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received from F. Cavagnaro Company to the payment of the notes sued upon in counts one and two of plaintiff's complaint, after the payment of the one forty-seven hundred and eighty and 94/100 dollar note then due plaintiff's assignor, was ample and sufficient to satisfy the indebtedness due on the note sued upon in the first count of plaintiff's complaint herein.'"

"It was admitted by the plaintiff that the bank realized from the sale of certain goods belonging to Cavagnaro & Co. the sum of $408.75 and received from the insurance policies referred to in the answer the sum of $12,425.00. The undisputed evidence shows that the money so received was applied by the bank to the satisfaction of two notes of the F. Cavagnaro Company which are not involved in this action, and that, consequently, no part of said money was applied to the payment of either of the notes in controversy.

"The evidence as to the making of the oral agreement discloses that the parties making said agreement were a representative of the defendants, a representative of the Hilbert Mercantile Company, Elwin W. Gates, president and manager of the Cavagnaro Company, and the plaintiff's assignor, the latter having been represented by Mr. Tognazzi, its manager. Thereafter, Mr. Gates had several conversations with a Mr. Brunner, also an official of the bank, having authority to bind it, and to the latter Gates stated that it was the understanding of all the parties and the desire of the makers of the notes that all moneys received by the bank from Cavagnaro & Co. should be applied to the liquidation of the notes in suit, after first so paying the note mentioned in the answer as evidencing an indebtedness to the bank of $4,780.94, which note, as seen, is not involved in this action, so far as the purpose of it is concerned. The evidence shows that the defendants, before signing the notes, declared to the manager of the bank, on the occasion of the making of the oral agreement, that they would refuse to become sureties on the notes unless the proposition there suggested as to the order of the payment of the notes in dispute was assented to by the bank and that thereupon the manager of the latter agreed to said proposition.

"It is in evidence, and, indeed, admitted, that the money received by the bank on account of the insurance policies was first applied to the payment of the $4,780.94 note and the balance remaining applied to the extinction of obligations due the bank from Cavagnaro & Co. other than those evidenced by the notes declared upon.

"The plaintiff produced proof to sustain his claim that no such oral agreement as the one upon which the defendants wholly rest their resistance to recovery upon the notes in controversy was made or entered into; but, manifestly, the result of this denial of the oral agreement is only to create a conflict in the evidence upon that question, and it follows, therefore, that, as to the fact of the making of the agreement, the conclusion of the jury is conclusive.

"The defendants, in confirmation of the special defense set up and relied upon by them, contend that, agreeably to the terms

of the oral agreement, so much of the money paid to the bank on the insurance policies as was remaining after the satisfaction therewith of the $4,780.94 note ought to have been credited upon the notes in suit or applied in payment thereof. The contention is, obviously, the offspring of the theory that the oral agreement referred to amounted, within the contemplation of section 1479 of the Civil Code, to the manifestation to the bank of an intention or desire of the makers of the notes that the money so received should be applied to the extinction of those particular obligations. It is further contended by the defendants that, since they became sureties upon the notes upon the agreement with the bank that the latter would apply the money received by it from Cavagnaro & Co. to the payment of said notes in preference to the settlement with such money of any other indebtedness of Cavagnaro & Co. to it, excepting the note for $4,780.94, there was, by reason of the violation of said agreement by the bank, a failure of consideration for the notes in suit.

"The plaintiff, on the other hand, insists that, to have entitled the makers of the notes in dispute to the benefit of the application of said money to the payment of said notes, by virtue of the provisions of section 1479, supra, it was the duty of the makers of the notes, under the terms of said section, to have made known to the bank, at the very time the money was received by or paid to the bank, their intention or desire in that respect, and that there is no evidence of any such intention or desire having been manifested to the bank by the debtors at that time. It is, therefore, argued that the effect of the oral agreement, if enforced, will be to vary or modify the terms of a contract in writing. The further point is made by the plaintiff that the oral agreement referred to, if made at all, was not between the principal debtor, Cavagnaro & Co., and the creditor, the bank, but between the sureties and the bank, and that such an agreement so made could not in any event, within the meaning of section 1479, supra, be treated as a manifestation by the debtor to the bank of an intention or desire that the money received by the bank from the insurance companies should be applied to any particular obligation Cavagnaro & Co. were under to the bank.

"The points thus stated and urged here are tested by exceptions reserved at the trial to the rulings of the court admitting evidence of the parol agreement referred to.

[1] "The argument by counsel for the defendants that the failure of the bank to apply the money received by it on the insurance policies to the payment of the notes in suit constitutes a failure of the consideration moving the defendants to become sureties upon said notes, has made no impression upon us. The defendants and the Hilbert Mercantile Company appear upon the face of the instrument as joint makers with Cavagnaro & Co. The evidence, however, shows them to be endorsers or sureties. In any event, the loan of the money was a valuable and adequate consideration for the agreement by the sureties that the notes would be paid. (Lompoc Valley Bank v. Stephenson, 156 Cal. 350.)

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[2] "We are of the opinion, however, that the testimony received by the court in proof of the oral agreement was properly admitted as in proof of the direction by the makers of the notes in suit to apply any moneys received by the bank from Cavagnaro & Co. to the extinction of their obligations to the bank as evidenced by said notes.

"Section 1479 of the Civil Code reads, in part, as follows:

"Where a debtor, under several obligations to another, does an act, by way of performance, in whole or in part, which is equally applicable to two or more of such obligations, such performance must be applied as follows:

"'One. If, at the time of performance, the intention or desire of the debtor that such performance should be applied to the extinction of any particular obligation, be manifested to the creditor, it must be so applied.

44 "Two. If no such application be then made, the creditor, within a reasonable time after such performance, may apply it toward the extinction of any obligation, performance of which was due to him from the debtor at the time of such performance; except that if similar obligations were due to him both individually and as a trustee, he must, unless otherwise directed by the debtor, apply the performance to the extinction of such obligations in equal proportion; and an application once made by the creditor cannot be rescinded without the consent of (the) debtor."

[3] "We are not inclined to accept the view that, in order to comply with and thus receive the benefit of the provisions of the foregoing section, the debtor, under several obligations to the creditor, must, necessarily, at the precise time of performance, direct the application of any payments made by him toward the extinction of a particular obligation. We are of the opinion, rather, that, in sound reason, all that the statute requires or contemplates is that the creditor, at the time of performance or payment, must be in possession of knowledge, obtained from the debtor, of the intention or desire of the latter that the payment shall be applied to the satisfaction of a particular obligation, and that the time, in respect of the date of performance or payment, at which such knowledge is so obtained-that is to say, whether it be at the precise time of performance or at some prior time-is wholly immaterial. In other words, where the appropriation of payments by the debtor has once been made known to the creditor, the intention or desire of the former as to such appropriation is thus manifested to the creditor when the payments are actually made, and a repetition of such manifestation is not necessary. [4] It is no doubt true that the debtor, at the time of performance, may make a different direction as to the application of payments, but unless he does so, the original direction must govern the creditor in the application of the moneys paid. This view of the section under consideration harmonizes with the expressions of our supreme court upon the subject in some early cases.

"In Wendt v. Ross, 33 Cal. 650, 657, the court, dealing with a

statute whose provisions were substantially the same as those of section 1479, said: "The debtor may, at or before the time of payment, direct the application of the payment, and if the creditor receives the money, he is bound by the direction. If the debtor omits to do so, the creditor may, generally, apply it to any debt he chooses, and when the application is made, he is bound by it, and cannot, without the consent of the other party, change the application to another debt," citing 1 Am. Lead. Cases, 268-Notes to Mayor etc. v. Patton, and Field v. Holland. "In Clarke v. Scott, 45 Cal., 86, 88, the trial court refused to receive evidence in proof of an oral agreement, made concurrently with the execution of the notes upon which the action was brought, whereby it was agreed or understood between the sureties on the notes in suit and the payee that any payments made to the creditor by the principal obligor should be applied to the payment of said notes. On appeal the supreme court held that the evidence was admissible, saying: "If it be a fact that at the time the defendants, J. M. Scott & Co., as sureties of the other defendant, S. W. Scott, signed the note in suit, it was then agreed or understood between all the parties that such payment as the defendant S. W. Scott might thereafter make should be applied toward the satisfaction of that particular note, it would be a circumstance tending, in some degree at least, to establish by presumption that the payments, when they were subsequently actually made by the defendant, S. W. Scott, without any intermediate change of his first intention, were to be so applied; and in this view we think that the proffered evidence ought to have been admitted." (See Eppinger v. Kendrick, 114 Cal. 620, 625; 2 Am. & Eng. Ency. of Law, p. 444.)

[5] "Nor need the communication to the creditor by the debtor of the latter's intention or desire to apply the payments toward the extinction of a particular obligation be expressed in writing, or in any technical or formal words, or delivered in any particular manner. fest, and that it comes to the knowledge of the other party." (Am, & Eng. Ency. of Law, p. 448.) [6] It therefore necessarily follows that the communication may be shown by parol, whether made at the time of performance or at the time when the obligation as to which the direction was intended to operate was created and its terms committed to writing or at any time between the date of the making of the obligation and that of payments to the payee.

"It will be sufficient that the intention is mani

[7] "It is very true, as counsel for the appellant declares, that the terms of a written instrument cannot be altered or varied by a parol agreement. This is, of course, an elementary rule. But, obviously, the effect of testimony disclosing a direction by a debtor to his creditor to apply payments to the extinction of a particular obligation of several the former is under to the latter is not to modify or vary in the slightest degree the terms of the writing. In the case at bar, the defendants do not deny the due execution of the notes in suit or challenge the legal stability, thereof in any respect. Indeed, they expressly admit the due

execution of the notes, that they signed the same and thus became legally bound to the obligations thereof. In legal effect, their resistance to recovery upon the notes is wholly founded upon the claim that sufficient payments of money had been made by Cavagnaro & Co. to the bank to satisfy the notes and that the bank had wrongfully refused and failed to credit the notes with such payments. Their position is, in other words, no different in principle from the case where the maker of a promissory note has made payments on such note, thereby reducing the amount due thereon, which payments, however, had not been credited on the note by the payee. In such case, of course, no one will dispute the maker's right to resist payment of the original amount of the note, or his right to show such payments by parol testimony, nor will it be claimed that the effect of thus showing such payments would be to alter or vary the terms of the note. At any rate, our conclusion is that if the evidence discloses that contemporaneously with the execution of the notes, the makers thereof manifested or communicated to the bank their desire that the moneys received by the bank from Cavagnaro & Co. should be applied as indicated, it was the duty of the bank to so apply such moneys; that its failure to do so under the stated circumstances involved a violation of the rights of the defendants under the terms of section 1479 of the Civil Code, and that, since the notes themselves do not indicate the order of their payment with respect to other like obligations which Cavagnaro & Co. were under to the bank, it was competent to show such direction or communication by parol testimony. (Hagood v. Swords, 2 Bailey, 305; Grogan et al. v. Valley Trading Co., [Montana], 76 Pac. 211, 213; Saffer v. Lambert, 111 Ill. App. 410, 412; Frutig v. Trafton, 2 Cal. App. 47, 48.)

That the so-called oral agreement in question must be held to have involved a direction by the debtor to the bank to apply the moneys received by it from Cavagnaro & Co. in the manner and order explained, cannot be doubted.

[8] The contention of the plaintiff that no evidence was introduced disclosing that the principal debtor, Cavagnaro & Co., took any part in the making of the oral agreement or the direction that said moneys should be applied as stated is not borne out by the record. The witness, Gates, testified that he was president and manager of said corporation at the time it became insolvent, in October, 1905; that he attended to all its affairs at that time and also in the year 1906; that he was present as a representative of Cavagnaro & Co. when the oral agreement was had with the bank's manager, Mr. Tognazzini, and participated therein and that subsequently he apprised Mr. Brunner, an official of the bank, who, it was admitted, had authority to act for the plaintiff, of the understanding that the moneys paid by Cavagnaro & Co. should be applied upon the notes in suit, after the note for $4,780.94 was satisfied. It is true that it does not affirmatively appear what the precise scope or limitations of Gates' authority were as president and manager of Cavagnaro & Co., but we have a right to infer, from the fact that he was the corpora

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