10 July 2026
/ Benjamin N. Hoen
U.S. Supreme Court Clarifies Constitutional Limits on Tax Foreclosure Recoveries
Last year, Cleveland Shareholder Ben Hoen reported that the U.S. Supreme Court agreed to hear Pung v. Isabella County, a Michigan tax foreclosure case that raised important questions concerning the constitutional rights of property owners following a tax foreclosure sale. Click here to read the article from November, 2025.
Specifically, the court agreed to consider whether the Fifth Amendment requires compensation based upon a property's fair market value, rather than the amount realized at a tax foreclosure sale, and whether the difference between those amounts could constitute an excessive fine under the Eighth Amendment.
Following Michigan's statutory tax foreclosure process, the property was sold at public auction for $76,008. The property had an assessed value for tax purposes of approximately $194,400 and was later resold by the purchaser for $195,000.
After the Supreme Court's decision in Tyler v. Hennepin County, the county acknowledged that the property owners were entitled to receive the surplus proceeds generated by the sale after satisfaction of the tax debt. The remaining issue before the court was whether the Constitution required compensation based upon the property's alleged fair market value rather than the amount actually obtained through the tax sale.
The court therefore held that, when a tax foreclosure sale is fairly conducted, the measure of just compensation under the Fifth Amendment is the actual sale price, not an appraisal or estimated market value.
The court also noted several practical reasons supporting this conclusion. Property owners generally receive notice before foreclosure and have opportunities to redeem the property, refinance the debt, or sell the property themselves before the tax sale occurs. Requiring governments to guarantee fair market value after foreclosure would fundamentally alter the traditional tax collection process by requiring governmental entities to market and sell foreclosed properties in the same manner as private sellers or face potential liability whenever a property sold below its appraised value.
Accordingly, the court reaffirmed the principle established in the Tyler decision, that property owners are constitutionally entitled to recover the surplus proceeds from a tax foreclosure sale, but no more.
Although the court resolved the valuation issue, it declined to address several additional arguments raised by the homeowners concerning the procedures employed during the tax foreclosure process.
Among other things, the homeowners argued that the county should have pursued less intrusive methods of collecting the tax debt before foreclosing on the property. The Supreme Court concluded that those issues were outside the questions presented for review and remanded the matter to the Sixth Circuit to determine whether those arguments had been properly preserved and should be considered further.
Accordingly, while the Pung decision resolves the constitutional measure of compensation following a tax foreclosure sale, questions concerning the procedural fairness of particular tax foreclosure practices may continue to be litigated.
For state and local governments, the decision significantly limits the potential expansion of liability that many anticipated following the Tyler decision. Assuming a tax foreclosure sale is properly conducted, governmental entities satisfy the Takings Clause by returning the surplus proceeds generated by the sale. They are not constitutionally required to compensate former owners for any difference between the sale price and the asserted fair market value.
For lenders and mortgage servicers, the decision provides additional certainty regarding the constitutional framework governing tax foreclosures. While the Tyler decision requires excess sale proceeds to be returned to former property owners, the Pung decision confirms that the Constitution does not transform tax foreclosure litigation into disputes over competing property valuations.
The decision also serves as an important reminder that property owners retain the greatest ability to preserve their equity before foreclosure occurs. Once a properly conducted tax sale has taken place, the owner's constitutional recovery is generally limited to the surplus proceeds generated by that sale.
Our team is constantly monitoring changes within the industry. If you have questions on this topic, or would like to learn more about Weltman’s Real Estate Default Solutions, feel free to connect with Ben at any time.
This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
Specifically, the court agreed to consider whether the Fifth Amendment requires compensation based upon a property's fair market value, rather than the amount realized at a tax foreclosure sale, and whether the difference between those amounts could constitute an excessive fine under the Eighth Amendment.
The court has now issued its decision, reaffirming that while governments may not retain surplus proceeds generated from a tax foreclosure sale, the Constitution does not require payment of a property's fair market value.
The dispute arose after a Michigan township revoked the Pung family's Principal Residence Exemption, resulting in additional property taxes. Although the family successfully challenged portions of the assessor's actions in state administrative and judicial proceedings, they ultimately failed to pay approximately $2,242 in property taxes.Following Michigan's statutory tax foreclosure process, the property was sold at public auction for $76,008. The property had an assessed value for tax purposes of approximately $194,400 and was later resold by the purchaser for $195,000.
After the Supreme Court's decision in Tyler v. Hennepin County, the county acknowledged that the property owners were entitled to receive the surplus proceeds generated by the sale after satisfaction of the tax debt. The remaining issue before the court was whether the Constitution required compensation based upon the property's alleged fair market value rather than the amount actually obtained through the tax sale.
The Supreme Court unanimously rejected the homeowners' argument.
Looking to the historical treatment of tax foreclosures dating back to English common law, early federal statutes, and longstanding state practice, the court concluded that governments have traditionally been required to return only the excess proceeds generated by a tax sale after payment of the taxes owed. Nothing in that history supported requiring governments to compensate property owners based upon a hypothetical fair market value.The court therefore held that, when a tax foreclosure sale is fairly conducted, the measure of just compensation under the Fifth Amendment is the actual sale price, not an appraisal or estimated market value.
The court also noted several practical reasons supporting this conclusion. Property owners generally receive notice before foreclosure and have opportunities to redeem the property, refinance the debt, or sell the property themselves before the tax sale occurs. Requiring governments to guarantee fair market value after foreclosure would fundamentally alter the traditional tax collection process by requiring governmental entities to market and sell foreclosed properties in the same manner as private sellers or face potential liability whenever a property sold below its appraised value.
Accordingly, the court reaffirmed the principle established in the Tyler decision, that property owners are constitutionally entitled to recover the surplus proceeds from a tax foreclosure sale, but no more.
The court likewise rejected the argument that payment of only the surplus proceeds constitutes an excessive fine.
The court found no historical support for extending the Excessive Fines Clause to require compensation based upon fair market value following a properly conducted tax foreclosure sale. Because the Fifth Amendment did not require additional compensation, the court concluded that the Eighth Amendment likewise did not entitle the homeowners to recover the difference between the property's sale price and its alleged market value.Although the court resolved the valuation issue, it declined to address several additional arguments raised by the homeowners concerning the procedures employed during the tax foreclosure process.
Among other things, the homeowners argued that the county should have pursued less intrusive methods of collecting the tax debt before foreclosing on the property. The Supreme Court concluded that those issues were outside the questions presented for review and remanded the matter to the Sixth Circuit to determine whether those arguments had been properly preserved and should be considered further.
Accordingly, while the Pung decision resolves the constitutional measure of compensation following a tax foreclosure sale, questions concerning the procedural fairness of particular tax foreclosure practices may continue to be litigated.
For state and local governments, the decision significantly limits the potential expansion of liability that many anticipated following the Tyler decision. Assuming a tax foreclosure sale is properly conducted, governmental entities satisfy the Takings Clause by returning the surplus proceeds generated by the sale. They are not constitutionally required to compensate former owners for any difference between the sale price and the asserted fair market value.
For lenders and mortgage servicers, the decision provides additional certainty regarding the constitutional framework governing tax foreclosures. While the Tyler decision requires excess sale proceeds to be returned to former property owners, the Pung decision confirms that the Constitution does not transform tax foreclosure litigation into disputes over competing property valuations.
The decision also serves as an important reminder that property owners retain the greatest ability to preserve their equity before foreclosure occurs. Once a properly conducted tax sale has taken place, the owner's constitutional recovery is generally limited to the surplus proceeds generated by that sale.
Our team is constantly monitoring changes within the industry. If you have questions on this topic, or would like to learn more about Weltman’s Real Estate Default Solutions, feel free to connect with Ben at any time.
This blog is not a solicitation for business, and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
