In a decision closely watched by local governments, tax-lien investors, and property owners nationwide, the United States Supreme Court just issued its long-anticipated opinion in Pung v. Isabella County, Michigan, No. 25-95, clarifying how “just compensation” is measured following a tax foreclosure sale.[1] The Court held that the proper measurement of just compensation after a tax sale is the auction price, not what it might sell for in a hypothetical arms-length transaction. “To sum up, just compensation in the tax-sale context need not be based on a property’s fair market value.”

Building on its 2023 landmark ruling in Tyler v. Hennepin County, No. 22-166 (May 25, 2023),[2] the Court rejected the argument that the Takings Clause requires compensation based on hypothetical fair market value when property is sold through a tax foreclosure process. Instead, the Court held that compensation is generally measured by reference to the surplus proceeds generated by a lawful tax sale, rather than by post hoc appraisals untethered from the sale itself. That is, the surplus proceeds provide the “baseline” remedy for the taking.

The ruling provides guidance to lower courts still grappling with Tyler’s aftermath and alleviates concerns that routine tax collection could become constitutionally unworkable. But it may not be the last word on how the fairness of the tax sale procedure may impact the amount of “just compensation” owed to a defaulting taxpayer.

Background: Tyler’s Open Questions Come Back to the Court

Just three years ago, Tyler established a clear constitutional rule: a homeowner has a protected property interest in surplus value above a tax debt, and the government may not simply confiscate that value without paying just compensation.

But Tyler left several questions unanswered, most notably:

• How is “just compensation” measured when property is taken through a tax foreclosure?
• Is the constitutionally required measure the property’s asserted fair market value?
• Or is the amount actually realized at a tax sale the appropriate benchmark?[3]

Those open questions squarely framed Pung.

The Court’s Holding in Pung v. Isabella County

Although the Supreme Court agreed to hear questions about both the Takings Clause and the Excessive Finds Clause, the nine Justices focused the oral argument almost exclusively on the just compensation question raised in the Petition: “Whether taking and selling a home to satisfy a debt to the government, and keeping the surplus value as a windfall, violates the Takings Clause of the Fifth Amendment when the compensation is based on the artificially depressed auction sale price rather than the property’s fair market value?”

So too was this question the focus of the Court’s opinion issued today. The Court concluded that: “the proper baseline under the Takings Clause is the price obtained in a tax sale, at least when the sale is fairly conducted in light of our country’s history of tax sales.” In four short paragraphs, the Court also held that the Eighth Amendment does not require a local taxing official to return more than the surplus proceeds.

In practical terms, the Court ruled that surplus proceeds—if any—that remain after a fairly conducted tax sale are the proper measure of compensation, even if the home might have sold for more in a voluntary, private-market transaction. The Court, however, declined to address Pung’s arguments about the procedural aspects of the sale and whether Isabella County conducted a fair auction, leaving those questions to be decided on remand if the Sixth Circuit found them preserved.

Why the Court Rejected a Fair-Market-Value Rule

The Court emphasized several considerations that strongly echo themes from oral argument:

1. Historical Practice

The Court explained that tax foreclosure by public sale has long been a constitutionally accepted method of debt collection, and that auction prices have historically been treated as conclusive evidence of value, not as a floor subject to later judicial revision.  Its opinion even traces the practices back to the Magna Carta, explaining that a “long legal tradition dating back to the Founding embodies” the principle that tax-collecting officials need only return the “overplus,” or the difference between the tax sale and the tax debt.  Against this historical backdrop, the Court was unwilling to hold that the Takings Clause prevented local governments from resorting to tax sales when needed: “Tax sales have been an accepted means for governments to collect debts since the earliest days of our Nation.  If the Takings Clause had been understood to impose restrictions that rendered these sales untenable, they would have presumably faded away, at least after the Fourteenth Amendment incorporated the Takings Clause against the States.”

2. Systemic Consequences

Echoing concerns raised by several Justices at oral argument, the Court declined to adopt a rule that would effectively require governments to guarantee market outcomes or risk converting tax sales into fiscal liabilities. “Pung’s fair-market-value theory would impose unprecedented burdens on jurisdictions that wish to collect unpaid taxes and might well make tax sales impractical.” A fair-market-value rule, after all, could transform routine tax collection into appraisal-driven constitutional litigation, requiring courts to resolve valuation disputes years after foreclosure, often with incomplete or stale evidence.

As the Court explained, the Takings Clause does not constitutionalize optimal sales conditions, nor does it force governments to absorb the risk inherent in selling property on a delinquent taxpayer’s behalf. While legislatures may impose certain conditions under which a tax sale may be held, the Constitution itself does not. 

Clarification of Tyler

Importantly, Pung does not retreat from Tyler’s core holding that taxpayers hold a protected interest in their properties when a Takings occurs:

• Governments may not keep surplus value as a windfall.
• Homeowners retain a protected equity interest above the tax debt.
• But Tyler does not mandate compensation untethered from the foreclosure mechanism itself.

The Court just explains that the Takings Clause operates slightly differently within the tax sale context than in a normal eminent domain context: “But what is ‘just’ in one context may not be ‘just’ in another.” Or as Justice Thomas explained in his concurring opinion, the “case thus implicates a new exception [to the fair-market-value rule] for tax foreclosure sales.”

The Excessive Fines Claim

The Court also rejected the petitioner’s Eighth Amendment challenge.  In a short part of the Court’s opinion, it holds that no historical evidence suggested that a tax foreclosure conducted to collect delinquent taxes, without more, is not an “excessive fine.” The Court declined to consider alternative arguments regarding the Eighth Amendment claim as a result of Pung’s failure to provide a historical precedent warranting application of the Amendment in the tax sale context.

Market Implications

Fortunately, the Supreme Court’s decision heeded the Solicitor General’s warning that adopting the Petitioner’s position could “spell the end of tax sales in America.” In rejecting that argument, the Court’s decision provides significant clarity for each aspect of the tax-lien industry. 

1. Local Governments: The ruling limits, but does not eliminate, exposure to appraisal-based takings claims and preserves the viability of established tax foreclosure systems.
2. Tax-Lien Investors: Auction price remains a defensible constitutional benchmark, reducing the risk that investors will be drawn into valuation-based Section 1983 litigation so long as the record supports a fairly conducted tax sale.
3. Property Owners: While Tyler ensures protection against outright confiscation of surplus equity, Pung confirms that constitutional remedies have limits tied to the foreclosure process itself.

The real winner in Pung is law-abiding taxpayers themselves, however.  As the United States argued before the Court in February, a ruling adopting Pung’s position would impact those who pay their taxes the most:  “And at the end of the day, who does this hurt?  It hurts other taxpayers who are actually paying their taxes because the shortfall has to come from real taxpayers.”  Indeed, this concept was explained in the Court’s opinion: “And jurisdictions with a large inventory of unpaid taxes might well compensate for this lost revenue by increasing the burden on residents who do pay their taxes.  So for taxpayers viewed as a group, the demise of tax sales might be a most unwelcome development.”

After all, local governments still must pay for schools, first responders, and other key local government functions—they can continue to do so through the benefits provided by the tax sale in light of the Court’s ruling in Pung.

What Comes Next

Although Pung resolves the headline question left open by Tyler, litigation in the tax foreclosure space is far from over, as is the variety of class actions currently pending around the country on the issue. Courts will continue to evaluate:

• Whether specific sale procedures are fair or constitutionally adequate, a decision that Justice Sotomayor explained in her concurrence, remains for another day: “I do not read the Court’s opinion as identifying the contours of a fair auction, or endorsing the parties’ or the United States’ articulations of what this standard requires.”
• Whether intentionally depressed or manipulated, sales might present different issues.
• Whether the Court’s prior opinion in Nelson v. City of New York—cited again by the Court in Pung—remains good law and insulates state actors from Takings claims.
• How remedies apply in state-specific foreclosure structures and whether those statutory schemes present fair methods for collecting taxes, a decision the Sixth Circuit may wrestle with on remand.

Some uncertainty may exist as a result of the Court’s repeated emphasis on the surplus proceeds being the “baseline” for just compensation and Justice Thomas’s concurring opinion. Still, the Supreme Court’s decision significantly stabilizes the post-Tyler landscape.

Who to Contact?

Matt Abee, Randy Saunders, Carl Fumarola, and Jonah Samples with the Nelson Mullins Tax Lien Resolution and Litigation Team are available to answer questions about how today’s Supreme Court opinion in Pung v. Isabella County, Michigan, may impact tax sale investors, servicers, and others in the industry. Please reach out to Nelson Mullins for more information about how you may be able to seek to address claims for just compensation or excessive fines as a part of your investment in tax liens.

These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. As portions of this alert may have been created with the benefit of artificial intelligence or large-language models, Internet subscribers and online readers should not act upon this information without seeking professional counsel.