WASHINGTON − A Michigan familylosttheir ranch-style home to cover $2,242 in disputed and unpaid taxes.
The government sold the place for a song−$76,008 at a public auction − before the buyer flipped it for $195,000.
A 2023Supreme Courtruling meant Isabella County had togive Michael Pung's familywhat was left after selling the house and settling the tax bill, but his attorneys argue in a case the court will hear on Feb. 25 that it's not enough. They say compensation should be based on the seized home's fair market value, noting it had been appraised at nearly $200,000.
Unless the high court intervenes – again − lawyers for the family say, governments have no reason to sell property for anything more than the amount of taxes owed.
"Whatever else above that, they're no longer allowed to keep, so they don't care," attorney Philip L. Ellison said in abriefingabout the case by the Pacific Legal Foundation, which is helping to represent the family.
The libertarian public interest law firm brought the previousSupreme Court challengeto what they call "equity theft" after a 94-year-old grandmother in Minnesota lost her property to foreclosure.
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"The taxpayer must render unto Caesar what is Caesar's, but not more,"Chief Justice John Robertswrote in the court's unanimous decision siding with the grandmother.
But that ruling didn't get into whether states can sell the property for far less than what it may be worth.
AARP: `Shockingly low' sale price
The AARP called the price the county got for the Pungs' house "shockingly low."
The advocacy group, whichfiled a briefsupporting the challenge because of its concern that older Americans may be particularly vulnerable to tax foreclosure, also pointed to a 2011 tax lien auction in Poughkeepsie, New York.
A company paid $4,825 for the home of a widow whose dementia prevented her from paying $4,242 in taxes, even though she had the money, according to the AARP. The home was assessed at $132,000, and the purchaser subsequently sold it for $115,000.
Since 2023, some states − Oregon, Massachusetts and Maine – now require seized homes to first be marketed by a real-estate broker at fair market value.
That shows there are alternatives to a fire-sale auction which would allow governments to collect what they're owed, and homeowners to keep most of the home's value, AARP argued.
Another powerful interest group, the U.S. Chamber of Commerce, has also weighed in.
"The government is incentivized to sell quickly and on the cheap, frequently resulting in catastrophic losses for property owners," the business groupsaid in a filing.
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A main legal issue in the case is the takings clause in the Fifth Amendment, which bars the government from taking private property "without just compensation." The Pungs also argue that property sold for a fraction of its value to cover a tax bill is an excessive fine under the Eighth Amendment.
What is 'fair market value' for a foreclosed house?
Attorneys for Isabella County said that calls for governments to base compensation on a property's fair market value ignore the fundamental differences between a market sale with a willing seller and buyer and a forced sale on foreclosure.
Property in foreclosure is simply worth less, the countysaid in a filing.
"The Constitution does not entitle delinquent taxpayers to hypothetical pre-foreclosure valuations rather than actual sale proceeds," Michigan and 10 other stateswrote in a briefsupporting Isabella County.
Hennepin County, the local government at the center of the 2023 case from Minnesota,saidthe properties it recently sold through an online public auction went for about 40% of their estimated market value.
The Wisconsin Counties Associationtold the courtthat the state has already taken steps to comply with the court's 2023 decision, and another change would "likely require a wholesale re-evaluation of Wisconsin's tax-foreclosure statutes."
States were doing 'a lot of bad things'
After the Supreme Court's 2023 ruling, nearly every state amended its laws, according to the Pacific Legal Foundation.
"There were a lot of states that were doing a lot of bad things,"saidChristina Martin, the foundation lawyer who argued that case. "In most states, people are better off than they were before."
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But the libertarian public interest law firm recentlyidentifiedways it said Alabama, Arizona, Michigan, New Jersey and New York are engaging in "shadow equity theft." Those include requiring property owners to file a claim with the government for any surplus proceeds from the tax sale. Homeowners may need to make that request even before the property is sold and the timeline for filing a claim can be compressed.
The Pacific Legal Foundation, in recent months, has asked the Supreme Court to get involved in multiple cases from Michigan involving such "bureaucratic traps."
The court has so far declined to hear those appeals.
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In the Isabella County case about fair market value that the court will hear Feb. 25, the Justice Department argues a property owner can challenge whether there was insufficient notice of a sale or a lack of opportunity for bidding. But if the sale was conducted fairly and the homeowner received the surplus, that's all the Constitution requires, according to the department.
"The best measure of the property's value is the price obtained at the foreclosure sale itself, as long as the sale is conducted fairly," the Justice Departmentsaid in a filingpreviewing the argument it will make during the oral arguments. "Like any debtor, a taxpayer who wishes to avoid the foreclosure process can pay the outstanding debt."
This article originally appeared on USA TODAY:Supreme Court looking at 'equity theft' in foreclosure sales
