Following on its decision in Tyler v. Hennepin County in 2023, the Supreme Court of the United States again waded into the thicket of tax foreclosure and enforcement in its ruling this week in Pung v. Isabella County, a case arising out of Michigan. Justice Alito’s majority opinion framed the issue posed by the case as whether the constitutional baseline for “just compensation” is the actual tax-sale price or the price that someone would pay for the property in a hypothetical open-market transaction?
Background
The Pung family owned property that, through a rather complicated series of facts, became tax-delinquent in the amount $2,242. The County foreclosed on that property to satisfy the tax lien and sold the property at auction, a common practice for the collection of unpaid property tax liens.
To satisfy the $2,242 lien, the property was sold for $76,008, significantly less than the $194,400 taxable value—a value later supported by a $195,000 arms-length sale by the new owner approximately eighteen months after the conclusion of the foreclosure action.
After the sale, the county initially held on to all the sale proceeds of $73,766, but eventually a Federal District court, in line with Tyler, ordered only these proceeds to be paid to Pung, effectively taking any other calculations based on another value of the property out of the calculation for a Fifth Amendment takings claim. Before the District court, Pung contended that the auction sale price did not represent the full fair market value for the purposes of determining “just compensation” under the requirements of the Fifth Amendment’s Takings Clause, and that instead the County should have paid the difference between the unpaid taxes and fair market value as represented by the taxable value. In review, the Sixth Circuit affirmed the District court’s ruling determining the proceeds from the auction sale satisfied the Fifth Amendment’s requirements.
In review, the Supreme Court unanimously held that the auction process and the compensation resulting from foreclosure sales complies with the requirements of the Takings Clause. Justice Alito’s majority opinion notes that the process of tax foreclosure as remedy for unpaid property taxes is well-grounded in the historical record, and that the auction is long-established as the process by which communities can collect unpaid taxes. Beyond the historical record, the majority also notes that a more ad hoc process would foist significant burdens on foreclosing jurisdictions, either through the time and rigor of managing a traditional “arms-length” sale or through the actual costs of compensation beyond what the community could receive to collect its unpaid taxes. The majority held that the Fifth and Eighth Amendments do not require governments to compensate former owners based on a hypothetical fair market value of their property.
Takeaways For Counties, Cities, & Land Banks
The majority opinion provides a concise and crisp overview of the history of tax foreclosure and its longstanding existence as the primary remedy for the government to collect unpaid property taxes. The concurring opinions, especially the opinion of Justice Thomas, go deeper and provide some useful insight and contours that communities should be attentive to as they consider their tax collection and foreclosure process. When viewed in light of the concurrences, some of the things left unsaid in the Opinion of the Court may be worth contemplating as the literary “dog that didn’t bark.”
Auctions Must Be Fair
The opinion provides that the proceeds from a fair auction constitute fair market value for the purposes of the Takings Clause. While there is some discussion as to the parameters of a fair auction, the majority opinion does not squarely address it and the concurrences go further, indicating their view that it should be addressed on remand. In any event, communities should review their auction processes and ensure that the process falls within the clear historic understanding of a fair auction. Communities should be especially attentive to how this process intersects with properties that the community itself, whether through its Land Bank or in its more traditional public use acquisitions.
Alternative Disposition Methods Should Be Closely Examined
The opinion discusses in depth how the foreclosure and auction process is well-grounded in the history of collection of delinquent property taxes. Any other method for collection of delinquent taxes may not be on sound ground. Administrative methods through non-judicial processes especially may want to re-examine their process to ensure that they provide a fair level of compensation to the former property owners in order to ensure full compliance with the constitutional requirements.
The challenge created when a property is offered for auction but not sold also should be reviewed. In any other foreclosure process, a lienholder can bid the value of its lien and secure clear title to the property. In theory, the foreclosing tax jurisdiction can argue that its acquisition of the property after a “fair auction” for the minimum bid value of its lien falls within the same category. However, private entities are not subject to the provisions of the Takings Clause. Therefore, there should be a very careful and considered review of the process to ensure that the auction is fair and open and does not create an appearance of being a sham or tainted process.
Land banking entities, especially units of government, should be attentive as well to their process to ensure that they are not vulnerable to equitable claims of unjust enrichment when properties are eventually transferred. A fact pattern not unlike the pattern in Pung may be viewed differently if the government is the ultimate beneficiary of taking the property.
Tax Lien Sales
Communities may also want to be attentive to the process of tax lien sales. The Court grounds its decision in the historic tradition by which governments collect on delinquent taxes. While the sales of tax collection interests have a long history dating back to antiquity, the intersection of taking private property in collection of an interest in a purchased tax certificate is at least somewhat cloudy. Again, the various opinions accent the importance of following a “fair” process. A private entity attempting to collect on a government tax lien may face scrutiny if it engages in acts that shortcut a typical foreclosure process or evade procedural safeguards.
Proportionality
Finally, while the majority opinion is fairly clear that a fair auction process is well-grounded in history and explicitly considers the burdens that going beyond a simple auction to collect on delinquent taxes would impose upon a government, the concurrences, especially Justice Thomas’, indicate there is at least a faction of the Court that would require more procedural steps before permitting foreclosure and sale. Justice Thomas’ examination of historic context finds at least some evidence that taking personal property as an alternative to foreclosing on real property exists in prior practice. Moreover, even the majority opinion indicates some discomfort between taking a property valued at nearly $200,000 over a $2,000 lien. That question was not put squarely before the Court here, but it is worth watching over the coming years.
Looking Ahead
In conclusion, the Supreme Court has taken an interest in enforcing the provisions of the Takings Clause as it pertains to the foreclosure and tax lien process over the past several years. The political system is dealing with pressure on two fronts: increasing tax delinquency and the continued challenge of vacant and abandoned property on one hand and an increasing public distaste for the value of property taxation on the other. A real estate market that wants its personal wealth to grow through rising property values struggles to balance that desire with the tax implications of rising property values. Expect to see the Court drawn into this conversation more often over the next few years.
Contact
To discuss further, contact KJK partners David Ebersole (DME@kjk.com) and Rich Morehouse (RAM@kjk.com) or anyone in KJK’s Economic Development & Incentives practice group.