What originated as a dispute between one family and their county officials now presents significant implications for the entire tax lien foreclosure process.
On Feb. 25, the Supreme Court is scheduled to hear oral arguments in the case of Pung v. Isabella County, which centers on a family estate that was foreclosed upon and auctioned by the local government of Isabella County, Mich. The National Tax Lien Association (NTLA) recently hosted a webinar with a panel of presenters who broke down the facts of the case.
Leonid Krechmer, Of Counsel with New York-based law firm Bronster LLP, examined the constitutional issues. Namely, Krechmer said, the Fifth Amendment’s guarantee of just compensation and the Eighth Amendment’s protection against excessive fines are key factors in the case.
Bronster LLP represents the NTLA in Pung v. Isabella County and filed an amicus curiae brief with the Supreme Court in January.
Krechmer explained that the Pung estate was foreclosed due to tax delinquencies. It was then sold by Isabella County for $76,000 at a foreclosure auction. Initially, the County kept the full amount, but after litigation and changes in the law under Tyler v Hennepin County and Rafaeli, LLC v. Oakland Co., Pung received the sale proceeds, less the $2,200 tax burden originally owed to the County. Meanwhile, the new owner renovated the property over the next year and a half, then sold it for $195,000.
Michael Pung argued that the County essentially “cheapened” his property via the foreclosure process and that the auction price should have been much higher, although Krechmer said it is unclear by which mechanism that higher auction price could have been achieved.
“The petitioner in this case, Michael Pung, is saying that as a result of tax lien foreclosure, he lost property to judicial auction and while he received the surplus from the auction, his position is that it’s not enough – that the auction price was a depressed price and that he lost equity in the amount of about $120,000 because the property was worth more before foreclosure and after foreclosure,” Krechmer said. “He’s saying that the county caused loss of equity in the property and he’s seeking compensation for that lost equity. The issue here is … what is the appropriate valuation of the property in the foreclosure scenario? Is auction price sufficient and fair and is the surplus that results from the auction sufficient compensation or not?”
Krechmer called it “an incredibly important case because if the court looks at his arguments favorably and provides some kind of relief, it changes the whole tax lien foreclosure process for all of us, probably.”
When asked by moderator Gregory Jacovini, Chief Operating Officer of Pro Capital, LLC, whether he believes the Supreme Court will focus more on the takings clause or excessive fines clause when determining constitutional issues, Krechmer leaned toward the Takings Clause, referring to the Supreme Court’s previous ruling in Tyler v. Hennepin County.
“My expectation is that the dispute is going to be about the takings clause because that’s the clause that was mentioned in the Tyler case,” Krechmer said. “This case relies on, to a significant extent, Tyler’s analysis of the takings clause. In Tyler v. Hennepin County, the Supreme Court held that not returning surplus constitutes a taking without just compensation. Minnesota, like Michigan here, did not have a process for returning the surplus – they just took the entire proceeds from the sale of a foreclosed property. So, under the takings clause, the decision was handed down from the Supreme Court saying, ‘no, this is a violation of the fifth amendment of the constitution.’”
How is fair value defined?
Bronster LLP Partner Andrew Kazin outlined his view that Pung seeks entitlement to a home value that he did not earn because the home only increased in value after the new owner’s renovations.
“The core issue is to determine how value should be ascribed and when,” Kazin said. “Should the value be affixed when the auction occurred, or when the resale occurred? The Supreme Court has held at least three times … that you ascribe value for purposes of a taking at the time that the property is removed from the owner and not the resale value. So, in other words, an owner is not entitled to exploit and benefit from the investment or the work that a subsequent owner puts into a property.”
Kazin added that the Pung family’s plight in this case was largely self-inflicted, as he believes the auction and resale could have been avoided by heeding the county’s multiple warnings and settling the outstanding tax debt.
“The notion that the government is coming to take homes, whether it be the Michigan government or any other throughout the nation, is fiction. It’s divorced from reality,” Kazin said. “The reality is … the government sends multiple notices before it actually begins foreclosure. And that’s what happened in this case. The homeowner has numerous chances to retain his property, to cut off the foreclosure process and be left alone.
“The government doesn’t have a desire to seize this property – it’s required to do so to answer to the greater public,” he added. “At the end of the day, the government has an obligation to the rest of the taxpaying citizens who actually do pay their taxes.”
Bronster, LLP Founding Partner Bruce Bronster further added that contrary to the Pung family’s position that they were cheated out of the full equity of their home, the property’s value was inherently lowered by the auction process through no fault of the county.
“The purchaser (of a tax lien foreclosure auctioned property) has capital risk, so the purchaser is not going to pay bust-out retail for a nice, clean, beautifully refreshed property inside and out with perfectly clean, pristine title because … that’s not what they’re getting,” Bronster said. “They’re getting something that’s not perfect and they’re taking the capital risk hopefully to make a profit. They’re going to pay for something less than a perfect product.
“But, it also has to be said that there is a sophisticated buyer’s market out there,” he added. “There are people who follow these auctions, there are people who want these homes for themselves and it’s a robust market. Really, (a foreclosed home) is a product that’s put out to market at the highest and best price considering the shape of the house that Mr. Pung put it in.”
Nelson Mullins Riley & Scarborough LLP Partner Matt Abee also joined the conversation, illuminating the core issue before the Supreme Court: what factors truly determine the fair value of a property. According to Abee, the highest court in the land is being asked to decide whether the auction value or a hypothetical pre-foreclosure value is more relevant.
“The best indication of market value of a piece of property is what a willing buyer will pay a willing seller,” Abee said. “So, if at the time of the tax auction, the willing buyer in this case was willing to pay roughly $76,000, that’s a good indication of what the property is worth, given all of the circumstances in which that property was sold. That’s the best argument that the county has … a distressed sale of property is just different from an arms-length transaction in which due diligence is completed.
“Now, on the flip side of the coin, with Mr. Pung, his argument is that the just compensation clause focuses on what the taxpayer has lost to the government,” Abee continued. “It doesn’t focus on what the buyer or the government has gained. Mr. Pung’s argument is ‘we’ve got prior cases that talk about the full and perfect equivalent of the money lost’ or, ‘what is the full monetary equivalent of the property taken?’ Those are quotes from prior cases, and his point is, ‘if you’re looking at what I lost, I lost property that was worth $194,000 to $196,000.’ That’s probably his strongest argument.”
The Legal Description plans to be in D.C. to cover the Supreme Court hearing. Check back with TheLegalDescription.com for more on this story.
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