Summary:
The Supreme Court issued an important property-rights decision today in Pung v. Isabella County, Michigan, holding that when a government forecloses on real property for unpaid taxes and conducts a properly conducted tax sale, the Constitution does not require compensation based upon the property's hypothetical fair market value. Instead, the owner is entitled to the surplus proceeds actually generated by the sale after satisfaction of the tax debt.
The facts were unusually sympathetic. The Pung family lost a home assessed at approximately $194,400 over a disputed tax obligation of only $2,241.93. The county ultimately sold the property at auction for $76,008. After the Supreme Court's decision in Tyler v. Hennepin County established that governments may not simply keep surplus proceeds from tax foreclosure sales, Pung argued that the Fifth Amendment required compensation based upon the home's fair market value rather than the substantially lower auction price. The Court disagreed.
Writing for the Court, Justice Alito concluded that centuries of English and American tax-sale practice have treated the sale proceeds—not hypothetical market value—as the relevant benchmark. In doing so, the Court relied heavily on both Tyler v. Hennepin County, which held that property owners are constitutionally entitled to surplus proceeds from tax foreclosure sales, and BFP v. Resolution Trust Corp., the bankruptcy case holding that a properly conducted foreclosure sale establishes the relevant value for purposes of the fraudulent transfer provisions of the Bankruptcy Code rather than some hypothetical fair market value. Drawing on those historical practices and precedents, the Court held that so long as a tax sale is fairly conducted, the Constitution requires the return of surplus proceeds, but not the difference between auction value and fair market value. The Court similarly rejected Pung's claim under the Excessive Fines Clause of the Eighth Amendment.
The vote was noteworthy. Justice Alito's opinion was joined in full by Chief Justice Roberts and Justices Sotomayor, Kagan, Kavanaugh, Barrett, and Jackson. Justice Thomas, with Justice Gorsuch, joined all but a portion of the discussion in Part II-B. Thus, all nine Justices agreed that the Constitution does not require compensation based upon hypothetical fair market value following a properly conducted tax foreclosure sale.
There were two concurring opinions.
Justice Sotomayor, joined by Justices Gorsuch and Jackson, emphasized that the Court was deciding only the narrow question presented. While agreeing that fair market value is not constitutionally required, she cautioned that the Court was not attempting to define the precise contours of what constitutes a "fairly conducted" tax sale. Those questions remain available for future litigation and for consideration on remand.
Justice Thomas, joined by Justice Gorsuch except as to one footnote, focused on the unusual facts of the case. He expressed concern that historical tax collection practices often required governments to pursue less drastic collection methods before selling an entire parcel of real property and questioned whether the procedures employed against the Pung family were consistent with those historical limitations. Justice Thomas ultimately agreed that those issues should remain open on remand.
The concurrences are important, but they should not obscure the central holding. All nine Justices agreed that fair market value is not the constitutional measure of compensation in a properly conducted tax foreclosure sale. The separate opinions simply emphasize that future disputes may arise regarding whether a particular tax sale was conducted fairly in the first place.
Commentary:
Why Bankruptcy Lawyers Should Care:
Although Pung is a tax foreclosure case rather than a bankruptcy case, it may ultimately have significant implications for valuation disputes under the Bankruptcy Code.
Consumer debtor attorneys frequently litigate the proper valuation methodology for applying the "best interests of creditors" test under 11 U.S.C. §1325(a)(4), as well as similar hypothetical liquidation analyses in Chapter 11 cases. Trustees and creditors often advocate fair market value. Debtors frequently contend that liquidation value should be substantially lower.
Pung provides substantial support for the proposition that the appropriate measure under a hypothetical liquidation analysis may often be foreclosure-sale or auction-sale value rather than retail market value.
The Supreme Court repeatedly emphasized that forced-sale contexts differ fundamentally from ordinary market transactions. Tax sales are designed to collect debts efficiently and are not equivalent to traditional arm's-length sales marketed over time through real estate brokers. As the Court recognized, auction values are frequently lower than values obtainable through ordinary market exposure. Indeed, one of the most striking facts in Pung was that a property assessed at approximately $194,400 sold at tax auction for only $76,008 and later resold on the open market for approximately $195,000. Yet the Court concluded that the constitutionally relevant value was the amount actually realized through the tax-sale process.
That reasoning has obvious relevance to §1325(a)(4), which does not ask what a debtor's property might sell for after six months of marketing by a realtor. Rather, it asks what unsecured creditors would receive in a hypothetical Chapter 7 liquidation.
Importantly, 11 U.S.C. §506(a)(2) should not dictate a different result.
First, §506(a)(2) applies only to personal property securing an allowed secured claim. Congress deliberately limited that provision to personal property and did not extend replacement-value treatment to real property.
Second, §506(a)(2) serves a different purpose. It addresses valuation for allowance of secured claims and cramdown treatment when a debtor retains collateral. Section 1325(a)(4), by contrast, asks what creditors would receive if the property were actually liquidated. Those are distinct statutory inquiries.
The fact that replacement value may be appropriate when a debtor keeps collateral does not mean replacement value must be used when estimating what creditors would receive from a forced sale.
Indeed, Pung reinforces precisely that distinction. The Court rejected reliance upon hypothetical market value and instead focused on the amount actually realized through the liquidation process itself.
Practical Applications: Developing Evidence of Real-World Liquidation Value
One challenge for consumer debtor attorneys is that evidence of actual liquidation value is often difficult and expensive to obtain. Unlike retail market values, which can be supported through tax assessments, broker price opinions, Zillow estimates, or traditional appraisals, reliable evidence regarding foreclosure-sale or liquidation value is rarely assembled in any systematic fashion.
Pung may provide an incentive for the consumer bankruptcy bar to begin developing that evidence.
Individual attorneys can often obtain useful information through public-record requests, county tax foreclosure records, sheriff's sale records, trustee's deed filings, upset-bid proceedings, and Chapter 7 sale motions and reports. Discovery in contested confirmation matters, claim objections, and adversary proceedings may also provide access to information regarding actual recovery rates achieved through foreclosure and liquidation sales.
More broadly, this appears to be an area where coordinated action by consumer debtor attorneys, NACBA, state bankruptcy associations, legal aid organizations, and academic researchers could produce significant benefits. Rather than relying on anecdotal examples, the consumer bar could begin assembling large datasets comparing:
- Tax-assessed values;
- Traditional appraisal values;
- MLS listing prices;
- Actual foreclosure-sale prices;
- Chapter 7 trustee sale recoveries; and
- Subsequent resale values.
Such information could be gathered through public-record requests, court filings, county foreclosure databases, trustee reports, and recorded deeds.
Artificial intelligence may make this project far more feasible than it would have been even a few years ago. Modern AI tools can rapidly collect, organize, and analyze large volumes of publicly available foreclosure, tax-sale, and bankruptcy-sale data across multiple counties and jurisdictions. AI-assisted analysis could identify patterns that would otherwise be difficult to detect, including average foreclosure-sale discounts, regional variations, differences between residential and investment properties, and correlations between tax assessments and actual liquidation recoveries.
Over time, consumer attorneys (perhaps supported by empirically minded law professors) could develop empirical evidence demonstrating the gap between hypothetical retail values and actual liquidation outcomes. Such data could support expert testimony, judicial notice arguments, local market studies, and even nationwide analyses regarding what unsecured creditors realistically receive when real property is liquidated.
If Pung teaches anything, it is that forced-sale value and retail-market value are not necessarily the same thing. The next challenge for consumer bankruptcy attorneys may be proving, with real-world data rather than assumptions, just how large that gap can be.
Conclusion:
Pung is not a bankruptcy case. But it may become an important bankruptcy valuation case.
The Supreme Court has now recognized that auction value and fair market value are fundamentally different concepts and that, in at least one forced-sale context involving real property, the legally relevant value is the amount actually realized through the liquidation process rather than a hypothetical retail value.
For Chapter 13 debtors seeking confirmation under §1325(a)(4), and for Chapter 11 debtors facing similar liquidation analyses, Pung offers a potentially powerful new argument. If the question is what unsecured creditors would receive in a hypothetical liquidation, then the answer should be based upon realistic liquidation economics—not idealized retail pricing that a Chapter 7 trustee is unlikely to obtain.
Whether bankruptcy courts ultimately extend Pung that far remains to be seen. But consumer debtor attorneys now have fresh Supreme Court language recognizing that forced-sale value and market value are not the same thing—and that distinction may prove important in future confirmation battles.
To read a copy of the transcript, please see:
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