Michigan family gets Supreme Court support in foreclosure fairness bid

WASHINGTON (CN) — The Supreme Court on Tuesday reversed a lower court ruling that led a Michigan county to seize a family home to satisfy a $2,000 tax debt.

The high court rejected the family’s argument that the takings clause, which requires the government to return any surplus proceeds from tax foreclosure sales, means former owners must be compensated based on the hypothetical fair market value of their property.

However, it vacated the lower court’s ruling in favor of the county and sent the case back for further proceedings on whether an auction of the family’s home was fairly conducted.

In a unanimous opinion, the justices concluded the proper baseline under the Fifth Amendment’s takings clause is the price obtained in a tax sale, at least when the sale is fairly conducted.

“In short, 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,” Justice Samuel Alito wrote.

“Our nation’s history and this court’s precedent thus establish the principle that when the government seizes and sells property to collect a tax debt, the owner is entitled to the surplus sale proceeds — nothing less, and nothing more,” the George W. Bush appointee wrote.

In a concurring opinion from Justice Sonia Sotomayor, the Barack Obama appointee applauded the court for leaving the issue of what constitutes a fair auction sale for the Sixth Circuit to decide. She was joined by justices Neil Gorsuch, a Donald Trump appointee, and Justice Ketanji Brown Jackson, a Joe Biden appointee.

In 1991, Timothy Pung bought a three-bedroom, 3,000-square-foot house in Isabella County, Michigan, for $125,000. He applied for and received a state property tax credit exempting owners from a local tax on primary residences.

Nearly two decades later, an assessor retroactively revoked that exemption for three years because Pung’s estate didn’t resubmit an affidavit that the home was a primary residence. Pung died in 2005, but his wife and children continued to live in the house.

Michael Pung, the representative of Timothy Pung’s estate, challenged the revocation. A tax tribunal reversed the denial, but the assessor refused to apply the credit for 2010 and 2011. The Pungs refused to pay the extra taxes that arose from the decision.

Despite an administrative law judge’s ruling allowing the 2010-2011 credit, the assessor again revoked it for the 2012 tax year. The Pungs say they never received a revised bill.

The assessor reported the property as delinquent, leading the county treasurer to begin foreclosure proceedings. After an extended court fight, Isabella County obtained a final foreclosure judgment on Pung’s property in 2018.

To satisfy the $2,242 tax debt, Isabella County sold the Pung home for $76,008 at auction. But the Pungs said the fair market value of the house was $194,400. The auction winner soon confirmed this claim, selling the property for $195,000.

Pung sued the county, claiming it violated his Fifth and Eighth Amendment rights. A lower court rejected the excessive fines claim but upheld Pung’s takings claim under the Supreme Court’s 2023 ruling, Tyler v. Hennepin County.

In Tyler, the court held that a Minnesota county violated the rights of a 94-year-old woman when it took a property worth over double the tax she owed. At the Supreme Court in February, Pung asked the justices to go further, arguing the takings clause requires just compensation in the form of fair market value.

“The case isn’t over. The Pungs won the right to continue their fight in the lower courts,” Larry Salzman, Pacific Legal Foundation’s vice president for litigation and strategy, said in response to the ruling.

Justice Clarence Thomas, a George H.W. Bush appointee, concurred with the majority’s decision, but wrote separately to say that what Isabella County did to the Pungs was wrong and likely unconstitutional. Justice Neil Gorsuch, a Donald Trump appointee, concurred in part.

Thomas said the way the assessor imposed the additional tax increased the likelihood of delinquency and seemingly failed to follow rigorous notice requirements to allow the family to keep their property.

“Whatever utilitarian desire the state may have for a tax collection system that effectively confiscates citizens’ homes based on small tax debts, citizens such as the Pungs have an antecedent and higher right to those homes,” Thomas wrote.

Ilya Somin, the B. Kenneth Simon Chair in Constitutional Studies at Cato and a coauthor of the institute’s amicus brief in the case, called the ruling “badly flawed.”

Somin criticized the court for elevating the supposed needs of the tax foreclosure system over the constitutional property rights protected by the Fifth Amendment. He said a property owner should be fully compensated for losses suffered, not just a small fraction as happened in the Pung case.

“As explained in the amicus brief filed by the Cato Institute and myself, the prices secured at foreclosure auctions often fall far short of that,” Somin said.

“Today’s decision is likely to perpetuate abusive foreclosure auctions that particularly victimize elderly, disabled, minority and legally unsophisticated property owners,” he added.

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