The "American Dream" often evokes images of owning a charming house in the suburbs—imagery that represents security and stability and having "made it." The Pung family of Isabella County, Michigan achieved that dream: they purchased a three-bedroom ranch-style home that they owned for 27 years. But when a Michigan tax assessor determined that the Pungs owed $2,241.93 in additional property taxes—a tax that the Pungs vigorously disputed and that Justice Thomas noted was "not in the [Pungs'] tax bill and not authorized by law"—they lost that part of their American Dream.
After protracted legal battles, the county foreclosed on the Pungs' home, and their house was sold at a tax auction for $73,766.07—under 40% of the house's fair market value. Even the county had determined the Pungs' house was worth $194,400 for property tax purposes. And, in fact, "less than 18 months after the auction, the new owner sold the property on the open market for $195,000, almost exactly its earlier assessed value."
The Pungs sued in federal court, claiming that the county had violated two provisions of the Constitution. First, they argued that the county had violated the Fifth Amendment's Takings Clause by initially keeping the sale proceeds, and eventually compensating them based on the home's depressed auction sale price rather than its fair market value. Second, they argued that the county had violated the Eighth Amendment's Excessive Fines Clause because selling the property for a fraction of its value constituted a grossly disproportionate punitive forfeiture.
At the district court, the Pungs received a half-win. While that court recognized that the county had effected a taking because it initially retained all of the sale proceeds, the court rejected the Pungs' argument that just compensation for that taking should be measured by the home's (higher) fair market value. Instead, the district court held that payment of the surplus proceeds was sufficient. The district court also dismissed the Pungs' Eighth Amendment claim. The Sixth Circuit affirmed, holding that a foreclosed property owner "is entitled to 'the amount of sale above his debt and no more.'" The Supreme Court granted review.
In a (near) unanimous ruling penned by Justice Alito, the Supreme Court affirmed the Sixth Circuit's decision and rejected the Pungs' dual constitutional attacks. As to the Pungs' Takings Clause argument, the Court held that, consistent with long-standing precedent, the owner of a foreclosed property is entitled only to the surplus sale proceeds remaining after the debt is paid, "nothing less, and nothing more." To hold otherwise, the Court explained, would be to assign the government a loss that is paid to the delinquent taxpayer himself. Tax sales as a debt collection mechanism would then become infeasible. The Court refused to allow such a "perverse result[.]"
In reaching this result, the Court mined the history of tax sales. It observed that tax sales have long been a constitutionally accepted means of collecting debts, and that fair market value is not always an appropriate measure of a property's value. Thus, accepting the Pungs' fair market value interpretation of the Takings Clause would not only "impose unprecedented burdens on jurisdictions that wish to collect unpaid taxes[,]" but would also "whisk this longstanding practice into the dust bin[.]"
The Court likewise rejected Pung's Excessive Fines argument. The Court acknowledged that while a property forfeiture could be considered a fine if it was designed as a punishment, Pung failed to offer historical or precedential evidence that a fairly conducted tax sale is considered "punitive." To hold otherwise, the Court reiterated, would harken "the demise of this country's longstanding use of tax sales to collect debts. The Eighth Amendment requires no such thing."
Although all members of the Court reaffirmed the constitutionality of the County's tax-sale procedures in this specific case, the opinion notably declined to address whether the County's foreclosure procedure was fair. This was the thrust of Justice Sotomayor's brief concurrence, which stated that the Court "correctly le[ft] those issues for remand, should the Sixth Circuit find them preserved."
Justice Thomas's concurrence doubled down on perceived unfairness in the County's tax procedures. Joined in part by Justice Gorsuch, he emphasized that historically, the government was required to satisfy tax debts by first seizing personal property, pursuing only part of a delinquent taxpayer's property, and upholding rigorous notice requirements before divesting an owner of real property. In his view, these strict limitations indicate that the Court "departed from that history and tradition." "What Isabella County did to the Pungs was wrong, and, on my initial view, likely unconstitutional." But because that issue was not before the Court, there was no occasion for the Court to rule.
With the proper valuation issue settled, the question, it appears, is what is fair in state and local foreclosure procedures for tax delinquencies? What process is enough? Assuming the Sixth Circuit finds the issue preserved, that question just may return to the Court someday. In the meantime, local governments, tax-lien investors, and property owners should pay close attention to potential shifts in state foreclosure practices.
Venable will continue to monitor legal developments from the Supreme Court that affect our clients and stakeholders.
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The authors thank Mariah Grant, a summer associate in our Washington, DC office, for her assistance in writing this article.