Win for Local Governments in Pung v. Isabella County

24 Jun Win for Local Governments in Pung v. Isabella County

Supreme Court Rules for Isabella County in Pung v. Isabella County, No. 25-95 / win for local government tax foreclosure / auction sale processes nationwide.   

In a major win for local governments nationwide, the Supreme Court ruled in a unanimous decision authored by Justice Alito that the Fifth Amendment’s Takings Clause does not require the government to use fair market value as a baseline when it sells a foreclosed property at a tax auction and returns only the surplus proceeds above the outstanding tax debt. The Court also rejected the taxpayer’s claim that the County’s forfeiture process constituted an excessive fine in violation of the Eighth Amendment.

Background: The case was brought by the estate of Timothy Pung, a homeowner in Isabella County, Michigan, who had long received a Principal Residence Exemption from property taxes on his three-bedroom residence. After Mr. Pung’s death in 2004, his son lived in the home but the property’s continuing entitlement to the exemption became the subject of dispute.  Ultimately, a delinquency of $2,242 was assessed against the property, which the estate refused to pay. The County initiated foreclosure proceedings, and the home was subsequently sold at public auction for $76,008.  The County then returned the balance-slightly less than $74,000-to the estate.  Given that the County had assessed the home for  property tax purposes at $194,000 and the residence was resold some 18 months later by the auction purchaser for $195,000, the estate sought to recover a much higher amount from the County, arguing that fair market value was the proper baseline under the Fifth Amendment’s Takings Clause “just compensation” requirement.  The estate also argued that the County’s failure to remit excess monies based on fair market valuation constituted an unconstitutional excessive fine under the Eighth Amendment.

Lower courts: Those arguments failed at the District Court and at the Sixth Circuit, which held that when local government sells foreclosed property at a properly conducted auction, “the owner is entitled to the amount of the sale above his debt and no more,” and that the Michigan tax-foreclosure regime was not punitive and thus not “within the ambit of the Eighth Amendment.”

Supreme Court:  Justice Alito’s opinion, which vacates the Sixth Circuit and remands for further inquiry into the County’s tax sale procedures, relied both on history and tradition and on the impracticality of the Pung estate’s proposition. In terms of history, governments have seized property from delinquent taxpayers since the time of Magna Carta. “For hundreds of years, English and American law have allowed the seizure and sale of property as a tax-collection method, provided that the government return any surplus proceeds to the debtor.” Numerous  federal and state laws codified that principle, as did a spectrum of Supreme Court precedents, including the Court’s recent property tax decision in Tyler v. Hennepin County.

Caselaw that Pung cited to the contrary was distinguishable.  For example, where the government had taken multiple pieces of a taxpayer’s property (nine cows where only seven were owed), the excess should obviously be returned to the taxpayer.  Similarly, eminent domain cases where the government was initiating the taking presented a materially different scenario from the situation where a taxpayer could avoid the process entirely by paying the taxes owed—and even in the eminent domain context, the Court has “refused to designate market value as the sole measure of just compensation.” (citation omitted).

The estate’s failure to take action played a significant role in Justice Alito’s opinion. “[T]he Pungs had years to take these steps and avoid foreclosure. They failed to do so. In such a situation, the traditional rule, under which the taxpayer receives only the difference between the auction sale price and unpaid taxes, is ‘just.’” And that failure necessarily resulted in a lower price—as the opinion notes, tax sales, by their very nature, are incompatible with traditional marketing techniques, and imposing that burden on government would be impractical:

Among other things, tax sales are designed to collect unpaid taxes without undue delay and administrative expense. By contrast, homeowners who want to receive the best price for their property may wait to list their house until there is an upswing in the market or until the right buyer comes along. Pung’s fair-market-value theory would impose unprecedented burdens on jurisdictions that wish to collect unpaid taxes and might well make tax sales impractical. In order to obtain something like fair market value for homes on which they have foreclosed, jurisdictions would have to do what homeowners typically do when they want to sell their homes: either shoulder the burden of selling the property themselves or employ a real estate agent. In the meantime, local governments would have to do without the unpaid taxes and bear the costs and risks that go with the ownership of unoccupied homes.

Beyond that impracticality, Justice Alito wrote, a fair market value requirement might easily place the jurisdiction at having to use taxpayer dollars to compensate for tax auctions sales that did not achieve a fair market price.  Requiring governments to make up the difference between auction price and assessed or appraised value would effectively hold the government liable for market conditions beyond its control and would impose unpredictable financial burdens on local tax collection systems. The majority opinion also points out that the Pung’s interpretation of the Takings Clause (and the Eighth Amendment) would “impose restrictions that rendered these sales untenable,” and that the fact that such an interpretation would whisk this longstanding practice into the dust bin is strong evidence that his interpretation is incorrect.”

The Alito opinion made swift work of the estate’s Eighth Amendment excessive fines argument, stating that the petitioner lacked historical or precedential support and did not cite “a single decision holding that the government violates the Eighth Amendment by returning only the surplus proceeds from a tax sale.”

One issue left unresolved was the underlying procedural adequacy of the Isabella County forfeiture and sale process.  While that question was not specifically before the Court, Justice Alito noted that both parties appeared to agree that a jurisdiction might violate the Constitution if it employed “blatantly unfair procedures, such as by conducting a sham sale or needlessly delaying a tax sale while real estate prices crashed.” But the parties disagreed on what constitutes a fair process. According to the County, governments need only follow the contours of state law, while the United States, as amicus, argued that the process must be fairly conducted  “in light of the Nation’s history and tradition of tax sales.”  That issue would not be decided in Justice Alito’s opinion, which returned the question to the Sixth Circuit:  “We will not resolve any of Pung’s newfound procedural arguments. On remand, the Sixth Circuit may decide whether they were properly preserved in that court, and, if they were, may entertain Pung’s arguments.

Sotomayor concurrence: Justice Sotomayor’s concurrence, joined by Justices Jackson and Gorsuch, merely agreed that the Court was not issuing any opinion on the underlying tax sale procedural issues:  “I do not read the Court’s opinion as identifying the contours of a fair auction, or endorsing the parties’ or the United States’ articulations of what this standard requires. The Court correctly leaves those issues for remand, should the Sixth Circuit find them preserved. With that understanding, I join the Court’s opinion.”

Thomas concurrence:  Justice Thomas concurred as to the proposition that benchmarks other than fair market value may apply in the context of tax foreclosure: “I agree that sufficient historical evidence can justify an exception to the fair market-value rule, and I join the Court’s opinion on that basis. But, any exception based on history can be no broader than what that history justifies. And, on my initial view, any history of tax foreclosure sales reflects a greater respect for principles of just compensation than the County showed the Pungs here.”

One such principle, he argued, was a tradition of taking personalty before real property.  He disputed that an entire residence would need to be foreclosed to satisfy a $2200 tax:

Here, the County did not try to collect anything less than the entire property—such as the Pungs’ personal goods, their car, or a portion of their land. Instead, for a mere $2,242 debt, the County proceeded immediately to the seizure of the Pungs’ entire $194,400 home. So, although the County invokes history and tradition to justify its departure from the fair-market-value rule, its actions here seem to have departed from that history and tradition.

Implications: The decision preserves the basic architecture of tax foreclosure law as it has operated in jurisdictions across the country for generations. Local governments retain the ability to satisfy unpaid tax debts through public auction without exposure to liability for the gap between sale price and appraised value, provided the auction itself is procedurally sound.  In our Local Government Legal Center brief, filed by NLC, NACo, IMLA, GFOA, and ICMA,  we argued these points, identifying various property tax default processes around the nation and the overwhelming importance of property tax revenues to local government budgets. We also argued that, irrespective of any specific issues that might be found in the Isabella County procedures in this case, the viability of property tax structures nationwide must be preserved– and were gratified to see the Court overwhelmingly reach that conclusion.