Supreme Court Limits Equity Claims in Tax Foreclosure Case

The U.S. Supreme Court handed local governments a significant win in the fight over home equity theft, ruling that homeowners whose properties are seized and sold for unpaid taxes generally aren’t entitled to compensation based on a home’s full market value.

In a unanimous decision Tuesday, the court held that the benchmark for “just compensation” after a tax foreclosure sale is typically the price a property actually fetches at auction, not what it might have sold for through a conventional listing, according to Realtor.com.

The ruling in Pung v. Isabella County narrows a potentially lucrative avenue for property owners seeking to recover lost equity after tax foreclosures. For municipalities and counties that rely on tax-sale auctions, it also provides a measure of certainty around how courts should value seized properties when constitutional claims arise.

The case stems from a long-running dispute between the Pung family, Michigan homeowners, and Isabella County. After a disagreement over a tax exemption, the family’s delinquent tax bill grew to roughly $2,200 with penalties and interest. The county ultimately foreclosed on the home and sold it at auction for $76,000.

The family argued that returning only the surplus proceeds from the sale failed to compensate them for the property’s full value under the Fifth Amendment. Lower courts had already ordered the county to return roughly $74,000 remaining after the tax debt was satisfied, but rejected the family’s claim for additional compensation tied to the home’s assessed value.

Justice Samuel Alito, writing for the court, said the Constitution does not require governments to bridge the gap between a foreclosure auction price and a hypothetical market value, provided the sale was conducted fairly. The court also dismissed the family’s argument that the arrangement violated the Eighth Amendment’s prohibition on excessive fines.

The decision builds on the Supreme Court’s 2023 ruling in Tyler v. Hennepin County, which held that governments cannot keep excess proceeds from tax foreclosures after collecting what they are owed.

Tuesday’s opinion addresses the next question: how that excess value should be calculated.

But the ruling stops short of defining what constitutes a fair tax-sale process. The justices sent the case back to the Sixth Circuit, leaving open the possibility that homeowners could still challenge foreclosure systems if they can show auction procedures were fundamentally flawed.

That unresolved issue may become the next battleground in the home equity theft movement.

While the court rejected claims tied solely to low auction prices, several justices signaled skepticism of tax-sale practices that fail to maximize value or provide adequate notice, suggesting future litigation may focus less on appraisal gaps and more on how governments conduct the sales themselves.

— Holden Walter-Warner