Supreme Court appears split in tax foreclosure case

The Supreme Court seemed torn Wednesday in a case that pits property rights against the government’s ability to collect unpaid taxes.

At issue is whether a county can seize a homeowners residence for unpaid property taxes and sell the house at auction for less than the homeowners would get if they put their home on the market themselves. 

In 2023, the Supreme Court ruled that when a government entity puts up a house for foreclosure or auction in order to collect back taxes, the government has to give the taxpayer any proceeds beyond the taxes due.

At the Supreme Court Wednesday, property rights advocates sought to push the boundaries considerably further. They argued that delinquent taxpayers are entitled to more than what is typically collected at a foreclosure auction. They are entitled instead to the fair market value of the property being sold.

The case was brought by the estate of Timothy Pung, whose family lived in the house without settling the estate for more than a decade. Isabella County, Mich., advised the estate executor in 2012 that the estate owed roughly $2,000 in back taxes. What followed was a long legal fight, with the Michigan state and federal courts ultimately upholding a foreclosure sale of the house for $76,000. The proceeds went to the family minus the $2,000 plus interest owed in taxes.

The homeowners, however, appealed to the U.S. Supreme Court, contending that if the house had been placed on the open market, instead of an auction sale, the value of the home would have been $194,000—the amount it sold for close to two years later.

In the Supreme Court Tuesday, the justices struggled mightily to figure out how such a small amount of delinquent tax money could have led to a foreclosure sale. 

“If you’re satisfied with the fairness of the process and it comes out with something below what you think is fair market value, is that just too bad?” Chief Justice John Roberts asked Pung’s lawyer, Philip Ellison.

Ellison suggested that the county could have gone after a smaller piece of property, prompting this exchange with Justice Samuel Alito.

“What sorts of personal property do you think the government has to go after first before it goes after the house?” he asked.

“Well, in this case, with a tax debt of about 2200 bucks, it could have been the Peloton bike that was in the house,” Ellison responded.

“You think a Peloton bike today is worth $2,000?” Alito retorted to laughter from the courtroom.

Justice Ketanji Brown Jackson, however, seemed to have little sympathy for the homeowners.

“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,” she said. “So having chosen not to do that, forcing the government to sell his house, I guess I’m worried about suggesting that he can come back after the fact and say, ‘No, you didn’t do enough to get the maximum price.'”

Justice Amy Coney Barrett also seemed skeptical.

“It seems to me pretty … dangerous road to go down for us to say that those things would be constitutionally required when they were neither pressed nor passed upon below,” she said.

But Justices Neil Gorsuch and Sonia Sotomayor repeatedly suggested that something wasn’t right.

Finally, Assistant Solicitor General Frederick Liu, arguing in support of the county, got this question from Justice Elena Kagan, who asked what would happen if counties were forced to pay much more than the price received at auction.

“So what would it mean if we said that the measure was fair market value with respect to foreclosure sales?” she asked.

Liu said the impact would be massive.

“It would spell the end of tax sales in America,” he replied. “And at the end of the day, who does this hurt? It hurts other taxpayers who are actually paying their taxes because the shortfall has to come from real taxpayers.”

A decision in the case is expected by summer.