Sully v. American National Bank

Background

A group of creditors sued over how the assets of the Carnegie Land Company should be divided after insolvency. Among them was A. B. Carhart, an unsecured creditor who identified himself as a New York resident, and other nonresident creditors and mortgage holders. Tennessee had a statute from 1877 that gave preference to resident creditors when assets were distributed. Some creditors raised objections in state courts; others did not. The dispute reached the U.S. Supreme Court about whether the state law illegally discriminated against nonresidents.

Reasoning

The Court first required that a party asking this Court to review a state-law question must have raised that question in the state courts; only Carhart met that test. The Court concluded Carhart was a New York citizen and therefore could challenge the Tennessee law. Applying earlier decisions (including Blake v. McClung), the Court held that Carhart, as a nonresident unsecured creditor, was entitled to share equally with like resident unsecured creditors, and the Tennessee decree denying him that equality was reversed. On the mortgage issue, the Court read the Tennessee statute to postpone payment of mortgages for both resident and nonresident mortgagees in favor of debts that existed before the mortgage was filed, so the law was not shown to single out nonresident mortgagees for worse treatment.

Real world impact

Carhart wins the right to an equal share with in-state unsecured creditors, and the case is sent back to state court to apply this ruling. Mortgage priorities will be adjusted based on when the underlying debts arose, not solely on the creditor’s residence.