On appeal from Superior Court of New Jersey, Chancery Division, Hudson County.
Dreier, Bilder and Gruccio. The opinion of the court was delivered by Dreier, J.A.D.
Defendants Lee, mortgagors, and defendant Spencer Savings & Loan Association, a successor mortgagee, appeal by leave granted from the denial of their motion for summary judgment in this foreclosure action. Their motion had demanded dismissal of the action and the cancellation of record of the Lees' mortgage in favor of plaintiff, United Orient Bank, based upon the Lees' payment in full of the balance due. The payment had been made by the Lees' attorneys when the Lees refinanced the mortgage loan through Spencer Savings & Loan Association. The attorneys forwarded payment by their trustee check in the amount of $74,286.55 which bore the notation, "Lee refinance mtge payoff 636 Kenwood Rd., Ridgewood, N.J." It was accompanied by the attorneys' letter of May 31, 1984 stating that the check represented "payment in full for your mortgage/loan as above. Interest has been added through June 4, 1984." The letter also requested return of the mortgage endorsed for cancellation. Prior to mailing their check, the attorneys had requested a pay-off figure from United Orient Bank and, from the exchange of correspondence, it cannot reasonably be argued that the bank was unaware that this was a refinancing of the mortgage loan through another bank.
At the time of this refinancing Edward T. F. Lee, one of the defendants, was otherwise indebted to United Orient Bank by virtue of his guarantee of the obligations of Kam Kuo Seafood Corp. under the terms of two separate but identical forms he had signed entitled "United Orient Bank Commercial Loan Guaranty." Presuming to act by reason of Lee's status as guarantor, the bank applied the proceeds of the attorneys' check to the guaranty of the corporate obligation, leaving the mortgage indebtedness unpaid. When no further payments were made on this indebtedness, the bank declared a default, accelerated the balance and instituted the foreclosure proceedings. The Lees and Spencer Savings & Loan Association moved for summary judgment, but this motion was denied.
Their leave to appeal was granted by us and we have accelerated the processing of the appeal so that the parties' respective interests can be defined with a minimum of delay.
We determine that summary judgment was improperly denied defendants for three independent and compelling reasons, none of which was advanced before the trial judge. First, there is no question that where a debtor owes multiple obligations to a creditor, the debtor has the right to designate to which debt a payment should be applied. Restatement, Contracts 2d, § 258 (1979), comment a, reiterates:
The obligor can effectively direct that a performance be applied to a duty that is not matured, to one that is unsecured, and even to one that is unenforceable on grounds of public policy.
The creditor must make proper application of the proceeds in accordance with that direction.
Borough of Totowa v. American Sur. Co. of N.Y., 39 N.J. 332, 338 (1963); Naidech v. Hempfling, 127 N.J.L. 430, 432 (Sup.Ct.1941).*fn1 Plaintiff acknowledges this rule of law but contends that the guaranty agreement authorized it to make its own election. The guarantee agreement, consisting of four pages of small print provides, inter alia, in its second paragraph (upon which plaintiff relies):
Guarantor does hereby give to United Orient a continuing lien upon and a security interest in . . . any and all moneys . . . of Guarantor and the proceeds
thereof, now or hereafter actually or constructively held or received by . . . United Orient . . . from or for Guarantor, . . . coming into the possession of United Orient in any way. . . . United Orient is also given a continuing lien and/or right of setoff . . . upon any and all deposits . . . and credits of Guarantor with, and any and all claims of Guarantor against United Orient at any time existing and United Orient is hereby authorized at any ...