The U.S. Supreme Court on Tuesday unanimously sided with Isabella County, Michigan, rejecting a family’s claim that local governments must pay homeowners the full fair market value of property seized and sold in tax foreclosures rather than the lower price obtained at public auction.
In the 9-0 decision, the court ruled that under the Fifth Amendment, “the proper baseline under the Takings Clause is the price obtained in a tax sale, at least when the sale is fairly conducted in light of our country’s history of tax sales.”
Writing for the court, Justice Samuel Alito explained that “neither the Fifth nor the Eighth Amendment requires the government to compensate former owners based on the hypothetical fair market value of their property.”
The high court noted that creating a fair-market-value baseline would impose “unprecedented burdens” on local governments seeking to collect unpaid taxes, making these sales “impractical.”
“Under Pung’s rule, a tax sale to collect $20,000 in delinquent taxes would net the government a $20,000 loss—a loss paid out to the delinquent taxpayer himself,” Alito continued. “The possibility of such a perverse result would render tax sales infeasible as a debt-collection mechanism.”
The ruling comes amid a decade-long legal battle between Isabella County and the Pung family over what they called “home equity theft.” Isabella County foreclosed on the family’s 3,000-square-foot home over a disputed $2,241.93 tax bill stemming from a revoked Principal Residence Exemption, subsequently selling the $194,400 property at auction for just $76,008. Michael Pung, acting as the personal representative of the estate, disputed the bill and brought the legal challenge on behalf of the family.
While the county eventually returned the surplus auction proceeds, the family argued the Constitution required “just compensation” based on the home’s actual worth, rather than a low-ball auction price that destroyed more than $118,000 in equity.
However, the court said on Tuesday it would not “resolve any of Pung’s newfound contentions that the procedure the County followed in seizing and selling his property was unfair.”
The court ultimately vacated and remanded the case, sending it back to the U.S. Court of Appeals for the Sixth Circuit to reconsider those procedural claims.
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