The U.S. Supreme Court ruled Tuesday that local governments are only required to return the surplus cash generated at a tax auction, rather than the full market value, when foreclosing on property to satisfy a tax debt.
The unanimous decision comes in the case of Pung v. Isabella County, Michigan. It settles a nationwide debate over how much money governments owe property owners after seizing and selling real estate for delinquent taxes.
The legal battle began after a property tax dispute involving the estate of Timothy Scott Pung in Isabella County, Michigan. A local tax assessor denied the family a primary residence tax exemption, a move the Pungs successfully challenged in a state tax tribunal. However, the assessor later levied an additional tax bill of $2,241.93 for related fees and penalties. When the family did not pay, the county foreclosed on the home.
Though the property carried a tax-assessed value of $194,400, the county sold it at a public auction for $76,008. Less than 18 months later, the auction purchaser resold the home on the open market for $195,000.
Michael Pung, representing the estate, sued the county in federal court. He argued that under the Fifth Amendment’s Takings Clause and the Eighth Amendment’s Excessive Fines Clause, the government owed him the home’s fair market value minus the debt, rather than just the lower auction price. The District Court and the Sixth Circuit Court of Appeals both rejected that argument, holding that Pung was only entitled to the auction surplus of $73,766.07.
Justice Samuel Alito, writing for the Supreme Court majority, affirmed that historical traditions support using the auction price as the baseline.
“Neither the Fifth nor the Eighth Amendment requires the government to compensate former owners based on the hypothetical fair market value of their property,” Alito wrote. He noted that English and American law have allowed the seizure and sale of property for centuries, provided the “overplus” is returned to the debtor.
The Court stated that forcing local governments to pay out fair market value would disrupt the tax collection system. Alito wrote that under Pung’s proposed rule, a tax sale could routinely net the government a financial loss paid directly to the delinquent taxpayer, making the process impractical.
“The possibility of such a perverse result would render tax sales infeasible as a debt-collection mechanism,” Alito wrote.
While the high court rejected the fair-market-value standard, it vacated the Sixth Circuit’s judgment and sent the case back for further review regarding the fairness of the auction process itself.
Justice Sonia Sotomayor, joined by Justices Neil Gorsuch and Ketanji Brown Jackson, filed a brief concurring opinion emphasizing that the court was not outlining what makes an auction fair, leaving that specific question for the lower courts to handle on remand.
Justice Clarence Thomas also filed a separate opinion, joined in part by Gorsuch, highlighting the specific details of the Pung family’s situation. Thomas noted that the county proceeded directly to seizing the entire home for a $2,242 debt without attempting to seize personal property first, which he wrote departed from historical strict limits on foreclosures.
Thomas wrote that historical traditions required governments to sell only what was necessary to clear a debt. He noted that these procedural arguments remain open for the Sixth Circuit to evaluate on remand.
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