Part 3: The End of Michigan's Tax Foreclosure System
Michigan’s tax foreclosure system won't survive a ruling in favor of Pung. What replaces it could be worse.
Oral arguments in Pung v. Isabella County take place before the US Supreme Court today, February 25th.
In Part 1 of this series, I laid out the Fifth Amendment question and showed that the answer could blow a multi-hundred-million-dollar hole in Michigan county budgets.
In Part 2, I argued that the Eighth Amendment question in the case is aimed at the wrong target: the real excessive fine in Michigan’s tax foreclosure system isn’t the foreclosure itself, it’s the 18% interest charged on delinquent taxes.
In Part 3, I’m going to offer my prediction of the outcome of this case and then explain what I think a ruling in Pung’s favor means for the future of Michigan’s tax foreclosure system.
My Prediction: I think the Court rules in favor of Pung on the Fifth Amendment question — that just compensation must be based on fair market value (and leaves it to states to decide how that’s defined) — and either sidesteps the Eighth Amendment question entirely, or, maybe rules in Pung's favor on that as well.
There’s an expanded explanation of why I think this is the most likely outcome at the end, but I’m not a lawyer and this isn’t a SCOTUS blog, so let’s just get to “what happens after, if this is the outcome”…
The Math That Kills the System
Under Michigan’s current tax foreclosure system, a county takes a tax delinquent property, sells it at auction, keeps the tax debt owed (plus interest, penalties, and fees), and returns any surplus to the former owner. The county’s financial exposure is zero1. It is only ever returning money it actually received from the bidder.
Under a ruling in favor of Pung on the Fifth Amendment question at stake in the case, the county owes the former owner the fair market value (FMV) of the property minus the tax debt, regardless of what the property sells for at auction. If the property sells for less than FMV (and it almost always will, because tax auctions are distressed sales) the county is underwater.
Here’s what this looks like using Pung’s own numbers:
In the current system, Isabella County received $76,008 at auction, returned the $73,766 surplus to the Pung estate, kept the $2,242 in taxes (plus interest, penalties, and fees…) owed. The county lost nothing:
In a post-Pung system, the county still receives $76,008 from the auction. But it now owes the Pung estate $192,158 (the $73,766 surplus AND the difference between the sale price at auction and the FMV of the home).
In Pung’s equation, that’s $118,392 more than the county received from the bidder:
That money has to come from somewhere — almost certainly the county’s Delinquent Tax Revolving Fund, financed in large part by the 18% interest charged to people still trying to keep their homes, as explained in Part 1 of this series. But county DTRFs don’t have infinite money. It wouldn’t take long for too many Pung-like auction sales to drain those pools.
So, the question is: what county treasurer would bring properties to auction under these conditions? Every foreclosure becomes a financial bet that the property will sell at or above fair market value. Tax auctions aren’t designed for that.
The system, as it exists, cannot survive the math if the Supreme Court rules in favor of Pung on the Fifth Amendment question.
The 8,571% Loophole
Although… there is one way I can imagine the existing system could survive a pro-Pung ruling. And it exposes the fundamental flaw (and the underlying false promise) of the entire legal project that began with Rafaeli v. Oakland County a decade ago.
Every case in this lineage — from Rafaeli, to Tyler, to Pung — has made the same concession: the government can keep what’s “theirs,” defined as taxes, interest, penalties, and fees. The dispute has only ever been about what happens to the surplus beyond that amount. As the attorneys in Rafaeli said explicitly:
“The government can take what belongs to them… the taxes, the penalties, the interest, the fees.”
None of these cases challenge the interest rate.
So: what if a state legislature, faced with the post-Pung math, simply raised the interest rate on delinquent property taxes high enough to eliminate owner equity entirely?
Using Pung’s own numbers: the tax debt was $2,242. The fair market value was $194,400. To bring the total debt, defined as “taxes, interest, penalties, and fees,” to parity with FMV, the retroactive interest rate at the moment of foreclosure would need to be approximately 8,571%.
At that rate, Pung’s $2,242 debt becomes ~$194,400 in “taxes, interest, penalties, and fees.”
The total debt equals the FMV. There is no owner equity left. There is nothing to compensate. If someone wants to pay the $194,400 minimum bid to buy that property at auction — go for it! And guess what: The county would keep every cent the bidder paid. The former owner would get nothing. If the property doesn’t sell at all (much more likely), no big deal — it winds up in a land bank, same as now.
All within the framework that Pung, Rafaeli, and Tyler have conceded.
This is a thought experiment, but it’s not only a thought experiment. It demonstrates that a decade of litigation claiming to eliminate the “perverse incentive” for government to profit from tax foreclosure has never once targeted the actual mechanism of that profit: the interest rate on delinquent taxes.
The 18% interest survived Rafaeli. It survived Tyler. It will survive Pung. And if a state legislature wanted to, it could set that rate at whatever number makes the math work, and every constitutional argument in these cases would be powerless to stop it.
As I have said throughout these lawsuits: If your project is removing the “perverse incentive” from government to profit off tax foreclosure, you target the interest rates on delinquent taxes.
You only target the foreclosure auction if your actual agenda is property rights.
What Actually Replaces the Tax Foreclosure System
I doubt the Michigan legislature would have the gumption to pass an 8,571% interest rate. What they’re far more likely to do is revert to some form of a tax lien sale system.
Michigan used a tax lien sale system before Public Act 123 of 1999 overhauled delinquent tax collection. In that system, counties didn’t foreclose on properties and sell them at auction. Instead, they sold the tax lien — the right to collect the delinquent taxes, plus interest, from the property owner. If the owner paid up, the lien buyer collected their money plus a return. If the owner didn’t pay, the lien buyer could eventually take title to the property.
The critical distinction for a post-Pung world: in a lien sale, the government never takes the property. If the government never takes the property, the Fifth Amendment issue is never triggered, and the FMV question disappears. The county sells the lien, collects its money, and the constitutional framework established by Pung simply doesn’t apply to whatever happens next between the private lien buyer and the property owner.
That makes lien sales the obvious escape hatch for counties. But it introduces a different problem that I don’t think anyone preemptively celebrating Pung has thought through.
Michigan’s current system is bureaucratic and impersonal. It has been destructive, yes, but at least no one from the county ever showed up at anyone’s front door to shake them down for delinquent property taxes. The worst that came to your door was a sad yellow baggie with a notice inside.
Now imagine replacing that system with one in which private investors (probably the same speculators who currently buy at the tax foreclosure auctions) instead purchase the right to your debt. They own your delinquency. They collect the interest. And if you can’t pay, they take your home. The dynamic shifts from “the county sends you notices” to “a private investor owns your debt and comes to your door demanding their money or your house.”
The 1999 Citizens Research Council report that informed PA 123’s adoption documented these problems in Michigan’s prior lien system. Most lien buyers had no intention of taking ownership — they were in it for the interest rate (same as the counties today!). Liens went unperfected, properties languished for years, and in Wayne County, only 17% of liens sold. The CRC called the system a “hodgepodge” that produced “an untenably long process” for returning delinquent properties to productive use.
PA 123 was the fix. Michigan’s current foreclosure system was designed to replace the dysfunction of the lien sale era. So much for that.
New Systems Generate New Problems
Michigan’s current tax foreclosure system has been destructive. I’ve spent years documenting and fighting against the ways it has harmed communities, displaced families, and enriched county governments.
But through all that destruction, we built knowledge. Legal aid attorneys, nonprofits, and legislators learned how the system breaks, and built safeguards. The PAYS program, the Detroit Tax Relief Fund, Make it Home, the HOPE property tax exemption, surplus proceeds requirements, the push to correct Detroit’s unconstitutional over-assessments: none of these are perfect, and all require political will to enforce. But they exist because people learned where the failures were and fought to contain them, which they now largely are. That knowledge was hard-won, paid for in tens of thousands of lost homes.
A new system erases all of that knowledge.
A lien sale system, or whatever hybrid Michigan’s legislature produces under political urgency, will generate its own failures. Those failures will be unpredictable and invisible until they’ve already caused harm. New systems generate new problems.
We will be starting from scratch on a learning curve that, for the current system, was measured in decades and devastation. We’ll do the same thing again.
If you gave me the choice between the absurd loophole — a system I know, with a grotesque but visible interest rate that could be challenged on its own terms — and a new lien sale system with failure modes nobody has mapped? I’d take the loophole. Not because it’s good. Because it’s known. And because the people who have spent a quarter century fighting tax foreclosure in Michigan deserve the advantage of fighting on familiar ground.
Background: How I Think the Court Rules
I think the Court rules in favor of Pung on the Fifth Amendment question: that just compensation for a tax-foreclosed property must be based on fair market value, not the auction sale price.
In every other takings context I’ve looked at, “just compensation” has meant fair market value. I don’t see why tax foreclosure would be the exception and the Court’s unanimous ruling in Tyler v. Hennepin County (2023) laid the groundwork by establishing that the government can’t keep surplus equity beyond the tax debt. Pung is the next logical step: if the government can’t keep the surplus, then what does the owner actually get back? The answer always seems to be “fair market value”.
On the Eighth Amendment (whether foreclosure itself is an excessive fine) I’m less confident. My best guess is the Court sidesteps it entirely, ruling that the Fifth Amendment remedy makes the Eighth Amendment question unnecessary. That’s essentially what happened in Tyler: the majority resolved the case on Takings Clause grounds without reaching the Excessive Fines question. However, if the Court does reach the Eighth Amendment, Justices Gorsuch and Jackson went out of their way in Tyler to signal that the lower courts got the excessive fines analysis wrong — Gorsuch called their reasoning one that “contains mistakes future lower courts should not be quick to emulate.” That feels like a pretty clear tell.
What I don’t think the Court will do is dictate how fair market value must be calculated. Pung is pushing the government’s own assessed value as the FMV proxy, and it’s a clever trap. But the Court is more likely to establish the principle (FMV is the standard) and leave the method to the states.
None of that hedging changes the bottom line: a ruling that just compensation equals fair market value breaks the math that Michigan’s tax foreclosure system runs on.
Reminder: The mechanism that ensures the county can never lose money on the current tax foreclosure system is the name of this Substack…
Would the financial exposure from Pung extend to sub-county local units through chargebacks? Going back to the key difference that it includes money the county never collected