The Supreme Court unanimously sided with Isabella County, Michigan, on Tuesday, rejecting a family’s claim that local governments must pay homeowners the full fair market value of property seized and sold in tax foreclosure cases.
In a 9-0 ruling, the justices said the Constitution does not require local governments to compensate former owners based on a property’s hypothetical market value when a tax sale is fairly conducted.
The case centered on the Pung family, whose 3,000-square-foot Michigan home was foreclosed on over a disputed $2,241.93 tax bill tied to a revoked Principal Residence Exemption.
The county later sold the property, valued at $194,400, at auction for $76,008.
The family argued the sale wiped out more than $118,000 in equity and amounted to what critics call “home equity theft.”
But the high court ruled that the Fifth Amendment does not require counties to pay the fair market value of a home after a tax foreclosure sale.
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.”
Justice Samuel Alito, writing for the court, said the Constitution does not force governments to compensate owners based on a theoretical higher price.
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 court warned that adopting the family’s argument would create major problems for local governments trying to collect unpaid taxes.
The justices said a fair-market-value rule would place “unprecedented burdens” on counties and make tax sales “impractical.”
Alito said such a standard could even force local governments to lose money while trying to collect delinquent taxes.
“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 after a long legal fight between Isabella County and the Pung family over the home’s seizure and sale.
The county eventually returned the surplus auction proceeds, but the family argued that was not enough.
They said the Constitution required “just compensation” based on the home’s full value, not the lower auction price.
The Supreme Court did not fully close the book on the case, however.
The justices said they 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 vacated and remanded the case, sending it back to the U.S. Court of Appeals for the Sixth Circuit to reconsider the family’s procedural claims.
Larry Salzman, an attorney with the Pacific Legal Foundation who represented the Pung estate, said the family was disappointed but ready to continue the fight in the lower courts.
“It’s disappointing because we believe that, at least in some cases, fair market value is demanded by the Constitution, and we’re happy to see that at least Justice Thomas and Gorsuch agree on that point, but it’s satisfying that we get to continue fighting the case for another day, that the case is no longer final and that the Pungs have an opportunity to remedy the harms that were done to them,” Salzman said.
Justice Clarence Thomas, joined by Justice Neil Gorsuch, wrote separately and sharply criticized the county’s handling of the case.
“What Isabella County did to the Pungs was wrong, and, on my initial view, likely unconstitutional,” Thomas wrote.
Isabella County, backed by 10 other states and the District of Columbia, had urged the Supreme Court to reject Pung’s fair-market-value theory, arguing it had “no foothold in history or precedent.”
The county said in court filings that Michael Pung repeatedly refused to submit paperwork needed to keep the home’s Principal Residence tax exemption, declined to appeal the tax assessment and failed to pay the disputed bill despite years of notices.
County officials also argued that Pung could have redeemed the property, challenged the assessment during foreclosure hearings or sold the home himself before foreclosure, but “took none of those off ramps.”
Isabella County said the Fifth Amendment’s “just compensation” requirement was satisfied when the estate received the surplus proceeds from the auction after the tax debt was paid.
The county also argued that foreclosure properties are generally worth less because they are sold through forced public sales.
Attorneys for Isabella County praised the decision, saying it preserved a long-used tool for collecting delinquent property taxes.
“We are grateful the U.S. Supreme Court rejected Pung’s challenge to the constitutionality of the process governments have relied on for centuries to collect property taxes that remain unpaid for years,” Matthew T. Nelson, a partner with Warner Norcross + Judd LLP, said in a statement shared with Fox News Digital. “Isabella County and other counties throughout the state of Michigan regularly make herculean efforts to help homeowners avoid foreclosure. But at the end of the day, foreclosure is a tool that needs to remain in their toolboxes.”
Nelson said the county believes it followed the law and expects the lower court to agree.
“We are confident the process Isabella County followed in this case exceeded what the law required,” Nelson continued. “The simple fact is that Mr. Pung refused to pay the property tax due after litigating the matter through the entirety of the Michigan court system. After filing the federal lawsuit, Mr. Pung never challenged the adequacy of the auction procedures for the simple reason that the auction was conducted in a manner consistent with the law. We have no doubt the Sixth Circuit will reach the same conclusion.”
The unanimous decision gives local governments a major victory while leaving the Pung family one remaining path to argue that the specific procedures used in their case were unfair.
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