Podcast - Pung v. Isabella County: U.S. Supreme Court Revisits Takings, Excessive Fines in Property Tax Forfeitures

Alexander Lycoyannis: Hello and welcome to the latest episode of Holland & Knight's "Real Estate Law Unlocked" podcast. My name is Alex Lycoyannis. I'm the co-head of the Real Estate Disputes and Advocacy Team at Holland & Knight. I work out of the New York office, and I'm here with my colleague, Jen Karpchuk.

Jennifer Karpchuk: Hi, I'm Jen Karpchuk. I am co-chair of Holland & Knight's State and Local Tax group, and I sit in our Philadelphia office. So we are here today to talk about an exciting case that is pending before the U.S. Supreme Court. Those practicing in the state and local tax area are always very excited when we see the U.S. Supreme Court take a SALT (state and local taxes) case. We finally have one this coming term with Pung v. Isabella [County]. It is a property tax case, and it raises some really interesting constitutional claims and arguments that Alex and I are going to be talking about today.

But before we can get into that case, we sort of need to understand how we got here. And that involves backing up to 2023 to talk about a case called Tyler v. Hennepin. And Tyler v. Hennepin was another U.S. Supreme Court case. And that was a case in which a property owner had owed about $15,000 in taxes, penalties, interests and relating costs to Hennepin County, related to her real property. And the taxes were about $2,000 of that $15,000, so about $13,000 were penalties, interest-related costs. And to satisfy that debt, Hennepin County took the home and they sold it for $40,000, and they kept the remainder of the $25,000 surplus money. So [the] petitioner filed suit and argued that in taking that money, that surplus, that they'd exceeded the tax debt. The county took private property without just compensation, which is a violation of the takings clause. And that petitioner also argued for a violation of the Eighth Amendment's Excessive Fines clause. As many of us know, the Supreme Court's decisions can be quite split sometimes. This is not one of those cases. This was a unanimous decision from the U.S. Supreme Court that held that Hennepin County's retention of the surplus value from the tax sale was a claim for a taking under the Fifth Amendment's Takings Clause. Because Tyler agreed that relief under the Takings Clause would fully remedy her harm, the court did not decide her Eighth Amendment Excessive Fines claim.

Justice Gorsuch did author a concurring opinion in Tyler v. Hennepin, and that was joined by Justice Jackson. And in that opinion, Justice Gorsuch highlighted that there were analytical errors in the lower court's excessive fines analysis. And he emphasized that there were economic penalties that can serve a purpose of retribution versus deterrence and those would be fines and cannot be excessive. So that implies that Justice Gorsuch and Justice Jackson believe that a similar tax forfeiture regime could result and implicate in a violation of the Eighth Amendment Excessive Fines Clause. So before the court now is what I like to call Tyler v. Hennepin 2.0 in the form of Pung v. Isabella. And some of the issues in Pung were sort of alluded to in Tyler's oral arguments before the Supreme Court, which we'll discuss in a bit. But Alex, do you want to sort of take us through what's going on in Pung versus Tyler?

Alexander Lycoyannis: Will do. One of the things I often tell clients is that when you have bad facts, it actually benefits you when you go to court. Looking at the facts here, I think any reasonable person would say that they're unfortunate, but in turn, I think it makes for a very compelling presentation to the Supreme Court. So our story begins in Isabella County, Michigan, which is right in the central part of the state. Timothy Pung purchased a home in Isabella County, lived there with his family and as he was entitled to do, claimed a principal residence exemption, which resulted in a partial exemption from certain local property taxes. Unfortunately, Mr. Pung passed away in 2004, but the exemption continued under Michigan law while the property remained occupied by his surviving family members. However, in 2010, the local tax assessor retroactively revoked the principal residence exemption for several prior years because, according to the assessor, a new affidavit attesting to the applicability of the exemption had to have been filed but wasn't filed. That case went to the Michigan Tax Tribunal, and the Michigan Tax Tribunal ruled against the assessor and ruled that the exemption remained valid. Despite that, the assessor nevertheless, again, denied the principal residence exemption for a later year on the same rationale that the tax tribunal had rejected the assessor's position, generating a tax bill of about $2,200. The estate didn't pay that bill and disputed it, relying on the tax tribunal's earlier ruling. But Isabella County, undaunted, initiated foreclosure proceedings based on this alleged tax debt. And, unfortunately for the Pung estate, that proceeding proceeded to a final judgment of foreclosure.

And what ended up happening was: The county held a public tax auction where the property was sold for $76,000. What's notable is that even though the property sold for $76,000 to satisfy an alleged $2,200 tax debt, the county's assessment records valued the fair market value of the property at $194,000. And the county retained the entirety of the delta between the $2,200 tax debt and the $76,000 sale price at the auction and didn't return any of that excess to the Pung estate. And to add insult to injury, the auction purchaser turned around and flipped that property for, you guessed it, almost exactly the amount that Isabella County had assessed the property at, $195,000. So it turns out that the tax auction purchaser realized that benefit that was denied to the Pung estate.

So thereafter, the Pung estate's personal representative sued Isabella County and various officials, asserting violations of the Fifth Amendment's Takings Clause and the Eighth Amendment's Excessive Fines Clause. The district court held that the county's retention of surplus proceeds did indeed constitute a taking, but limited the compensation to the difference between the tax debt and the auction sales price, and not, as the Pung estate argued, the home's fair market value. The Sixth Circuit Court of Appeals affirmed the district court's ruling and rejected the estate's claim to compensation measured by the full market value. And they also rejected the Excessive Fines claim. They thereafter filed a petition for certiorari to the U.S. Supreme Court. And in October of 2025, the Supreme Court granted certiorari setting up, as Jen referred to it, Tyler v. Hennepin 2.0. So Jen, what did the petitioner, the Pung estate, argue in their briefs at the Supreme Court?

Jennifer Karpchuk: Petitioner's arguments are similar to Tyler's. They're arguing a violation of the Fifth Amendment's Takings Clause as well as the Eighth Amendment's Excessive Fines Clause. And for purposes of the Takings Clause, they are arguing that the Constitution requires just compensation and that just compensation is measured by the owner's loss, which is the fair market value at the time of the taking plus interest, not the proceeds that are realized by a forced auction sale. And they also say that the county can't define compensation by reference to that unnecessary depressed auction that it is controlling, that historically and doctrinally, governments have a duty to avoid sacrificial prices. They have to protect equity, they can't seize and sell more property than necessary to satisfy a debt. So oftentimes these auctions have low attendance, they're set at below market value rates, and they usually sell for below market values – as we clearly see with Pung.

And then the petitioner's other argument is that under the Eighth Amendment excessive fines, the county's forfeiture operated as a punitive fine because it imposed a substantial economic penalty to deter or punish nonpayment, which was well beyond any remedial purpose. So after the court ordered return of the surplus auction proceeds, the remaining loss was still approximately $118,000 – if we look at what the fair market value of the property was and what the county sold the property for – and so petitioner says well, that is a sanction of about 53 times the disputed amount, so that is grossly disproportionate to the offense and the sanctions magnitude is completely untethered to any injury to the government, varies dramatically with the happenstance of the property value – what the auction conditions are – and therefore underscores the punitive nature of the system. So of course, the county is going to have some arguments too. Alex, how is the county supporting its position?

Alexander Lycoyannis: The county is basically saying that they're not a real estate brokerage. Their job is not to try to realize the highest value for the property. And they rely heavily on Tyler v. Hennepin. They say that Tyler v. Hennepin only prohibits the government from keeping the surplus proceeds beyond the tax debt. It doesn't require compensation based on a hypothetical market value when the government follows all the rules, sells the property through a lawful tax foreclosure and otherwise follows the correct steps in the process that's well recognized in Isabella County and Michigan and throughout the country in similar situations. And under traditional takings analysis, returning that auction surplus should fully satisfy the Pung estate's constitutional claim.

As to the excessive fines claim, the county's main argument is that tax foreclosure is not meant to be a punitive measure as a fine typically is. It's a remedial measure meant to return to the government taxes that are rightfully, in their mind, owed to it, even though in this situation, it turns out that they're not owed these taxes based on the Michigan Tax Tribunal, but we'll put that to the side for now. And even if the Excessive Fines Clause were to apply, the county argues that foreclosure of the entire property is a traditional and proportionate means of enforcing tax obligations. And again, it's something that's recognized throughout the entire country, it's the traditional way that these sorts of debts are satisfied and there is nothing unusual or disproportionate about it. But one of the things that is notable about Pung v. Isabella County is you have certain cases that generate a lot of amicus briefs and here there were quite a few that were filed. Jen, why don't you summarize what the amici argued?

Jennifer Karpchuk: Sure. So there are a number of amici briefs on both sides. A number of those same amici filed briefs in Tyler v. Hennepin as well. We even have Hennepin County stepping in to file an amicus brief here in Pung. And I think some things to look for as we approach oral argument also apply into some of the points raised by the amici and influenced by Tyler v. Hennepin. So I'm going to talk a little bit about some things to look for in oral argument. There were concurring opinions, again, in Tyler v. Hennepin – or one concurring opinion in Tyler v. Hennepin – and that opinion implies, again, that Justice Gorsuch and Justice Jackson believe some similar tax forfeiture regimes can implicate the Eighth Amendment, and I think we can expect some questions about the Excessive Fines Clause. In Tyler, the court did not have to address that issue because its ruling under the Takings Clause made that issue essentially moot for Ms. Tyler. However, some amici have called for the court to add some clarity to this area since there were at least two justices interested in that issue. I think we'll probably see some more questions, and maybe this is a more proper case for the courts to sort of discuss and analyze the excessive fines issue as it relates to the taxes.

And I imagine we'll also see some questions from the justices about the value of the property. How do we know what that is at the time of the taking? In Tyler v. Hennepin's oral argument, Justice Sotomayor was concerned with what happens if the stock market crashes the day after the taking and that states would be put in this untenable, very risky situation going forward and wouldn't go forward with any of these sales. They could be sued for selling at not-fair market value, not selling fast enough, that this would create cash flow problems for the counties if they can't sell these properties. But I think the other side of that is, then they also might be not so quick to take a property that only has nominal taxes that are owed on it.

And then some of the amici also discuss tools that would be available to states to avoid the unfair undervaluation of the property at these sales that are occurring at auctions, such as using a private real estate broker to get the best sale price, which is something that Wisconsin permits, or using the appraised market value of the properties as the minimum bid, which is something that Ohio has done. So I think we'll see a lot of questions again as to value, determination of value, that sort of thing in oral arguments, and again, some of these points that the amici have raised in their briefing. Alex, are there other parts of the oral argument that you want to highlight as items to watch?

Alexander Lycoyannis: Yeah, thanks, Jen. I think that, again, looking at what some of the briefs have argued and some of amici, I think an analogy to the eminent domain situation or the eminent domain case law might play a role here. Because you look at what happens in your typical eminent domain situation, and you analogize it to what's happened here and it's very similar in a lot of ways, right? And in the eminent domain context, the homeowner whose home is taken is entitled to just compensation. And the case law says that just compensation is the fair market value at the time of the taking. And so in the eminent domain situation, just like here, you have a government entity that takes full title, takes title involuntarily and the homeowner is permanently dispossessed from his or her property. And that's exactly what's happened here with the Pung estate. And you look at what happens in the eminent domain context in this – when a single-family home or a non-commercial property is taken, you look at comparable sales. And Jen, you mentioned the notion of hiring a private real estate broker. There are certain ways that are already recognized in the law, both in Supreme Court precedent and also as a matter of practicality, where it wouldn't be a new concept to say to homeowners whose homes are taken by a tax foreclosure that you're going to be entitled to fair market value, just like all of these other homeowners in all of these other contexts under the law.

But even if the court were to agree that fair market value is the appropriate measure of value, I'm also going to be expecting some questions from the court about process. So typically in this context, when there's a tax debt, you hold an auction. Maybe there's some differences in the particulars, but usually that's what happens. Are the justices going to say to Isabella County and other local municipalities, you can't do that anymore, you have to now put properties up for sale and hire a broker and advertise and do all of these sorts of things to try to maximize the value, or are they going to say, look I don't care what you do, I don't care how you do it, but there's got to be a process and at the end of the process, homeowners whose homes are taken by tax foreclosure sales, once you take away the tax debt, they've got to be given the fair market value. And whether it's through some kind of supplemental proceeding or some other new process, I expect the court, if they are inclined to agree on the fair market value piece of it, to really question the parties on what that process would look like. Because they have to figure out if they're going to create their own role or if they are just going to kick it back to the local municipalities to just figure it out on their own, but at the end of the day, they've got to give fair market value. So oral argument is going to be on February 25, and I know Jen and I are going to be listening.

Jen, do you have anything else you want to say, anything else maybe that I missed or that you think is going to be worthwhile to listen for at oral arguments or anything else interesting that maybe we didn't touch on so far?

Jennifer Karpchuk: I think it'll be a really interesting oral argument. The U.S. Solicitor General also has reserved 10 minutes of time, so it'll interesting to hear the arguments there as well. They also participated in Tyler v. Hennepin. So again, I think something interesting to listen for, as Alex said, on February 25. Thank you all for joining the "Real Estate Law Unlocked" podcast by Holland & Knight.