The Supreme Court recently heard oral arguments in a case revolving around whether a county in Michigan violated the constitutional rights of a homeowner whose property was foreclosed on and sold for far more than he owed in taxes, but far less than it was probably worth.
The case,
The Supreme Court heard oral arguments in the case on Feb. 25, questioning the attorneys about the constitutional implications and whether the county had violated the Fifth Amendment's Takings Clause and Eighth Amendment's Excessive Fines Clause by retaining surplus equity ($76,008 in this case) after selling a home for a minor tax debt of $2,241.
"The Fifth Amendment requires just compensation be measured by the value of what's taken," said the attorney representing the Pung estate, Philip Ellison, according to the
He argued that the lower courts erred when holding that the later auction price of just $76,000, minus the debt, was the only just compensation owed. He cited two earlier cases.
"An owner is owed just compensation, not inadequate compensation," said Ellison. "Following Tyler, there are no windfalls to the government. This case now asks the Court to confirm the other half, that the Constitution likewise forbids confiscatory losses when being — when being imposed upon a former owner. Federal courts should consider all relevant market — evidence of market value and determine whether just compensation has, in fact, been paid. In addition to the Fifth Amendment, the Eighth Amendment's Excessive Fines Clause provides a backstop as well. Taking a six-figure home to punish over a small four-figure tax constitutes a fine and was sufficiently alleged to be grossly disproportionate to get past the initial pleading stage. The judgment below should be reversed."
The case may have wider implications for state and local taxes, and some of the justices seemed to recognize the factors on both sides.
"Multiple justices recognized that the foreclosure and auction process, specifically in Michigan, can depress prices through procedures such as cash‑only requirements and no property inspections," said attorney Jennifer Karpchuk, co-chair of the law firm Holland & Knight's state and local tax team and a partner in its tax practice group. "However, there seemed to be concern over requiring counties to obtain fair market value and the procedural questions that would raise."
Some justices also questioned the timing of the foreclosure and auction. "There were also repeated questions over the timing of the taking – does it occur at the foreclosure judgment, transfer or title, expiration of redemption rights, or after an auction?" said Karpchuk.
The timing can naturally affect the price. "It's one thing to say that an auction price reflects the just compensation when it's close to or at the time of the taking," said Justice Sonia Sotomayor. "But, once you separate out the point of just compensation, which is when you've taken it, which you seem to agree, is the time you took title … and redemption rights have expired, what permits you to hold onto that property until it secures the lowest value? Meaning, I can assume that just compensation is just as an auction price if the auction is close to the taking. But, if it's not, how do I make that leap?"
Justice Ketanji Brown Jackson also wondered about problems with the foreclosure and whether the homeowner could have done more to pay off their tax debts.
"There were a number of questions from Justice Jackson regarding whether the defects in the foreclosure system would be resolved with a Due Process claim instead of a Takings Clause claim," said Karpchuk. "She also pushed hard on the idea that the taking was the fault of the taxpayer who failed to pay their tax bill."
"There are things he could have done to cover his tax bill," said Brown Jackson. "So the government is coming in at the beginning to foreclose on this house for the payment of his debt. Given that circumstance, I guess I don't understand why your argument doesn't kind of turn the government into Mr. Pung's real estate agent with some sort of fiduciary duty to maximize the value of this asset. The government's only real interest in this is covering its tax liability. And if Mr. Pung wanted to get the maximum value of the house to cover that debt, he could have sold it himself and gotten the fair market value on the day that the government came to foreclose on it."
The estate's attorney responded with two general points, Karpchuk noted. "Once the government chooses foreclosure, it assumes the constitutional obligation to ensure mechanisms that reasonably reach just compensation," she said. "Second, moral fault is irrelevant; the Takings Clause does not turn on whether the taxpayer was blameworthy."
The equities of the case resonated strongly with some of the justices, she believes. "Several justices expressed discomfort with a system that allows a government to destroy most of a homeowner's equity to collect a trivial debt — in this case around $2,000, but in some cases even lower amounts," said Karpchuk.
The constitutional implications could go beyond the provisions addressed during the hearing.
"Oral argument was heavily focused on the Takings Clause," said Karpchuk. "However, Petitioner raised an alternative argument under the Eighth Amendment's Excessive Fines Clause. Even if the Court rejects a Takings claim, the Excessive Fines Clause may provide an independent constitutional backstop."
