Larrow v. Ludwig, 56 N.Y.2d 677 (1982)

When a debtor makes payments exceeding the required installment amount, and neither party specifies how the excess should be applied, the presumption is that the excess payment should be applied to the portion of the debt first becoming due.

Summary

In an ejectment action, the New York Court of Appeals addressed how excess payments made under a purchase contract should be credited when the debtor later defaults. The contract required monthly payments of $200, but the debtors sometimes paid $300. Although the debtors later missed payments, they had previously paid $100 more than required had they made consistent $200 payments. The court held that, absent an agreement to the contrary, excess payments are presumed to apply to the installments first coming due. Because the creditor failed to overcome this presumption, the debtors were not in default, and summary judgment was granted in their favor.

Facts

The Ludwigs (plaintiffs) and Larrows (defendants) entered into a purchase contract requiring monthly payments of $200. The contract allowed the Larrows to make payments exceeding that amount, and for several months, they paid $300 per month. Later, the Larrows failed to make some payments. Up to the point of the motion for summary judgment, the Larrows had paid $100 more than they would have if they had consistently paid $200 per month. The Ludwigs brought an ejectment action, claiming the Larrows were in default.

Procedural History

Both the Ludwigs and the Larrows moved for summary judgment in the ejectment action. The lower court’s decision was appealed to the Appellate Division. The Appellate Division’s order was appealed to the New York Court of Appeals.

Issue(s)

Whether the defendants were in default in payment of the monthly installments due under the purchase contract at the time the motion for summary judgment was made, given that they had made some excess payments which if properly credited, would have avoided the default.

Holding

No, because the excess payments made by the debtors should be credited against installments first becoming due, and the creditors failed to rebut the presumption that the excess payments were meant to be applied to those installments.

Court’s Reasoning

The court relied on the general rule that a debtor may direct the application of their payments. However, if the debtor fails to do so, the creditor may apply the payments as they see fit. However, the Court highlighted that “The presumption, however, is that a payment is to be applied to that portion of the debt first becoming due”.

The court noted that the Ludwigs did not dispute the Larrows’ claim that the excess payments were intended to be credited against later unpaid installments, rather than the last installments due under the contract. The receipts issued by the Ludwigs supported this construction. The court concluded that since the Ludwigs did not overcome the presumption that the payments should be applied to the earliest debt, the Larrows were entitled to summary judgment because their excess payments covered the missed installments. The court distinguished this case from situations where the creditor had specifically directed how the payment should be applied and the debtor had knowledge of that application without objection.

The Court cited Davison v Klaess, 280 NY 252, 261 and Shahmoon Inds. v Peerless Ins. Co., 16 AD2d 716, 717 to reinforce the principle that debtors can direct payment applications, but creditors have the right to apply the payment as they see fit if the debtor doesn’t. Farm Supplies Corp. v Goldstein, 240 App Div 330, 332 was cited for the presumption that payment should be applied to the earliest part of the debt.