Attorney: Supreme Court leaves path for property owners

By Elyse Apel
The Center Square

A Pacific Legal Foundation attorney said the U.S. Supreme Court’s latest ruling on a Michigan property seizure case is a disappointment for property owners but still important for constitutional rights.

In a unanimous decision issued Tuesday, the court ruled that property owners whose homes are sold in tax foreclosures generally are entitled to the surplus proceeds from a fairly conducted auction, not the property’s fair market value.

“The decision is disappointing in that the court carved out an exception to the general rule that just compensation consists of the fair market value of the property that was taken,” Deborah J. La Fetra, Pacific Legal Foundation senior attorney and co-counsel on the case, told The Center Square in an exclusive interview. “However, the court also rejected the Sixth Circuit’s categorical rule that surplus proceeds are the only possible measure of just compensation under all circumstances.”

This is just the latest in the decades-long case that began with a Michigan family’s fight over a property seizure by Isabella County.

The home, valued at nearly $200,000, was sold at auction for about $76,000 after the county foreclosed over disputed property taxes. The county initially kept all of the sale proceeds, but a federal court later ruled it only had to return the surplus proceeds from the auction—not compensate the family for the home’s full value.

Represented by Pacific Legal Foundation and Michigan attorney Philip Ellison, the Pung family argued they should receive compensation based on the home’s fair market value.

Justice Samuel Alito, writing for the court, rejected that argument, finding that the proper measure of compensation is the auction sale price.

“Our nation’s history and this court’s precedent thus establish the principle that when the government seizes and sells property to collect a debt, the owner is entitled to the surplus sale proceeds—nothing less, and nothing more,” Alito wrote. “The baseline for measuring just compensation in the tax-sale context is therefore the sale price, not the property’s hypothetical fair market value, at least when the sale is fairly conducted in light of our country’s history of tax sales.”

La Fetra said the court’s emphasis that foreclosure and auction must be fairly conducted allows the Pung family to continue arguing Isabella County violated the Constitution.

“The key is that the auction process – which arguably includes the foreclosure process leading up to the auction – must be ‘fairly conducted,” La Fetra said. “Property owners who lose high-value homes over insignificant tax debts are now limited to challenging the fairness of the procedures that resulted in the foreclosure and auction itself to obtain just compensation that exceeds the surplus proceeds of an auction.”

Fair conduction is determined by reference to historical practices.

According to La Fetra, that means the Pacific Legal Foundation and other property owner advocate groups will take the issue to state legislatures to push for more protections for homeowners.

“As a practical matter, property owners and their advocates . . . will also seek relief from to state legislatures to implement greater protections that would prevent families like the Pungs from suffering this type of profoundly unjust foreclosure and auction,” she explained.

Justice Clarence Thomas wrote in a concurring opinion on the case that “what Isabella County did to the Pungs was wrong, and, on my initial view, likely unconstitutional.”

Justice Neil Gorsuch joined that opinion.

La Fetra said that opinion gives the Pung family hope and, with the case headed back to the 6th U.S. Circuit Court of Appeals, they are eager to continue making the case that the county’s actions were unconstitutional.

“By . . . emphasizing that the foreclosure and auction procedures must be fairly conducted, property owners retain a path to recovering the just compensation to which they are constitutionally entitled,” La Fetra said. “The Pungs look forward to making those arguments in the lower courts.”