Yesterday’s debate was Peng v Isabella County There are two different threads. On the one hand, the judges discussing the issues raised seemed to have little doubt that they would reject the idea that the customary practice of selling real estate at auction to recover back taxes amounted to expropriation without just compensation. On the other hand, several judges were outraged by local governments’ heavy-handed treatment of taxpayers.
On the legal matter, the taxpayer (Michael Pung) complained that when the county sold its property in foreclosure based on unpaid taxes, the foreclosure sale price was less than the fair market value of the property. In his view, this meant that the Fifth Amendment’s Takings Clause (that “private property” shall not be “taken for public use without just compensation”) required the county to reimburse him for the difference—to write him a check for the difference between the property’s fair market value (as estimated by an appraiser) and the county’s selling price at a public auction.
During oral arguments, the justices found some difficulties with Peng’s position. On the one hand, Peng is challenging the constitutionality of something that has happened regularly in every jurisdiction in the United States since before the Constitution was adopted. So it wasn’t entirely unfair that Judge Clarence Thomas asked Philip Ellison (Peng’s attorney) in his first question of the morning how he “dealt with the fact that English and American legal traditions appear to permit such foreclosures”? Likewise, Justice Sonia Sotomayor challenged Ellison, “[g]I received a ruling from a court in our 250-year history where we have said that the tax measure on foreclosures is fair market value, not auction price. “
Another issue related to the first is that accepting Peng’s position might end the practice of using foreclosure sales to force taxes. As Judge Elena Kagan has repeatedly pointed out, the logic of Pung’s position is that when the government sells property of delinquent taxpayers at auction, then, under normal circumstances, the distress sale at auction does not yield fair market value and the jurisdiction will have to pay out of its own pocket and use other funds to repay the delinquent taxpayer’s “shortfall” at the time of the sale. Justices Ketanji Brown Jackson and Amy Coney Barrett seemed particularly concerned about this issue, arguing that it was unfair to suggest that other taxpayers (i.e., those who were not in arrears) should pay their taxes to compensate those who refused to pay their taxes. As Jackson commented, it seems truly unfair to “the rest of the American people” that we’re paying you because you didn’t pay your taxes and the government had to foreclose on your house.
Another difficulty with Pung’s argument is that the Supreme Court has heard a case in the past involving whether frustrated landowners could challenge a foreclosure sale based on a low price. In that case, Justice Antonin Scalia strongly rejected the challenge, explaining that the foreclosed property was “simply not worth anything” because it would be sold. During the arguments, Justice Brett Kavanaugh actually read Scalia’s opinion, and several other justices noted that the discussion was the court’s most relevant treatment of foreclosure sales.
All of which suggests that anything the court says about the legal issues it granted review could overrule Peng’s position. But there are good reasons to think that there will at least be pressure to consider the underlying circumstances. Pung still maintains to this day that no taxes were actually owed, although, of course, it’s difficult to establish any fact other than the fact that a Michigan court ruled that the unpaid taxes justified the foreclosure, according to the appellate brief. But Justices Sotomayor and Neil Gorsuch seemed to think the process followed here was so egregious that they desperately needed some relief. For example, Gorsuch simply cannot accept that a property with an assessed value of approximately $200,000 was sold in foreclosure due to a negligible tax debt (less than $3,000). Both judges also seemed to believe the foreclosure sale process was moving too quickly.
To be sure, other judges saw the issue of fairness very differently, asking pointedly why, if the property was really worth nearly $200,000, as Pung claimed, he didn’t simply sell it or borrow $3,000 to pay the taxes. As Justice Samuel Alito said, “If your client has $190,000 of equity in this house…couldn’t your client use it as collateral to get a loan, pay the taxes, and never have a sale?” Kagan and Jackson echoed the same sentiment.
Another topic that emerged offers a potential way to avoid simply rejecting Peng’s argument. The issue before the judge did not relate to the fairness or propriety of the sale process, but rather to the question of compensation. One possible solution floated by the attorney general — and met with apparent sympathy from at least some judges — is that the court could deny Peng’s request for damages but send the case back to a lower court to consider whether he should have a chance to argue that the sale process was fundamentally unfair to prove invalid, perhaps under the due process clause. Given this, it is difficult to determine exactly where the court will hear the case. But I think it’s unlikely they will order the county to pay the compensation Peng is seeking.
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