor is known by the creditor to be derived from a particular source or fund, the creditor must apply it to the exoneration of the debt related to that source or fund, at least where the rights of third parties are concerned. Thus in Masten v. Cummings, 24 Wis. 623 (1869), the court held that a debtor may not direct that the moneys received from the sale of collateral securing one debt be applied to satisfy another debt, secured by different collateral, where the effect is to leave the first debt unsecured and to defeat the rights of the creditor of the first debt to his security in that debt. Similarly, in Sorge Ice Cream & Dairy Co. v. Wahlgren, supra , a debtor purchased some equipment with a note guaranteed by the debtor's sister. When this equipment was eventually sold and a payment made to the creditor, the creditor applied the payment to unguaranteed obligations of the debtor, pursuant to an agreement between the debtor and creditor. This court held that, even though the debtor and the creditor agreed otherwise, the proceeds of the equipment should have been applied to satisfy the debt incurred in purchasing that equipment and for which the guarantor was bound. See also: Restatement of Contracts, secs. 388 and 389 (1932). The identical property exception thus requires the court to determine what was the source of the $48,471.20 that Midland received from Community Newspapers. Moser contends that the source of the $48,471.20 payment was the sale of North Shore's intangibles, and therefore Midland should have applied it to North Shore's corporate debt. On the other hand, Midland contends that the source of the payment was the $100,000 received for the noncompetition agreements by Polka and Frey, and therefore it was properly applied to the individual debt. The trial court's findings of fact on this question are ambiguous. In one portion of its memorandum opinion, it states that The funds involved in the $48,000 payment by Community were undesignated monies of Frey and Polka and North Shore . . . . But this finding cannot be reconciled with a statement later in the opinion that Moser failed to prove that these funds, apparently the $48,471.20 payment, were not the personal property of Frey and Polka. However under the circumstances presented here, the source of the funds disbursed by Community Newspapers to Midland is irrelevant. By the time this payment was made, all three of the debtors had defaulted on all of their obligations to Midland. Even if the $48,471.20 was in a technical sense North Shore's funds, those funds were properly applied to the personal indebtedness of Polka and Frey because North Shore's guaranty of the personal obligations of its officers had ripened to direct and absolute liability for that debt upon the officers' default. Therefore the proceeds from the sale of North Shore's intangibles were applied to a debt that those intangibles secured. [1-3] This court will only interfere with the application of payments agreed upon by the parties where the rights of third parties are injured. The propriety of an application of payment by a creditor must be determined from the facts existing at the time the payment was applied. On May 2, 1974, when Midland received and applied the $48,471.20 check, it had no reason to know of the rights of Moser. The record does not disclose whether Moser was a creditor of North Shore on that date. Even if Moser was in fact an unsecured creditor of North Shore at that time, Moser had not reduced its claim to judgment. As an unsecured general creditor, Moser had no interest in the proceeds of North Shore's intangibles at the time the application of payment was made which equity should enforce contrary to the agreement of the debtor and the creditor. Thus, although we disagree with the trial court's analysis, we agree with its ultimate conclusion that Midland's application of payment was proper.