Thursday’s decision in Pung v Isabella County squarely rejects an argument that the longstanding use of tax foreclosure sales as a method to collect unpaid real-estate taxes violates the takings clause of the Fifth Amendment or the excessive fines clause of the Eighth Amendment.
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The specific problem that gives rise to the case is the reality that a tax foreclosure sale typically, perhaps invariably, produces a sale price far lower than the price that would come from the ordinary sale process of listing the property with a broker and marketing it over the course of weeks (or months). In this case, for example, Michael Pung’s home was auctioned to recover about $2,200 in unpaid real-estate taxes. The home, with an assessed value of about $194,000, sold at the auction for about $76,000. Under the existing regime, Pung received the surplus – the difference between the sale price and the amount of taxes. Pung’s claim is that the state also owes him the difference between $194,00 and $74,000 as compensation, even though the state sold the property to a third party at the sale and has nowhere other than general tax revenues from which to recover that sum.
Justice Samuel Alito for the court, joined by all of the justices except Clarence Thomas. Alito starts by considering the takings problem, which he describes as “whether ‘just compensation’ [required by the takings clause] following a tax sale is measured by the price that the property fetched at auction or its hypothetical fair market value.” For the court, “the auction price is the proper baseline, at least when the procedure is fair in light of our country’s history of tax sales.”
Alito then briskly recounts the lengthy history, with examples dating to “the time of Magna Carta,” “the early days of the Republic,” and “later in the 19th century,” demonstrating that “for hundreds of years, English and American Law have allowed the seizure and sale of property as a tax-collection method, provided that the government return any surplus proceeds to the debtor”—“nothing less, and nothing more.” Applied to Pung’s challenge then, “[t]he baseline for measuring just compensation in the tax-sale context is … the sale price, not the property’s hypothetical fair market value.”
Reprising points that he emphasized at the argument, Alito emphasizes the practical realities that protect the taxpayer from loss in this context:
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[I]f the owner believes that the fair market value of the property exceeds the taxes that are due, the owner may be able to avoid foreclosure by refinancing the property or using the property as collateral for a new loan … Or the owner may be able to sell the property … himself before foreclosure, pay off the tax debt, and keep what is left … Here, the Pungs had years to take these steps and avoid foreclosure. … They failed to do so.
Alito also describes the “unprecedented burdens” that Pung’s arguments “would impose … on jurisdictions that wish to collect unpaid taxes.” One possibility is that in an effort “to obtain something like fair market value for homes on which they have foreclosed, jurisdictions would have to … either shoulder the burden of selling the property themselves or employ a real estate agent. In the meantime, local governments would have to do without the unpaid taxes and bear the costs and risks that go with the ownership of unoccupied homes.” Alternatively, jurisdictions that “proceeded with traditional tax-sale procedures” often would face “a net loss” under Pung’s theory, as “[t]he government would be on the hook for any difference between the foreclosed property’s fair market value and the tax-sale price,” typically being (as here) multiples of the proceeds received at the tax sale.
In the end, Alito explains, the court’s “task … is not to decide whether tax sales as historically conducted represent good public policy. Our authority is limited to deciding whether the Takings Clause requires the transformation Pung advocates, and the answer to that question is clear.”
Alito also devotes a few paragraphs to rejecting Pung’s claim that the local government’s “failure to compensate him for the fair market value of his property constituted an excessive fine.” On that point, he notes that “[f]orfeiture of property can be a ‘fin[e]’ for purposes of the Eighth Amendment if it serves ‘in part to punish.’” He explains that the court always “has consulted historical practice” in examining that question and then concludes that the historical practice that defeats the just compensation claim suffices for this point as well: “So, like his Fifth Amendment claim, Pung’s Eighth Amendment claim lacks historical or precedential support.”
The case is unlikely to make any great jurisprudential splash, as it validates what has been a common practice of all levels of government in this country for almost three centuries. Perhaps more notable is the concurrence of Justice Clarence Thomas. He makes two points, the first of which is the conclusion that the Michigan courts erred under Michigan law in concluding that Pung in fact owes any taxes – a question neither presented to nor decided in the lower court. Second, he concludes that the takings clause obligated the government first to sell Pung’s personal property before proceeding to sell the land that was the subject of the unpaid taxes. Neither of those points resonated with any other member of the court.
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