the circumstances, "Generally an application after a controversy has arisen between the parties regarding the matter is not within a reasonable time." Plaintiff has failed to prove with credible evidence an effective allocation prior to the March, 1975, letter which was written in contemplation of the issues raised in this lawsuit.
Thus the issue turns on whether Clark-Fontana had "reason to know" that a substantial portion of the payments came from the government job. Lacking such "reason to know," it was entitled to apply payment to the oldest unpaid bills. Although Clark did not know the source of each individual payment, he did know in a general way of the surety's obligation on the government job and at least "had reason to know" that a substantial portion of the payments made to him derived from its proceeds. Cf. United States for the Use of C. H. Benton, Inc. v. Roelof Const. Co., supra, 418 F.2d at 1329-30.
In any case, when it ultimately emerges that the payments came from a source intended to exonerate the surety (and in this case the personal indemnitor who stands behind the institutional surety), the equities favor the court allocating the payments to fulfill this implicit purpose, even if the creditor had no knowledge of it, where there has been no effective allocation and no detrimental reliance by the creditor. Indeed, this is precisely the rule recognized in Restatement (I) of Contracts, supra, § 394, illustration 3 at 745.
Those courts which assert in dicta that a knowledge requirement may be imposed do so both in the case when the debtor directs the payment to be made to a different obligation, and where there is no direction of any kind by either party. See, e. g., United States for the Use of Crane Co. v. Johnson, Smathers & Rollins, 67 F.2d 121, 123-24 (4th Cir. 1933); St. Paul Fire & Marine Ins. Co. v. United States for the Use of Dakota Elect. Supply Co., supra. While it may well be sound to require that the creditor "have reason to know" of the debtor's duty to a third party in cases where he is required to ignore the debtor's direction to apply the payment to another obligation, there is little logic to requiring such knowledge where no such purported allocation by the debtor is being countermanded. All other things being equal, it is equitable to apply monies having their source in a particular job to the satisfaction of the obligations attributable to that job.
Here Clark agreed to continue doing business with a company owing him $34,450.75 in unsecured debt which it had not been able to pay promptly. During the course of the G.S.A. contract, payments of $66,000 were made out of the proceeds of that contract, more than twice the amount of purchases attributable to it. As a result, the amount owed Clark has been reduced from $34,450.75 to $18,550.27. Clark is certainly in no worse position than it was before the G.S.A. contract began. On the other hand, the surety (and the indemnitor) ought not to be charged with what are essentially outstanding past debts even though the contract on which they agreed to stand surety yielded payments to the supplier twice additional purchases.
Judgment shall enter in favor of the defendants for the reasons stated.
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