Jorgensen v. Aetna Casualty & Surety Co.

769 P.2d 809, 98 Utah Adv. Rep. 32, 1988 Utah LEXIS 132, 1988 WL 149158

• Court: Utah Supreme Court
• Decided: December 29, 1988
• Docket: 20196
• Status: Published

Opinions

ZIMMERMAN, Justice:

Defendant Aetna Casualty & Surety Company (“Aetna”) appeals a final order holding Aetna liable to plaintiff Neil Jor-gensen for the principal sum of $60,337.68 and interest accrued after April, 1984. We affirm.

Defendant John Clay & Company (“Clay”)¹ is a livestock dealer. Clay agreed to purchase some of Jorgensen’s sheep and, as required by the federal Packers and Stockyards Act, had purchased a broker’s bond from Aetna. See 7 U.S.C. §§ 201, 204 (1982). Under the bond’s terms, Aetna agreed to act as surety for Clay in its dealings as a broker with third parties up to the bond’s limit of $75,000. Later, Jorgensen sued Clay and Aetna, alleging that Clay had wilfully and maliciously breached the contract to purchase the sheep and seeking to recover under the bond. Jorgensen obtained a judgment in the amount of $191,463.40. Aetna, as surety on the broker’s bond, was found jointly and severally liable with Clay for $75,000 of that amount, and Clay was found separately liable for the remainder. The trial court reserved the question of liability for prejudgment interest, and attorney fees for later determination.

Clay and Aetna appealed the judgment and sought reversal on several grounds. When the appeal was taken, Clay filed a supersedeas bond for $191,463.40, the amount of damages awarded by the trial court. This bond, like the broker’s bond, was purchased by Clay from Aetna. The supersedeas bond agreement stated in part:

That we John Clay and Company as principal and The Aetna Casualty and Surety Company as surety are firmly bound unto Neil Jorgensen in the penal sum of One hundred ninety one thousand four hundred sixty three and 40/100 dollars ($191,463.40) for the payment of which we firmly bind ourselves jointly and severally.

(Emphasis added.) Although a party to the appeal, Aetna did not file a separate super-sedeas bond on its own behalf to cover the $75,000 portion of the damage award for which it was jointly and severally liable. After the appeal and the supersedeas bond were filed, the trial court augmented the judgment by awarding prejudgment interest of $14,822.37, punitive damages of $1, attorney fees, and interest accruing daily after the judgment. The amount of the supersedeas bond was not increased to cover the augmented judgment.

On appeal, this Court upheld the trial court’s damage and interest awards, but reversed the awards of punitive damages and attorney fees. Jorgensen v. John Clay & Co., 660 P.2d 229, 233 (Utah 1983). When the case was remanded to the trial court, Jorgensen moved for judgment against Aetna, as surety on Clay’s superse-deas bond, for $191,463.40, plus the costs and prejudgment interest reflected in the total judgment, as well as postjudgment interest, all totalling $267,849.07. Clay was not involved in that proceeding, having filed a bankruptcy petition. By stipulation of counsel for both Jorgensen and Aetna, the motion was denied, and Aetna, as surety, tendered $191,463.40 to Jorgensen on the supersedeas bond obligation. Jorgen-sen accepted payment and released Aetna from any further obligation as surety under that bond. In acknowledging the payment, the trial court found that it had been made pursuant to the supersedeas bond and that Jorgensen’s claims against Aetna as a debtor on the original judgment were reserved for future adjudication.

Jorgensen then claimed that Aetna still owed him $75,000 on the original judgment, plus interest. Aetna asserted that the $191,463.40 payment had discharged its $75,000 obligation for principal under the original judgment and that its only remaining liability was for postjudgment interest on that $75,000. Consistent with this position, Aetna then paid Jorgensen $25,097.30, the amount it calculated was due for post-judgment interest on the $75,000 judgment. Aetna claimed that as of the date of this payment, it had fully satisfied the judgment against it.

The trial court agreed with Jorgensen. It found that the $191,463.40 had not discharged Aetna’s joint and several obligation for the $75,000 principal, but rather that the $191,463.40 had to be applied first to pay Clay’s separate obligation under the judgment, including interest, and only then could the remainder be applied to Clay and Aetna’s joint and several obligation for $75,000 plus the interest on that amount. According to the trial court’s calculations,² the payment of $191,463.40 had entirely satisfied Clay’s separate obligation, both principal and interest, and left a remainder which the court applied to the portion of the judgment for which Clay was jointly and severally liable along with Aetna.

The trial court applied this remainder to accrued interest on the joint obligation before applying it to principal. Using that approach, the court found that the interest due was reduced to $1,632.24 and that the principal remained at $75,000, with additional interest accruing on the principal from the date of the $191,463.40 payment. Aetna was jointly and severally liable for all of this. The court then considered Aet-na’s payment of $25,097.30 and found that it should be applied first to interest on the joint obligation and then to principal. The court applied the payment to satisfy the accrued interest obligation, which it calculated to be $10,434.98 on that date, and then to reduce the outstanding principal to $60,337.68. Accordingly, it ordered Aetna to pay Jorgensen an additional $60,337.68, plus costs of enforcement, plus interest accruing on the $60,337.68 principal from the date of the $25,097.30 payment until the entire obligation was satisfied.

Aetna appeals that order, arguing that the trial court erred in the manner in which it allocated the $191,463.40 payment and that, properly allocated, the payment should have discharged Aetna’s joint and several obligation for the $75,000 principal, leaving only its obligation for interest, which was discharged by the payment of $25,097.30.

To begin our analysis, it is important to clarify that the $191,463.40 payment was, in effect, made by Clay, not by Aetna. Aetna had two very different roles to play at the time of that payment. First, it was a joint and several obligor under the original judgment. Second, it was Clay’s surety on the $191,463.40 supersedeas bond filed by Clay.³ When Aetna paid Jorgensen under that bond, for our purposes here it was as if Clay made the payment, not Aetna. In order to keep those roles distinct, we will refer to that payment as Clay’s payment.

Aetna’s challenge to the trial court’s order raises two questions of law. First, what is the proper allocation to be made of a partial payment on a debt when the pay- or, in this case Clay, has two obligations to the payee, one a separate obligation for the entire amount due the payee and the other a joint and several obligation for a portion of that entire amount? Second, when partial payment is made on an interest-bearing debt, should the payment first be credited to principal or to interest?

In the absence of a controlling statute, we answer the first question by adopting the generally accepted common law rules. Specifically, when a debtor who is solely and individually liable for a debt and concurrently liable, jointly and severally with one or more co-obligors, for a portion of that debt, makes a payment insufficient to satisfy the entire debt, under the general rule, the payment will be applied, as between the two debts, as follows: (i) if there is a controlling agreement between the debtor and the creditor, the payment shall be applied as provided in the agreement; (ii) if there is no controlling agreement, but the debtor, at or before the time of payment, indicates an intent as to how the payment should be applied, that intent shall be followed; (iii) if there is no controlling agreement and the debtor has not adequately designated how the payment should be applied but the creditor made a definite election, within a reasonable time after receipt of the payment, as to how to apply the payment, the creditor’s election will govern; and (iv) if there is no controlling agreement and neither the debtor nor the creditor has made a clear, timely designation, the presumption is that the payment should be credited first to the separate debt, with any remainder being allocated to the joint and several obligation. See generally 60 Am.Jur.2d, Payment §§ 94-113, 119 (1987); 70 C.J.S. Payment §§ 36-54 (1987).

Aetna argues that these generally accepted rules are preempted by section 15-4-3 of the Code, which provides in pertinent part:

The amount or value of any consideration received by the obligee from one or more ... joint and several obligors, in whole or in partial satisfaction of their obligations shall be credited to the extent of the amount received on the obligation of all co-obligors_

Utah Code Ann. § 15-4-3 (1986). Under Aetna’s interpretation of the statute, when a payment is made by one who owes both an individual debt and a joint and several debt, the creditor must always apply the payment to the joint and several debt rather than to the individual debt.

The question raised by Aetna is one of first impression in Utah. Section 15-4-3 is part of the Joint Obligations Act, codified in sections 15-4-1 to -7 of the Code. The Act was first passed in 1929, see 1929 Utah Laws ch. 61, §§ 1-11, and was taken verbatim in all relevant respects from the Model Joint Obligations Act,⁴ promulgated in 1925 by the National Conference of Commissioners on Uniform State Laws. See Model Joint Obligations Act §§ 1-11 & adoption notes, tables, 13 U.L.A. 407-13, 422, 430-31, 434, 436 (1925). Hawaii, Maine, Nevada, New York, and Wisconsin also have adopted the Act. We have found no case from any of those states in which a court has adopted the construction of the language corresponding to section 15-4-3 that is urged on us by Aetna.

Moreover, the language of section 15-4-3 expressly limits the section’s applicability to payments made in “satisfaction of their obligations.” (Emphasis added.) We find this usage of the word “their” indicative of the fact that the drafters had in mind only such obligations as are shared by the obli-gors and did not intend that the provision govern the allocation of a payment made by one who has two separate obligations, one of which happens to be a shared obligation and the second of which is an entirely individual obligation.⁵ Further, Aetna’s interpretation would force us to disregard, in all cases and without exception, any agreements made between the debtor and the creditor regarding allocation of payments and to ignore the clear intent of the debtor or the creditor. Thus, that construction would effectively preclude the operation of the generally accepted rules we outlined above. We certainly cannot presume that a sixty-year-old uniform act that has never been so construed by any court was intended to accomplish this purpose.

We therefore conclude that section 15-4-3 does not operate in the manner Aet-na urges in a situation such as this, where a payment has been made by a debtor who has both an individual obligation and a separate joint and several obligation. Rather, the section applies only to a payment made by one obligor for the purpose of partially or wholly satisfying a shared obligation. In a situation such as the present one, section 15-4-3 comes into play only after application of the common law rules which we have outlined. Thus, when a debtor is liable to a creditor on two debts, one a separate, unshared debt and the other a joint or a joint and several debt, and that debtor makes a payment, we will determine how the‘payment should be applied by resorting first to the general rules. We will begin by looking to any agreement between the debtor and the creditor, then to the intent of the debtor, next to a choice made by the creditor, and, finally, to the judicial presumption that the payment should be applied first to the individual debt, any remainder going to the shared debt. If, in accordance with these rules, we determine that the payment should be credited entirely to the separate, individual debt, section 15-4-3 does not come into play. On the other hand, if, at any point in this process, the rules dictate that a payment should be applied to the shared obligation, then that payment falls within the operation of section 15-4-3. The effect of section 15-4-3 is to mandate that the amount applied to the shared obligation shall be credited equally to the benefit of all of the debtors sharing the obligation, rather than allowing one or more, but fewer than all, of the debtors to receive the credit.⁶ See, e.g., Western Steel Co. v. Travel Batcher Corp., 663 P.2d 82, 84 (Utah 1983); Green v. Lang Co., 115 Utah 528, 529-31, 206 P.2d 626, 627-28 (1949); Whittlesea v. Farmer, 86 Nev. 347, 350, 469 P.2d 57, 59 (1970); Livant v. Livant, 18 A.D.2d 383, 384, 239 N.Y.S.2d 608, 610 (1963).

We next address the question of the proper rule for allocating payments as between principal and interest. This is not an issue of first impression in Utah. We follow the general or “United States” rule. When the debtor on an interest-bearing debt makes a partial payment, absent a contrary agreement between the creditor and the debtor or a controlling statutory provision, the payment is applied first to accrued interest and then to principal. Petty v. Clark, 113 Utah 205, 223, 192 P.2d 589, 598 (1948); see Claudio v. School City of Gary, 448 N.E.2d 1212, 1215 (Ind.Ct.App.1983); Security Ins. Co. of Hartford v. Houser, 191 Colo. 189, 193-94, 552 P.2d 308, 311 (1976). See generally 45 Am.Jur. 2d Interest and Usury § 99 (1969); 47 C.J.S. Interest and Usury § 74(a) (1982); 70 C.J.S. Payment § 58 (1987). Some jurisdictions have codified the rule. See, e.g., Cal.Civ.Code § 1479(3) (West 1982).

We now apply the above-stated rules regarding the allocation of a payment between separate and joint debts and interest and principal to determine the correctness of the trial court’s ruling. The first question is whether the payment of $191,-463.40 was properly allocated entirely to Clay’s debt to Jorgensen. As explained earlier, the payment on this supersedeas bond must be viewed as if it were made by the bond purchaser, Clay, not by the bonding entity, Aetna. Clay had two obligations, one a joint and several obligation for a portion of the entire debt — $75,000 plus interest — the other a separate debt for the remaining principal plus interest. When Clay made the payment, there was no agreement between Clay and Jorgensen governing allocation of the payment between the two debts, and no indication of any intended allocation accompanied the payment.⁷ Moreover, Jorgensen chose to apply the payment to Clay’s individual debt —including both the principal and the interest that Clay owed. Under the rules set out above, the trial court quite properly found that the payment should first be applied to Clay’s separate debt, interest before principal, and then to Clay’s joint and several debt, interest first and principal second, with the resulting reduction of that joint and several debt being credited equally between the co-obligors, as section 15-4-3 of the Code requires.

After properly applying the $191,463.40 payment, the trial court found that Clay and Aetna remained jointly and severally liable to Jorgensen for $75,000 principal ¡plus $1,632.24 accrued interest, together with interest accruing from the date of Clay’s payment. Meanwhile, Aetna had made a payment of $25,097.30. The next question is whether the court correctly applied Aetna’s payment.

Aetna had only one obligation. Therefore, the first set of rules we have clarified today — those describing how to treat payments made by one who is both individually liable on one debt and jointly liable on another — is not at issue. Only the rule regarding allocation of payments between principal and interest comes into play. Under the United States rule, an agreement between the payor and the payee that indicates how the payment is to be allocated governs. In the absence of a controlling agreement, the rule is that the payment applies first to accrued interest and then to principal. Aetna and Jorgen-sen had no agreement; Aetna simply made its payment, and Jorgensen applied it first to interest and then to principal. The trial court therefore acted correctly when it approved that course of action. Pursuant to the trial court’s calculations, Aetna’s payment covered all interest accrued to the date of payment and left an obligation consisting of $60,337.68 principal, as well as all interest accruing on that amount after the date of Aetna’s payment. That is the amount the court then ordered Aetna to pay.

Having considered each of Aetna’s arguments and finding all to be without merit, we affirm the order of the trial court.

HALL, C.J., and STEWART, J., concur.

1 . Clay filed a bankruptcy petition in federal court and is not a party to the present appeal.

2 . The record is somewhat unclear as to the basis for some of the trial court’s mathematical calculations. Although there appear to be several discrepancies in the record with respect to the amounts and dates of the various payments and resulting obligations, neither party to this appeal has seen fit to raise a question as to the accuracy of the trial court’s calculations. We therefore confine our review to the correctness of the trial court’s application of relevant law and do not consider the accuracy of its arithmetic.

3 . Associate Chief Justice Howe suggests that this bond was only to cover the principal amount of the judgment and that none of it should be applied to accrued interest. This works to Aet-na’s advantage by discharging its portion of the judgment, despite the inadequacy of the bond to pay accrued interest. It is notable that by its terms the bond made no mention of principal; it simply obligated Aetna to pay Jorgensen a fixed amount — $191,463.40—on Clay’s behalf. Nor is there evidence that at the time the bond amount was paid when Clay owed interest as well as principal, Clay wanted the money paid to Aetna’s benefit, as opposed to Clay’s. Associate Chief Justice Howe’s conclusion relies only on Aetna’s self-serving statements. When it became clear that the amount of Clay’s bond was not going to be enough to discharge both Clay’s and Aetna’s obligations for principal and interest, Aetna could have either asked Clay to purchase a larger supersedeas bond or purchased one on its own behalf. It did neither, apparently hoping for the result reached by the dissent — a free ride in its capacity as a judgment debtor because of the bond purchased from it as a bonding company by its co-obligor, Clay.

4 . The Act was initially designated the Uniform Joint Obligations Act but was redesignated the Model Joint Obligations Act in 1943. Model Joint Obligations Act, Historical Note, 13 U.L.A. 407 (1925).

5 . The comments of the Uniform Law Commissioners are also instructive on this point. The prefatory note to the Act explains that the Act was promulgated to address injustices in "the common law in regard to joint obligations." Model Joint Obligations Act Prefatory Note, 13 U.L.A. 407 (1925) (emphasis added). The entire tone of the note indicates that the drafters of the Act did not intend that the Act apply as Aetna contends when a payment is made by one who has both a joint and a separate debt.

6 . Our interpretation does not in any way hinder the operation of section 15-4-3 in those circumstances where it was intended to apply. Outside the narrow range of circumstances described here, the statute will continue to have full effect. When a debtor has an obligation which is shared with other obligors and that debtor has no other obligation to the creditor to whom he or she makes a payment, the above-described common law rules of payment allocation are not relevant. Section 15-4-3 governs, and it requires that the payment be credited to reduce the shared obligation and thus to reduce equally the amount owed by each debtor.

7 . Associate Chief Justice Howe's dissent suggests that there was, in fact, a clear indication of the payment’s intended allocation and that the trial court therefore erred. He relies on statements made by Aetna at the time of the payment. We think the record adequately supports the trial court’s decision on this point for two reasons. First, the language of Aetna's statements is ambiguous, indicating only that the payment was being made “for judgment on the verdict.” We do not find in these words the clear message gleaned from them by Associate Chief Justice Howe to the effect that the payment was meant to be applied to the principal due on the entire amount owed to Jorgensen by Clay and Aetna jointly, with nothing to be allocated to Clay’s separate debt for principal and interest. Second, as we explained earlier, the payment was made on Clay’s behalf, not Aet-na’s. Therefore, the relevant inquiry was Clay’s intended application of the payment, not Aet-na's. Nothing in the record shows that the statements made by Aetna in fact reflected Clay's wishes.