Graffam, Ballentyne, BFP, and Pung: When auction prices fall short
Last week, the Supreme Court heard oral arguments in PLF’s case Pung v. Isabella County. At its core, the case is about home equity theft and the Fifth Amendment’s promise of just compensation.
The Constitution says that when governments take your home to satisfy a tax debt, they can take only what is owed to them and are required to return the surplus to the property owner as just compensation. But should just compensation requirements be based on the fair market value of the home as it stands when the government takes title? Or on a depressed auction price?
For more background on the case, read our story about the Pung family’s ordeal, and check out our full breakdown of last week’s oral arguments.
As oral arguments kicked off, Justice Sonia Sotomayor pointed out that the Court has long recognized tax foreclosures as constitutionally sound, as long as the surplus is returned, and asked attorney Philip Ellison, representing Mike Pung, to point to any case in the country’s 250-year history where the Court has said that the “measure of damages on a tax foreclosure is fair market value, not the auction price.”
While the Court has not yet explicitly ruled that tax foreclosures require fair market value, Ellison highlighted three historical cases where justices acknowledged that, traditionally, auction prices are not immune to scrutiny when they yield grossly disproportionate outcomes.
Graffam v. Burgess: A shock to the conscience
In 1877, Christine J. Burgess hired Peter Graffam to do masonry work on her $10,000 home in Melrose, Massachusetts. When Graffam presented her with the $23 bill, she refused to pay, claiming the work had been improperly completed.
Graffam obtained a lawyer, sued, and got a judgment for about $28.95. In 1879, an execution was issued and the sheriff held a public auction on the home, where it sold for $73.10 to none other than Graffam himself.
Even though it was a loss for Burgess, Massachusetts law gave property owners one year to redeem the property by paying the sale price plus interest. This “right to redeem” is considered property under the law, which becomes important as the story continues.
Represented by the same lawyer as Graffam, another person claimed Burgess owed him money for unpaid real estate services and sued for $30 and won. This small amount was used to seize the only remaining property Burgess owned: her right to redemption.
Graffam then purchased the right to redemption from this other person, taking ownership of not only the home, but also any chance Burgess had to reclaim her property.
When the case came before the Supreme Court, it ruled that the low sale price was not enough on its own to invalidate a sale that followed proper procedure. However, because the circumstances were glaringly improper, if not downright shady, the sale warranted a second look.
The Graffam decision established that if a price is so absurdly low that it “shocks the conscience,” then even the slightest condition of unfairness is enough for the court to intervene and provide relief.
Ballentyne v. Smith: Before confirmation
Pacific Heights Electric Railway Company owned a railway in Honolulu worth tens of thousands of dollars. In the early 1900s, the company secured a bond debt of $50,000, on which it defaulted a few years later.
A court ordered that the railway be sold at a public foreclosure auction. Proper notice had been given and every step of the foreclosure and auction process had been performed to the letter of the law. In the end, the railway sold for the low price of $1,100.
Unlike Graffam, there was no collusion or improper conduct. Still, the property’s value was at least seven times what it fetched at public auction, according to the trial court’s findings. Due to the great disparity, the commissioner advised against confirmation of the sale. The Supreme Court of the Territory of Hawaii agreed, and the purchaser appealed.
When the case came before the U.S. Supreme Court, the justices once again acknowledged that price alone was generally not enough to warrant interference. But looking to Graffam, the Court concluded that the disparity was so extreme that the sale should not be confirmed.
Where the Ballentyne ruling was distinct from Graffam was its declaration that even in the absence of unfair auction circumstances, when a price is so grossly inadequate that it would be unjust to let it stand, a court can intervene and refuse to confirm the sale.
The last part is particularly important because Ballentyne was litigated before the sale was confirmed, giving the courts greater flexibility to prevent an inequitable result prior to being finalized.
The Ballentyne ruling also come into play in a third case that both Ellison and the Assistant to the Solicitor General—who represented the United States as amicus curiae in support of neither party—mentioned during Pung.
BFP v. Resolution Trust Corp.: A modern foreclosure rule
BFP v. Resolution Trust Corp. points in a slightly different direction. In the late 1980s, a group called BFP purchased a home in California that had been tied up with major debts. BFP defaulted on those debts, the lender initiated a nonjudicial foreclosure, and the home was eventually auctioned for $433,000—even though it was allegedly worth about $725,000.
That should have been the end of the foreclosure process. But after the sale, BFP filed for Chapter 11 bankruptcy, which operates under a special set of federal powers pursuant to Article I, Section 8 of the Constitution. BFP invoked the Bankruptcy Code’s constructive fraudulent transfer provision, which allows a sale to be undone if it occurred within one year before bankruptcy while the debtor was insolvent and the debtor received less than “reasonably equivalent value” in return.
BFP argued that because the foreclosure price was so much lower than the home’s value, the transfer could be undone under bankruptcy law. In 1994, the Supreme Court disagreed and said that because the foreclosure sale had followed the state laws, the foreclosure price was “reasonably equivalent value.” The Court reasoned that foreclosure auction sales will inherently depress the prices below a regular market sale.
Zooming out to look at the broader picture, what do these three cases have in common with Pung?
Ballentyne and Graffam were both equity cases involving judicial supervision of foreclosure sales between private parties. BFP reflects modern bankruptcy statutes that foreclosure auctions themselves should define value.
Pung v. Isabella County: The constitutional question
Graffam and Ballentyne involve judicial sales. Pung, by contrast, is a Takings Clause case arising from tax foreclosure. Further, neither Graffam nor Ballentyne sought to define the meaning of just compensation. But they reflect a longstanding judicial principle that is relevant to Pung: Lawful procedures do not automatically legitimize outcomes that are grossly disproportionate.
These two cases were not cited during Pung as examples of constitutional authority; they were cited to show how courts historically refuse to rubber-stamp shocking disparities in forced sales, as the lower courts did in Pung’s case.
Justice Sotomayor was correct that the Court has never held that fair market value is the measure of damages in a tax foreclosure case. Ellison’s response pointed instead to the Court’s history of refusing to treat grossly inadequate forced-sale prices as automatically correct and final.
Pung goes further, asking whether the Constitution likewise forbids governments from defining “just compensation” with a categorical rule that considers only the outcome of an auction.
As for BFP, the County relies on the ruling to argue that auction prices should likewise determine the value of property in tax foreclosure cases. According to this argument, if the auction procedures were fair, then the price produced by the sale reflects the property’s true value.
But Ellison pointed to two reasons why BFP does not apply here. First, in BFP’s footnote 3, the Court explicitly limited the ruling to bankruptcy sales only, stating that it did not apply in the context of tax liens. Pung, by contrast, arises under the Takings Clause and involves the government taking private property through a tax foreclosure.
Second, BFP acknowledged the older equitable principles discussed in Ballentyne: The Court described Ballentyne’s rule allowing courts to intervene when forced-sale prices are grossly inadequate as settled law, signaling that the bankruptcy decision did not displace the judiciary’s longstanding skepticism of sacrificial foreclosure prices.
The Takings Clause guarantees just compensation. The Court is now at a constitutional fork in the road and must decide whether that guarantee can be satisfied by whatever price a forced auction happens to fetch or whether property owners may introduce evidence to help a jury or judge determine the fair market value of the home at the time of the taking.
On one side stands BFP’s view that foreclosure auctions themselves define value. On the other stand the venerable equitable principles reflected in Graffam and Ballentyne, where courts refused to treat sacrificial auction prices as conclusive. The Court must now decide which tradition governs when the government takes a home for unpaid taxes.
