The U.S. Supreme Court heard oral arguments February 25 in a case that could reshape how states handle tax foreclosures and the rights of property owners whose homes are seized and sold for unpaid taxes. (Pung v. Isabella County, No. 25-95)
At issue is whether Michigan’s process – allowing counties to take and sell a property at an artificially depressed auction sale price rather than the property’s fair market value – violates the 5th Amendment’s Takings Clause. The petitioner also challenges the county’s act of taking real property worth far more than needed to satisfy a disputed tax debt as violating the 8th Amendment’s Excessive Fines Clause.
What Constitutes ‘Just Compensation’?
The case was brought by Michael Pung after dispute over a state property tax credit – the Principal Residence Exemption – led to a tax bill that Pung argued was never actually owed. Following a series of administrative and court proceedings, Isabella County, Michigan, foreclosed on the property and sold it at auction.
The assessed fair market value of the home was $194,400 at the time, whereas Isabella County auctioned it for only $76,000, Pung’s counsel Philip Ellison explained during oral arguments. The property was soon resold for $195,000. What’s more, said Ellison, the home was foreclosed to satisfy a disputed tax bill of approximately $2,200.
Ellison told the Court that the lower courts had erred “when holding that the later auction price of just $76,000 less the debt was categorically the only just compensation owed.” He argued that “federal courts should consider all relevant market evidence of market value and determine whether just compensation has, in fact, been paid.”
Justice Clarence Thomas jumped in, asking Ellison, “What do you do with the fact that the English and American legal traditions seem to permit these sorts of foreclosures?” When pushed for case law, Ellison conceded that the Court has not specifically held that the measure of damages on a tax foreclosure action is based on fair market value versus auction value.
“The thing that I’m really, really struggling with is the notion that just compensation is necessarily always tied to the fair market value,” said Justice Ketanji Brown Jackson. “The government’s only real interest in this is covering its tax liability,” she added, noting that Pung could have sold the property himself to cover the tax debt.
And Justice Jackson said she sees Pung’s case differently than, say, a takings case where the government builds a railroad or park on the forfeited property. “They’re taking property because he didn’t pay his taxes,” she stressed.
Matthew Nelson, who argued the case for Isabella County, said Pung’s Takings Clause question had “morphed” from one about whether fair market value is just compensation to “whether the Takings Clause dictates the procedures for government auctions of foreclosed property.” He distinguished the later resale of Pung’s property from the auction sale circumstances. During the auction sale, “there was not an unlimited time to purchase the property,” said Nelson.
“Multiple justices recognized that the foreclosure and auction process, specifically in Michigan, can depress prices through procedures such as cash only requirements and no property inspections,” Holland & Knight attorney Jennifer Karpchuk told Checkpoint. But the Court was also concerned about “requiring counties to obtain fair market value and the procedural questions that would raise,” she added.
Excessive Fines Argument
Ellison also advanced an 8th Amendment argument that “taking a 6-figure home to punish over a small, 4-figure tax constitutes a fine” and is “grossly disproportionate.” He stressed that the 8th Amendment’s prohibition on excessive fines can provide “alternate relief” in Pung’s case, “where the delta is so high.”
Karpchuk noted that the oral argument “was heavily focused on the Takings Clause.” But she suggested that Pung’s argument under the 8th Amendment Excessive Fines Clause could serve as “an independent constitutional backstop.”
That alternate argument might be needed. “I’m struggling to see how [Pung’s case] fits into the takings framework,” Justice Amy Coney Barrett told Ellison. “Can you tell me of a case that we have that treats the foreclosure of a house as a taking?” she asked.
However, Karpchuk said “the equities of the case resonated strongly with some of the justices.” Those justices, she explained, “expressed discomfort with a system that allows a government to destroy most of a homeowner’s equity to collect a trivial debt.”
But taxpayers have “a very clear opportunity” to avoid Pung’s outcome by simply paying the tax allegedly owed, according to Justice Jackson. “To the extent that the homeowner has notice that the government is intending to use this particular tool to recover its debt,” said Justice Jackson, “I wonder if the fairness questions that you are raising don’t get resolved.” In her view, “the notice gives the homeowner a chance to prevent that terrible outcome.”
To that, Ellison replied, “I believe if Mr. Pung knew he was going to be at the U.S. Supreme Court arguing about $2,200 he would have paid that many years ago.”
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