U.S. Supreme Court Clarifies Compensation in Tax Foreclosure Cases: What Pung v. Isabella County Means for Property Owners

By: W. Dane Carey

The United States Supreme Court has issued another significant property-rights decision following its landmark ruling in Tyler v. Hennepin County. In Pung v. Isabella County, the Court addressed an important question left unresolved by Tyler: when a government forecloses on property for unpaid taxes, is the owner constitutionally entitled to the property’s fair market value, or only the amount actually realized at the tax foreclosure sale?

For Michigan property owners, local governments, and real estate practitioners, the decision provides important guidance while leaving several issues for future litigation.

Background

Michael Pung challenged a property-tax assessment of approximately $2,242. After the taxes remained unpaid, Isabella County foreclosed on his home. The property had a tax-assessed value of roughly $194,400 but sold at a public tax auction for approximately $76,008. The purchaser later resold the property for nearly $195,000.

Following Tyler, Pung argued that the Fifth Amendment required the government to compensate him based on the home’s fair market value—not the substantially lower auction price. He also argued that taking a home worth nearly $200,000 over a relatively small tax debt constituted an excessive fine under the Eighth Amendment.

The Supreme Court’s Holding

In an opinion authored by Justice Samuel Alito, the Court rejected both arguments. The Court held that when a tax foreclosure sale is fairly conducted, the Constitution measures compensation by the actual proceeds of the tax sale, not by a hypothetical fair market value determined through appraisal.

The Court emphasized that governments have historically collected delinquent taxes through public foreclosure sales. Historically, owners were entitled to receive any surplus proceeds remaining after satisfaction of the tax debt and authorized costs—not to recover the difference between auction price and estimated market value. According to the majority, this longstanding historical practice informs the meaning of ‘just compensation’ under the Fifth Amendment.

The Court likewise rejected the Eighth Amendment claim, concluding that the historical practice surrounding tax foreclosures did not support treating the difference between auction value and market value as an unconstitutional excessive fine.

An Important Limitation

Importantly, the Court stressed that its decision was narrow. It did not determine whether Isabella County’s foreclosure procedures themselves were fair. Additional procedural challenges raised by Pung were not properly before the Court and may continue on remand. As a result, the opinion should not be read as insulating every tax foreclosure from constitutional scrutiny.

Justice Thomas’s Concurrence

Justice Clarence Thomas, joined in substantial part by Justice Neil Gorsuch, agreed with the judgment but questioned whether auction value should always define just compensation. He noted the significant disparity between the auction price and the property’s apparent market value and suggested that future cases may require the Court to reconsider whether depressed foreclosure-sale prices adequately compensate property owners.

Why the Decision Matters

Pung significantly narrows the potential expansion of Tyler. Tyler established that governments may not simply retain surplus proceeds after a tax foreclosure. Pung clarifies that, absent some independent constitutional defect in the foreclosure process, the Constitution generally does not require payment of the property’s full fair market value if the property sells for less at a properly conducted tax sale.

Nevertheless, the decision leaves meaningful room for future litigation involving defective foreclosure procedures, inadequate notice, collusive or commercially unreasonable sales, or other constitutional challenges. Justice Thomas’s concurrence also suggests that the Court’s jurisprudence in this area may continue to evolve.

Takeaway

For Michigan property owners, Pung reinforces two principles.

First, owners retain constitutional protection against governments keeping surplus proceeds after tax foreclosure.

Second, however, the Supreme Court has now held that ‘just compensation’ ordinarily means the amount actually realized through a fairly conducted tax sale—not an independent determination of fair market value. Property owners facing tax foreclosure should therefore focus not only on valuation issues but also on whether the foreclosure procedures themselves complied with constitutional requirements.