The Supreme Court handed down a unanimous decision Tuesday, siding with Isabella County, Michigan, and rejecting a family’s claim that local governments must pay homeowners the full fair market value of property seized and sold through tax foreclosure.
All nine justices agreed the Constitution does not require local governments to compensate former owners based on what a property might fetch on the open market, at least when a tax sale is conducted fairly.
The case involved the Pung family, whose 3,000-square-foot Michigan home was foreclosed on over a disputed $2,241.93 tax bill tied to a revoked Principal Residence Exemption. The county later sold the property, valued at $194,400, at auction for just $76,008. The family argued the sale erased more than $118,000 in equity, a practice critics have labeled “home equity theft.”
The court ruled that the Fifth Amendment does not require counties to pay fair market value following a tax foreclosure sale. As originally reported, the justices held that “the proper baseline under the Takings Clause is the price obtained in a tax sale, at least when the sale is fairly conducted in light of our country’s history of tax sales.”
Justice Samuel Alito, writing for the court, made clear that “neither the Fifth nor the Eighth Amendment requires the government to compensate former owners based on the hypothetical fair market value of their property.
The court also warned that accepting the family’s argument would create serious headaches for local governments trying to collect unpaid taxes. A fair-market-value standard would place “unprecedented burdens” on counties and make tax sales “impractical,” the justices said.
Alito offered a pointed example. “Under Pung’s rule, a tax sale to collect $20,000 in delinquent taxes would net the government a $20,000 loss, a loss paid out to the delinquent taxpayer himself,” he wrote. “The possibility of such a perverse result would render tax sales infeasible as a debt-collection mechanism.”
Isabella County, backed by 10 other states and the District of Columbia, had argued the family’s fair-market-value theory had “no foothold in history or precedent.” County officials noted that Michael Pung repeatedly declined to submit paperwork to keep his tax exemption, failed to appeal the assessment, and ignored years of notices before foreclosure. They said he had multiple opportunities to redeem the property or sell it himself but “took none of those off ramps.”
The court did not completely close the door on the Pung family, however. The justices vacated and remanded the case back to the Sixth Circuit Court of Appeals to reconsider the family’s claims about whether the county’s procedures were fair.
Attorney Larry Salzman of the Pacific Legal Foundation, who represented the Pung estate, called the outcome disappointing but said the family was ready to keep fighting. “It’s satisfying that we get to continue fighting the case for another day,” he said.
Justice Clarence Thomas, joined by Justice Neil Gorsuch, wrote separately and took direct aim at the county’s conduct. “What Isabella County did to the Pungs was wrong, and, on my initial view, likely unconstitutional,” Thomas wrote.