Keep the change: high court confirms surplus is enough in tax sales

In Pung v. Isabella County, the U.S. Supreme Court issued a unanimous decision reinforcing the constitutionality of traditional tax foreclosure practices. This outcome is of particular importance to local governments that rely on those mechanisms to collect delinquent property taxes.

The case involved a modest tax delinquency of approximately $2,242 owed by the Pung family. After years of nonpayment, Isabella County foreclosed on the property and sold it at a public auction for $76,008, although it had been assessed at $194,400. The County initially retained the sale proceeds, leading the Pung estate to challenge the foreclosure under the Fifth and Eighth Amendments. Lower courts held that the County was required to return any surplus proceeds above the tax debt but rejected the claim that the Constitution requires payment of the property’s full fair market value. The Sixth Circuit affirmed, and the Supreme Court granted review. 

No Taking. The Supreme Court affirmed the lower courts and clarified that the Fifth Amendment’s Takings Clause does not require municipalities to use fair market value as the measure of compensation following a tax foreclosure sale. Instead, the Court held that “just compensation” is properly measured by the actual auction sale price, provided the sale is conducted fairly. 

The Court grounded its decision in longstanding historical practice. For centuries, governments in both England and the United States have used tax foreclosure and public sale as a means of collecting unpaid taxes, with the consistent requirement that any “overplus” (surplus proceeds) be returned to the taxpayer. This historical understanding, the Court explained, reflects the constitutional baseline: owners are entitled to surplus proceeds, “nothing less, and nothing more.” 

Importantly for local governments, the Court rejected the argument that fair market value should control. It reasoned that imposing such a requirement would dramatically alter established tax collection systems, potentially forcing municipalities to absorb losses when auction prices fall below market value. The Court emphasized that tax foreclosure is a practical, efficient debt-collection tool, and nothing in the Constitution requires converting those proceedings into market-based real estate transactions. 

Not an Excessive Fine. The Court also unanimously rejected the claim that tax foreclosure constitutes an excessive fine. It found no historical or precedential support for treating properly conducted tax sales as punitive. Instead, such sales are understood as remedial efforts to recover unpaid taxes. As a result, returning surplus proceeds without additional compensation tied to market value does not violate the Eighth Amendment. 

Practical Implications for Municipalities

The Pung decision provides important clarity and reassurance for municipalities. It confirms that:

• Tax foreclosure sales remain a constitutionally permissible and essential tool for enforcing tax obligations.

• Municipalities are required to return surplus proceeds, but not to guarantee property owners the full market value of foreclosed property.

• Courts will evaluate compensation based on the actual auction result, not hypothetical valuations.

At the same time, the Court stressed that tax sales must be fairly conducted, and it left open the possibility of future challenges based on alleged procedural deficiencies. Municipalities should therefore ensure strict compliance with notice, process, and auction requirements to avoid litigation risk.