Today, the Supreme Court issued a terrible Takings Clause decision in Pung v. Isabella County. It’s the worst Supreme Court takings decision in a long time, and perpetuates the Court’s tradition of issuing awful property rights decisions on June 23 (which is the anniversary of Kelo v. City of New London). The ruling is unanimous, albeit with a concurring opinion by Justice Thomas, joined by Gorsuch, which is really more of a dissent.
Isabella County, Michigan seized the late Timothy Pung’s house because he supposedly failed to pay some $2200 in taxes and fees (his estate claims he didn’t actually owe anything). They then sold the property at auction for about $76,000; the County kept the $2200 it thought was owed and transferred the remaining funds (about $73,800) to Pung’s estate. But the County had earlier appraised the value of the property at $194,400 and the winner of the auction quickly resold the home for $195,000. That’s strong evidence the auction price undercompensated the Pungs, and the County failed to pay the “just compensation” required by the Takings Clause of the Fifth Amendment.
In Tyler v. Hennepin County (2023), the Supreme Court unanimously ruled that “home equity theft” (the use of tax foreclosure auctions to take more than the owner owed) is a taking, and emphasized “[t]he principle that a government may not take more from a taxpayer than she owes.” Nonetheless, today, in an opinion by Justice Samuel Alito, the Supreme Court ruled that owners whose property is taken by tax foreclosure are only entitled to the difference between the auction price and what they owed in delinquent taxes. This goes against the longstanding principle that “fair market value” is the standard for just compensation, and that the compensation is based on what the owner lost, not what the government gained.
Justice Alito cites two major justifications for the decision: that longstanding precedent supports it, and that a contrary ruling “would impose unprecedented burdens on jurisdictions that wish to collect unpaid taxes and might well make tax sales impractical” because local governments might end up suffering a “net loss” from foreclosure auction sales that sold for significantly less than fair market value.
Both of these arguments are badly flawed. None of the precedents Alito cites actually holds that fair market value compensation isn’t required. None of them even addresses that issue. They all simply state that, under the Takings Clause or (in some cases) various federal and state statutes, the owner of the property is entitled to the surplus value obtained at the foreclosure auction beyond what he or she owed in delinquent taxes. They do not consider whether, in some cases, the Takings Clause actually requires more than that.
The only one of the cases cited by Alito that rejects fair market value compensation at all is BFP v. Resolution Trust Corp. (1994). But that ruling is not about the Takings Clause (which isn’t even mentioned in the Court’s opinion). It construes the meaning of “reasonably equivalent value” under the federal Bankruptcy Code. Significantly, BFP doesn’t even involve a tax foreclosure, but one for an unpaid mortgage. Such a foreclosure likely doesn’t qualify as a taking at all, because it is the creditor, not the government, that has the right to foreclose in such cases.
Justice Alito largely ignores the vast body of precedent indicating that “fair market value” is the usual standard for “just compensation” and that the proper measure is what the owner has lost, not what the government gains. For details, see the amicus brief I submitted on behalf of the Cato Institute, and a group of property and takings scholars, including myself.
He does claim that fair market value is generally the standard only in “eminent-domain cases.” But there is no justification for this arbitrary limitation. Indeed, Knick v. Township of Scott (2019), the case he cites for this proposition, is actually a regulatory takings case where the government did not initiate any eminent domain proceedings, because it claimed there was no taking at all.
Yet another error in the majority opinion is its perpetuation of the myth that the Supreme Court incorporated the Takings Clause against the states in 1897. In reality, as discussed in Chapter 2 of my book The Grasping Hand: Kelo v. City of New London and the Limits of Eminent Domain, the Court did not incorporate the Clause at that time, and only later retroactively claimed that it had done so. This matters for the present case because tax foreclosures are almost always conducted by state and local governments. The lack of incorporation in the 19th and early 20th centuries helps explain why there were no Fifth Amendment Takings Clause decisions requiring fair market value compensation at that time.
Justice Alito notes (correctly) that precedent holds that fair market value need not be the standard ‘[W]hen market value has been too difficult to find, or when its application would result in manifest injustice to owner or public.” Tax foreclosure sales rarely, if ever, fall in the former category, given that local governments that impose property taxes regularly appraise property in their jurisdiction (as happened in the Pung case itself).
Alito contends requiring fair market value compensation would be unjust because a delinquent property owner could potentially sell for fair market value before a foreclosure occurs, and because requiring fair market value compensation might render tax foreclosure auctions “impractical.” Both theories are wrong.
A property owner facing foreclosure may not have the time or means needed to sell for fair market value. Moreover, there is often uncertainty about whether the foreclosure will actually occur, or whether a deal with the government can be worked out. Regardless, the fact that the owner might have been able to sell the property before the government takes it in no way vitiates the government’s constitutional obligation to pay full compensation.
As detailed in our amicus brief (pg. 18), and others, states have a variety of options for structuring foreclosure auctions in ways that avoid the problem of net losses. For example, they can simply mandate a minimum auction bid equal to fair market value, or close to it.
If states cannot find a way to structure tax foreclosure auctions without often suffering net losses, that’s a sign that those auctions are unjust and unconstitutional, and they should find some other way to deal with property tax delinquencies – or find some other way to fund local government. As Justice Thomas points out in his concurring opinion:
The County [claims that] if it is not able to take people’s homes and sell them at auction in the manner that it did here, it will not be able to efficiently collect taxes. It argues that a fair-market-value rule would impede “the government’s ability” to foreclose on homes in order to collect delinquent taxes…
In my view, that is the point of the Takings Clause, which necessarily prioritizes homeowners’ property rights over the government’s interest in efficiency and public necessity. “William Blackstone wrote that ‘the law of the land . . . postpone[s] even public necessity to the sacred and inviolable rights of private property.’ ” Kelo, 545 U. S., at 505 (THOMAS, J., dissenting) (quoting 1 Blackstone 134–135). Whatever utilitarian desire the State may have for a tax-collection system that effectively confiscates citizens’ homes based on small tax debts, citizens such as the Pungs have an antecedent and higher right to those homes.
Exactly so.
Speaking of Thomas’s concurring opinion (joined on most points by Justice Gorsuch), it is really more of a dissent. Justice Thomas agrees with the majority that tax foreclosures need not always require fair market value compensation. But he also emphasizes that “Just compensation generally requires paying fair market value. Regardless of when exactly the history of tax foreclosure sales can justify a departure from that rule, my initial impression is that it cannot do so in this case.” He goes on to point out that foreclosure auction rules historically required the government to first try to seize personal property to pay off a delinquent tax debt, and then – if that fails – try to settle the debt by taking only part of the owner’s land, instead of all of it. He also emphasizes the vast discrepancy between the assessed market value of the Pung property and what the estate received from the proceeds of the foreclosure auction. He concludes that “[w]hat Isabella County did to the Pungs was wrong, and, on my initial view, likely unconstitutional.”
Given these points, it seems like Thomas (and Gorsuch) believe the Pung estate deserves to prevail in this case, not the County. They should have just dissented. They nonetheless concur in judgment, possibly because the majority opinion does not rule for the County outright, but rather vacates the lower court decision and remands for further proceedings.
In addition to rejecting the Pung estate’s Takings Clause argument, the Court also rejects the argument that foreclosure violated the Excessive Fines Clause of the Eighth Amendment. The Court does not decide the issue of whether the foreclosure procedure was sufficiently “fair” (a question much-discussed during oral argument). That will, presumably, be considered on remand.
But, regardless of what might happen in this specific case after remand, today’s decision is a terrible mistake that is likely to perpetuate abusive and unconstitutional tax foreclosure auctions. As noted in our amicus brief, such abuses are particularly likely to victimize elderly, disabled, minority, and legally unsophisticated property owners.
NOTE: The Pung estate is represented by the Pacific Legal Foundation, a public interest law firm which is also my wife’s employer. She, however, is not one of the attorneys on the case. The estate is also represented by other attorneys.
