The Legal Description traveled to D.C. and sat in on oral arguments in front of the U.S. Supreme Court on Feb. 25 for Pung v Isabella County, a case that could have significant implications for the entire tax lien foreclosure process.
The facts
The case involves the Pung family of Michigan. Timothy “Scott” Pung owned a home in Isabella County and had taken advantage of the state’s Principal Residence Exemption (PRE), which exempts the household from property taxes owed their school district. Pung passed away in 2004, and his family continued living in the house, which was owned by Pung’s estate. 
In 2010, the township tax assessor rescinded the PRE because no current resident of the property had filed a new PRE, resulting in an unpaid tax bill. Michael Pung, Scott Pung’s uncle who lived in the home, filed an appeal with the Michigan Tax Tribunal, which ruled the Pungs did not have to file a new PRE to continue receiving the exemption. The township tax accessor disagreed with the ruling and in 2012, tax-foreclosure proceedings were initiated by the county.
The Pung family challenged the foreclosure in state court, which granted the family’s motion to dismiss the foreclosure proceedings for their 2010 and 2011 property taxes. The decision was affirmed by the Michigan Court of Appeals.
The township tax assessor again rescinded the PRE in 2012. The Pungs believed the earlier tax tribunal’s ruling protected them from more PRE denials and refused to pay the property tax bill of $2,242. The county foreclosed on the home in 2015 to collect the tax debt and later sold the house at auction for $76,008, keeping the sales proceeds.
The Pung family sued the county, claiming under the Fifth Amendment takings clause, the county was required to pay them the surplus from the tax sale after the tax debt was paid, which was $73,766. They also claimed the amount of just compensation owed them under the takings clause must be determined according to the assessed fair-market value of the property, which was $194,400, not the depressed value produced by the tax sale auction. In fact, the purchaser of the home at auction resold it for $195,000.
The family also claimed that the loss of $192,158 in equity of their home (the fair-market value minus the tax debt) imposed an impermissible excessive fine under the Eighth Amendment.
The district court ruled the county did owe the Pungs the surplus funds from the auction sale as a result of Tyler v Hennepin County but was not required to pay the excess equity under the fair-market value of the property. On appeal, the Sixth Circuit affirmed the district court decision.
Supreme Court hearing
The justices seemed to agree that the Pung family losing their home to foreclosure to pay a $2,200 property tax bill was an extraordinary occurrence.
“I’m just curious how a $2,000 erroneously applied, it seems, tax bill led to taking someone’s home, a sale for a third of what it’s worth, and then very promptly the whole value is secured again by the person who collected it out of foreclosure,” Justice Neil Gorsuch said. “It’s a striking set of facts.”
“I want to echo what Justice Gorsuch said,” Justice Amy Coney Barrett added. “I mean, it seems like there was some real unfairness to your client. Frankly, reading the briefs, it sounds to me like the tax assessor was like Inspector Javert, but it was even worse because Jean Valjean hadn’t stolen the bread,” she said, referring to the plot of Les Misérables.
Justice Samuel Alito brought a little levity to the proceedings when he asked Attorney Philip Ellison of Outside Legal Counsel PLC, who has represented the Pung family throughout the case, what personal property he thought the government should go after before taking a house to pay a property tax debt.
“Well, in this case, with a tax debt of about 2,200 bucks, it could have been the Peloton bike that was in the house,” Ellison answered.
“You think a Peloton bike today is worth $2,000?” Alito asked, which caused laughter in the courtroom. “If you go on Facebook Marketplace and you try to sell a Peloton bike today for $2,000, I don’t think you’re going to be very successful.”
While there was agreement that in this particular case, the family may have been treated unfairly, there did not seem to be consensus among the justices on how just compensation from tax sales should be determined.
Justice Sonia Sotomayor challenged Ellison to “give me a holding from a court in our 250-year history where we have said that the measure of damages on a tax foreclosure is fair market value, not the auction price.” Ellison conceded there has not been that specific holding from the court.
“What if it were (a) completely fair process … and you still came out with a price that was below what, for example, the house would sell on the open market?” Chief Justice John Roberts asked. “In other words, if you’re satisfied with the fairness of the process and it comes out with something below what you think is fair market value, is that just too bad?”
“The Fifth Amendment guarantees just compensation; it doesn’t guarantee the outcome of an auction,” Ellison answered. “And I would point this court to the Lawton decision that says that when a former property owner affirms the selling of the property, they’re entitled to ‘at least’ – and that’s, I think, a very important two words – at least the surplus proceeds.”
Justice Ketanji Brown Jackson suggested the case might be more about due process than just compensation.
“To the extent you’re arguing about or your claim is that they needed to do other steps before they took the property, I didn’t understand the takings clause to be concerned about pre-takings deprivation, that the takings clause was just about just compensation,” Jackson said to Ellison. “And so wouldn’t you be needing to bring kind of a due process-type claim if you’re complaining about the personal property aspect of this?”
“We would acknowledge that due process comes awful close in the just compensation world, but the question that’s being challenged here is does the result of this foreclosure process result in just compensation,” Ellison answered.
The justices also expressed concerns about what a ruling could mean for the future of tax foreclosure sales.
Justice Elena Kagan referenced former Justice Antonin Scalia’s opinion in BFP v. Resolution Trust Corp. that stated foreclosure sales don’t generate as much money as a fair market sale would. She asked Frederick Liu, assistant to the solicitor general with the U.S. Department of Justice, “what would it mean if we said that the measure was fair market value with respect to foreclosure sales?”
“It would spell the end of tax sales in America,” Liu answered. “Every tax sale is necessarily going to yield less than fair market value. If the government is nevertheless required to reimburse the taxpayer as if the sale yielded fair market value, then every tax sale is going to end up costing the government money, and it won’t be long before governments simply stop conducting tax sales altogether.”
In his remarks, Attorney Matthew Nelson, representing Isabella County, said, “Even though the government has been selling properties at auction and returning the overplus for centuries, not a single case has ever suggested that the surplus proceeds are equal to the property’s fair market value less the debt.”
“The takings clause does not require compensation to the owner for owner-created reductions to the property value. That would be unjust to the government and to the public,” he added.
Gorsuch asked Nelson how the case got as far as it has. “How come nobody over the many years between there and here said, ‘hey, wait a minute, what are we doing over a $2,000 tax bill?’ … I mean, nobody can say, hey, there was a mistake?” he asked.
Nelson answered that the Pungs did not attend hearings that would have been able to address the issue.
Attorney reaction
Christina Martin, a senior attorney in Pacific Legal Foundation’s (PLF) property rights practice group, attended oral arguments, as PLF is also representing the Pung family. PLF also represented Geraldine Tyler in Tyler v Hennepin County, where the Supreme Court determined that a county that retains the excess value of a homeowner’s property beyond the tax debt owed is in violation of the takings clause. Martin argued that case.
While Tyler set a precedent against government forfeiture beyond what is owed in taxes, Pung v Isabella County concerns the question of what constitutes just compensation.
“The lower court held that the surplus proceeds from a poorly run and unnecessary auction satisfies the just compensation clause of the Fifth Amendment, so that the Pungs only got $74,000 for that $200,000 house,” she said. “But we think it cannot be the rule that surplus proceeds are categorically just compensation. I’m optimistic that the court will continue to look hard at the law and the briefs and I’m hopeful that they’ll issue a just rule in the end.”
As far as the questions from the Justices, Martin said they did expect someone would bring up the due process clause, as some of the amicus briefs indicated they thought it was a due process case.
“Due process is about the opportunity to be heard and noticed and about fair procedures. The just compensation clause is about just compensation, and that does include a reasonable, certain and adequate process in obtaining just compensation,” she explained, citing Cherokee Nation v Southern Kansas Railroad Co. “There is an element of procedure baked into the just compensation clause. This case is about the failure to pay just compensation.”
Martin said she was surprised the Justices did not ask more questions about the excessive fines issue, since the court did grant both questions. That signals to her that they are more interested in addressing the takings clause issue.
She also emphasized that while Liu discussed the federal tax sale process and protections, Michigan’s process ignores most of those safeguards, including an opportunity to redeem the property up until the time of the sale.
“It makes it very different than the traditional foreclosure process,” Martin said.
For example, unlike Michigan, many states won’t foreclose over a single tax year, she said.
“I’ve seen many cases [in Michigan] where they have foreclosed over very small debts on very valuable properties,” Martin added, citing a case where a house was taken over an accidental $8 underpayment and another where a county foreclosed on a house over $21.
She also pointed out that they briefed the issue in a way that the Supreme Court could fashion a more narrow rule and remand the case so the Pungs could have their day in court to argue that under these specific circumstances, the Pung estate did not get just compensation.
A decision from the Supreme Court is expected by this summer.
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