The Court ruled that neither the Fifth nor Eighth Amendment requires the government to compensate the former property owner based on the fair-market value. In this case, therefore, Pung was entitled only to the difference between the tax debt and the auction sale price of their home.
In 2010, the County tax assessor denied Pung a state-law tax exemption for their principal residence. Pung prevailed on appeal to the Michigan Tax Tribunal. In 2012, the tax assessor denied an exemption again and imposed additional taxes. Pung on appeal prevailed again but still owed $2,241.93 in unpaid real property taxes. He refused to pay them and so the County initiated foreclosure proceedings. The Michigan Court of Appeals allowed the foreclosure and sale of the property.
The County sold Pung’s house at auction for $76,008, which was 40% under the fair-market value. They applied this to what Pung owed in unpaid taxes, initially retained the balance, but later paid Pung the difference. They gave him $73,766.07.
The first question for the Supreme Court was “[w]hether taking and selling a home to satisfy a debt to the government, and keeping the surplus value as a windfall, violates the Takings Clause of the Fifth Amendment when the compensation is based on the artificially depressed auction sale price rather than the property’s fair market value.” Id. at 1968.
The answer seems to be that it depends on the circumstances. With three exceptions (including a new one for real property tax sales) the government cannot keep the surplus. Let’s look closer at this application of the rules as modified by the Supreme Court.
The Court ruled that the auction price is the baseline for just compensation “when the procedure is fair in light of our country’s history of tax sales.” Id. The Court reasoned that established court precedent and history entitles the former property owner to the difference between the tax debt owed and the price the property was sold for at a tax sale.
This logic builds on a seminal case, Tyler v. Hennepin County, 598 U.S. 631 (2023), which set the legal world on fire in the evolving field of whether tax proceeds are takings or excessive fines. Now the Supreme Court adds to that jurisprudence, ruling that only the surplus of the auction price is owed, nothing more.
Previously, the Court had “rejected any suggestion that the owner of a foreclosed property is entitled to recover the fair market value of [the] property.” Pung, 146 S. Ct. at 1969 (citing BFP v. Resolution Trust Corp., 511 U.S. 531, 538-539 (1994)).
The Pung decision illustrates once more the circumstances where the fair-market value as the touchstone is inappropriate. First, when the market value is too difficult to find. Secondly, when the fair-market value would “result in manifest injustice” to the owner or the public. Id. a 1971 (quoting United States v. 564.54 Acres of Monroe and Pike County Land, 441 U.S. 506, 512 (1979)).
The Supreme Court now has created a third circumstance in which to no use fair-market value as the base: a real estate property tax sale. Specifically, if the tax sale procedure is proper, the Court says, and the property owner fails to act, then “the traditional rule, under which the taxpayer receives only the difference between the auction sale price and unpaid taxes, is ‘just.’” Id.
Pung argued that the baseline should be the hypothetical fair-market value of the property. The Court rejected this. If the government had to pay the former property owner the fair-market value of the property, then the government would not recover enough money to pay off tax debts, resulting in a net loss of money. And the government cannot wait for an upswing in the market to sell the property at auction. “Tax sales are designed to collect unpaid taxes without undue delay and administrative expense.” Id.
The second question for the Court was “[w]hether the forfeiture of real property worth far more than needed to satisfy a tax debt but sold for [a] fraction of its real value constitutes an excessive fine under the Eighth Amendment….” Id. at 1968. The Court quickly rejected this argument, reasoning that Pung’s argument lacked history and precedent for support.
The Court vacated the Sixth Circuit’s judgment and remanded the case for further proceedings in accord with this opinion. Justice Sotomayor and Justice Thomas wrote concurring opinions observing that the government’s procedure in a tax sale is an issue to be addressed on remand.
Justice Sotomayor, with Justices Gorsuch and Jackson joining, concurred, observing that the Court’s opinion does not identify “the contours of a fair auction, or endors[e] the parties’ or the United States’ articulations of what this standard requires.” Id. at 1973. (Sotomayor, J., concurring). Justice Thomas also concurred, joined by Justice Gorsuch (except for footnote 1), to set forth what he calls his “preliminary view of the proper resolution of the Pung’s claims.” Id. at 1974 (Thomas, J., concurring).
Thomas agreed with the majority opinion because historical evidence supports an exception for tax foreclosure sales. He disagreed, however, whether the County’s foreclosure procedure here was consistent with the historical practice. Historically, he says, there are two applicable limits when the government takes an entire home to pay for a small tax debt. First, the government has to try to sell the taxpayer’s personal property before it moves on their real property. Secondly, before foreclosing on a taxpayer’s entire property, the government has to pursue only part of the property.
Where the government did not first attempt to sell either personal property or part of the real property, the taxpayer could reclaim his property or compensation for the taking. “The measure of damages for a trespass or trover action based on improper foreclosure procedures was fair market value.” Id. at 1980. Thomas feels that selling Pung’s entire property constituted a trespass or trover, that is, the County exceeded its authority when more property was taken than necessary to pay off Pung’s debt. In Thomas’s view, the County’s actions strayed from the history and tradition of tax sales. Thomas believes “these issues should remain open on remand.” Id.
In conclusion, neither the Fifth nor the Eighth Amendment requires starting with fair-market value when compensating a former property owner with “just compensation.” The tax foreclosure sale price is the proper baseline when fairly conducted in light of this country’s history of tax sales. Stay tuned for more exposition of what constitutes fair procedure.
Madison A. Foley is a student at Vermont Law School who is presently a legal intern at our firm.